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sha256:5cdc6cd220bfcf63b23d51f4baa8973305a1f3a1cb49af1bad6a02820e725c7f +size 159069 diff --git a/raw/aaer/2016/AAER-3750.txt b/raw/aaer/2016/AAER-3750.txt new file mode 100644 index 0000000000000000000000000000000000000000..1ced106ae1e9a33c5c6ff60923406657c7667cd7 --- /dev/null +++ b/raw/aaer/2016/AAER-3750.txt @@ -0,0 +1,190 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 77254 / February 29, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3750 / February 29, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17140 + +In the Matter of + +KeyBanc Capital Markets Inc. + +Respondent. + +ORDER INSTITUTING ADMINISTRATIVE +AND CEASE-AND-DESIST PROCEEDINGS, +PURSUANT TO SECTIONS 15(b) AND 21C +OF THE SECURITIES EXCHANGE ACT OF +1934, 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 pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange +Act”) against KeyBanc Capital Markets Inc. (“Respondent” or “KBCM”). + +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 +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the +Exchange Act, 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 finds1 that: + +1 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. + 2 + + + +Summary + +1. These proceedings concern Respondent’s failure to make and keep accurate books +and records. + +2. Respondent, a broker-dealer registered with the Commission, is a subsidiary of +KeyCorp, a financial services company headquartered in Cleveland, Ohio. + +3. Beginning at some point prior to January 2011, and through January 2012, +Respondent’s then Chief Financial Officer (“CFO”) (until November 2011), Jason Maiher, caused +unsubstantiated or “plug” entries to be made to one or more accounts in Respondent’s general +ledger. The amount of the unsubstantiated entries varied over time. + +4. The plug entries resulted in Respondent reporting unsubstantiated assets in the +financial statements included in its fiscal year 2010 Annual Audited Report filed with the +Commission in February 2011 and in its monthly FOCUS Reports filed with FINRA, which then +furnished the FOCUS Reports to the Commission, including those filed in 2011and January 2012. + +5. In Respondent’s Annual Audited Report for the year ended December 31, 2011, +Respondent disclosed that its prior period financial statements (for fiscal year 2010) included +unsubstantiated assets of $13,679,000 ($8,591,000 net of taxes) and omitted liabilities of +$4,305,000 ($2,701,000 net of taxes). Accordingly, Respondent restated net income as $3,136,000 +versus the previously reported $14,428,000 (a 78% reduction) and restated shareholder’s equity +from $328,088,000 to $316,796,000, as of December 31, 2010. + +Respondent + +6. Respondent is a broker-dealer registered with the Commission and is headquartered +in Cleveland, Ohio. + +Other Relevant Party + +7. Jason Maiher, age 41, was Respondent’s Chief Financial Officer from April 2007 +through November 2011 and Series 27 Financial and Operations Principal from April 2007 +through December 2011. Maiher was primarily responsible for maintaining Respondent’s +financial records and oversaw the filing of its monthly FOCUS Reports with FINRA, which then +furnished the FOCUS Reports to the Commission. As required by company policy, Maiher was +required to certify at the close of each month that Respondent’s general ledger balance sheet +information had been compared with, and reconciled to, the underlying back-office system +information from which the general ledger was prepared. + + + 3 + + +KBCM’s Books and Records Were Inaccurate + +8. Beginning at some point prior to January 2011 through January 2012, Maiher +caused unsubstantiated or “plug” entries to be made to one or more accounts in Respondent’s +general ledger, in order to complete Respondent’s monthly close-the-books process. + +9. The plug entries resulted in Respondent overstating its assets and income in its +fiscal year 2010 financial statements, which were included in its fiscal year 2010 Annual Audited +Report filed with the Commission in February 2011. Maiher signed this report, affirming that the +accompanying financial statements were “true and correct.” + +10. The plug entries to the general ledger also resulted in inaccurate financial +information being included in Respondent’s monthly FOCUS Reports that Maiher caused to be +filed with FINRA, which then furnished the FOCUS Reports to the Commission, in January 2011 +through January 2012 , among other months. + +11. In its Annual Audited Report for the year ended December 31, 2011, Respondent +disclosed that its prior period financial statements (for fiscal year 2010) included unsubstantiated +assets of $13,679,000 ($8,591,000 net of taxes) and omitted liabilities of $4,305,000 ($2,701,000 +net of taxes). The firm’s write-off of the unsubstantiated assets and accrual of the unrecorded +liabilities resulted in restated net income of $3,136,000, a 78% reduction versus the previously +reported $14,428,000, and restated shareholder’s equity of $316,796,000, an $11,292,000 +reduction from the previously reported $328,088,000. + +12. As a result of the conduct described above, Respondent willfully2 violated Sections +17(a) and 17(e) of the Exchange Act and Rules 17a-3(a)(2) and 17a-5(a) and (d) thereunder, which +require broker-dealers to make and keep current books and records, and to make certain reports and +filings as required by the Commission. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent KBCM’s Offer. + + Accordingly, pursuant to Sections 15(b) and 21C of the Exchange Act, it is hereby +ORDERED that: + + +2 A willful violation of the securities laws means merely “‘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)). There is no requirement that the actor +“‘also be aware that he is violating one of the Rules or Acts.’” Id. (quoting Gearhart & Otis, Inc. +v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965)). + 4 + A. Respondent KBCM cease and desist from committing or causing any violations and +any future violations of Sections 17(a) and 17(e) of the Exchange Act and Rules 17a-3and 17a-5 +thereunder. + +B. Respondent KBCM is censured. + +C. Respondent KBCM shall, within 10 (ten) days of the entry of this Order, pay a civil +money penalty in the amount of $175,000 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 +KeyBanc Capital Markets Inc. 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 Timothy L. +Warren, Chicago Regional Office, Securities and Exchange Commission, 175 W. Jackson, Suite +900, Chicago, IL 60604. + + + By the Commission. + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3756.txt b/raw/aaer/2016/AAER-3756.txt new file mode 100644 index 0000000000000000000000000000000000000000..5a5ab42e8865d705cb5a20db84fd387d2c7c860d --- /dev/null +++ b/raw/aaer/2016/AAER-3756.txt @@ -0,0 +1,493 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 77345 / March 10, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3756 / March 10, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17166 + + +In the Matter of + +Magnum Hunter Resources +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 Magnum Hunter Resources Corporation (“MHR” +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: + +A. SUMMARY + +1. This proceeding concerns failures by MHR and its management to properly +implement, maintain, and evaluate internal control over financial reporting (“ICFR”) for the fiscal +year-ended December 31, 2011 and to maintain ICFR sufficient to keep pace with MHR’s growth +from at least the fiscal year-ended December 31, 2011 through the quarter-ended September 30, +2013. MHR’s failures resulted in part from Ronald D. Ormand (“Ormand”) and David S. Krueger +(“Krueger”) improperly evaluating the severity of identified control deficiencies. +B. RESPONDENT AND RELATED ENTITIES AND INDIVIDUALS + +i. Respondent +2. MHR is a Delaware corporation headquartered in Irving, Texas that operates as an +independent oil and gas company engaged in the exploration and production of oil and gas in the +United States. At all relevant times, MHR’s stock was registered with the Commission pursuant to +Section 12(b) of the Exchange Act and traded on the New York Stock Exchange (“NYSE”). At all +relevant times, MHR filed periodic reports with the Commission, including Forms 10-K and 10-Q, +pursuant to Section 13(a) of the Exchange Act and related rules thereunder. On December 15, +2015, MHR filed a Form 8-K disclosing that the Company and certain subsidiaries had filed +voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. +ii. Other Relevant Entities and Individuals +3. Ormand is a resident of Houston, Texas and was MHR’s Chief Financial Officer +(“CFO”) from May 2009 through July 2013. +4. Krueger is a resident of Flower Mound, Texas and was MHR’s Chief Accounting +Officer (“CAO”) from October 2009 through October 2012. He was previously licensed as a CPA +in the states of Arkansas and Oklahoma. +5. Wayne Gray, CPA (“Gray”) is a resident of Plano, Texas and a former partner at +a Public Company Accounting Oversight Board (“PCAOB”) registered public accounting firm. +Gray was the engagement partner responsible for providing MHR’s external auditing services for +the December 31, 2009 through June 30, 2012 reporting periods. Gray is a CPA licensed in the +state of Texas. + +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 +6. Joseph Allred, CPA (“Allred”) is a resident of Arlington, Texas and is a partner at +a PCAOB-registered public accounting firm. Allred was responsible for the firm’s engagement +that provided Sarbanes-Oxley Act of 2002 (“SOX”) consulting and internal auditing services to +MHR from 2009 through 2012. These services included assisting MHR with documenting, +evaluating, testing, and improving accounting and reporting processes. +C. FACTS + +i. Statutory requirements regarding ICFR +7. Section 13(b)(2)(B) of the Exchange Act makes public companies responsible for +devising and maintaining a system of internal accounting controls sufficient to provide +reasonable assurance that transactions are recorded as necessary to permit preparation of +financial statements in conformity with GAAP. See 15 U.S.C. §78m(b)(2)(B). +8. Exchange Act Rule 13a-15(a) requires issuers, including MHR, to maintain ICFR.2 +See 17 C.F.R. 240.13a-15(a). Rule 13a-15(f) defines ICFR as: +[A] process designed by, or under the supervision of, the issuer’s principal +executive and principal financial officers, or persons performing similar functions, +and effected by the issuer’s board of directors, management and other personnel, to +provide reasonable assurance regarding the reliability of financial reporting and the +preparation of financial statements for external pu rposes in accordance with +generally accepted accounting principles[.] 17 C.F.R. 240.13a-15(f). +9. Exchange Act Rule 13a-15(c) requires management—together with the +participation of principal executive and principal financial officers (or persons performing similar +functions)—to evaluate the effectiveness of ICFR as of the end of each fiscal year. See 17 C.F.R. +240.13a-15(c). Under Rule 13a-15(c), management may satisfy its obligations by conducting an +evaluation in accordance with interpretive guidance issued by the Commission in Release +No. 34-55929, Commission Guidance Regarding Management’s Report on Internal Control Over +Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, (the +“2007 Guidance”). +10. Item 308 of Regulation S-K requires management to provide an annual report that +contains its assessment of the effectiveness of ICFR and any material weakness in ICFR. Under +Item 308, “[m]anagement is not permitted to conclude that the registrant’s [ICFR] is effective if +there are one or more material weaknesses in the registrant’s [ICFR].” 17 C.F.R. 229.308. +11. Item 308 of Regulation S-K further instructs that the registrant “must maintain +evidential matter, including documentation, to provide reasonable support for management’s +assessment of the effectiveness of the registrant’s [ICFR].” The 2007 Guidance similarly states + +2 Rule 13a-15(c) applies to issuers whose securities are registered under Section 12 of the +Exchange Act and who are required either to file annual reports under Section 13(a) or 15(d) of +the Exchange Act for the prior fiscal year or filed an annual report for the prior fiscal year. + 4 +that “[m]anagement is responsible for maintaining evidential matter, including documentation to +provide reasonable support for its assessment.” +12. Rule 1-02(a)(4) of Regulation S-X defines categories of ICFR deficiencies based +on the severity, as follows: + A “material weakness” is a “deficiency, or a combination of deficiencies, in [ICFR] +such that there is a reasonable possibility that a material misstatement of the company’s +annual or interim financial statements will not be prevented or detected on a timely +basis.” See 17 C.F.R. 210.1-02(a)(4) (emphasis added). A misstatement is reasonably +possible if the chance of a misstatement is more than remote but less than likely. See +2007 Guidance at 34-35, n. 47 (citing Financial Accounting Standards Board Statement +No. 5, Accounting for Contingencies3). + A “significant deficiency” is a “deficiency, or a combination of deficiencies, in [ICFR] +that is less severe than a material weakness, yet important enough to merit attention by +those responsible for oversight of the registrant’s financial reporting.” Id. + +13. The “severity of a deficiency in ICFR does not depend on whether a misstatement +actually has occurred but rather on whether there is a reasonable possibility that the company’s +ICFR will fail to prevent or detect a misstatement on a timely basis.”4 See 2007 Guidance at 35 +(emphasis added). +14. Item 308(a)(3) of Regulation S-K requires public companies such as MHR to +annually provide a report of management that discloses material weaknesses that have been +identified by management. They are not required to publicly disclose significant deficiencies. +15. Exchange Act Rule 13a-14 requires that every Form 10-Q and 10-K include +certifications signed by each principal executive and principal financial officer (or persons +performing similar functions). See 17 C.F.R. 240.13a-14. The certifying officers must confirm +that the Form 10-Q or 10-K does 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 which +such statements were made, not misleading. Id. Ormand certified MHR’s 2011 Form 10-K and +March 31, 2012 and June 30, 2012 Forms 10-Q. + +3 FASB Statement No. 5 is available at +http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220126761&acceptedDis +claimer=true. It defines “reasonably possible” as: “The chance of the future event or events +occurring is more than remote but less than likely.” FASB No. 5 at 4. It defines “remote” as: +“The chance of the future event or events occurring is slight.” Id. + +4 See FR-77, Commission Guidance Regarding Management’s Report on Internal Control Over +Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (June +27, 2007) (“Commission Guidance”), available at http://www.sec.gov/rules/interp/2007/33- +8810.pdf. + + 5 +16. As detailed further below, MHR engaged Allred's firm to assist its management +with the documentation, testing, and evaluation of the company’s ICFR in 2010, 2011, and 2012. +Notwithstanding MHR’s reliance on the firm's services, MHR’s management—including Ormand +and Krueger—were ultimately responsible for its conclusions about the effectiveness of MHR’s +ICFR. +ii. MHR’s Rapid Growth and Strained Accounting Resources +17. MHR’s rapid growth strained its accounting resources. For example, MHR grew +from $6 million in revenues in 2009 to $23 million in 2010, largely as the result of an $82 million +acquisition in February 2010. In connection with the issuance of the external auditor’s report on +MHR’s 2010 year-end audit results, Gray informed Ormand, Krueger, and MHR’s Audit +Committee in February 2011 that MHR’s accounting department was experiencing “manpower +issues” and lacked sufficient personnel to complete all required tasks on a timely basis. +18. Between December 2010 and April 2011, MHR acquired another $70 million in oil +and gas properties and leasehold mineral interests. MHR also completed two other acquisitions in +April and May 2011 for an aggregate purchase price of approximately $565 million. In 2011, +MHR booked over $100 million in revenues—largely as a result of these acquisitions. This rapid +growth created a significant burden on MHR’s accounting department. For example, beginning in +November 2011 MHR failed to complete its standard monthly close process and began formally +closing its books on a quarterly basis with only sporadic monthly closes in 2012. +iii. MHR’s ICFR assessment as of December 31, 2011 +a. Allred identified MHR’s insufficient accounting staffing as a control deficiency +as of December 31, 2011. +19. Allred led consulting engagements to document and test MHR’s ICFR. In February +2012, his firm issued a written report on MHR’s ICFR to certain MHR managers—including +Ormand and Krueger—and MHR’s Audit Committee. The report identified problems in MHR’s +accounting department, including that the “accounting and financial reporting team has +experienced significant delays in preparing financial statements and reports.” As a result, Allred's +team could not complete its testing activities within the time period originally scheduled. The +report further stated that two balance sheet account reconciliations for the month ending October +2011 were not reviewed and approved in a timely manner and that management review of the +consolidated October 2011 financial statements had not been formally documented. +20. As of December 31, 2011, the report identified control deficiencies within MHR’s +accounting function, including: (a) instances in which reconciliations were not prepared, reviewed, +or approved on a timely basis; (b) failures to document the completion of required monthly +management reviews; and (c) significant delays in preparing financial statements and reports due +to “inadequate and inappropriately aligned staffing.” The report stated: +[T]he potential for error in such a compressed work environment presents +substantial risk. With complex financial and reporting structures there are few +individuals within the team with the capacity to perform many tasks and there is + 6 +little time for senior reporting personnel to review, analyze, and evaluate because +they are performing transaction level reporting tasks. (emphasis added) +21. The report concluded, without explanation, that MHR’s staffing deficiency +represented only a significant deficiency—rather than a material weakness. The report did not +explain how a deficiency that created a “substantial risk” of a financial statement error did not rise +to the level of a material weakness, defined as a deficiency in ICFR that creates a reasonable +possibility of a material misstatement not being prevented or detected on a timely basis. +22. Krueger and Ormand accepted the assessment that MHR’s insufficient accounting +staffing represented a significant deficiency. Both Krueger and Ormand also relied on the absence +of an actual identified material error in MHR’s financial statements as evidence that a material +weakness did not exist as of December 31, 2011. Neither Krueger nor Ormand prepared any +documentary evidence to supplement the documentation created by Allred's team. Consequently, +the only documentation that supports MHR management’s assessment of the effectiveness of +MHR’s ICFR as of December 31, 2011 is the documentation created by Allred's team and +provided to MHR management. +23. Because MHR management concluded that the control deficiency only rose to the +level of a significant deficiency, rather than a material weakness, MHR did not publicly disclose +the deficiency but instead stated that its ICFR was effective. + +b. Gray Misapplied the Applicable Standard When Determining the Severity of +MHR’s Control Deficiency as of December 31, 2011. +24. Gray failed to conduct the 2011 audit of MHR’s ICFR in accordance with PCAOB +Auditing Standards No. 3, Audit Documentation (“AS3”), and No. 5, An Audit of Internal Control +Over Financial Reporting That Is Integrated with An Audit of Financial Statements (“AS5”) and +improperly approved the issuance of the external auditor’s audit report containing an unqualified +opinion on MHR’s ICFR as of December 31, 2011. +25. In February 2012, a year after first raising concerns over MHR’s accounting +“manpower issues,” Gray reported to MHR’s Audit Committee a “[d]elay in closing the books due +to [the] Company manpower shortage relative to [the] volume of financial activity.” This resulted +in “[n]umerous top-side adjustments” creating significant audit inefficiencies. +26. Gray, as engagement partner, further reported that: +We believe there is not adequate internal control over financial reporting due to +inadequate and inappropriately aligned staffing. This factor increases the +possibility of a material error occurring and being undetected and reduces the +Company’s ability to file its 10-K on time. +27. Despite assessing that there was “not adequate internal control over financial +reporting due to inadequate and inappropriately aligned staffing,” Gray concluded that this control +deficiency rose to the level of a significant deficiency—rather than a material weakness. The audit +work papers failed to adequately document the basis for this conclusion. They also failed to + 7 +explain how the fact that MHR did “not [have] adequate internal control over financial reporting” +was not indicative of a material weakness, defined as weakness that creates a reasonable possibility +(i.e., “more than remote but less than likely”) of a material error not being detected or corrected on +a timely basis. +28. When reporting audit results on the effectiveness of MHR’s ICFR as of +December 31, 2011 to MHR’s Audit Committee, Gray identified MHR’s “inadequate and +inappropriately aligned staffing” as a significant deficiency rather than as a material weakness. +29. Gray determined that MHR’s inadequate and inappropriately aligned accounting +staff did not constitute a material weakness because, among other things: (i) the audit work did not +identify material errors for the reporting period, and (ii) he understood that MHR had recently +hired additional accounting staff and that the existing staff, while overworked, was competent. +30. However, this was a misapplication of the applicable standards. As the engagement +partner who led the audit of the effectiveness of MHR’s ICFR, Gray improperly applied the +definitions of “material weakness” and “significant deficiency” codified in Rule 1-02(a)(4) of +Regulation S-X and Appendix A of AS 5. The severity of a deficiency does not depend on +whether an error actually occurred. AS 5, ¶ 64. +31. Notwithstanding the systemic importance of an entity-level control, the written +analysis was deficient for two reasons. First, it failed to apply the appropriate standard for defining +a material weakness. Second, it failed to evaluate the severity of MHR’s control deficiency in +accordance with AS 5 because it did not adequately consider: (a) the misstatement that might result +from having insufficient accounting staff; (b) MHR’s ability to prepare accurate financial +statements based on the possible future consequences of the deficiency; (c) the amounts and +transactions exposed to the deficiency; or (d) the volume of activity exposed to the deficiency that +occurred in the current period or that is expected in future periods. AS 5, ¶¶ 62-70. +32. Gray also failed to adequately document the basis for his conclusion. Under AS 3, +“[a]udit documentation should be prepared in sufficient detail to provide a clear understanding of +its purpose, source, and the conclusions reached.” AS 3, ¶ 4. “The auditor must document the +procedures performed, evidence obtained, and conclusions reached with respect to relevant +financial statement assertions.” AS 3, ¶ 6. “Audit documentation must clearly demonstrate that the +work was in fact performed.” AS 3, ¶ 6. +33. The only written audit documentation assessing the severity of MHR’s accounting +staffing deficiency was a summary spreadsheet purportedly identifying all MHR control +deficiencies for the 2011 reporting period. It documented the conclusion that MHR’s control +deficiency did not rise above a significant deficiency for three main reasons: (i) MHR hired a +controller and several senior level accountants during the latter part of 2011; (ii) MHR was in the +process of integrating two major acquisitions completed in the second quarter of 2011 and the +delay in the close process was mostly due to integration across entities; and (iii) individual analysis +of two identified audit adjustments did not support a conclusion of a more severe control +deficiency. + 8 +34. In doing so, Gray failed to evaluate MHR’s deficiencies in accordance with AS 5. +Auditors “must evaluate the severity of each control deficiency that comes to his or her attention to +determine whether the deficiencies, individually or in combination, are material weaknesses as of +the date of management’s assessment.” AS 5, ¶ 62 (emphasis in original). +c. MHR’s Management Retained Ultimate Responsibility for Evaluating the +Severity of Any Control Deficiencies. + +35. MHR disclosed in its 2011 Form 10-K that: +Under the supervision and with the participation of our management, including our +Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness +of our internal controls over financial reporting as of the end of the period covered +by th is report based on the framework in “Internal Control – Integrated +Framework” issued by the Committee of Sponsoring Organizations of the +Treadway Commission. Based on that assessment, our Chief Executive Officer and +Chief Financial Officer concluded that our internal controls over financial reporting +were effective as of December 31, 2011 to provide reasonable assurance regarding +the reliability of our financial reporting and the preparation of our financial +statements for external purposes in accordance w ith U.S. generally accepted +accounting principles. +See MHR Fiscal Year 2011 Form 10-K at p. F-53. +36. When determining whether a deficiency constitutes a material weakness, +management should consider all relevant information,5 including information provided by outside +parties. While MHR management retained ultimate responsibility for assessing MHR’s ICFR, +including evaluating the severity of any deficiencies in ICFR,6 the information provided by Allred +and Gray was relevant to its assessment. In addition, MHR’s management was responsible for +maintaining documentation to support its assessment.7 +37. Ormand and Krueger had knowledge of the stress placed on MHR’s accounting +department as a result of its rapid growth. Nonetheless, they did not sufficiently consider Allred’s +or Gray’s findings in analyzing the severity of the control deficiencies, or the appropriateness of +Allred’s and Gray’s conclusions in light of all other information which they were aware. +Additionally, as discussed further below, MHR failed to maintain required evidential matter— +including documentation—providing reasonable support for its assessment. + +5 2007 Guidance at 37. + +6 17 CFR 240.13a-15(c). + +7 Instruction No. 2 to Item 308 of Regulation S-K. + 9 +d. MHR’s Documentation Indicated That Krueger Failed to Review MHR’s Q3 +2011 Form 10-Q on a Timely Basis. +38. One of the consequences of MHR’s staffing deficiency resulted in Krueger signing +off on MHR’s third quarter 2011 Form 10-Q five days after the Form 10-Q was filed with the +Commission. Because Krueger was the CAO—and highest ranking officer with an accounting +background—responsible for reviewing MHR’s periodic reports prior to filing them with the +Commission, MHR had no compensating control8 in its ICFR. +e. MHR Failed to Adequately Document its Assessment of ICFR. +39. Item 308 of Regulation S-K requires and the 2007 Guidance states that +management must maintain documentation to provide reasonable support for its assessment of the +effectiveness of the company’s ICFR. +40. However, in its year-end 2011 assessment, MHR failed to generate or maintain +documentation supporting its basis for determining the severity of its accounting staff deficiency. +It thus did not adequately document its basis for concluding that the deficiency was a significant +deficiency—rather than a material weakness. This was true even though MHR management, and +Ormand and Krueger specifically, had been informed that: (a) there was a “substantial risk” of an +error (by Allred); and (b) “there is not adequate internal control over financial reporting” (by +Gray). +41. The control deficiency caused by MHR’s inadequate accounting staffing was +particularly important because it was an entity-level control. Because it was an important control +that could affect other controls throughout the company, it needed to be fully understood and +defined in order to determine the nature, extent, and severity of the deficiencies. +f. MHR Management Misapplied the Appropriate Definition When Determining +the Severity of MHR’s Control Deficiency as of December 31, 2011. +42. Ormand and Krueger failed to apply the appropriate standard when determining the +severity of MHR’s internal control deficiency. As detailed above, while actual errors may inform +assessments of control deficiencies, the presence of an actual error is not a prerequisite to +concluding that a material weakness exists. Rather, management is to consider whether there is a +reasonable possibility that a material misstatement will not be timely detected or prevented. In +addition, the effectiveness of a company’s ICFR is assessed at a specific point in time—as of the +end of the fiscal reporting period. Planned or anticipated remedial efforts are irrelevant to the +analysis. +43. Ormand and Krueger improperly assessed the severity of the control deficiency +caused by MHR’s “inadequate and inappropriately aligned staffing” as of December 31, 2011. +MHR management should have assessed whether a reasonable possibility existed that a material + +8 “Compensating controls are controls that serve to accomplish the objective of another control +that did not function properly, helping to reduce risk to an acceptable level.” 2007 Guidance at +n. 49. + 10 +misstatement of the company’s financial statements would not be prevented or detected on a timely +basis. +iv. MHR’s Disclosure of the Existence of Material Weaknesses +a. MHR Restates its June 30, 2012 Form 10-Q and Discloses Material +Weaknesses. +44. On November 14, 2012, MHR filed an amended Form 10-Q restating its June 30, +2012 financial statements to correct a material error related to stock-based compensation and +certain other errors. MHR disclosed that management concluded that material weaknesses existed +as of June 30, 2012 related to (i) a lack of sufficient, qualified personnel to design and manage an +effective control environment; (ii) MHR’s period-end financial reporting process; and (iii) controls +over calculation and review of share-based compensation expense. MHR also disclosed +management’s plans to remediate and improve the company’s ICFR and disclosure controls and +procedures. +45. Before restating, MHR’s Audit Committee met on October 19, 2012 to understand +how the company had materially understated option based compensation expense in the second +quarter. Ormand reported that the person responsible for reviewing the calculation signed off +without reviewing it. Also at that meeting, Gray “restated that the root cause [of the error] was +inadequate and inappropriately aligned staffing of the accounting department.” +b. MHR’s Disclosed Material Weaknesses in its September 30, 2012 Form 10-Q. +46. On November 13, 2012, MHR’s Audit Committee met and approved the +company’s Form 10-Q for the third quarter-ended September 30, 2012. That filing disclosed the +same three material weaknesses existed at September 30, 2012 that had been disclosed in MHR’s +amended June 30, 2012 Form 10-Q. +c. MHR Delinquently Files its 2012 Form 10-K and Discloses Material +Weaknesses. +47. MHR delinquently filed its 2012 Form 10-K on June 14, 2013. In it, MHR +disclosed fourteen material weaknesses as of December 31, 2012, including that “[i]n certain areas +the Company did not have sufficient personnel with an appropriate level of knowledge, experience +and training commensurate with the growth of the Company's corporate structure and financial +reporting requirements” and not upgrading “resources around internal audit, tax, financial reporting +and certain accounting areas.” +48. MHR’s internal analysis of the material weaknesses posed by its understaffed +accounting department, as disclosed in its 2012 Form 10-K, recognized that the “significant +deficiency identified at year-end 2011 does not appear[] to be remediated. Personnel do not appear +to have the competence and training necessary for their assigned level of responsibility.” + 11 +v. MHR Remediates Inadequate and Inappropriately Aligned Staffing in the +Third Quarter 2013 +49. On November 8, 2013, MHR filed its Form 10-Q for the quarter-ended September +30, 2013. While concluding that the Company’s ICFR was not effective as of September 30, 2013, +management concluded that the material weakness that existed at quarter-end concerning +accounting staff inadequacies had subsequently been remediated. +D. VIOLATIONS +i. MHR Violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange +Act and Rules 13a-1, 13a-13, and 13a-15(a) thereunder. + +50. As a result of the conduct described above, MHR violated Section 13(b)(2)(A) of +the Exchange Act, which requires Section 12 registrants 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, and Section 13(b)(2)(B) of the Exchange Act, which requires Section 12 +registrants to devise and maintain a system of sufficient internal accounting controls. +51. As a result of the conduct described above, MHR violated Section 13(a) of the +Exchange Act and Rules 13a-1 and 13a-13, thereunder, which require issuers with classes of +securities registered pursuant to Section 12 to file periodic and other reports with the Commission +and Rule 13a-15(a) which requires issuers to maintain ICFR. +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: + + A. Respondent shall cease and desist from committing or causing any violations and +any future violations Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules +13a-1, 13a-13, and 13a-15(a) thereunder. + +B. Respondent shall, on the effective date of MHR’s Chapter 11 Bankruptcy Plan +incorporating the terms of this Order, pay a civil money penalty in the amount of $250,000 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; + + 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 +MHR 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 L. Peavler, Division of +Enforcement, Securities and Exchange Commission, 801 Cherry Street, Suite 1900, Fort Worth, +Texas 76102. + + 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. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3757.pdf b/raw/aaer/2016/AAER-3757.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e593b2eb595367740474ae203d4e3b6547d52548 --- /dev/null +++ b/raw/aaer/2016/AAER-3757.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c854bd667e8cccfd25a62cc5e940410853ea12a94adb5dd02ba6918a579306d2 +size 276470 diff --git a/raw/aaer/2016/AAER-3760.pdf b/raw/aaer/2016/AAER-3760.pdf new file mode 100644 index 0000000000000000000000000000000000000000..6cbf5be7478e5d1f09eeb6eaad2530bf21263409 --- /dev/null +++ b/raw/aaer/2016/AAER-3760.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:794976ea9238372886c0b2c882ae1434474f406c504fe513e3cb5dcecf4dde85 +size 405973 diff --git a/raw/aaer/2016/AAER-3761.pdf b/raw/aaer/2016/AAER-3761.pdf new file mode 100644 index 0000000000000000000000000000000000000000..280aab78425c68c054022e1e9d955592a2ce6c29 --- /dev/null +++ b/raw/aaer/2016/AAER-3761.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:eda8a06bc478946ff9366ba9d3db499e1e93691b7397f0b912513206f12f5548 +size 213737 diff --git a/raw/aaer/2016/AAER-3767.pdf b/raw/aaer/2016/AAER-3767.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5bf15ada8d4f507813cfbbce38a08951e6152b8b --- /dev/null +++ b/raw/aaer/2016/AAER-3767.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a5db784d9c170e23c7f17d4b9bbfe1ab1d6b17687765a4be9390253b4e42989b +size 190163 diff --git a/raw/aaer/2016/AAER-3771.txt b/raw/aaer/2016/AAER-3771.txt new file mode 100644 index 0000000000000000000000000000000000000000..4798f5bea2cfbefedf153476e89603cd6abc7066 --- /dev/null +++ b/raw/aaer/2016/AAER-3771.txt @@ -0,0 +1,639 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 77718 / April 26, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3771 / April 26, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17228 + + +In the Matter of + +David S. Hall, P.C. d/b/a The Hall +Group CPAs, +David S. Hall, CPA, +Michelle L. Helterbran Cochran, CPA, +and +Susan A. Cisneros + +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 + +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) and (iii) of the Commission’s Rules of +Practice2 against David S. Hall, P.C. d/b/a The Hall Group CPAs (“The Hall Group”), + +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 . . . (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, 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. + +Rule 102(e)(1)(iii) provides, in pertinent part, that: + + 2 +David S. Hall, CPA (“Hall”), and Michelle L. Helterbran Cochran, CPA +(“Helterbran”); and Sections 4C and 21C of the Exchange Act and Rule 102(e)(1)(iii) +against Susan A. Cisneros (“Cisneros”). + +II. + +After an investigation, the Division of Enforcement alleges that: + +A. RESPONDENTS + + +1. David S. Hall, P.C. d/b/a/ The Hall Group CPAs is a Texas corporation +which was licensed to practice public accountancy in Texas as The Hall Group CPAs from +April 5, 2006 through May 31, 2014. Thakkar CPA, PLLC (“Thakkar CPA”)3 acquired +certain assets of David S. Hall, P.C. on or about January 6, 2014 (the “Closing Date”), after +which the latter firm ceased operations. Thakkar CPA agreed to pay David S. Hall, P.C. +$450,000 in cash at closing and to enter into a 5%, two-year promissory note for $313,516. +On March 25, 2015, David S. Hall, P.C. requested that its registration with the PCAOB be +withdrawn. + +2. David S. Hall, age 58 and a resident of Lewisville, Texas, is a CPA +licensed in Texas. Hall owns 100% of David S. Hall, P.C. On April 15, 2014, Hall +became the CFO for DynaResource, Inc., (“DynaResource”) whose auditor was David S. +Hall, P.C. d/b/a The Hall Group CPAs through January 29, 2014 and, later, Thakkar CPA +d/b/a The Hall Group CPAs for the 2013 audit and 2014 reviews. + +3. Michelle L. Helterbran Cochran, age 46 and a resident of Coppell, Texas, +is a CPA licensed in the state of Texas. From September 2007 through July 2013, +Helterbran was employed by David S. Hall, P.C. and became a non-equity partner with that +firm in February 2012. + +4. Susan A. Cisneros, age 58 and a resident of Flower Mound, Texas, holds a +Master’s of Science degree in Accounting from the University of North Texas but is not a +CPA. Cisneros worked as an audit senior for David S. Hall, P.C. from January 2005 +through January 2012 and again from May 2013 through December 2013. + + +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 On April 6, 2016, the Commission issued an Order finding that Thakkar CPA, its managing partner, and +its owner, engaged in improper professional conduct and violated or willfully violated Rule 2 -02 of +Regulation S-X and caused issuers to violation Section 13(a) of the Exchange Act and Rules 13a -1 and +13a-13 thereunder. The Order also found that Thakkar CPA’s Vice President of Operations caused +Thakkar CPA’s violations of Rule 2-02(b)(1) of Regulation S-X and caused issuers to violate Section 13(a) +of the Exchange Act, and Rules 13a-1 and 13a-13 thereunder. In the Matter of Thakkar CPA, PLLC et. al, +Exchange Act Rel. No. 77542 (April 6, 2016). + + 3 +B. OTHER RELEVANT ENTITIES + +5. Thakkar CPA, is a Texas corporation formed to acquire certain assets of +David S. Hall, P.C. and provided auditing services for multiple public companies between +January 2014 and January 2015 signing audit reports as “The Hall Group CPAs,” but never +became registered with the PCAOB. + +C. FACTS + +i. Failure to Conduct Audits and Reviews in Accordance with PCAOB +Standards + +6. The Hall Group, Hall, Helterbran, and Cisneros collectively failed to +conduct at least 16 annual audits and 35 quarterly reviews4 in accordance with PCAOB +standards in at least three ways: (1) they repeatedly failed to prepare adequate audit +documentation in connection with audit and review engagements; (2) failed to conduct – or +failed to obtain – an engagement quality review (“EQR”) of audit and review engagements +by a qualified reviewer; and (3) on at least four engagements, The Hall Group and Hall +performed audit services while the firm’s independence was impaired. As a result, The +Hall Group falsely stated that it conducted its audits in accordance with PCAOB standards +in at least 16 annual audit reports for eight issuers. Additionally, Hall, after becoming CFO +of DynaResource, Inc., allowed Thakkar CPA to provide audit services to DynaResource, +Inc. even though he knew he had a direct financial interest in and a business relationship +with the company’s external audit firm. + +a. Failure to Adequately Prepare Required Audit Documentation + +7. PCAOB Auditing Standard No. 3, Audit Documentation (“AS 3”), states +that “[a]udit 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.” (emphasis in original.) AS 3, ¶ 2. +Additionally, AS 3 states that: + +The auditor must document the procedures performed, evidence obtained, +and conclusions reached with respect to relevant financial statement +assertions. Audit documentation must clearly d emonstrate that the work +was in fact performed. This documentation requirement applies to the +work of all those who participate in the engagement as well as to the work +of specialists the auditor uses as evidential ma tter in evaluating relevant +financial statement assertions. Audit documentation must contain +sufficient information to enable an experienced auditor, having no +previous connection with the engagement: + +4 See Appendix attached herewith. + + 4 +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. (emphasis added) AS 3, ¶ 6 +8. AS 3 states that an auditor must “identify all significant findings or issues in +an engagement completion document,” which includes either all information necessary to +understand the significant findings, issues or provides references to other audit +documentation. AS 3, ¶ 13 (emphasis in original.) + +9. The Hall Group utilized standardized forms and checklists while +documenting its audit work. For example, The Hall Group used a “Supervision, Review +and Approval Form” to document, in part, (1) who performed the partner review and the +engagement quality review, (2) the dates of such reviews, (3) the partner’s approval for +issuance of the report, and (4) the engagement quality reviewer’s concurring approval for +issuance of the report. The Hall Group also used a standardized “Engagement Completion +Document Form” to assist in summarizing all significant findings or issues. + +10. Hall and Helterbran failed to comply with AS 3 on multiple audits because +their workpapers contained blank or incomplete Supervision, Review, and Approval Forms +and blank or incomplete Engagement Completion Document Forms for at least five audit +and twenty review engagements over multiple periods. + +11. The existence of blank or incomplete Engagement Completion Document +Forms further evidences Hall’s and Helterbran’s failure to prepare documentation in +accordance with AS 3 requirements and does not allow an experienced auditor, having no +previous connection with the engagement, to determine who reviewed the work and the +date of such review. + +b. Failure to Obtain Required Engagement Quality Reviews + +12. Auditing Standard No. 7, Engagement Quality Review (“AS 7”), requires an +auditor to obtain an EQR and concurring approval to issue the engagement report for each +audit and interim review engagement.5 Additionally, AS 7 states, “[a]n engagement quality +reviewer from the firm that issues the engagement report (or communicates an engagement +conclusion, if no report is issued) must be a partner or another individual in an equivalent +position.” Among other things, an engagement quality reviewer must be competent, i.e., +must possess the level of knowledge and competence related to accounting, auditing and +financial reporting required to serve as the engagement partner on the engagement under +review. Additionally, an engagement quality reviewer must have competence, +independence, integrity, and objectivity. To maintain objectivity, the engagement quality + +5 AS 7 is effective for audits and interim reviews for fiscal years beginning on or after +December 15, 2009. + + + 5 +reviewer should not make decisions on behalf of the engagement team or assume any of the +responsibilities of the engagement team. AS 7, ¶¶ 3-7. An audit firm may grant permission +to the client to use the firm’s audit report only after the engagement quality reviewer +provides concurring approval of issuance, AS 7, ¶ 13. + +13. The PCAOB defines the engagement partner as the member of the +engagement team with primary responsibility for the audit. Auditing Standard No. 10, +Supervision of the Audit Engagement, (“AS 10”), Appendix, A2. The engagement partner +remains responsible for the engagement and its performance, notwithstanding the +involvement of the engagement quality reviewer. AS 7, ¶7. Accordingly, the engagement +partner is responsible for, among other things, compliance with PCAOB standards. AS 10, +¶3. + +14. Audit firms’ quality control policies and procedures should include +provisions that provide the firm with reasonable assurance that the engagement quality +reviewer has sufficient competence, among other things, to perform the EQR in accordance +with PCAOB standards. AS 7, ¶4. Policies and procedures should be established to +provide the firm with reasonable assurance that “those hired possess the appropriate +characteristics to enable them to perform competently” and “[w]ork is assigned to +personnel having the degree of technical training and proficiency required in the +circumstances.” PCAOB Quality Control Standard QC 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, ¶ 02. + +15. Hall and The Hall Group failed to establish these required policies and +procedures. Moreover, on multiple occasions, Hall and Helterbran also failed to comply +with AS 7 by either failing to obtain any EQR or instructing an unqualified person, +including Cisneros, to perform engagement quality reviews for multiple audit and review +engagements from 2010 through 2013. For at least two audit engagements, Hall +improperly acted as both the engagement partner and the EQR partner. + +16. Hall and Helterbran knowingly or at least recklessly directed or permitted +Cisneros to perform an EQR on multiple audits and reviews despite knowing she was not a +partner or someone in an equivalent position.6 Cisneros knowingly or at least recklessly +provided the engagement quality reviewer’s concurring approval of issuance of the report +despite knowing that she was not a partner or someone in an equivalent position at The +Hall Group and not qualified to conduct an EQR. Indeed, Cisneros acknowledged to +Commission staff that she lacked the knowledge and competence in accounting, auditing, +and financial reporting required to serve as engagement partner for an engagement +conducted under PCAOB standards. + + +6 Although AS 7 does not necessarily require that persons performing EQRs be l icensed CPAs, the +standard states that the person “must be a partner or another individual in an equivalent position.” Cisneros +not being a CPA is relevant here because The Hall Group required anyone holding the title of +“Principal/Partner” must also be a licensed CPA in Texas. + + + 6 +17. Cisneros performed the engagement quality reviews for at least eight issuer +audit engagements for seven issuers and 15 reviews of six issuers’ interim financial +information, and signed Supervision, Review, and Approval Forms, as the engagement +quality reviewer. In each instance, Hall and Helterbran failed to determine whether +Cisneros prepared required documentation in connection with the EQRs she performed. +AS 7, ¶¶ 9-11 and ¶ 21. + +18. Hall failed to comply with AS 7 even after confirming to the PCAOB that +he would do so. In connection the PCAOB’s 2013 inspection of The Hall Group, Hall +confirmed in writing to the PCAOB inspection team that Cisneros performed the EQR for +two issuers’ fiscal year 2012 audits and the EQRs for the first, second, and third quarter +reviews for a third issuer.7 Hall also told the inspection team during its fieldwork that +Cisneros was not a CPA. In August 2013, the PCAOB issued an inspection comment +stating that The Hall Group failed to comply with AS 7 and failed to ensure that EQRs +were performed by persons with sufficient qualifications. The inspection comment states +that Hall’s representations demonstrated that Cisneros did not meet the firm’s requirements +for a “Principal/Partner,” and, accordingly, she did not meet the AS 7 requirements for +serving as EQR. In an August 5, 2013 handwritten response to this inspection comment +form, Hall wrote, “[w]e agree with the issue noted above and are in the process for [sic] +negotiating with an outside firm (PCAOB registered) and will not issue any more reports +until this is in place and have that firm perform the appropriate review process.” (emphasis +added). + +19. Contrary to Hall’s representation, he knowingly disregarded the PCAOB +standards when he failed to obtain an EQR by a qualified reviewer for any of the firm’s +review and audit engagements for fiscal periods ended June 30 and September 30, 2013 – +engagements conducted after his written representation to the PCAOB. On at least one +2013 audit, Hall added a memo to the audit file stating, in part, “The Hall Group did not +have access to an Engagement Quality Reviewer for this audit” and “[t]herefore, Mr. Hall +acted as Eng. Quality Reviewer.” Hall then signed the supervision, review, and approval +checklist as both the engagement and EQR partner. Subsequently, for the first quarter +fiscal year 2014 review for this same client, Hall did not sign off as EQR but added a +memo to the file reiterating that “The Hall Group did not have access to an Engagement +Quality Reviewer” and concluded by stating “[w]e stand by our work.” + +c. The Hall Group’s Independence Was Impaired + +20. Section 10A(j) of the Exchange Act, Audit Partner Rotation, states “it shall +be unlawful for a registered public accounting firm to provide audit services to an issuer if +the lead (or coordinating) audit partner (having primary responsibility for the audit) or the +partner responsible for reviewing the audit, has performed audit services for that issuer in +each of the previous five fiscal years of that issuer. The Commission’s independence rules +allow engagement and concurring partners to serve for five consecutive years, after which +they may not serve in either role for another period of five years. Rule 2-01(c)(6)(i)(A) of + +7 Freestone Resources, Inc. for fiscal year ended June 30, 2012; Seven Arts Entertainment for fiscal +year ended June 30, 2012; and DynaResource for quarters ended March 31, June 30, and Sept. 30, 2012. + + 7 +Regulation S-X. Related PCAOB rules and standards require that a registered public +accounting firm and its associated persons be independent of the Firm’s issuer audit clients. + +21. Hall was The Hall Group’s sole partner prior to 2012 and therefore served +as the only engagement partner on each of The Hall Group’s engagements before 2012. In +a February 2012 response to the PCAOB addressing deficiencies noted in the PCAOB’s +2010 inspection, Hall acknowledged that he served as the lead engagement partner for one +issuer for five consecutive years and the firm’s review of the issuer’s first quarter of the +sixth year. Hall explained that it was the last quarter the firm was engaged as the issuer’s +auditor, and that to remediate, he (1) named Helterbran as a partner in February 2012; and +(2) developed a log to ensure that appropriate partner rotation occurs. + +22. After Helterbran’s departure in early July 2013, Hall was once again The +Hall Group’s sole partner. Hall attempted to address the partner rotation issue by offering +to promote one of his audit staff to a non-equity partner but the individual rejected the +offer. As a result, Hall knowingly or at least recklessly served as the lead engagement +partner for at least three of The Hall Group’s reviews for quarters ended June 30, 2013 and +September 30, 2013, even though he had already served as the lead engagement partner for +five consecutive years and, accordingly, The Hall Group lacked independence under the +Commission’s rules with respect to these issuers. + +d. Reports on Audited Financial Statements + +23. Under AU § 508, Reports on Audited Financial Statements, an auditor may +only express an unqualified opinion on historical financial statements when he has formed +such an opinion on the basis of an audit performed in accordance with PCAOB standards. +AU § 508.07. + +24. 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.” +And “references 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). Thus, 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 PCAOB standards when it has not. + +. +25. The Hall Group issued and Hall and Helterbran approved the issuance of, at +least 16 audit reports, including at least eight for which Cisneros provided concurring +approval of issuance. Each of the firm’s audit reports states that “The Hall Group CPAs” +conducted its audits in accordance with PCAOB standards. As stated above, these +statements were false. As a result, The Hall Group willfully violated, and Hall, Helterbran, +and Cisneros willfully aided and abetted The Hall Group’s violations of, Rule 2-02(b)(1). + + + 8 +ii. Hall, as CFO, Allowed DynaResource to File its 2014 Forms 10-Q Without +Reviews by an Independent Public Accountant + +26. Rule 10-01(d) of Regulation S-X states, in part, “[p]rior to filing, interim +financial statements included in quarterly reports on Form 10-Q (17 CFR 249.308(a)) must +be reviewed by an independent public accountant using professional standards and +procedures for conducting such reviews.” Rules 2-01(c)(1) and 2-01(c)(3) of Regulation S- +X state, in part, that an accountant is not independent when the accounting firm has any +loan to or from, or certain business relationships with, an audit client’s officers. + +27. After selling certain of his firm’s assets to Thakkar CPA, Hall assisted +Thakkar CPA in soliciting audit engagements from each of The Hall Group’s audit clients, +including DynaResource. DynaResource engaged Thakkar CPA in January 2014. On +April 15, 2014, Thakkar CPA issued an audit report on DynaResource’s 2013 financial +statements, which it signed as “The Hall Group CPAs.” The same day, DynaResource +named Hall as its CFO. Thereafter, Hall functioned as Thakkar CPA’s primary contact on +audit-related issues. Thakkar CPA continued as DynaResource’s external auditor until it +resigned on March 5, 2015. + +28. DynaResource filed its first, second, and third quarter 2014 Forms 10-Q +with the Commission after the included financial statements were reviewed by Thakkar +CPA. Hall signed management letters of representation in connection with each of +Thakkar CPA’s reviews, and made certifications required under Rule 13a-14 of the +Exchange Act for each of DynaResource’s first, second, and third quarter 2014 Forms +10-Q. + +29. Hall allowed Thakkar CPA to provide audit services to DynaResource even +though he knew that he was an officer of the company and that he had a direct financial +interest in and a business relationship with Thakkar, CPA. Specifically, the following +events impaired Thakkar CPA’s independence with respect to its reviews of interim +financial information DynaResource included in its Forms 10-Q filed with the Commission +in 2014: + + Thakkar CPA delivered a note payable to David S. Hall, P.C., which remained +outstanding even after Hall became DynaResource’s CFO, as a result of the terms +of the asset purchase agreement, under which Thakkar paid Hall $450,000 in cash +and undertook a 5%, two-year promissory note for $313,516. The final purchase +price also was dependent upon the future success of Thakkar CPA as the purchase +price was to be adjusted up or down based upon actual collection during the three +years following the Closing Date. Additionally, the asset purchase agreement +included a provision under which Hall could earn fees for providing services to +Thakkar CPA after the Closing Date (although Hall did not earn any fees under +this provision). + + + 9 + Thakkar CPA unilaterally suspended payments on the promissory note to David +S. Hall, P.C. in May 2014 after determining that future collections were likely to +be less than the amounts expected at the Closing Date. +30. Hall allowed Thakkar CPA to provide audit services to DynaResource even +though he knew he had a direct financial interest in and a business relationship with the +company’s audit firm and, despite this knowledge, executed the certifications required +under Rule 13a-14 of the Exchange Act and allowed DynaResource to file its 2014 Forms +10-Q with the Commission. + +D. VIOLATIONS + +31. As a result of the conduct described above, The Hall Group willfully +violated, and Hall willfully aided and abetted and caused The Hall Group’s violations of, +Section 10A(j), which makes it unlawful for a registered public accounting firm to provide +audit services to an issuer if the lead (or coordinating) audit partner (having primary +responsibility for the audit) or the partner responsible for reviewing the audit, has +performed audit services for that issuer in each of the previous five fiscal years of that +issuer. + +32. As a result of the conduct described above, The Hall Group willfully +violated, and Hall, Helterbran, and Cisneros willfully aided and abetted and caused The +Hall Group’s violations of, Rule 2-02(b)(1) of Regulation S-X which requires an +accountant’s report to state whether the audit was made in accordance with PCAOB +Standards. + +33. As a result of the conduct described above, The Hall Group, Hall, +Helterbran, and Cisneros willfully aided and abetted and caused issuers to violate Section +13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. + +34. As a result of the conduct described above, Hall willfully aided and abetted +and caused DynaResource to violate Section 13(a) of the Exchange Act and Rule 13a-13 +thereunder. + +35. As a result of the conduct described above, Hall willfully violated rule +13a-14 of the Exchange Act which requires an issuer’s principal financial officer to attest +that the company’s “report does not contain any untrue statement of a material fact.” + +36. As a result of the conduct described above, The Hall Group, Hall and +Helterbran engaged in improper professional conduct subject to Section 4C(a)(2) of the +Exchange Act and the Commission’s Rules of Practice 102(e)(1)(ii). + +37. As a result of the conduct described above, Cisneros engaged in improper +professional conduct subject to Section 4C(a)(2) of the Exchange Act. + +38. As a result of the conduct described above, The Hall Group, Hall, +Helterbran, and Cisneros willfully violated and/or willfully aided and abetted and caused + + 10 +violations of the federal securities laws, which constitutes conduct subject to Section +4C(a)(3) of the Exchange Act the Commission’s Rules of Practice 102(e)(1)(iii). + +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 Respondents an opportunity to establish any defenses to such +allegations; + +B. Whether, pursuant to Section 21C of the Exchange Act, Respondents should +be ordered to cease and desist from committing or causing any violation and any future +violation of Sections 10A and 13(a) and Rules 13a-1, 13a-13, 13a-14 of the Exchange Act +and Rule 2-02(b)(1) of Regulation S-X; + +C. Whether, pursuant to Section 4C of the Exchange Act and Rule 102(e) of +the Commission’s Rules of Practice, Respondents should be censured or denied, +temporarily or permanently, the privilege of appearing or practicing before the Commission +as accountants; + +D. Whether, pursuant to Section 21B of the Exchange Act, civil penalties +should be levied against Respondents; and + +E. Whether, pursuant to Section 21C(e) of the Exchange Act, Respondents +should be subject to disgorgement with prejudgment interest. + +IV. + +IT IS ORDERED that a public hearing for the purpose 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, 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. + +IT IS FURTHER ORDERED that each 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 of the Commission's Rules of Practice, 17 C.F.R. § 201.220. + +If a Respondent fails to file the directed answer, or 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 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. + + 11 + +This Order shall be served forthwith upon Respondents as provided for in the +Commission’s Rules of Practice. + +IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an +initial decision no later than 300 days from the date of service of this Order, pursuant to +Rule 360(a)(2) of the Commission’s Rules of Practice. + +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. + + + + Brent J. Fields + Secretary + + + + 12 +Appendix +David S. Hall, P.C. d/b/a The Hall Group CPAs +Audits Not Performed in Accordance with PCAOB Standards + + +Issuer +Fiscal Year +Ended +Engagement +Partner EQR +1. Freestone Resources, Inc. 6/30/12 Hall Cisneros +2. Kingdom Koncrete, Inc. 12/31/10 Hall Cisneros +3. Seven Arts Entertainment, Inc. 6/30/12 Hall Cisneros +4. Surface Coatings, Inc. 12/31/10 Hall Cisneros +5. Surface Coatings, Inc. 12/31/12 Hall Not Obtained or Not Documented +6. Medient Studios, Inc. 12/31/12 Hall Hall +7. Kingdom Koncrete, Inc. 6/30/13 Hall Hall +8. 360 Global Investments, Inc. +f/k/a 360 Global Wine, Inc. +12/31/10 Helterbran Cisneros +9. Dyna Resource, Inc. 12/31/10 Helterbran Cisneros +10. Kingdom Koncrete, Inc. 12/31/11 Helterbran Cisneros +11. Premier Oil Field Service 12/31/12 Helterbran Cisneros +12. Kingdom Koncrete, Inc. 12/31/12 Helterbran Performed by other staff below +partner or equivalent level +13. Surface Coatings, Inc. 12/31/11 Helterbran Not Obtained or Not Documented +14. 360 Global Investments, Inc. +f/k/a 360 Global Wine, Inc. +12/31/11 +Helterbran Not Obtained or Not Documented +15. 360 Global Investments, Inc. +f/k/a 360 Global Wine, Inc. +12/31/12 +Helterbran Not Obtained or Not Documented +16. Dyna Resource, Inc. 12/31/11 Helterbran Not Obtained or Not Documented + + + + + 13 +David S. Hall, P.C. d/b/a The Hall Group CPAs +Reviews Not Performed in Accordance with PCAOB Standards + + +Issuer +Quarter +Ended +Engagement +Partner EQR +1. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 3/31/12 Helterbran + Cisneros +2. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 6/30/12 Helterbran Cisneros +3. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 9/30/12 Helterbran Cisneros +4. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 3/31/13 Helterbran Not Obtained or Not Documented +5. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 6/30/13 Hall Not Obtained or Not Documented +6. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 9/30/13 Hall Not Obtained or Not Documented +7. Dyna Resource, Inc. 3/31/12 Helterbran Cisneros +8. Dyna Resource, Inc. 6/30/12 Helterbran Cisneros +9. Dyna Resource, Inc. 9/30/12 Helterbran Cisneros +10. Dyna Resource, Inc. 3/31/13 Helterbran Not Obtained or Not Documented +11. Dyna Resource, Inc. 6/30/13 Hall Not Obtained or Not Documented +12. Dyna Resource, Inc. 9/30/13 Hall Not Obtained or Not Documented +13. Freestone Resources, Inc. +(FYE 6/30) 9/30/11 ** Blank **8 Not Obtained or Not Documented +14. Freestone Resources, Inc. +(FYE 6/30) 12/31/11 ** Blank ** Not Obtained or Not Documented +15. Freestone Resources, Inc. +(FYE 6/30) 3/31/12 Hall Not Obtained or Not Documented +16. Freestone Resources, Inc. +(FYE 6/30) 9/30/12 Hall Not Obtained or Not Documented +17. Freestone Resources, Inc. +(FYE 6/30) 12/31/12 Hall Not Obtained or Not Documented +18. Kingdom Koncrete, Inc. 3/31/12 Helterbran Cisneros +19. Kingdom Koncrete, Inc. 6/30/12 Helterbran + Cisneros + +8 **Blank** references instances in which neither the Supervision, Review, and Approval Forms nor the +Engagement Completion Forms identify the lead engagement partner. + + 14 +Issuer +Quarter +Ended +Engagement +Partner EQR +20. Kingdom Koncrete, Inc. 9/30/12 Helterbran Cisneros +21. Kingdom Koncrete, Inc. 3/31/13 ** Blank ** Not Obtained or Not Documented +22. Kingdom Koncrete, Inc. 6/30/13 Hall Not Obtained or Not Documented +23. Premier Oil Field Service 3/31/12 Helterbran Not Obtained or Not Documented +24. Premier Oil Field Service 6/30/12 Helterbran Not Obtained or Not Documented +25. Premier Oil Field Service 9/30/12 Helterbran Cisneros +26. Premier Oil Field Service 3/31/13 ** Blank ** Not Obtained or Not Documented +27. Premier Oil Field Service 6/30/13 Hall Not Obtained or Not Documented +28. Seven Arts Entertainment, Inc. +(FYE 6/30) 9/30/12 Hall Cisneros +29. Seven Arts Entertainment, Inc. +(FYE 6/30) 12/31/12 ** Blank ** Not Obtained or Not Documented +30. Seven Arts Entertainment, Inc. +(FYE 6/30) 9/30/13 Hall Not Obtained or Not Documented +31. Surface Coatings, Inc. 3/31/12 Helterbran Cisneros +32. Surface Coatings, Inc. 6/30/12 Helterbran Cisneros +33. Surface Coatings, Inc. 9/30/12 Helterbran Cisneros +34. Surface Coatings, Inc. 3/31/13 Helterbran Cisneros +35. Surface Coatings, Inc. 6/30/13 Hall Not Obtained or Not Documented + + +Engagement Partner Cisneros Not Obtained or Not Documented Total +Hall 1 7 8 +Helterbran 14 4 18 +Blank -- 9 9 +Totals 15 20 35 + + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3772.pdf b/raw/aaer/2016/AAER-3772.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f3b0c65787ba5f460ff791dbec7658039cff47c6 --- /dev/null +++ b/raw/aaer/2016/AAER-3772.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4658900a1702d1c10b2391eeb0b28dcca1fd980897c507989578516a0ce56813 +size 307480 diff --git a/raw/aaer/2016/AAER-3773.pdf b/raw/aaer/2016/AAER-3773.pdf new file mode 100644 index 0000000000000000000000000000000000000000..20dd0fed198682700bed39f8f7f66901c0c34790 --- /dev/null +++ b/raw/aaer/2016/AAER-3773.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:ad206203ae18796cf8aac2280da318be6004cd83959aa4d0867171f81f7cb0d1 +size 365713 diff --git a/raw/aaer/2016/AAER-3777.txt b/raw/aaer/2016/AAER-3777.txt new file mode 100644 index 0000000000000000000000000000000000000000..79208a15f8085afbea715275c41539ada621bbc2 --- /dev/null +++ b/raw/aaer/2016/AAER-3777.txt @@ -0,0 +1,1057 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 77997 / June 6, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3777 / June 6, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17277 + + + +In the Matter of + +SILBERSTEIN UNGAR PLLC, +RONALD N. SILBERSTEIN, CPA +JOEL M. UNGAR, CPA +SETH A. GORBACK, AND +DAVID A. KOBYLAREK, 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 and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted against Silberstein Ungar PLLC (or “the firm”), Ronald N. Silberstein, CPA, Joel M. +Ungar, CPA, Seth A. Gorback, and David A. Kobylarek, CPA (collectively “Respondents”) +pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and +Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice. + +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 + +2 +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 +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 finds1 that + +Summary + + These proceedings arise out of deficient audits of financial statements of nine issuer clients +by the Respondents, who issued audit reports that failed to comply with Public Company +Accounting Oversight Board (“PCAOB”) auditing standards.2 During the audits in question, each +of the Respondents repeatedly engaged in improper professional conduct pursuant to Exchange Act +Section 4C and Rule 102(e)(1) of the Commission’s Rules of Practice that resulted in violations of +applicable professional standards and demonstrated a lack of competence to practice before the +Commission. Specifically, the Respondents failed to comply with some or all of the following +requirements in PCAOB standards: (1) obtain sufficient appropriate evidence to provide a +reasonable basis for the audit opinion; (2) evaluate the reasonableness of accounting estimates +made by management in the context of the financial statements taken as a whole and adequately +document the corresponding audit procedures performed; (3) properly document procedures +relating to the evaluation of the adequacy of disclosure in financial statements; (4) obtain +appropriate engagement quality reviews; (5) properly examine journal entries for evidence of +possible misstatement due to fraud and document the performance of journal entry testing; (6) +document how the firm overcame the presumption to send accounts receivable confirmations; (7) +perform analytical procedures related to revenue; (8) properly supervise the audit; and (9) exercise +due professional care and professional skepticism. + + In addition, Silberstein Ungar violated, and Silberstein, Ungar, Gorback, and Kobylarek +willfully aided and abetted and caused the firm’s violations of, Exchange Act Rule 2-02(b)(1) of +Regulation S-X when Silberstein Ungar claimed in each of its audit reports that it complied with +PCAOB standards when it had not. Based upon Silberstein Ungar’s deficient audit reports being +included in issuers’ filings, the Respondents also willfully aided and abetted and caused issuers’ +violations of Exchange Act Sections 13(a) and 15(d) and Rules 13a-1 and 15d-1 thereunder. + + +1 The findings herein are made pursuant to Respondents’ Offers and are not binding on any other person or entity in +this or any other proceeding. +2 The relevant period involves audits conducted for the year ended August 31, 2012 through the year ended +February 28, 2013. References to PCOAB auditing standards refer to the standards in effect during the relevant +period. + +3 +Respondents +1. Silberstein Ungar PLLC. Silberstein Ungar is a Michigan limited liability +company and CPA firm located in Bingham Farms, Michigan. The firm previously represented +that its specialties included audits of issuers and those companies planning to go public at a later +date. During the relevant period, the firm was registered with the PCAOB, the Canadian Public +Accountability Board, and the International Franchise Association.3 In July 2014, Silberstein +Ungar’s client base was purchased by another CPA firm. Silberstein Ungar still exists but does not +currently conduct work auditing public companies. + +2. Ronald N. Silberstein. Age 59. Silberstein holds an active CPA license in +Michigan and joined the firm now known as Silberstein Ungar in July 2007. Silberstein served as +the engagement partner for all but one of the audits under review. Silberstein served as a non- +equity partner at another CPA firm until August 2015. + +3. Joel M. Ungar. Age 54. Ungar holds an active CPA license in Michigan and co- +founded Ungar & Associates in 2003 (later known as Silberstein Ungar). He served as the +engagement quality reviewer for seven of the audits under review in this investigation. Ungar +served as the engagement partner for the Issuer C audit. He left the firm in November 2013. + +4. Seth A. Gorback. Age 37. Gorback began working at Silberstein Ungar in +January 2008 as a staff auditor before becoming a manager in March 2010, a non-equity partner in +August 2011, and an equity partner in or around August 2012. Although Gorback was a partner in +the firm at the time of the audits, he did not serve as the engagement partner in any of the relevant +audits and functioned in a role more analogous to that of engagement manager on four of the audits +under review. Gorback is currently self-employed. + +5. David A. Kobylarek. Age 65. Holds an active CPA license in Michigan. +Kobylarek began working at Silberstein Ungar in December 2007 as a senior accountant before +becoming a manager in March 2010, a non-equity partner in August 2011, and an equity partner in +or around August 2012. Although Kobylarek was a partner in the firm at the time of the audits, he +did not serve as the engagement partner in any of the relevant audits, functioned in a role more +analogous to that of engagement manager on six of the audits under review and prepared and +reviewed certain audit work papers for one additional audit under review. Kobylarek is currently +retired. + +Other Relevant Entities + +6. Issuer A is a Nevada corporation with its principal place of business in South +Africa. Issuer A’s business includes the daily rental of vehicles to business and leisure customers +through company-owned stores in the country of South Africa. During the relevant period, Issuer +A was a reporting company pursuant to Section 15(d) of the Exchange Act and was quoted on the + +3 In 2015, Silberstein Ungar withdrew its registration from the PCAOB. Silberstein Ungar also withdrew from the +Canadian Public Accountability Board in October 2014 and transferred its membership in the International +Franchise Association to another CPA firm in 2014. + +4 +OTC Bulletin Board (“OTCBB”). Silberstein Ungar served as Issuer A’s auditor as of and for the +year ended February 28, 2013. +7. Issuer B is a Nevada corporation with its principal place of business in +Nevada. Issuer B is an exploration stage mining company with claims in Arizona and +California. During the relevant period, Issuer B common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and was quoted on the +OTCBB. Silberstein Ungar served as Issuer B’s auditor as of and for the year ended September 30, +2012. +8. Issuer C is a Nevada corporation with its principal place of business in +Nevada. Issuer C is engaged in the identification, acquisition, and development of prospects +believed to have mineral deposits in Nevada and Colorado. Issuer C was a reporting company +pursuant to Section 15(d) of the Exchange Act and was quoted on the OTCBB. Silberstein Ungar +served as Issuer C’s auditor as of and for the year ended December 31, 2012. +9. Issuer D is a Nevada corporation with its principal place of business in +California. Issuer D owns or has exclusive licenses to various product candidates in the +biopharmaceutical and diagnostic areas of the healthcare industry. Issuer D common stock is +registered with the Commission pursuant to Section 12(g) of the Exchange Act and is quoted on +the OTCBB. Silberstein Ungar served as Issuer D’s auditor as of and for the year ended December +31, 2012. +10. Issuer E is a Nevada corporation with its principal place of business in +Nevada. Issuer E specializes in the design, development, manufacturing, marketing and +acquisition of proprietary casino table games and associated technology, platforms and systems for +the casino gaming industry. Issuer E common stock is registered with the Commission pursuant to +Section 12(g) of the Exchange Act and is quoted on the OTCBB. Silberstein Ungar served as +Issuer E’s auditor as of and for the year ended December 31, 2012. +11. Issuer F is a Nevada corporation with its principal place of business in +Michigan. Issuer F is a technology company providing support within physician and patient web- +based platforms, including Electronic Health Records and Patient Portals. Issuer F common stock +is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is quoted on +the OTCBB. Silberstein Ungar served as Issuer F’s auditor as of and for the year ended December +31, 2012. +12. Issuer G is a Delaware corporation with its principal place of business in New +York. Issuer G is an alcoholic beverage company specializing in the development and early +growth of spirits and establishing its assets as viable and attractive acquisition candidates for the +major global spirits companies. During the relevant period, Issuer G common stock was registered +with the Commission pursuant to Section 12(g) of the Exchange Act and was quoted on the +OTCBB. Silberstein Ungar served as Issuer G’s auditor and audited the financial statements for +the year ended December 31, 2012 included in the Form 10-K filed on April 1, 2013, and the +restated financial statements for the year ended December 31, 2012 included in the Form 10-K/A +filed on August 21, 2013. + +5 +13. Issuer H is a Wyoming corporation with its principal place of business in +California. Issuer H’s business includes audio and video streaming and advertising services to +internet and terrestrial radio stations and other broadcast content providers. Issuer H was a +reporting company pursuant to Section 15(d) of the Exchange Act and is quoted on the +OTCBB. Silberstein Ungar served as Issuer H’s auditor and audited the financial statements for +the year ended August 31, 2012 included in the Form 10-K filed on December 14, 2012, and the +restated financial statements for the year ended August 31, 2012 included in the Form 10-K/A filed +on June 4, 2013. +14. Issuer I is a Nevada corporation with its principal place of business in +Oregon. Issuer I is in the business of designing, developing, and marketing distributed generation, +wind power systems for the small wind market as well as power management solutions. During +the relevant period, Issuer I common stock was registered with the Commission pursuant to +Section 12(g) of the Exchange Act and was quoted on the OTCBB. Silberstein Ungar served as +Issuer I’s auditor as of and for the year ended February 28, 2013. +The Conduct at Issue + +A. Failure to Obtain Sufficient Evidence to Support the Audit Opinion, the +Accounting Estimates Made by Management and Adequately Document the Audit +Procedures Performed (AS No. 15, AU § 342, and AS No. 3) + +15. PCAOB Auditing Standard No. 15 Audit Evidence requires that the auditor plan +and perform audit procedures to obtain sufficient appropriate audit evidence to provide a +reasonable basis for his or her opinion. As the assessed risk increases, the evidence that the auditor +should obtain also increases. For example, ordinarily more evidence is needed to respond to +“significant risks.”4 When using the information produced by the Company as audit evidence, the +auditor should evaluate the evidence by testing its accuracy and completeness and evaluating +whether it is sufficiently precise and detailed for the purposes of the audit.5 Additionally, under +PCAOB Auditing Standard AU § 342 Auditing Accounting Estimates, the auditor's objective when +evaluating accounting estimates is to obtain sufficient appropriate evidential matter to provide +reasonable assurance that all accounting estimates that could be material to the financial statements +have been developed; those accounting estimates are reasonable in the circumstances; and the +accounting estimates are presented in conformity with applicable accounting principles and are +properly disclosed.6 + +16. PCAOB Auditing Standard No. 3 Audit Documentation requires an auditor to +prepare and retain documentation that provides a written record of the basis for its conclusions. +Audit documentation must clearly demonstrate that the work was in fact performed. Among other +items, the audit documentation must contain sufficient information to enable an experienced + +4 PCAOB Auditing Standard No. 12 Identifying and Assessing Risks of Material Misstatement requires the auditor +to determine whether any of the assessed risks of material misstatement are significant risks and provides factors +that should be evaluated when determining whether a risk of material misstatement is a significant risk. +5 AS No. 15 at .4 –. 5, and .10. +6 AU § 342 .07. + +6 +auditor, having no previous connection with the engagement to understand the nature, timing, +extent, and results of the procedures performed, evidence obtained, and conclusions reached. +Audit documentation must also contain sufficient information to enable an experienced auditor, +having no previous connection with the engagement, to determine, among other things, the person +who reviewed the work and the date of such review. 7 The following examples demonstrate some +of the violations of these auditing standards. + +1. Issuer A Audit for the Year Ended February 28, 2013 +17. Receivables and property and equipment comprised a total of approximately 87% +of Issuer A’s total assets at 2/28/13 and both audit areas were classified as “significant or fraud +risks” by Silberstein Ungar. Gorback and Silberstein initialed the work papers as the respective +preparer and reviewer of the documents supporting these audit areas. These work papers were +predominantly comprised of testing prepared and performed by a different accounting firm for a +different Issuer A audit. This other audit was separate and apart from Silberstein Ungar’s audit of +Issuer A. The other accounting firm did not assist Silberstein Ungar in performing its Issuer A +audit. Gorback and Silberstein considered the other accounting firm’s work papers as if they were +prepared by Issuer A’s internal accountants and placed no reliance on the testing performed by the +other accounting firm. Nevertheless, Silberstein Ungar’s work papers did not contain sufficient +documentation of additional audit testing performed by Silberstein Ungar. + +18. The audit work papers meant to document the audit procedures for related party +transactions,8 subsequent events,9 and inquiries of Issuer A’s management concerning the risk of +fraud and material misstatement,10 were either duplicates or near duplicates of work papers from +different Silberstein Ungar audits and included the documentation of procedures performed for the +other audits, not Issuer A’s audit. In addition, the audit program meant to document the +subsequent event procedures, which are procedures that are designed to test for events that occur +after the balance sheet date, contains dating that reflects that Gorback performed the procedures +prior to Issuer A’s balance sheet date. Gorback also failed to send Issuer A the inquiries of +management concerning the risk of fraud and material misstatement until the Form 10-K filing +date, and did not receive them back until after the Form 10-K was filed. + +2. Issuer B Audit for the Year Ended September 30, 2012 and Issuer C Audit +for the Year Ended December 31, 2012 + + +7 AS No. 3 at .1, .5, and .6. +8 AU § 334 Related Parties contained the auditors’ requirements at the time of this audit for identifying related +party relationships and testing related party transactions. +9 AU § 560 Subsequent Events contains the auditors’ requirements for performing procedures to ascertain whether +transactions or events occurring in the “subsequent period” between the balance sheet date and the date of the +auditor’s report require adjustment or disclosure in the financial statements or notes to the financial statements. +10 AS No. 12 requires the auditor to perform procedures for assessing the risk of material misstatement of the +financial statements, including misstatements due to fraud. One of the required risk assessment procedu res is for the +auditor to make inquiries of “the audit committee, management, and others within the company about the risks of +material misstatement.” + +7 +19. Issuer B and Issuer C are both mining companies whose largest assets, mining +claims and mineral rights, represent almost 80% and 45% of their total assets, respectively. For +Issuer B, Silberstein Ungar also identified the significant risk relating to these mining assets. +However, the audit work papers meant to support the respective audit procedures and conclusion +(that no impairment was necessary) mainly consisted of memos based on generally accepted +accounting principles applicable to companies in the oil and gas industry, which were not +applicable to Issuer B or Issuer C, since they are mining companies. Issuer B’s own treasurer +raised this concern in an email to Silberstein and others, stating that the accounting principles that +were included in the impairment memo pertained to oil and gas wells.11 Despite this red flag, +Silberstein agreed to the use of these accounting principles by the company. These work papers +did not contain sufficient documentation of the procedures performed to test the accuracy and +completeness of the information in the memos, an evaluation of whether the information was +sufficiently precise, or sufficient evidence supporting the company’s use of the oil and gas +accounting principles or the conclusion that no impairment of these assets was necessary. For +example, the audit work papers do not contain evidence Silberstein Ungar reviewed, evaluated, or +tested the process used by management to conclude that no impairment was necessary, or +developed their own independent expectation to corroborate the results of Issuer B and Issuer C’s +impairment tests.12 +20. Issuer B’s audit work papers and notes to the financial statements also reflect the +existence of a derivative valued at approximately 50% of Issuer B’s liabilities at September 30, +2012. The work papers did not reflect the work performed to assess whether the classification as a +derivative was correct. Nor did the Issuer B work papers contain documentation of procedures +performed and sufficient evidence supporting whether the information was sufficiently precise in +order to determine whether the accounting treatment and disclosures related to the derivative were +appropriate. For example, the work papers did not include documentation and sufficient evidence +supporting whether Kobylarek and Silberstein: (1) performed auditing procedures to understand +the application of generally accepted accounting principles for assertions made by Issuer B about +its derivative; (2) determined whether generally accepted accounting principles specified the +method to be used to determine the fair value of Issuer B’s derivative; (3) evaluated if Issuer B’s +fair value of the derivative was consistent with the specified valuation method; or (4) evaluated if +the presentation and disclosure of derivative was in conformity with generally accepted accounting +principles .13 + +11 The memos were prepared by the company or by an accountant engaged to assist in the preparation of the +company’s accounting records. +12 AU § 342 Auditing Accounting Estimates states that the auditor should obtain an understanding of how +management developed the estimate by either reviewing and testing the process used by management to develop the +estimate or developing an independent expectation of the estimate to corroborate the reasonableness of +management's estimate. AU § 342 .10. +13 AU § 332 Auditing Derivative Instruments, Hedging Activities and Investments in Securities provides guidance +for auditors in planning and performing auditing procedures for assertions about derivative instruments, hedging +activities, and investments in securities that are made in an entity’s financial statements. The auditing procedures +required by AU § 332 include obtaining an understanding the application of generally accepted accounting +principles for assertions about derivatives, which might require that the auditor have special knowledge because of + +8 +21. Finally, Issuer B’s audit file generally does not contain evidence of the date the +audit work was completed or the dates Kobylarek and Silberstein performed their review of the +work papers. Instead, the audit work papers generally contain the initials of the individual who +prepared or reviewed the respective audit work along with the date the audit work was placed into +the electronic audit file, rather than the date the audit work was completed or reviewed. For +example, the audit work papers reflecting audit testing for the company’s cash, mining claims, gold +bullion loan, financing fees, related party transactions, testing of journal entries, subsequent events, +and inquiries of management concerning the risk of fraud and material misstatement do not contain +evidence of the date the audit work was completed or reviewed. +3. Issuer G Restatement Audit for the Year Ended December 31, 2012 and +Issuer H Restatement Audit for the Year Ended August 31, 2012 +22. Issuer G filed a Form 10-K/A for the year ended December 31, 2012 on August 21, +2013 and restated the respective financial statements and notes to the financial statements to +correct its accounting for certain stock warrants. Issuer H filed a Form 10-K/A the year ended +August 31, 2012 on June 4, 2013 and restated the respective financial statements and notes to the +financial statements to report a contingent royalty liability associated with the purchase of certain +assets and liabilities. Silberstein Ungar’s audit documentation for Issuer G’s restated stock +warrants balances and for Issuer H’s restated contingent liability mainly consisted of spreadsheets, +memos, and/or calculations that were prepared by Issuer G or Issuer H or their representatives. +Kobylarek generally initialed these documents as the “preparer.” However, there is no evidence in +the audit documentation that Silberstein reviewed the Issuer G work papers. These work papers do +not contain sufficient evidence or documentation of procedures performed by Silberstein Ungar on +the main financial model inputs and other values underlying the restated amounts in the financial +statements, such as the “risk free rate,” “expected life in years,” and “volatility” inputs in the model +chosen to calculate the restated warrant values (for Issuer G) or the discount rate used to calculate +the contingent liability (for Issuer H). For example, the auditors did not document whether auditing +procedures were performed to test the “volatility” value used to calculate Issuer G’s restated +warrant values or the discount rate used to calculate Issuer H’s contingent liability.14 Additionally, + +the complexity of those principles. Additionally, the auditor should determine whether generally accepted +accounting principles specify the method to be used to determine the fair value of the entity’s derivatives and +securities and evaluate whether the determination of fair value is consistent with the specified valuation +method. The auditor should also evaluate whether the presentation and disclosure of derivatives and securities in the +entity’s financial statements are in conformity with generally accepted accounting principles. AU § 332 at .01, 05, +.35, and .49. +14 AU § 328 Auditing Fair Value Measurements and Disclosures establishes standards and provide guidance on +auditing fair value measurements and disclosures contained in financial statements. The auditor should obtain +sufficient appropriate audit evidence to provide reasonable assurance that fair value measurements and disclosures +are in conformity with GAAP. The auditor should test the data used to develop the fair value measurements and +disclosures and evaluate whether the fair value measurements have been properly determined from such data and +management’s assumptions. Specifically, the auditor evaluates 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. +The auditor’s tests also may include, for example, procedures such as verifying the source of the data, mathematical +recomputation of inputs, and reviewing of information for internal consistency, includ ing whether such information + +9 +besides recalculating the company’s own computations, the audit team did not perform procedures +to test the process used by management to develop the “risk free rate,” “expected life in years,” and +“volatility” inputs in the model chosen to calculate the restated warrant values (for Issuer G) or the +discount rate used to calculate the contingent liability (for Issuer H) and did not develop an +independent expectation of these estimates to corroborate the reasonableness of management’s +estimates. +23. Kobylarek and Silberstein also failed to gather sufficient evidence and +documentation supporting the performance of subsequent event testing. For example, the audit +documentation supporting Kobylarek’s and Silberstein’s subsequent events testing for these +restatement audits was limited to a management representation letter signed by Issuer G and Issuer +H management.15 +4. Other Issuer Audits +24. Failures to comply with the above PCAOB auditing standards regarding sufficient +evidence and documentation for the other issuers mainly relate to the impairment testing associated +with the issuer’s significant assets. Silberstein, Gorback, and Kobylarek failed to: (1) obtain +sufficient appropriate audit evidence supporting the impairment testing performed; (2) evaluate the +company-prepared impairment analyses by testing the accuracy and completeness of the +underlying information; (3) evaluate whether those analyses were sufficiently precise; and (4) +properly document the nature, timing, and extent of the procedures performed. +25. Issuer D’s audit work papers, initialed as prepared by Gorback and reviewed by +Silberstein, contained company-prepared financial and cash flows forecasts to support the +impairment testing of almost 44% of the company’s assets. The financial forecasts estimated +revenues of $21 – $137 million and income of $4 – $77 million from 2013 – 2015. However, for +2012, Issuer D had no revenues and a $5.1 million loss, and the notes to the financial statements +audited by Silberstein Ungar disclose, “company expects to continue to incur substantial losses +over the next several years during its development phase ….” The work papers did not contain +sufficient evidence to support testing the forecast or the conclusions reached from the forecast, +despite the fact the notes to the financial statements contained information about the company’s +future prospects that conflicted with the forecast. 16 The section of the audit documentation + +is consistent with management’s intent and ability to carry out specific courses of action. AU § 328 at .01, .03 , and +.39. +15 AU § 560 ¶ 12, states the auditor should also generally perform procedures such as making certain inq uiries of +officers and other executives having responsibility for financial and accounting matters, read the latest available +interim financial statements, read the available minutes of meetings of stockholders, directors, and appropriate +committees; as to meetings for which minutes are not available, inquire about matters dealt with at such meetings +and inquire of client's legal counsel concerning litigation, claims, and assessments as part of ascertaining the +occurrence of subsequent events that may require adjustment or disclosure in the financial statements. +16 “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 No. 15 at .29. + +10 +pertaining to inquiries of Issuer D’s management concerning the risk of fraud and material +misstatement contained inquiries made of a CEO from a different Silberstein Ungar audit client, as +opposed to inquiries made of Issuer D’s CEO. This audit documentation was reviewed by +Silberstein and Gorback. In addition, inquiries concerning the risk of fraud and material +misstatement were sent by Gorback to the Issuer D CFO after the Form 10-K was filed, and were +received back from the CFO even later. +26. For the Issuer F audit, Gorback and Silberstein used an audit program as +documentation for the impairment testing for 36% of the company’s assets, which were also +identified by the audit team as a significant risk. The audit program mainly contained initials and +dates or “N/A” next to audit steps without further documentation of the procedures performed.17 +The audit work papers do not contain evidence Silberstein Ungar reviewed, evaluated, or tested the +process used by management to test for impairment, or developed their own independent +expectation to corroborate the results of Issuer F’s impairment test. +27. The Issuer I and Issuer E impairment documentation, for assets that comprised +approximately 50% and 87% of the company’s assets, respectively, mainly consisted of statements +from management and/or company-prepared memos without further documentation of procedures +performed to evaluate whether the information was sufficiently precise and accurate. The audit +planning documentation also stated concerning Issuer E that, “there is minimal internal control, +and the opportunity for management override exists, so risk of misstatement will be at a high level. +We should be aware of the possibility of the overstatement of assets ….” Notwithstanding this red +flag, and the fact that significant risks were identified by Silberstein Ungar for these assets, +Silberstein, Gorback (for Issuer E), and Kobylarek (for Issuer I) did not obtain sufficient audit +evidence to respond to these risks. Additionally, the audit work papers did not contain evidence +Silberstein Ungar reviewed, evaluated, or tested the process used by management to test for +impairment, or developed their own independent expectation to corroborate the results of Issuer I +and Issuer E’s impairment test. +B. Failure to Properly Document Procedures Relating to the Evaluation of the +Adequacy of Disclosure in Financial Statements (AS No. 3) +28. In all of the audits at issue Silberstein, Ungar, Gorback, and Kobylarek failed to +include documentation that clearly demonstrated they reconciled underlying accounting records to +the issuers’ financial statements and/or notes to the financial statements.18 The audit work papers + +17 Audit programs may provide evidence of audit planning as well as limited evidence of the execution of audit +procedures. The PCAOB in developing AS No. 3 specifically considered and rejected the idea that use of an audit +program eliminated the need for proper documentation in the work papers. AS No. 3 at A12. +18 “Audit documentation must clearly demonstrate that the work was in fact performed.” AS No. 3 at .6. The auditor's +substantive procedures must include reconciling the financial statements with the underlying accounting records. AS +No. 13 The Auditor’s Response to the Risks of Material Misstatement at .41. The auditor is required to evaluate +whether the financial statements, “contain the information essential for a fair presentation of the financi al statements +in conformity with the applicable financial reporting framework. Evaluation of the information disclosed in the +financial statements includes consideration of the form, arrangement, and content of the financial statements +(including the accompanying notes), encompassing matters such as the terminology used, the amount of detail +given, the classification of items in the statements, and the bases of amounts set forth.” PCAOB Auditing Standard +No.14 Evaluating Audit Results at .31. + +11 +contain lists of audit procedures within audit programs and checklists that include a general +procedure for agreeing the financial statements and notes to the financial statements to the +accounting records. The respective procedure includes initials and a date or a “yes” indicating the +respective procedure was performed. However, there is generally no additional documentation +evidencing that the work was actually completed. For example, Issuer A’s audit work papers are +generally in a foreign currency and the financial statements and notes to the financial statements +are presented in U.S. dollars. The audit work papers did not include evidence that Gorback or +Silberstein performed any procedures on the conversion of the foreign currency amounts in the +work papers into the U.S. dollar amounts in the financial statements and notes to the financial +statements. In addition, the Issuer A, Issuer D, and Issuer E work papers did not contain a copy of +the respective Form 10-K or the financial statements and notes to the financial statements included +in the Form 10-K. +C. Failure to Comply with the Requirements for Engagement Quality Reviews (AS +No. 7) + +29. PCAOB Auditing Standard No. 7 Engagement Quality Review requires an +engagement quality review and concurring approval of issuance for each audit engagement. The +objective of the engagement quality reviewer is to perform an evaluation of the significant +judgments made by the engagement team and the related conclusions reached in forming the +overall conclusion on the engagement and in preparing the engagement report in order to +determine whether to provide concurring approval of issuance. The engagement quality reviewer +should review documentation, to the extent necessary, evaluate the significant judgments that relate +to engagement planning, and evaluate the engagement team’s assessment and response to +significant risks. The engagement quality reviewer should also evaluate whether the engagement +documentation that he or she reviewed when performing the procedures indicates that the +engagement team responded appropriately to significant risks, and supports the conclusions +reached by the engagement team with respect to the matters reviewed.19 +30. The engagement quality review documentation should contain sufficient +information to enable an experienced auditor, having no previous connection with the engagement, +to understand the procedures performed by the engagement quality reviewer and include +information that identifies: (1) the engagement quality reviewer; (2) the documents reviewed by +the engagement quality reviewer; and (3) the date the engagement quality reviewer provided +concurring approval of issuance.20 In addition, PCAOB standards provide that the firm may grant +permission to the client to use the engagement report in an audit only after the engagement quality +reviewer has performed the review required and provides concurring approval of issuance.21 + +19 AS No. 7 at .1-.2, and .9 - .11. +20 AS No. 7 at .19. +21 AS No. 7 at .13. + +12 +1. Issuer G and Issuer H + +31. Silberstein and his firm failed to comply with the engagement quality review +requirements in connection with the Issuer H audit for the year ended August 31, 2012, and the +restatement audits of Issuer H for the year ended August 31, 2012 and Issuer G for the year ended +December 31, 2012. In each of these cases, the firm issued audit reports for these audit +engagements without obtaining an engagement quality review and concurring approval of +issuance. Silberstein was the engagement partner for all three audit engagements. +2. Issuer B + +32. For the year ended September 30, 2012, Silberstein and the firm failed to obtain an +engagement quality review before issuing its audit report and granting Issuer B permission to use +that report. The audit report was dated January 15, 2013 and Issuer B filed its Form 10-K, for the +year ended September 30, 2012, on January 16, 2013. Ungar did not complete the engagement +quality review until after the filing date. +3. Ungar’s Performance of Engagement Quality Reviews + +33. Ungar served as the engagement quality review partner on the Issuer A, Issuer B, +Issuer D, Issuer E, Issuer F and Issuer I audits. The engagement quality review checklist, +completed by Ungar and included in the respective audit work papers, purportedly reflects that he +performed an objective review of audit documentation relevant to significant accounting, auditing +and reporting judgments made by the engagement team and the conclusions reached. It also +purportedly indicates that he reviewed and evaluated the engagement team’s assessment and +response to significant risks, and he acknowledged in the work papers that the engagement work +papers that he reviewed supported the conclusions reached by the engagement team with respect to +the matters reviewed. As noted above, the audit work papers for these audits did not include +sufficient appropriate evidence supporting the procedures performed and conclusions reached by +the audit team and documentation of the procedures performed for significant financial statement +balances and/or areas identified by the engagement team as a significant risk. Additionally, the +audit documentation does not indicate the inquiries Ungar made of the engagement team, the +procedures performed, documents reviewed, or whether discussions were held with the +engagement team to evaluate the significant judgments related to engagement planning and the +engagement team’s assessment and audit responses to significant risks. The audit documentation +also does not indicate all the documents reviewed by Ungar as part of the engagement quality +review. +34. AS No. 7 provides that the engagement quality reviewer may provide concurring +approval of issuance only if, after performing the engagement quality review with due professional +care, he or she is not aware of a significant engagement deficiency.22 Due professional care entails +possessing the degree of skill commonly possessed by other auditors and exercising it with +reasonable care and diligence.23 However, the audit areas discussed above, including audit areas + +22 AS No. 7 at .12. +23 AU §230 Due Professional Care in the Performance of Work at .03-.05. + +13 +identified as significant risks, did not contain sufficient evidence and documentation, and the +respective audit files do not reflect that Ungar performed his engagement quality reviews with due +professional care. +D. Failure to Properly Examine Journal Entries for Evidence of Possible +Misstatement Due to Fraud and Document the Performance of Journal Entry +Testing (AU § 316 and AS No. 3) + +35. Material misstatements of the financial statements due to fraud often involve +manipulation of the financial reporting process through recording journal entries.24 Accordingly, +the auditor should “design procedures to test the appropriateness of journal entries recorded in the +general ledger and other adjustments … made in the preparation of the financial statements.”25 For +purposes of identifying and selecting specific entries and other adjustments for testing, and +determining the appropriate method of examining the underlying support for the items selected, the +auditor should consider factors such as the auditor’s assessment of fraud risk, the effectiveness of +controls over journal entries, the nature and complexity of the accounts and whether journal entries +were processed outside the normal course of business.26 +36. “Because fraudulent journal entries often are made at the end of a reporting period, +the auditor’s testing ordinarily should focus on the journal entries and other adjustments made at +that time. However, because material misstatements in financial statements due to fraud can occur +throughout the period and may involve extensive efforts to conceal how it is accomplished, the +auditor should consider whether there also is a need to test journal entries throughout the period +under audit.”27 +37. The Issuer A, Issuer D, Issuer E, Issuer F, and Issuer H audits did not include +properly designed procedures to test the appropriateness of journal entries recorded in the general +ledger, and Silberstein, Gorback (for Issuer A, Issuer D, Issuer E, and Issuer F,) and Kobylarek (for +Issuer H) did not properly design or perform the testing. Silberstein Ungar’s “standard” journal +entry testing procedures were significantly different than what was actually performed during the +audits and did not comply with PCAOB auditing standards. The following are examples of the +deficiencies uncovered during the investigation. +1. Issuer A + +38. The audit work papers did not include evidence that journal entry testing was +performed by Silberstein Ungar personnel, except for initials or “yes” responses in audit programs +or checklists signed off by Gorback and Silberstein. + +24 AU § 316 Consideration of Fraud in a Financial Statement Audit at .58. +25 AU § 316 at .58. +26 AU § 316 at .61. +27 AU § 316.62. + +14 +2. Issuer E + +39. The journal entry testing performed by Gorback and reviewed by Silberstein was +based on a company-prepared report containing one line of Issuer E’s journal entries and not the +complete journal entries. Gorback and Silberstein did not perform any testing to ensure the report +contained all of Issuer E’s journal entries or document the journal entries that were selected for +testing or the methodology used for selecting journal entries for testing. Although certain journal +entries were selected in connection with testing Issuer E’s account balances, such as testing of +revenues and expenses, there is no evidence that Gorback or Silberstein considered factors from +AU § 316 when testing the journal entries, such as their assessment of fraud risk, the effectiveness +of controls over journal entries, the nature and complexity of the accounts, and whether journal +entries were processed outside the normal course of business. +3. Issuer H + +40. The audit work papers reflect three journal entries were selected when Kobylarek +performed testing of Issuer H’s account balances and transactions. Kobylarek’s initials are +reflected in an audit program next to journal entry testing procedures and Silberstein reviewed +these audit programs. However, there is no evidence these journal entries were selected or tested +in accordance with AU § 316 or that Kobylarek and Silberstein tested these journal entries in +response to considering the assessment of Issuer H’s fraud risk, the effectiveness of Issuer H’s +controls over journal entries, the nature and complexity of the accounts, or whether the journal +entries were processed outside the normal course of business. Additionally, Kobylarek obtained +the general ledger but did not make a selection of journal entries from the general ledger in +connection with fraud testing. Nor did he obtain a listing of Issuer H journal entries. There was no +specific documentation of the following journal entry testing work steps that Kobylarek initialed as +having performed: (1) the results of the journal entry testing; (2) how he determined the journal +entry population was complete; (3) who performed and reviewed the work; (4) the journal entries +selected for testing; (5) the procedures performed; or (6) the conclusions reached. + +E. Failure to Document How Silberstein Ungar Overcame the Presumption to Send +Accounts Receivable Confirmations for the Issuer A Audit (AU § 330) + +41. AU Section 330 The Confirmation Process provides guidance concerning the audit +confirmation process. Confirmation of accounts receivable is a generally accepted auditing +procedure. AU § 330 states, “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. Thus, there is a presumption that the auditor will request the confirmation of accounts +receivable during an audit” unless certain circumstances arise. AU § 330 reflects that an auditor +who has not requested confirmations in the examination of accounts receivable should document +how he or she overcame the presumption that confirmations should be obtained.28 Receivables +were classified as a significant risk by Silberstein Ungar and the audit work papers reflected +Silberstein Ungar planned to confirm accounts receivable. Additionally, receivables comprised a + +28 AU § 330 at .01, .34, and .35. + +15 +total of approximately 7% of Earn-A-Car’s total assets as of February 28, 2013. Silberstein Ungar +did not request accounts receivable confirmations during the Issuer A audit and the work papers +did not contain documentation concerning why accounts receivable confirmations procedures were +not performed by Silberstein Ungar. The work papers contain an “audit documentation checklist” +designed to “help the auditor assess the completeness of [its] documentation.” Gorback initialed +this document as preparer and Silberstein initialed as the reviewer. The document contains an +“N/A” next to the question prompting Gorback to document how he overcame the presumption to +confirm accounts receivable. +F. Failure to Perform Analytical Procedures Related to Revenue (AS No. 14) +42. As part of the overall review, the auditor should perform analytical procedures, +including “analytical procedures relating to revenue through the end of the reporting period.”29 No +analytical procedures were performed for the Issuer A, Issuer D, Issuer E, Issuer F, Issuer G, Issuer +H, or Issuer I audits. For example, the Issuer H audit work papers include an “Audit Program for +Fraud and Illegal Acts” prepared by Kobylarek and reviewed by Silberstein that reflects these +revenue analytical procedures were not applicable, and no analytical procedures were performed +for the Issuer H audit. For the Issuer E audit, Gorback marked these procedures, “N/A” in the +“Overall Audit Program,” which was also reviewed by Silberstein. +G. Failure to Properly Supervise the Audit (AS No. 10) +43. PCAOB Auditing Standard No. 10 Supervision of the Audit Engagement states that +the “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 ….”30 The engagement partner should +review the work of engagement team members and evaluate whether the work was properly +performed and documented, the objectives of the procedures were achieved, and the results of the +audit work support the conclusions reached.31 +1. Silberstein + +44. Silberstein was the engagement partner on the Issuer A, Issuer B, Issuer D, Issuer +E, Issuer F, Issuer G restatement, Issuer H, Issuer H restatement, and Issuer I audits and failed to +properly supervise those audits. This failure is illustrated by Silberstein failing to detect the +numerous errors noted above after reviewing work papers and authorizing the release of the + +29 AS No. 14 at .5 and .7. AS No. 14 states that analytical procedures performed during the overall review may be +similar to the analytical procedures performed as risk assessment procedures. Analytical procedures performed as +part of the risk assessment procedures should be designed to: +a. Enhance the auditor's understanding of the client's business and the significant transactions and events that +have occurred since the prior year end; and +b. Identify areas that might represent specific risks relevant to the audit, including the existence of unusual +transactions and events, and amounts, ratios, and trends that warrant investigation. AS No. 12 at .46. +30 AS No. 10 at .3. +31 AS No. 10 at .5. + +16 +respective audit reports. This was done even though audit evidence and documentation did not +comply with PCAOB auditing standards, and procedures required by PCAOB auditing standards +were not performed. For example, and as noted previously, the Issuer A audit testing was +predominantly comprised of documentation prepared and testing performed by a different +accounting firm for a separate Issuer A audit, even though Silberstein considered those work +papers and testing as documentation prepared by Issuer A’s internal accountants. Also, the Issuer +A and Issuer D audit files contained duplicative or nearly duplicative work papers documenting +procedures and testing from different audits. For the Issuer B audit, Silberstein did not identify, or +consider the impact of, the application of the wrong accounting principles for the impairment +testing of Issuer B’s largest asset, comprising 80% of Issuer B’s total assets. Those work papers, +which Silberstein signed off as reviewing, did not contain documentation of the procedures +performed or contain sufficient evidence supporting the conclusion that no impairment of those +assets was necessary. He was also responsible for the failure of the audit file to properly reflect the +dates on which the Issuer B audit work papers were completed and reviewed. Despite the +completion and review dates reflected in the audit file, Silberstein confirmed that the audit +documentation had been prepared in accordance with applicable auditing standards. +45. Silberstein also failed to properly supervise the audits and review the work papers. +Those failures related to: (1) the status of engagement quality reviews performed for the Issuer G +restatement, Issuer H, and Issuer H restatement audits; (2) journal entry testing performed on the +Issuer A, Issuer D, Issuer E, Issuer F, and Issuer H audits; (3) the sufficiency of the audit files for +Issuer A, Issuer B, Issuer C, Issuer D, Issuer E, Issuer F, Issuer G, Issuer H, and Issuer I to include +documentation that clearly demonstrated the underlying accounting records reconciled to the +respective issuers’ financial statements and/or notes to the financial statements; (4) the inclusion of +an engagement completion document for the Issuer G restatement and Issuer H restatement in the +audit files; (5) maintaining a complete and final set of audit documentation for the Issuer G +restatement audit; and (6) documentation explaining how Silberstein Ungar overcame the +presumption to send accounts receivable confirmations for the Issuer A audit. +2. Ungar + +46. Ungar was the engagement partner on the Issuer C audit and he failed to properly +supervise the audit. As noted above, Ungar failed to detect that Issuer C used the wrong +accounting guidance when analyzing its largest assets for impairment, even though he reviewed the +impairment analysis. He also failed to properly supervise the audit relating to whether the work +performed for the impairment testing contained documentation of the procedures performed and +sufficient evidence supporting the company’s conclusion that no impairment of these assets was +necessary. Additionally, Ungar was responsible for the failures of the audit documentation to +clearly demonstrate the underlying accounting records reconciled to the financial statements and +notes to the financial statements. + +17 +H. Failure to Exercise Due Professional Care and Professional Skepticism (AU § 230 +and AS No. 13) +47. PCAOB auditing standards require auditors to exercise due professional care in the +planning and performance of the audit.32 Due professional care requires the auditor to exercise +professional skepticism: an attitude that includes a questioning mind and a critical assessment of +audit evidence.33 Additionally, the auditor's responses to the assessed risks of material +misstatement, particularly fraud risks, should involve the application of professional skepticism in +gathering and evaluating audit evidence. Examples of the application of professional skepticism in +response to the assessed fraud risks are “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.”34 Respondents failed to exercise professional +skepticism and perform a critical assessment of the audit evidence as evidenced by the repeated +deficiencies noted above. +1. Silberstein + +48. For example, Silberstein authorized the issuance of audit reports even though the +Issuer A audit testing was predominantly comprised of documentation prepared and testing +performed by a different accounting firm for a separate Issuer A audit. Silberstein also reviewed +Issuer A and Issuer D audit documentation that was duplicative or a near duplicate of audit testing +from audits of other Silberstein Ungar clients, and he reviewed Issuer B audit documentation that +was dated as completed and/or reviewed after the date the Issuer B 10-K was filed. The lack of +engagement quality reviews performed for the Issuer G restatement, Issuer H, and the Issuer H +restatement audits also illustrate Silberstein’s lack of due professional care. +2. Ungar + +49. Ungar failed to exercise due professional care and professional skepticism since he +authorized the issuance of audit reports even though the audit documentation for the impairment +analysis of Issuer C’s largest asset was based on the wrong accounting guidance. The audit file +also did not contain documentation of agreeing the underlying accounting records to the financial +statements and notes to the financial statements. Ungar also failed to exercise due professional +care and professional skepticism when acting as an engagement quality reviewer, as noted above. +3. Gorback + +50. Gorback prepared and reviewed audit documentation that contained a significant +lack of audit documentation and sufficient audit evidence. For example, Gorback initialed as +preparer of the Issuer A audit documentation discussed above, which did not include sufficient +appropriate audit evidence and documentation of the procedures he performed. Gorback included + +32 AU § 230.01. +33 AU § 230.07. +34 AS No. 13 at .7. + +18 +audit documentation in the Issuer A and Issuer D audit files that were duplicates or near duplicates +of documents from other audit files for different audit clients, without updating the documents to +reflect whether those respective audit procedures were performed for the Issuer A or Issuer D +audits. Gorback also acknowledged in a “Review and Approval” checklist in the Issuer A and +Issuer D audit files that the audit documentation was complete and clearly demonstrated the work +performed and that they had properly indexed, cross referenced, signed, and dated audit +documentation even though the Issuer A and Issuer D audit documentation contained the +deficiencies noted above. Gorback also failed to include sufficient appropriate audit evidence and +documentation of the procedures performed for the Issuer E and Issuer F audits, including evidence +and documentation relating to the testing of assets that comprised approximately 87% and 36% of +those respective entity’s total assets, and which also contained significant risks identified by the +audit team. +4. Kobylarek +51. Kobylarek prepared and reviewed audit documentation that contained a +significant lack of audit documentation and sufficient audit evidence. As noted above, the audit +documentation for the Issuer H and Issuer G restatement audits mainly consisted of +documentation prepared by or on behalf of Issuer H or Issuer G, without sufficient appropriate +audit evidence supporting the audit testing and documentation of the audit procedures performed. +Kobylarek also acknowledged in the “Review and Approval” checklist in the Issuer B audit file +that the audit documentation was complete and clearly demonstrated the work performed and +that they had properly indexed, cross referenced, signed, and dated audit documentation even +though the Issuer B impairment testing did not contain sufficient appropriate evidence and +documentation of the procedures performed. The audit file also reflects that Kobylarek reviewed +most of the audit documentation after the Issuer B 10-K was filed. + +Violations + +52. As a result of the conduct described above, the Commission finds that Silberstein +Ungar, Silberstein, Ungar, Gorback, and Kobylarek 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, which includes negligent conduct in the form of: +(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. + +(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. +53. As a result of the conduct described above, Silberstein Ungar willfully violated +Exchange Act Rule 2-02(b)(1) of Regulation S-X, which requires that an auditor’s report state + +19 +whether the audit was made in accordance with generally accepted auditing standards, including +the standards of the PCAOB plus any applicable rules of the Commission. +54. As a result of the conduct described above, Silberstein, Ungar, Gorback, and +Kobylarek willfully aided and abetted and caused Silberstein Ungar’s violations of Exchange Act +Rule 2-02(b)(1) of Regulation S-X. +55. As a result of the conduct described above, Silberstein Ungar, Silberstein, Ungar, +Gorback, and Kobylarek willfully aided and abetted and caused the issuers discussed above to +violate Exchange Act Sections 13(a) and 15(d) and Rules 13a-1 and 15d-1 thereunder, which +prohibits issuers from filing annual reports with the Commission that have financial statements +containing false and misleading information. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, pursuant to Sections 4C and 21C of the Exchange Act and Rules 102(e)(1)(ii) +and (iii) of the Commission’s Rules of Practice, it is hereby ORDERED, effective immediately, +that: + + A. Respondents shall cease and desist from committing or causing any violations and +any future violations of Exchange Act Sections 13(a) and 15(d) and Rules 13a-1 and 15d-1 +thereunder, and Rule 2-02(b)(1) of Regulation S-X. + +B. Respondents are denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. After five years from the date of this order, Respondent Silberstein may +request that the Commission consider his reinstatement by submitting an application +(attention: Office of the Chief Accountant) 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. Such an application must satisfy the Commission that +Respondent Silberstein’s work in his practice before the Commission will +be reviewed either by the independent audit committee of the public +company for which he works or in some other acceptable manner, as long +as he practices before the Commission in this capacity; and/or +2. an independent accountant. Such an application must satisfy the +Commission that: + +20 +(a) Respondent Silberstein, or the public accounting firm with which +he is associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; +(b) Respondent Silberstein, or the registered public accounting firm +with which he is associated, has been inspected by the Board and +that inspection did not identify any criticisms of or potential +defects in Respondent Silberstein or the firm’s quality control +system that would indicate that Respondent Silberstein will not +receive appropriate supervision; +(c) Respondent Silberstein has resolved all disciplinary issues with the +Board, and has complied with all terms and conditions of any +sanctions imposed by the Board (other than reinstatement by the +Commission); and +(d) Respondent Silberstein acknowledges his responsibility, as long as +Respondent Silberstein appears or practices before the +Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but not +limited to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards. +D. The Commission will consider an application by Silberstein to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Silberstein’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + +E. After five years from the date of this order, Respondent Ungar may request +that the Commission consider his reinstatement by submitting an application (attention: Office +of the Chief Accountant) 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. Such an application must satisfy the Commission that +Respondent Ungar’s work in his practice before the Commission will be +reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + +21 +2. an independent accountant. Such an application must satisfy the +Commission that: +(a) Respondent Ungar, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; +(b) Respondent Ungar, or the registered public accounting firm with +which he is associated, has been inspected by the Board and that +inspection did not identify any criticisms of or potential defects in +Respondent Ungar or the firm’s quality control system that would +indicate that Respondent Ungar will not receive appropriate +supervision; +(c) Respondent Ungar has resolved all disciplinary issues with the +Board, and has complied with all terms and conditions of any +sanctions imposed by the Board (other than reinstatement by the +Commission); and +(d) Respondent Ungar acknowledges his responsibility, as long as +Respondent Ungar appears or practices before the +Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but +not limited to, all requirements relating to registration, +inspections, concurring partner reviews and quality control +standards. +F. The Commission will consider an application by Ungar to resume appearing +or practicing before the Commission provided that his state CPA license is current and he +has resolved all other disciplinary issues with the applicable state boards of accountancy. +However, if state licensure is dependent on reinstatement by the Commission, the +Commission will consider an application on its other merits. The Commission’s review +may include consideration of, in addition to the matters referenced above, any other matters +relating to Ungar’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission. +G. After three years from the date of this order, Respondent Kobylarek may +request that the Commission consider his reinstatement by submitting an application +(attention: Office of the Chief Accountant) 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. Such an application must satisfy the Commission that +Respondent Kobylarek’s work in his practice before the Commission will + +22 +be reviewed either by the independent audit committee of the public +company for which he works or in some other acceptable manner, as long +as he practices before the Commission in this capacity; and/or +2. an independent accountant. Such an application must satisfy the +Commission that: +(a) Respondent Kobylarek, or the public accounting firm with which +he is associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; +(b) Respondent Kobylarek, or the registered public accounting firm +with which he is associated, has been inspected by the Board and +that inspection did not identify any criticisms of or potential defects +in Respondent Kobylarek or the firm’s quality control system that +would indicate that Respondent Kobylarek will not receive +appropriate supervision; +(c) Respondent Kobylarek has resolved all disciplinary issues with the +Board, and has complied with all terms and conditions of any +sanctions imposed by the Board (other than reinstatement by the +Commission); and +(d) Respondent Kobylarek acknowledges his responsibility, as +long as Respondent Kobylarek appears or practices before the +Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but +not limited to, all requirements relating to registration, +inspections, concurring partner reviews and quality control +standards. +H. The Commission will consider an application by Kobylarek to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Kobylarek’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. +I. After three years from the date of this order, Gorback may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as an +accountant. + +23 +J. Respondent Silberstein shall pay a civil money penalty in the amount of $35,000 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). Payment shall be made in the following +installments: + +1. $12,000 within 10 days of entry of this Order; +2. $12,000 within 180 days of entry of this Order; +3. $11,000 plus interest on the payments described in Section IV.J(1)-(3) pursuant +to 31 U.S.C. 3717 within 360 days of entry of this Order. + +Prior to making the payment described in Section IV.J(3), Silberstein shall contact the +Commission staff to ensure the inclusion of interest. If any payment is not made by the date the +payment is required by this Order, the entire outstanding balance of civil penalties, plus any +additional interest accrued pursuant to 31 U.S.C. 3717, shall be due and payable immediately, at +the discretion of the Commission staff, without further application. + +K. Respondent Ungar shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $7,500 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. + +L. Silberstein’s and Ungar’s payments 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 +Ronald N. Silberstein or Joel M. Ungar 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 Tom +Krysa, Division of Enforcement, Securities and Exchange Commission, 1961 Stout Street, Suite +1700, Denver, CO 80294-1961. + + +24 + M. 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 Silberstein and Ungar 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 Silberstein’s and Ungar’s payment of a civil penalty in this action ("Penalty Offset"). +If the court in any Related Investor Action grants such a Penalty Offset, Respondents Silberstein +and Ungar 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 Silberstein or Ungar 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 Silberstein and Ungar, and further, any debt for disgorgement, prejudgment interest, +civil penalty or other amounts due by Respondent Silberstein or Ungar 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 Silberstein or Ungar 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. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3779.pdf b/raw/aaer/2016/AAER-3779.pdf new file mode 100644 index 0000000000000000000000000000000000000000..225d860c2c44fe76999676e2b01970827e92fe31 --- /dev/null +++ b/raw/aaer/2016/AAER-3779.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:546c18d0b3d2453420595d304fd2f94883f4fc44d17a0bbd9dc53b2041dc9b76 +size 221452 diff --git a/raw/aaer/2016/AAER-3785.pdf b/raw/aaer/2016/AAER-3785.pdf new file mode 100644 index 0000000000000000000000000000000000000000..3645d2bdd16781149cf0c49287d89593493a0a42 --- /dev/null +++ b/raw/aaer/2016/AAER-3785.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c8fd6b8f4aad09313448b6e650cdd7f9e5083c89169c5996891b68b855210c9c +size 148530 diff --git a/raw/aaer/2016/AAER-3788.pdf b/raw/aaer/2016/AAER-3788.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5ea96d9a3f26440952b796a059f84d69853cf87a --- /dev/null +++ b/raw/aaer/2016/AAER-3788.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:6331c00c2cba5c3bc61c21ad440f286f89a894b78c99395b43acf857b9407736 +size 153161 diff --git a/raw/aaer/2016/AAER-3789.pdf b/raw/aaer/2016/AAER-3789.pdf new file mode 100644 index 0000000000000000000000000000000000000000..09a31259afcfd81adf13525f3fe1759ee1079bd1 --- /dev/null +++ b/raw/aaer/2016/AAER-3789.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e3a4f4ccb65d8862642102390527b1f5bff2c60eb714217f6c11b1ac1cea8aae +size 193923 diff --git a/raw/aaer/2016/AAER-3789.txt b/raw/aaer/2016/AAER-3789.txt new file mode 100644 index 0000000000000000000000000000000000000000..8ef4aff69b36946c3d7c825e337094c53a2175b8 --- /dev/null +++ b/raw/aaer/2016/AAER-3789.txt @@ -0,0 +1,375 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78341 / July 15, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3789 / July 15, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17345 + + +In the Matter of + +The Phoenix Companies, 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 AND PENALTIES + +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 Phoenix Companies, Inc. +(“Phoenix” 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 and Penalties (“Order”), as set forth +below. + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary +1. On November 8, 2012, Phoenix, a public company with shares traded on the New +York Stock Exchange, announced that its previously issued audited financial statements included +in Forms 10-K for the years ended December 31, 2011, 2010, and 2009 could no longer be relied +upon and would be restated, along with the unaudited financial statements for quarterly periods +included in Forms 10-Q going back to March 31, 2011. Phoenix also warned that “[m]anagement +will likely conclude that there are one or more material weaknesses” in its disclosure controls and +procedures and internal controls over financial reporting. +2. As Phoenix worked through the restatement process of reviewing its previous +filings and trying to correct its financials, it discovered, in consultation with its auditors, dozens of +additional errors, including basic errors in its calculations, assumptions, and application of +accounting guidance to complex insurance products. Some of the errors were due to improper +accounting determinations, while others reflected carelessness in the implementation of Phoenix’s +accounting systems.2 +3. On April 1, 2014, Phoenix filed its Form 10-K for the year ended December 31, +2012 (the “Restatement 10-K”), and in this filing Phoenix restated and amended its consolidated +financial statements for the years ended December 31, 2011 and 2010. There were several +categories of identified errors in the Restatement 10-K, including: 1) Accounting for Certain +Universal Life Type Products; 2) Loss Recognition; 3) Fixed Indexed Annuities; and 4) Derivative +Valuation. Additionally, Phoenix identified several material weaknesses in internal controls over +financial reporting. + +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 These errors caused further delay in Phoenix’s filing of its restated numbers, additional Forms +10-K, and additional Forms 10-Q. On March 21, 2014, the Commission instituted settled cease +and desist proceedings which imposed penalties and undertakings for Phoenix to become current +in its delinquent periodic filings by November 2014. See The Phoenix Companies, Inc. and PHL +Variable Insurance Company, Exchange Act Release No. 71768 (Mar. 21, 2014). After Phoenix +was unable to meet certain of the deadlines imposed in the undertakings, the Commission +amended its March 21, 2014 order by extending the undertakings deadlines to December 2014 +and imposing additional penalties, including increasing penalties should Phoenix further delay its +filings. See The Phoenix Companies, Inc. and PHL Variable Insurance Company, Exchange Act +Release No. 72738 (Aug. 1, 2014). Pursuant to the original and amended orders, Phoenix paid +$1.1 million in civil penalties to the Commission. + + 3 +4. Based on the foregoing, and by the respective acts and omissions described below, +Respondent violated the reporting, internal accounting controls, and books-and-records provisions +of the federal securities laws. +Respondent + +5. The Phoenix Companies, Inc. (“Phoenix”) is a Delaware corporation located in +Hartford, Connecticut. Phoenix is a holding company with three insurance company subsidiaries, +Phoenix Life Insurance Company, Phoenix Life and Annuity Company, and PHL Variable, which +sell life insurance and annuity products. On June 20, 2016, Phoenix merged with a subsidiary of +Nassau Reinsurance Group Holdings, L.P. (“Nassau Re”) and became a privately held company +and a wholly owned subsidiary of Nassau Re. Before the merger, Phoenix common stock had +traded on the New York Stock Exchange (symbol “PNX”) and Phoenix bonds had traded on the +New York Stock Exchange (symbol “PFX”). +Facts +A. Phoenix’s Accounting Errors and Impact +6. On April 1, 2014, Phoenix filed its Form 10-K for the year ended December 31, +2012 (the “Restatement 10-K”), including restated and amended numbers for the 2010 and 2011 +fiscal years.3 A summary of the impact of the restatement (in millions of dollars) is contained in +the table below. + + + + + + +3 Phoenix did not file amended Forms 10-K with restated numbers for its fiscal years 2010 and +2011. + + +FY 2012 FY 2011 FY 2010 +Original income (loss) from +continuing operations +before income taxes ($ mm) + +(156.0) + +32.0 + +(34.7) +Restated and amended +income (loss) from +continuing operations +before income taxes ($ mm) N/A + +2.7 + +(41.6) +Percent decrease in income +(loss) from continuing +operations before income +taxes ($ mm) N/A 92% 20% +Original stockholders' +equity ($ mm) + +510.5 + +1,126.2 + +1,155.5 +Restated stockholders' +equity ($ mm) N/A + +695.7 + +800.4 + + 4 +7. In the Restatement 10-K, Phoenix identified several categories of restated figures, +including: 1) Accounting for Certain Universal Life Type Products; 2) Loss Recognition; 3) Fixed +Indexed Annuities; and 4) Derivative Valuation. +B. Errors in Phoenix’s Accounting for Universal Life Insurance Products +8. Certain errors discovered during the restatement process related to accounting for +Phoenix’s universal life insurance products. These errors were caused by Phoenix’s improper +application of the accounting guidance which was designed to take into account potential future +losses on certain insurance products, resulting in a material decrease in net income for fiscal years +2010 and 2011. +9. Phoenix’s universal life products are a form of life insurance with a savings account +component. Policyholders pay flexible premiums into the savings account, and the account is +credited interest at a predetermined rate. Upon death of the policyholder, the beneficiary receives +the face value of the policy or the account value, whichever is greater. Over the life of the policy, +Phoenix collects fees from the account for administrative expenses and the “cost of the life +insurance” (“COI”). One of Phoenix’s standard universal life products was the Phoenix +Accumulator Universal Life (“PAUL”) policy. A PAUL policy was designed as a traditional +universal life policy, but would generate higher COI fees in the early years, and lower COI fees in +the later years. +10. Starting around 2004, Phoenix began offering a universal life insurance product +with a “secondary guarantee” (“SGUL”). Typically, if a universal life policyholder’s account +value falls to $0, the policy lapses, because there are no more funds to pay the administrative fees +and the COI fees. The secondary guarantee effectively provided a no-lapse guarantee, as long as +certain criteria were met by the policyholder. Should the account value fall to $0, Phoenix would +keep the policy in force while receiving no additional fees. In addition, Phoenix offered certain +riders, or add-ons, for its SGUL and PAUL policies, including an extended life rider (“Extended +Life Rider”), which charged no premium once a policyholder reached age 100. This again meant +that Phoenix would offer life insurance and collect no fees for it, should the policyholder live past +100. +11. Phoenix determined that, by design, the COI feature of the PAUL policies, the +secondary guarantees of the SGUL policies, and the Extended Life Rider all were expected to +result in profits in earlier years and subsequent losses in later years. In this scenario, the relevant +accounting guidance, ASC 944-605-25-8, requires a liability to be established to account for the +future losses. ASC 944-40-35-9 through 11 requires this liability to be adjusted using current +estimates at each balance sheet date. During the restatement, Phoenix determined that the +accounting guidance required that this liability be established with regard to the product’s +insurance “benefit features”—not with regard to the product generally, as had previously been +done. Phoenix also determined that the higher COI fees in early years and lower COI fees in the +later years for the PAUL contracts did not qualify as a “benefit feature,” and therefore a liability +should not have been established for this aspect of the contract. In its restatement, Phoenix stated + + 5 +that it did not properly evaluate certain benefit features and, therefore, did not establish the +required reserves. +12. Phoenix was also required to perform a separate premium deficiency analysis under +ASC 944-60. In this analysis, Phoenix was required to determine whether the premiums would +cover the costs of the contracts. Phoenix tested the premium deficiency for each Phoenix +subsidiary and on a consolidated basis. Phoenix determined that no premium deficiency existed. +ASC 944-60 also requires a profits followed by losses analysis for each Phoenix line of business +and on a consolidated basis. Phoenix did not historically perform the profits followed by losses +analysis prescribed by ASC 944-60. +13. A Phoenix actuary analyzing the cash flows in the fall of 2013 as part of the +restatement review noticed that a pattern of profits followed by losses existed in Phoenix’s +universal life business, and determined that the profits followed by losses analysis should have +historically been performed. +14. In its pre-restatement application of ASC 944-605-25-8, Phoenix analyzed profits +followed by losses over a 30 year period. Phoenix had set this length of time to match the 30 years +over which its policies’ deferred acquisition costs were amortized. As part of the restatement, +Phoenix revisited the assumption, and determined it was appropriate to extend the period of +analysis, capturing additional losses in the later years. +15. The universal life products’ benefit feature liability decreased when the restated +numbers were calculated, but this decrease was more than offset by the increase in the premium +deficiency liability. For the 2011 fiscal year, these errors increased liabilities by $179.4 million +and decreased stockholder’s equity by $122.1 million. The errors also decreased net income by +$34.0 million for the 2011 fiscal year (135% of reported income from continuing operations before +income taxes). For the 2010 fiscal year, these errors decreased net income by $46.7 million (106% +of reported income from continuing operations before income taxes). By far, the largest impact on +Phoenix’s 2010 and 2011 financials were the “Accounting for Certain Universal Life Type +Products” errors. +C. Errors in Phoenix’s Fixed Indexed Annuity Valuation +16. In addition to the universal life products discussed above, Phoenix sold a separate +account product called a fixed indexed annuity (“Annuity”). Annuities are insurance products +which offer an income stream to the purchaser, typically for life. At the inception of the contract, +Annuity purchasers fund an account, often through a lump sum premium payment, which is then +credited with interest based on a reference index (e.g., LIBOR) sometimes subject to a cap and +floor, over the life of the Annuity. Phoenix sold optional riders for an additional fee, including a +guaranteed minimum withdrawal benefit rider. This rider would assure the annuitant a minimal +periodic income even if the Annuity account value were to fall to $0. +17. In the third quarter of 2011, Phoenix set up an internal valuation system to value its +Annuity contracts. When Phoenix made the transition to this system, it erroneously included the +fees it earned from purchases of the guaranteed minimum withdrawal benefit rider, while + + 6 +excluding the rider’s costs, when estimating its Annuities’ gross profits, which caused a $2.9 +million overstatement of earnings for the 2011 fiscal year. Phoenix determined that the inclusion +of the rider’s fees and exclusion of rider’s costs was not in accordance with GAAP,4 and Phoenix +ultimately concluded that it did not have in place properly designed internal accounting controls, +which should have caught this discrepancy. +18. As part of the restatement process, Phoenix scrutinized the internal valuation +system’s modelling capabilities and determined that the system lacked the functionality to +accurately value the Annuities, ultimately finding at least 30 errors within the valuation system +relating to a variety of Annuities calculations. +19. These errors included incorrect assumptions regarding policyholder behavior, such +as assuming static lapse rates, which were not adjusted based on account value, and assuming +withdrawals when it would be disadvantageous for the policyholder to do so. The valuation +system also only projected out the Annuities 30 years for valuation purposes, even though certain +policyholders’ expected lifetimes were longer. +20. Once restated, the identified fixed indexed annuity errors cumulatively caused a +$4.2 million decrease in net income before taxes for fiscal year-end 2011 (13% of reported income +from continuing operations before income taxes). Errors related to the Annuity products for the +2010 period resulted in a $2.3 million net loss (7% of reported income from continuing operations +before income taxes) and were classified as “Other Actuarial Errors” in the Restatement 10-K. +D. Error in Phoenix’s Reinsurance Accounting +21. Insurance companies often enter into reinsurance contracts to share the risk inherent +in a block of policies. Generally, these contracts require the reinsurer to pay a portion (or all) of +the expenses associated with a policy or block of policies and the original insurers to pay the +reinsurer compensation for entering into the contract. Phoenix entered into two such contracts with +a reinsurer in 2008 and 2009, for certain term life policies. These reinsurance contracts allowed +Phoenix to reduce its risks associated with its term life business. +22. Phoenix did not perform a premium deficiency analysis on the underlying block of +term life policies subject to the reinsurance contracts, as required by the relevant accounting +guidance, ASC 944-60. Phoenix assumed that the reinsurer had taken on all of the expenses +associated with the term life business. However, the terms of the reinsurance contract only +provided for the payment of a portion of these expenses. A subsequent analysis performed as part +of the restatement identified a premium deficiency and required Phoenix to establish a liability on +its books. This error had the impact of decreasing net income by $10.6 million for fiscal year-end +2010 (31% of reported income from continuing operations before income taxes) and $7.6 million +for fiscal year-end 2011 (24% of reported income from continuing operations before income +taxes). + +4 ASC 944-60-30. + + + 7 +23. Similar to the Annuity products discussed above, Phoenix also identified errors in +the way that its valuation system modelled its reinsurance contracts. Specifically, the valuation +system did not have functionality to model multiple reinsurance treaties for a given policy. Once +restated, all identified Phoenix’s reinsurance accounting errors caused a $3.3 million decrease in +net income for fiscal year-end 2011 (10% of reported income from continuing operations before +income taxes), and a $6.3 million increase in net income for fiscal year-end 2010 (18% of reported +income from continuing operations before income taxes). +E. Error in Phoenix’s Accounting for Derivatives +24. To hedge certain risks, Phoenix purchased a number of derivatives from, and +entered into certain swap agreements with, investment banks. Pre-restatement, Phoenix valued +these derivatives and swap agreements without taking a credit valuation adjustment (“CVA”), even +though one was required under ASC 815 and 8205 to take account of the counterparty risk for these +derivatives. The CVA is an allowance which accounts for the default risk of the counterparty. +25. As a result of this error, Phoenix’s net income before taxes decreased by $12.4 +million for fiscal year-end 2011 (39% of reported net income before taxes), and $4.2 million for +fiscal year-end 2010 (12% of reported net income before taxes). +Violations +26. As a result of the conduct described above, Phoenix violated Section 13(a) of the +Exchange Act and Rules 13a-1 and 13a-13 thereunder. +27. Also as a result of the conduct described above, Phoenix 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 tr ansactions +and dispositions of their assets. + +28. Lastly, as a result of the conduct described above, Phoenix 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 +generally accepted accounting principles. + + + +5 ASC 815-20-35-14 and 820-10-35-17 through 10-35-18A. + + 8 +Phoenix’s Remedial Efforts +In determining to accept the Offer, the Commission considered remedial efforts +undertaken by Phoenix and cooperation afforded to the Commission staff. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Phoenix’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Phoenix 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 13a-1 and 13a-13 thereunder. +B. Respondent shall, within ninety (90) days of the entry of this Order, pay a civil +money penalty in the amount of $600,000 to the Securities and Exchange Commission for +transfer to the general fund of the United States Trea sury 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 Phoenix +as a Respondent in these proceedings, and the file number o f these proceedings; a copy of the +cover letter and check or money order must be sent to Scott W. Friestad , Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, +D.C. 20549-5010. + + 9 + 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 In vestor +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 cour t 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. +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3793.pdf b/raw/aaer/2016/AAER-3793.pdf new file mode 100644 index 0000000000000000000000000000000000000000..92e4850d6dedd52fde2074134617b1866e4e8576 --- /dev/null +++ b/raw/aaer/2016/AAER-3793.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:7825ae922f7148c2502dfd852b377866985f53505b8a499346b81b358259b902 +size 175666 diff --git a/raw/aaer/2016/AAER-3795.pdf b/raw/aaer/2016/AAER-3795.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9050dbe20485aaa953b9404688a7317111d5b69f --- /dev/null +++ b/raw/aaer/2016/AAER-3795.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:82bc99fa40c974cee9fa7cc3c2d3eb78f90cc600cf45b23e09cb141427b271f4 +size 178875 diff --git a/raw/aaer/2016/AAER-3803.pdf b/raw/aaer/2016/AAER-3803.pdf new file mode 100644 index 0000000000000000000000000000000000000000..28c36af192d65bdc49a3bfce0097f392ff3f5a0d --- /dev/null +++ b/raw/aaer/2016/AAER-3803.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:767da6890e47987f7e5379867e9464a55f5fb39998a59d5040320601ca7e63fb +size 276470 diff --git a/raw/aaer/2016/AAER-3804.pdf b/raw/aaer/2016/AAER-3804.pdf new file mode 100644 index 0000000000000000000000000000000000000000..283ee71da0f4003efe5b18afb5d213af22821aef --- /dev/null +++ b/raw/aaer/2016/AAER-3804.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:1ebc2065a420f013e86d3b769a7e58fba4ac8502c2177facadfdb52341dd88a1 +size 268152 diff --git a/raw/aaer/2016/AAER-3806.pdf b/raw/aaer/2016/AAER-3806.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d72e0109cf3c52e18dc665cbd2fe00e77a280510 --- /dev/null +++ b/raw/aaer/2016/AAER-3806.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:06ece23b0d319dc59084ec1457b478e4e10ca832d479e3457abfc315fcf7a55f +size 407862 diff --git a/raw/aaer/2016/AAER-3808.pdf b/raw/aaer/2016/AAER-3808.pdf new file mode 100644 index 0000000000000000000000000000000000000000..88366cd1e20a757c7b8b6d5d735da8b0ad4fa614 --- /dev/null +++ b/raw/aaer/2016/AAER-3808.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:3b90ce069496b3a4208920486ae937dfaa85470079cdb0267e1cedefa64ae586 +size 200138 diff --git a/raw/aaer/2016/AAER-3809.pdf b/raw/aaer/2016/AAER-3809.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a2324833124507d767bf2f751261c9c6690a0ff4 --- /dev/null +++ b/raw/aaer/2016/AAER-3809.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:1701da4f9947c0c838e8b4b1c65505f632804b1bca944d619031d77e6d516da7 +size 172433 diff --git a/raw/aaer/2016/AAER-3813.pdf b/raw/aaer/2016/AAER-3813.pdf new file mode 100644 index 0000000000000000000000000000000000000000..fd08305a22ebf7691f8ccb0bcee2a5b76757f1ed --- /dev/null +++ b/raw/aaer/2016/AAER-3813.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f6ef9757683be4ef515e9386c2ef984cde3eb3921d75e87236e5f7c9942d02a1 +size 164274 diff --git a/raw/aaer/2016/AAER-3817.pdf b/raw/aaer/2016/AAER-3817.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a245b1f922cdad0a72c2c446476275b36ed1da79 --- /dev/null +++ b/raw/aaer/2016/AAER-3817.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:db2a010ebec8e83da9ba0d18285a94b3d0c36d3c3ccf2a8d2614dfe7982ec6cb +size 194561 diff --git a/raw/aaer/2016/AAER-3818.pdf b/raw/aaer/2016/AAER-3818.pdf new file mode 100644 index 0000000000000000000000000000000000000000..436143e35bcf3d731a9a3e0dc98dc15f0a120b59 --- /dev/null +++ b/raw/aaer/2016/AAER-3818.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:7a9f2c1503f098d47e5ada5f73fff54909eb80c347e7991ce786e91d80ebd561 +size 121729 diff --git a/raw/aaer/2016/AAER-3820.txt b/raw/aaer/2016/AAER-3820.txt new file mode 100644 index 0000000000000000000000000000000000000000..bb6884817090e02cf836eabd87c177b96801c5b4 --- /dev/null +++ b/raw/aaer/2016/AAER-3820.txt @@ -0,0 +1,512 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79193 / October 31, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3820 / October 31, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-17651 + + + + + +In the Matter of + +ADRIAN D. BEAMISH, 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 + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative proceedings be, and hereby are, instituted against Adrian D. Beamish, CPA +(“Respondent” or “Beamish”) pursuant to S ection 4C of the Securities Exchange Act of 19341 +(“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 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. + After an investigation, the Division of Enforcement and the Office of the Chief +Accountant allege that: +A. Summary +1. Respondent Adrian D. Beamish repeatedly engaged in improper professional +conduct during PricewaterhouseCoopers LLP’s audits of Burrill Life Sciences Capital Fund III, +LP, a $283 million San Francisco-based venture capital fund. PricewaterhouseCoopers LLP, was +first engaged to conduct the audits of the venture capital fund’s year-end 2006 financial +statements. As detailed below, Beamish, as the engagement partner, failed to comply with the +relevant professional standards in connection with his audits of the fund’s 2009, 2010, 2011, and +2012 year-end financial statements. +2. In the audit of the venture capital fund’s year-end 2009 financial statements, +Beamish became aware that the fund’s founder, G. Steven Burrill, had arranged for the fund to +pay millions of dollars to other companies that Burrill owned and controlled. From 2009 through +2011, Burrill characterized the payments as advances on future management fees that he would +earn through the provision of future management services as the fund’s manager. The payments +were made many months—and even years —before the fees were to be earned. In each of these +three years, Beamish failed to inquire whether Burrill had the authority to take the unusual +payments, nor did he scrutinize the rationale for the payments, which Burrill needed to pay his +own personal expenses and to fund his other businesses. Significantly, in conducting the year- +end 2012 audit, Beamish learned that the advanced management fee payments that had been paid +greatly exceeded any potential future management fee obligations the fund might owe. +3. Despite an advanced management fee balance rapidly growing over several years +and not decreasing, and Beamish’s own audit team’s suggested financial disclosure language +being rejected by management, Beamish improperly signed audit reports with unqualified +opinions for the fund’s year-end 2009, 2010, 2011, and 2012 financial statements, in violation of +Generally Accepted Auditing Standards (“GAAS”). In addition, the fund’s financial statements, +for those same years, did not comply with Generally Accepted Accounting Principles (“GAAP”). +Further, Beamish relied upon unreasonable bases as the supposed means for repayment of the +advanced management fee balance. + +B. Respondent +4. Adrian D. Beamish, CPA, age 44, is a resident of Los Altos, California. Beamish +has been licensed as a Certified Public Accountant in California since November 2004, and has +been a Chartered Accountant in England and Wales since 1995. Beamish was hired by +PricewaterhouseCoopers’ U.K. firm in 1995, and in 1998, he moved to PricewaterhouseCoopers’ +U.S.A. firm in San Jose, California, where he became an audit partner in 2006. Beamish +conducts audits of both public and private entities for PricewaterhouseCoopers, and he +specializes in the pharmaceutical life sciences and venture capital industries. +3 +C. Related Persons and Entities +5. G. Steven Burrill, age 71, resides in San Francisco, California, and Eagle River, +Wisconsin. From 1977 to 1993, Burrill was a partner at a large audit firm and focused on the +biotechnology industry. Burrill began raising venture capital funds when he left the audit firm in +1993. In addition to venture capital funds, Burrill owned and controlled a number of affiliated +businesses, including an investment adviser, a merchant banking firm, and a media company. On +March 16, 2016, Burrill, a CPA, was suspended from appearing or practicing before the +Commission as an accountant and was barred from association with any broker, dealer, investment +adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized +statistical rating organization and prohibited from serving or acting as an employee, officer, director, +member of an advisory board, investment adviser or depositor of, or principal underwriter for, a +registered investment company or affiliated person of such investment adviser, depositor, or +principal underwriter. +6. Burrill Capital Management, LLC (“BCM”) is a Delaware limited liability +company and filed reports as an exempt reporting adviser with the Commission from April 2012 +to January 2015, when it withdrew its registration. Burrill Capital Management is wholly owned +by Burrill and had its principal place of business in San Francisco, California. Now defunct, +BCM acted as the adviser to several venture capital funds operated by Burrill. Burrill also used +BCM as the operating entity through which he directed resources to his affiliated businesses. As +of its last filing in March 2014, BCM reported $358.6 million in total assets under management. +7. Burrill Life Sciences Capital Fund III, LP (“Fund III” or the “Fund”) is a +Delaware limited partnership formed by Burrill in 2006. The Fund received $283 million in +venture capital funds to invest in life sciences companies. The Fund retained BCM as its +investment adviser. +8. Burrill Life Sciences Capital Fund III Partners, LP ( “General Partner”), a +Delaware limited partnership, was the General Partner of Fund III during the relevant time +period. The General Partner’s Investment Committee included Burrill and four others. The +General Partner was entitled to receive fees for managing the Fund, but also could designate an +affiliate to receive the fees. +9. Burrill Capital, LLC (“Management Company”) is a Delaware limited liability +company owned and controlled entirely by Burrill. As described further below, in its 2012 +financial statements, the Fund stated that the Management Company was responsible for +repaying the balance of the management fees that had been advanced to the General Partner. +10. PricewaterhouseCoopers LLP (“PricewaterhouseCoopers” or “PwC”) +provides audit, assurance, tax, transaction, and advisory services throughout the United States, +and throughout the world via their members firms. Auditors from its San Jose , California office +conducted the audits of Fund III for fiscal years 2006-2012. + +4 +D. Formation of Fund and Retention of PricewaterhouseCoopers as Auditors +11. Burrill formed Fund III in 2006 to invest in life sciences companies. Established +with a projected 10-year lifespan, Fund III was originally scheduled to expire in February 2016. +Fund III is structured as a limited partnership. Investors in Fund III, which include public +companies, pension funds, and institutional investors, are limited partners in the Fund. During +the relevant period, Burrill Life Sciences Capital Fund III Partners, LP served as the Fund’s +General Partner. Five individuals, including Burrill, controlled the General Partner. +12. The rights and responsibilities of the General Partner and the limited partners of +Fund III are governed by a limited partnership agreement (“LPA”). The LPA delineates, among +other things, the manner and amount of the General Partner’s fees for managing the Fund. +According to the LPA, the General Partner or its designee is entitled to two percent of committed +capital for six years, payable on the first day of each fiscal quarter for management services to be +rendered during that quarter. After the initial six years, the General Partner or its designee is +entitled to two percent of the cost basis of the investments, plus reserves. As enumerated in the +LPA, the management fee was intended to be used by the General Partner to cover expenses in +connection with the management of the fund, including salaries, travel, and rent. The LPA did +not authorize the General Partner to take management fees more than one quarter in advance, and +prohibited non-arm’s length transactions between Fund III and the General Partner or its +members without explicit approval of an advisory committee of limited partners. +13. The Fund’s offering materials state that a major financial accounting firm would +issue a report on the financial statements annually. In addition, the LPA similarly stipulated that +the Fund would issue financial statements in accordance with GAAP, and would be audited +annually by a public accountant of recognized national standing. +14. Beginning in 2006, the Fund issued annual financial statements and retained +PricewaterhouseCoopers to serve as its auditor to conduct annual audits on the Fund. Beamish +served as the PwC audit partner responsible for the audit team’s compliance with the appropriate +professional standards. As the engagement partner, Beamish had final authority over the +planning, execution, and supervision of the audits and was responsible for audit reports issued by +PwC on the Fund’s financial statements. +15. For the year-end 2009 through year-end 2012 audits, Beamish authorized +PricewaterhouseCoopers to issue audit reports with unqualified opinions stating that the Fund’s +financial statements were presented fairly, in all material respects, in accordance with GAAP and +that the audits were conducted in accordance with GAAS. In reality, however, the Fund’s +financial statements failed to comply with GAAP and the audits failed to comply with GAAS. + +E. Burrill Took “Advanced Management Fees ” to Fund Other Businesses +16. In late 2007, Burrill and his affiliated businesses began to face cash flow +shortages. Burrill Capital Management, the adviser to Fund III and the entity through which +Burrill operated and funded his affiliated businesses, maintained records showing that the +expenses of the Burrill affiliates far exceeded the revenue that the businesses were generating. +5 +Even though he did not solely control the Fund’s General Partner, Burrill unilaterally directed +BCM’s controller to take $400,000 from Fund III to make up for the cash shortfall in BCM. +Burrill justified the withdrawal as an “advance on management fees” that the General Partner +expected to earn in the first quarter of 2008. The advance was recorded as a “prepaid expense” +on the books of Fund III. +17. By mid-2008, Burrill, alone directing the General Partner, had begun to take +routine and significant advances on management fees. Whenever BCM, or Burrill’s affiliated +entities, faced a cash shortfall, Burrill arranged to cover the shortfall by taking money from +Fund III and recording it as a prepaid expense to BCM on the Fund’s books. Advanced +management fees from Fund III became a consistent cash source for the affiliates and for Burrill +personally. Burrill used the money to pay for, among other things, salaries of employees of the +related entities and his personal expenses. These advanced management fees appeared in the +Fund’s financial statements as “prepaid expenses” or “receivables,” as described below. + +F. During the Year-End 2009, 2010, and 2011 Audits, Beamish Failed +to Scrutinize the Advanced Fees Appropriately +18. The amount of the advanced management fees taken by the General Partner was +disclosed to the PricewaterhouseCoopers audit team. Through the audits, Beamish became aware +that the balance of the advanced management fees increased by millions of dollars every year +from 2009 through 2011: + By the end of 2009, the advanced management fee balance totaled $4,927,374, +representing almost one year of advanced management fees. + By the end of 2010, the advanced management fee balance had grown to +$9,259,317, or just under two years of advanced management fees. + By the end of 2011, the advanced management fee balance had grown to +$13,374,569, or nearly three full years in advanced management fees. +19. These balances were significant, far surpassing PwC’s internally-established +threshold for materiality and were recognized by the PwC audit team, and by Beamish +particularly, as unusual in the industry. According to the relevant GAAS standards that relate to +the consideration of possibility of fraud, if an auditor becomes aware of significant and unusual +transactions, the auditor should gain an understanding of “the business rationale of such +transactions and whether that rationale (or lack thereof) suggests that such transactions may have +been entered into to engage in fraudulent financial reporting or to conceal the misappropriation +of assets.” AU § 316.66.3 Furthermore, in assessing the risk of material misstatement, the auditor +must consider there is a risk that “involves significant non-routine transactions . . . outside the +normal course of business for the entity, or that otherwise appear to be unusual.” AU § 314.111. + +3 “AU” and “AU-C” refer to Statements on Auditing Standards issued by the American Institute +of Certified Public Accountants. +6 +20. Despite the significant and unusual nature of the payment of the advanced +management fees, Beamish and the PwC audit team took no steps to try to understand the +business rationale for the payments. And even though the balance of the advanced fees grew +steadily during 2009, 2010, and 2011, Beamish did not inquire into the rationale for the +advances, nor did Beamish inquire as to why the amount grew. +21. Had Beamish made appropriate inquiries as required by professional standards, +his audit team would have likely discovered that the fees advanced to the General Partner had +been used for the business operations of affiliated Burrill entities, such as Burrill Securities LLC, +and to pay for Burrill’s own personal expenses. Further, Beamish did not attempt to obtain +evidence about whether Burrill and the affiliated entities were authorized to receive such +payments, as well as whether they had the ability to repay the amounts. +22. Generally Accepted Auditing Standards require auditors to exercise “due +professional care” throughout an audit. AU § 230. Due professional care requires an auditor to +exercise professional skepticism, “an attitude that includes a questioning mind and a critical +assessment of audit evidence.” AU § 230.07. “Since evidence is gathered and evaluated +throughout the audit, professional skepticism should be exercised throughout the audit process.” +AU § 230.08. The auditor “should not be satisfied with less than persuasive evidence because of +a belief that management is honest.” AU § 230.09; see also AU § 316.13. This is particularly +true with respect to related party transactions. Audit procedures for related party transactions +“should extend beyond inquiry of management” and require an auditor to obtain an +“understanding of the business purpose of the transaction.” AU § 334.09. +23. Beamish failed to exercise the professional care required by GAAS in the audits +of the Fund’s 2009, 2010, and 2011 financial statements. Beamish took no steps to obtain audit +evidence that the payments were properly approved and authorized, even as the balance +continued to grow year to year. During the audit of the Fund’s year-end 2011 financial +statements, Beamish’s audit team calculated the total future management fees due to the General +Partner for the remaining life of Fund III. The audit team estimated there was approximately +$10.2 million left in future management fees to be earned by the General Partner over the +remainder of the contractual life of Fund III, beyond the nearly $13.4 million that had already +been advanced. The audit team concluded that the General Partner could “earn down” the +balance, through the provision of management services by the expected termination of the Fund +in 2016. +24. The auditors’ calculation of the amount of future fees available to the General +Partner during the 2011 audit, however, was incorrect by a significant margin. If his audit team +had correctly calculated the future management fees to be earned, using a conservative +calculation, Beamish would have realized there was, at most, $3.2 million in future fees to be +earned—not the $10.2 million that the PwC team had calculated. After the approximately $3.2 +million was paid, Fund III would have no contractual obligation to pay additional management +fees to the General Partner or its designee for the remaining contractual term of the Fund. Had +Beamish exercised the appropriate professional skepticism required of him as an auditor, +especially in light of the ever increasing advanced management fee balance, he should have +questioned and sought evidence for the premise that the advanced management fee balance +7 +would likely be recovered simply through the provision of future management services by the +General Partner. +25. From his audit, moreover, Beamish learned that the Fund described the advanced +management fee balance as a “receivable,” or undocumented loan, to the General Partner in the +year-end 2009, 2010, and 2011 financial statements. Generally Accepted Auditing Standards +require special scrutiny of interest-free loans between related parties and loans with “no +scheduled terms for when or how the funds will be repaid.” AU § 334.03. When confronted with +such an undocumented loan, an auditor is required to “[d]etermine whether the transaction has +been approved by those charged with governance.” AU § 334.09. Nonetheless, Beamish, and the +PwC auditors working at his direction, took no steps to determine whether such a loan to the +General Partner was permitted by the LPA. Nor did Beamish inquire whether the General +Partner’s governing documents permitted Burrill to take the advanced fees without the consent of +the General Partner. + +G. The Fund’s Year-End 2009, 2010, and 2011 Financial Statements +Failed to Disclose Fees Accurately +26. Generally Accepted Auditing Standards concerning related party transactions +require that an “auditor should view related party transactions within the framework of existing +[accounting] pronouncements, placing primary emphasis on the adequacy of disclosure.” AU +§ 334.02 (emphasis added). Furthermore, an auditor should apply procedures to obtain +satisfaction about the related party transactions and the effect on financial statements. AU +§ 334.09. For each “material related party transaction . . . common ownership or management +control relationship . . . the auditor should consider whether he has obtained sufficient +appropriate audit evidence to understand the relationship of the parties and . . . the effects of the +transaction on the financial statements.” AU § 334.11. Disclosures of related party transactions +must include (1) the nature of the relationships involved; ( 2) a description of the transactions and +other such information deemed necessary to an understanding of the effects of the transactions +on the financial statements; and (3) the terms and manner of settlement. ASC 850-10-50-1.4 +27. The Fund III year-end 2009, 2010, and 2011 financial statements inconsistently +and inaccurately disclosed the nature of the advanced management fees. In none of the three +year-end financial statements did the Fund adequately disclose that management fees were being +advanced: + The balance sheet in the Fund’s year-end 2009 audited financial statements +included the amount of advanced management fees as an undefined part of a larger +“prepaid expense” paid by the Fund. The balance sheets in the 2010 and 2011 +financial statements similarly included the amount of advanced management fees as +an undefined part of a larger amount of “prepaid expenses and other receivables,” +but did not separately show a related party receivable on the balance sheet as +required by GAAP (and in particular, ASC 850-10-50-2). The balance sheets did + +4 “ASC” refers to the Accounting Standards Codification issued by the Financial Accounting +Standards Board. +8 +not further describe the nature of the “prepaid expenses” or “receivables,” and made +no explicit reference to the payment of advanced management fees. + The Related Party footnotes to the year-end 2009, 2010, and 2011 audited financial +statements described the amount of the advanced management fees only as a +“receivable from the General Partner .” The footnotes did not further describe the +transaction nor the terms and manner of settlement of the so-called “receivable,” as +required by GAAP. ASC 850-10-50-1. + The Management Fee footnotes to the year-end 2009, 2010, and 2011 audited +financial statements merely described the amount the General Partner was legally +entitled to receive over the course of the calendar year in accordance with the LPA. +The footnotes did not disclose that the Fund had actually paid advanced +management fees, and contained no references to the amounts described as “prepaid +expenses” and “receivables” on the balance sheets or a cross-reference to the +Related Party footnotes. As a result, the footnotes further created a misleading +picture of the Fund’s financial statements for each period. +28. The Fund’s audited financial statements materially misstated the nature of the +related party payments. Beamish failed to obtain sufficient appropriate audit evidence to +determine whether GAAP compliant disclosure of the payments made was adequate, as required +by GAAS, when he authorized PricewaterhouseCoopers to issue audit reports with unqualified +opinions on the Fund’s year-end 2009, 2010, and 2011 financial statements. + +H. Beamish Issued a Clean Opinion on the Fund’s Year-End 2012 Financial Statements +29. By the first quarter of 2012, the General Partner was paid more in management +fees from Fund III than the General Partner was contractually entitled to earn over the entire 10- +year life of the Fund. At the end of 2012, the balance of the advanced management fees totaled +$17,922,059. Beamish was aware of the balance of advanced management fees in connection +with the audit of the Fund’s 2012 financial statements. Under Beamish’s supervision, the PwC +audit team calculated that the fund overpaid in excess of approximately $7 million in +management fees. +30. Aware that millions of dollars in excess management fees had been taken from +the Fund, the audit team proposed to BCM management that the Fund provide the following +additional disclosure in its year-end 2012 financial statements: “Prepaid expenses and other +receivables at December 31, 2012 include $17.9 million due from the General Partner. This +amount exceeds the expected future management fee expenses for the remaining contractual life +of the fund.” (Emphasis added.) When BCM management rejected the second sentence of +Beamish’s proposal regarding the excessive amount, however, Beamish agreed that the +additional disclosure need not be included in the Fund’s financial statements. +31. Shortly thereafter, BCM management told Beamish that Burrill had executed an +unsecured promissory note for the full amount of the advanced management fee balance. The +BCM controller provided PwC with the promissory note, which was dated December 31, 2012. +After receiving the note, Beamish’s audit team suggested a revision to the proposed Related +9 +Party footnote for the Fund’s year-end 2012 financial statements to describe the terms of the +note, the manner of settlement, and the interest rate. The auditors provided the suggestion to +BCM management. Three days later, the BCM controller told Beamish that Burrill “strongly +feels he does not want the footnote as currently worded to be included in the financials” and that +the note had been “withdrawn.” The reference to the promissory note was omitted from the year- +end 2012 audited financial statements. +32. In April 2013, the Fund issued its year-end 2012 financial statements with an +audit report with an unqualified audit opinion from PricewaterhouseCoopers. The audited +financial statements materially misstated the nature of the related party payments. Beamish failed +to obtain sufficient appropriate audit evidence to determine whether GAAP compliant disclosure +of the payments was made, as required by GAAS, when he authorized PwC to issue its audit +report with an unqualified opinion. The balance sheet identified the advanced management fees +as part of a larger amount of “prepaid expenses and other receivables from related party” owed to +the Fund, but did not separately show a related party receivable on the balance sheet as required +by GAAP (and in particular, ASC 850-10-50-2). +33. In the Related Party footnote to the year-end 2012 financial statements, the Fund +described the advanced management fees only as a “receivable” owed by the Management +Company, Burrill Capital, LLC—not the General Partner, as had been disclosed in the year-end +2009, 2010, and 2011 financial statements. The footnote did not further describe the transaction +nor the terms of the “receivable,” as required by GAAP (and in particular, ASC 850-10-50-1). +34. The footnote further stated that the Management Company “intends to pay” the +receivable “from future distributions to the General Partner” and from “Management Company +funds.” Beamish and his audit team, however, failed to obtain sufficient audit evidence of the +receivable’s collectability, as required by GAAS. An auditor “should design and perform audit +procedures that are appropriate in the circumstances for the purpose of obtaining sufficient +appropriate audit evidence.” AU-C § 500.06. Furthermore, an auditor should “obtain sufficient +appropriate audit evidence about whether related party relationships and transitions have been +appropriately identified, accounted for, and disclosed in the financial statements.” AU -C +§ 550.09. +35. With respect to the collectability of the receivable “from future distributions to the +General Partner,” Beamish looked only to the Fund’s capital account for the General Partner, +which was fair valued at $15.3 million as of December 31, 2012. As set forth in the LPA, the +General Partner’s right to use the capital account was conditioned on the performance of its +management duties (including, among other things, not breaching its fiduciary duties nor engaging +in willful or reckless misconduct or fraud). Significantly, the LPA provided that if the General +Partner failed to make its required capital contributions to the Fund, its right to the capital account +could be substantially impaired. As Beamish and the PwC audit team were aware, the General +Partner had not made its required capital contributions from 2009 through 2012 and was instead +adding the amount of the contributions to the advanced management fee balance each year. By +relying only on the value of the General Partner’s capital account, and failing to consider that the +General Partner did not make its required capital contributions, Beamish failed to obtain sufficient +appropriate audit evidence about the collectability of the receivable. Additionally, when faced with +inconsistent audit evidence, “the auditor should determine what modifications or additions to audit +10 +procedures are necessary to resolve the matter…” AU-C § 500.10. In this situation, Beamish +failed to identify the contradictory audit evidence and thus did not consider additional audit +procedures to test the collectability of the receivable. +36. Furthermore, Beamish relied on Burrill’s representations about the General +Partner’s intent to pay the receivable through its future distributions without determining whether +Burrill had authority to bind the entity. Beamish did not inquire whether the General Partner’s +governing documents permitted Burrill to commit the future distributions of the General Partner. +Nor did Beamish obtain evidence of the financial condition of the General Partner to determine +whether the General Partner was encumbered by other financial obligations. Thus, Beamish’s +failure to scrutinize the representations made by Burrill regarding the intent to pay the receivable +“from future distributions to the General Partner” demonstrated a significant lack of professional +skepticism by Beamish under the circumstances. +37. Nor did Beamish take any steps to verify whether the Management Company had +the funds to repay the receivable. Had Beamish requested the Management Company’s balance +sheet, he would have discovered that the Management Company had less than $1,600 in cash on +hand as of December 31, 2012, and that its remaining assets were illiquid and arose out of related +party transactions with other Burrill entities. Generally Accepted Accounting Standards state that +written representations “complement other auditing procedures and do not provide sufficient +appropriate audit evidence on their own about any of the matters with which they deal.” AU-C +580.04. Additionally, “if written representations are inconsistent with other audit evidence, the +auditor should perform audit procedures to attempt to resolve the matter.” AU-C 580.23. +Instead, in violation of the professional standards required by GAAS, Beamish relied only on +Burrill’s representations about the sources and means of repayment. +38. As in the year-end 2009-2011 audited financial statements, t he Management Fee +footnote to the Fund’s year-end 2012 financial statements merely described the amount the +General Partner was legally entitled to receive over the course of the calendar year in accordance +with the LPA. The footnote did not disclose that the Fund had actually paid advanced +management fees, and contained no references to the amounts described as “prepaid expenses” +and “receivables” on the balance sheet and in the Related Party footnote. +39. With respect to the year-end 2012 audit specifically, Beamish was responsible for +obtaining audit evidence that “significant related party transactions outside the entity’s normal +course of business . . . have been appropriately authorized and approved.” AU-C § 550.24. This +he did not do. Beamish and the audit team took no steps to determine whether the LPA permitted +the payment of management fees in excess of what the General Partner would be entitled to earn, +or loans to related parties without approval of an advisory committee of limited partners. +40. Beamish failed to maintain professional skepticism with respect to the audit of the +Fund’s year-end 2012 financial statements, as required by GAAS (and in particular, AU-C +§ 200.08). Beamish did not inquire about the business rationale for taking advanced management +fees, even after BCM management resisted his proposed additional disclosure and “withdrew” +the promissory note, contrary to GAAS (and in particular, AU-C § 240.32 and AU-C §§ 315.28- +29). By failing to make inquiry into these matters, and instead relying on the representations of +BCM management, Beamish fell short of the professional standards required by GAAS. +11 +I. PricewaterhouseCoopers Resigned as Auditor of the Fund +41. From the beginning of 2013 through the issuance of the Fund’s year-end 2012 +audited financial statements on April 4, 2013, Burrill, alone directing the General Partner, took +an additional $3.2 million in advanced management fees. After the audit opinion was issued, +Burrill took another $1.15 million in advanced management fees through July 2013. +42. In late August 2013, the Fund’s investment committee became aware that +virtually all the committed capital in Fund III had been spent. Emergency meetings of the +investment committee were convened. Ov er the following weeks, the other members of the +General Partner were informed that the Fund paid approximately $18 million in advanced +management fees. The amounts taken exceeded the amount to which the General Partner was +entitled to receive over the contractual life of the Fund by millions of dollars. +43. In late October 2013, three members of the General Partner sent a letter to the +advisory committee of the limited partners informing them of Burrill’s misappropriation. In +response, the advisory committee of the limited partners removed the General Partner, including +Burrill, from managing the Fund. +44. On November 6, 2013, BCM management provided Beamish with several letters +between BCM management and various limited partners regarding the misappropriation. +45. On or about November 11, 2013, PricewaterhouseCoopers resigned as the auditor +of the Fund. +46. In 2014, the limited partners agreed to recycle distribution payments back into +Fund III, in lieu of receiving individual distribution pay-outs. They used the recycled money to +meet the Fund’s financial commitments to its portfolio companies and to stabilize the Fund. + +J. Violations +47. As a result of 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. +48. 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.” In relevant part, Section 4C(b)(2) and +Rule 102(e)(1)(iv)(B) define “improper professional conduct” as 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 discussed above, Respondent’s failures to conform to applicable professional +standards found in GAAS, in connection with the audits of the year-end 2009, 2010, 2011, and +2012 Fund III financial statements, constitute repeated instances of unreasonable conduct. In +addition, Respondent’s failures to conform to the applicable professional standards found in +12 +GAAS, in connection with the Fund’s year-end 2012 financial statements, constitutes an instance +of highly unreasonable conduct under circumstances that warranted heightened scrutiny, which is +required under Rule 102(e)(1)(ii) in instances where significant and unusual transactions take +place, such as taking millions of dollars in advanced fees beyond the life of Fund. +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: +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; and +B. Whether, pursuant to Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, Respondent should be censured or denied, temporarily or +permanently, the privilege of appearing or practicing before the Commission as an accountant. +IV. +IT IS ORDERED that a public hearing 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, 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. +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 of the Commission’s Rules of Practice, 17 C.F.R. § 201.220. +If Respondent fails to file the directed answer, or 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 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 as provided for in the +Commission’s Rules of Practice. +IT IS FURTHER ORDERED that, pursuant to Rule 360(a)(2)(A) of the Commission’s +Rules of Practice, the Administrative Law Judge shall issue an initial decision no later than 120 +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. +13 +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. + + + + Brent J. 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0000000000000000000000000000000000000000..a9f6ae966b90b4949a2f20b468ef23006f0129b7 --- /dev/null +++ b/raw/aaer/2017/AAER-3916.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:750f25d43502b98b30fb7feffe6a642aa22ee6c057f967be666ce88064f5ac60 +size 217448 diff --git a/raw/aaer/2023/AAER-4369.txt b/raw/aaer/2023/AAER-4369.txt new file mode 100644 index 0000000000000000000000000000000000000000..66a3ca5038703cc9cc001874b4eb053379b12579 --- /dev/null +++ b/raw/aaer/2023/AAER-4369.txt @@ -0,0 +1,123 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96652 / January 12, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4369 / January 12, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21273 + +In the Matter of + +COOPER J. MORGENTHAU, +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 Cooper +J. Morgenthau (“Respondent” or “Morgenthau”) 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 + +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 +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, paragraph 3 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. Morgenthau, age 35, is a resident of New York, New York. He served as +Chief Financial Officer of African Gold Acquisition Corp. (“African Gold”) from October 2020 +until his termination in August 2022. + +2. African Gold was, at all relevant times, a publicly traded special purpose acquisition +corporation (“SPAC”) with its principal place of business in New York, New York. At all relevant +times, African Gold’s securities were registered with the Commission pursuant to Section 12(b) of +the Securities Exchange Act of 1934, and trade on the New York Stock Exchange. + + 3. On January 3, 2023, the Commission filed a complaint against Morgenthau in SEC +v. Cooper J. Morgenthau (Civil Action No. 23-cv-00022) in the U.S. District Court for the +Southern District of New York. On January 6, 2023, the court entered a judgment permanently +enjoining Morgenthau, by consent, from future violations of Sections 10(b) and 13(b)(5) of the +Exchange Act and Rules 10b-5, 13b2-1, 13b2-2(a), 13b2-2(b), and 13a-14 thereunder and Section +17(a) of the Securities Act of 1933 and barring him from serving as an officer or director of a +publicly traded company. Morgenthau was also ordered to pay disgorgement of ill-gotten gains +plus prejudgment interest and civil monetary penalties to be determined at a later date. + + 4. The Commission’s complaint alleged, among other things, that Morgenthau +engaged in a fraudulent scheme by embezzling money from African Gold’s operating bank +account and wiring it to his own personal bank and brokerage accounts to pay personal expenses +and to trade in traditional and crypto asset securities. Morgenthau attempted to hide the +embezzlement by erasing the personal wires and other incriminating transactional details on +African Gold’s bank account statements. Morgenthau then provided the fraudulent bank account +statements to African Gold’s external auditor and accountants. During the same general time +period, Morgenthau raised money from investors for the purpose of launching another series of +SPACs called Strategic Metals Acquisition Corp. I and Strategic Metals Acquisition Corp. II +(together, “Strategic Metals”). Morgenthau made numerous false statements to investors +regarding, among other things, the purposes for which the investment would be used. Morgenthau +stole all of the money purportedly raised for Strategic Metals, transferring some of it to African +Gold’s bank account in order to help conceal his embezzlement of African Gold’s funds, and using +the rest to cover personal expenses and fund personal securities trading. As CFO of African Gold, +Morgenthau certified that the financial statements in African Gold’s annual report on Form 10-K + 3 +for the fiscal year ended December 31, 2021 and in its quarterly reports on Form 10-Q for the +second and third quarters of 2021 and the first quarter of 2022 (the “Financial Filings”) contained +no untrue statement of a material fact or omitted any material fact necessary to make the statements +made, in light of the circumstances under which such statements were made, not misleading; fairly +presented African Gold’s financial condition and cash flow in all material respects; and that he had +disclosed any fraud involving management with a significant role in African Gold’s internal +control over financial reporting to African Gold’s external auditor and audit committee. None of +these representations were in fact true. As a result of Morgenthau’s embezzlement, African Gold +has disclosed that the Financial Filings must be restated and should not be relied upon. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Morgenthau’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Morgenthau 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-4370.txt b/raw/aaer/2023/AAER-4370.txt new file mode 100644 index 0000000000000000000000000000000000000000..28655eb6437b88f1915fbb6293aa0a24d962a2c3 --- /dev/null +++ b/raw/aaer/2023/AAER-4370.txt @@ -0,0 +1,111 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96659 / January 13, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4370 / January 13, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21275 + +In the Matter of +KURT W. STREAMS, 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 Kurt W. +Streams (“Respondent” or “Streams”) pursuant to Rule 102(e)(3)(i) [17 C.F.R. § 201.102(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, 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. ¶ 3., 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. Respondent served as the Chief Financial Officer of SITO Mobile, Ltd., +from November 1, 2013 until his resignation on March 10, 2017. Streams was licensed as a +Certified Public Accountant from 2009 to 2012 in New York. + + 2. SITO Mobile, Ltd. (“SITO”), at all relevant times, was a Delaware +corporation with its principal place of business in Jersey City, New Jersey. SITO provided mobile +data advertising platforms that enable its clients to push to consumers mobile advertisements, +coupons and the like, based on location data derived from mobile devices. At all relevant times, +SITO’s common stock was registered with the SEC pursuant to Section 12(b) of the Exchange Act. +SITO’s Common stock traded on the OTC and NASDAQ Capital Market. + + 3. On August 2, 2019, the Commission filed a complaint against Streams in +SEC v. Hug, et al. No. 2:19-cv-16290-ES-JRA in the U.S. District Court for the District of New +Jersey. On November 30, 2022, the court entered an order permanently enjoining Streams, by +consent, from future violations of violations of Section 10(b) of the Securities Exchange Act of +1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. § +240.10b-5]; Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§ 77q(a)]; +Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)]; Rule 13a-14 of the Exchange Act +[17 C.F.R. § 240.13a-14]; Rules 13b2-1 and 13b2-2 of the Exchange Act [17 C.F.R. §§ 240.13b2-1 +and 240.13b2-2]; and aiding and abetting violations of Section 13(a) of the Exchange Act [15 +U.S.C. § 78m(a)] and Rules 12b-20 and 13a-1, promulgated thereunder [17 C.F.R. §§ 240.12b-20 +and 240.13a-1]; Sections 13(b)(2)(A) and (B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) +and (b)(2)(B)]; Section 14(a) of the Exchange Act [15 U.S.C. § 78n(a)], and Rules 14a-3 and 14a-9 +promulgated thereunder [17 C.F.R. §§ 240.14a-3 and 240.14a-9]. Streams was also ordered to pay +$48,796.00 in disgorgement, and a $20,204.00 civil penalty. + + 4. The Commission’s complaint alleged, among other things, that from 2014 +until his resignation from SITO in early 2017, Streams, as SITO’s CFO, knowingly and improperly +used SITO funds to pay for his personal expenses, in violation of company policies. The + 3 +complaint also alleges that Streams failed to implement and/or exercise sufficient controls over +corporate expense reimbursement and cash withdrawals, and that as a result, improper personal +expenses were improperly incorporated into SITO’s books and records. In addition, the complaint +alleges that Streams aided and abetted the company’s filing of proxy statements in 2015 and 2016 that +did not disclose personal expenses of the company’s executives as compensation, as required by law. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Streams’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Respondent Kurt W. +Streams is suspended from appearing or practicing before the Commission as an accountant +pursuant to Rule 102(e)(3)(i) 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-4371.txt b/raw/aaer/2023/AAER-4371.txt new file mode 100644 index 0000000000000000000000000000000000000000..18c21953fda579ee9ceab941aade6cc940ce8cad --- /dev/null +++ b/raw/aaer/2023/AAER-4371.txt @@ -0,0 +1,383 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11148 / January 19, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96710 / January 19, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4371 / January 19, 2023 + +Admin. Proc. File No. 3-21239 +In the Matter of + +ANDY CHIN FONG CHEN, CPA + + +ORDER DENYING PETITION TO LIFT TEMPORARY SUSPENSION AND DIRECTING +HEARING + +On November 10, 2022, we issued an order instituting proceedings (“OIP”) against Andy +Chin Fong Chen, pursuant to Commission Rule of Practice 102(e)(3),1 based on Chen’s having +been permanently enjoined from violating antifraud provisions of the securities laws.2 The OIP +further temporarily suspended Chen from appearing or practicing before the Commission.3 +According to the OIP, Chen was licensed in the State of Washington as a Certified Public +Accountant in 1990 and currently holds a valid CPA-inactive certificate in the state that expires +in 2025.4 + +1 17 C.F.R. § 201.102(e)(3). +2 Final Judgment, SEC v. Chen, Case No. 2:17-cv-00405-JLR (W.D. Wash. Aug. 16, +2022), ECF No. 181. +3 Andy Chin Fong Chen, CPA, Exchange Act Release No. 96299, 2022 WL 16900142 +(Nov. 10, 2022). Commission Rule of Practice 102(e)(3)(i)(A) authorizes us to temporarily +suspend an accountant subject to such an injunction from appearing or practicing before the +Commission. 17 C.F.R. § 201.102(e)(3)(i)(A). +4 We also take official notice of the results of a search for Chen’s name on the CPA Search +page of the Washington Board of Accountancy, which show that, as alleged, Chen holds a valid +CPA-inactive certificate that expires on June 30, 2025, but also reflect that he is not now licensed +to practice as a CPA. See CPA Search - Board of Accountancy, https://data.wa.gov/Consumer- +Protection/CPA-Search-Board-of-Accountancy/pqu3-uhwj; Karen Bruton, Exchange Act +Release No. 84627, 2018 WL 6061351, at *1 n.2 (Nov. 19, 2018) (taking official notice pursuant +2 + +On December 20, 2022, Chen filed a petition to lift his temporary suspension and dismiss +this administrative proceeding. For the reasons below, we deny the request to lift the temporary +suspension and set the matter down for a hearing in accordance with Commission Rule of +Practice 102(e)(3).5 +Background +On May 15, 2017, the Commission filed a civil complaint (the “Complaint”) against +Chen; the company of which he served as president, Aero Space Port International Group, Inc. +(“ASPI”); and others.6 As alleged in the Complaint, Chen and ASPI fraudulently raised over +$14.5 million from investors in exchange for membership interests in a limited liability +company, falsely representing that investor funds would be used to finance the development of +real property in Washington State. According to the Complaint, Chen instead misappropriated +virtually all of the investor funds and used them for other purposes. The Complaint also alleged +that Chen and ASPI misrepresented to investors, all of whom were foreign nationals, that their +investment would enable them to participate in the Employment-Based Immigration Fifth +Preference Program (“EB-5 program”). This program provides a means for foreign nationals to +obtain lawful permanent residency in the United States. + +On February 15, 2019, the court granted summary judgment in favor of the Commission +against Chen and ASPI on the Commission’s claims that they violated Section 10(b) of the +Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder,7 and Section 17(a)(2) of the +Securities Act of 1933,8 by falsely promising that Chen and ASPI would use investors’ capital to +finance the real estate project in accordance with EB-5 program requirements and by failing to + +to Commission Rule of Practice 323, 17 C.F.R. § 201.323, of licensing records available through +North Carolina Board of CPA Examiners’ website); Kalid Morgan Jones, Exchange Act Release +No. 80635, 2017 WL 1862331, at *1 n.3 (May 9, 2017) (taking official notice of website search +results from state government database); see also Use of the Title, https://acb.wa.gov/use-title +(“Individuals that hold a current [Washington State] CPA-Inactive certificate cannot practice +public accounting, and cannot use the title ‘Certified Public Accountant’ or ‘CPA.’”); mPhase +Techs., Exchange Act Release No. 74187, 2015 WL 412910, at *2 n.14 (Feb. 2, 2015) (taking +official notice of materials posted on state government website). +5 17 C.F.R. § 201.102(e)(3)(iii) (providing that, upon receipt of a timely petition to lift a +temporary suspension, “the Commission shall either lift the temporary suspension, or set the +matter down for hearing at a time and place designated by the Commission, or both, and after +opportunity for hearing, may censure the petitioner or disqualify the petitioner from appearing or +practicing before the Commission for a period of time or permanently”); id. § 201.102(e)(3)(iv) +(allocating burdens in Rule 102(e)(3)(iii) hearing). +6 Compl., SEC v. Chen, Case No. 2:17-cv-00405-JLR (W.D. Wash. May 15, 2017), +ECF No. 1. +7 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5(b). +8 15 U.S.C. § 77q(a)(2). +3 + +disclose that they would instead use investor funds for purposes contrary to the EB-5 program.9 +In holding that Chen and ASPI acted with scienter, the court found that Chen solicited investors’ +money with the intent to deploy those funds at ASPI’s complete discretion, contrary to the terms +of the EB-5 program.10 The court found that unauthorized expenditures of investors’ money on +payments on Chen’s luxury vehicle and loans to family members showed that Chen must have +been aware that he was falsifying the representations to investors.11 The court also found that +Chen knew that he could not verify the truth of the offering’s central premise that Chen and +ASPI would spend investors’ funds in a way that would enable investors to qualify for EB-5 +status.12 + +Following its grant of summary judgment, the court entered a final judgment on August +16, 2022,13 permanently enjoining Chen and ASPI from violating Exchange Act Section 10(b), +Exchange Act Rule 10b-5(b), and Securities Act Section 17(a)(2), and from participating in the +EB-5 program.14 The judgment also ordered Chen and ASPI to pay, respectively, $75,000 and +$375,000 in civil money penalties to a receiver previously appointed to protect investor assets.15 +The Commission previously had withdrawn its request that defendants be ordered to pay +disgorgement because their business expenses exceeded the amount of that request.16 The court +agreed with the Commission, however, that six investors’ initial $500,000 investments should be +returned to them from funds held by the receiver.17 + +9 SEC v. Chen, Case No. 2:17-cv-00405-JLR, 2019 WL 652360, at *10-18, *21 (W.D. +Wash. Feb. 15, 2019) (granting in part the Commission’s motion for summary judgment). +10 Id. at *17. +11 Id. +12 Id. at *17-18. +13 The judgment referred to Chen as “Andy Ching Fong Chen,” and the Complaint referred +to “Andy Shin Fong Chen.” (emphasis added). Neither the OIP nor Chen’s filing, which each +refer to “Andy Chin Fong Chen,” addresses these discrepancies or suggests that they affect the +temporary suspension. (emphasis added). Because Chen does not dispute that he was the subject +of the Commission’s injunctive proceeding, these discrepancies in the spelling of Chen’s name +do not affect our decision at this stage. We request, however, that the parties discuss whether the +caption should be amended and inform us of the result of their discussion. See infra note 39. +14 SEC v. Chen, ECF No. 181; see also SEC v. Chen, Case No. 2:17-cv-00405-JLR, 2022 +WL 3370206 (W.D. Wash. Aug. 16, 2022) (granting relief); SEC v. Chen, Case No. 2:17-cv- +00405-JLR, 2019 WL 652360, at *5-6 (W.D. Wash. Oct. 18, 2021) (analyzing permanent +injunction factors). +15 SEC v. Chen, ECF No. 181; SEC v. Chen, 2022 WL 3370206, at *9 (ordering defendants +make payment to receiver); SEC v. Chen, 2021 WL 4844716, at *7 (finding that “appointment of +a receiver is necessary to ensure that the investors’ assets are independently controlled and +preserved”). +16 SEC v. Chen, 2022 WL 3370206, at *4 (stating that “[i]n light of Defendants’ established +business expenses, the SEC now agrees that no disgorgement should be ordered”). +17 Id. at *5. +4 + +On November 10, 2022, we issued the OIP, temporarily suspending Chen from appearing +or practicing before the Commission.18 The OIP further ordered that the temporary suspension +become permanent unless Chen filed a petition to lift it within 30 days after service of the OIP, +and we provided that if Chen filed such a petition we would “either lift the temporary +suspension, or set the matter down for hearing . . . or both.”19 On December 20, 2022, Chen filed +this petition requesting that we lift the temporary suspension and dismiss the proceeding. + +Analysis +Under Rule of Practice 102(e)(3)(i), we may, with due regard to the public interest and +without preliminary hearing, temporarily suspend from appearing or practicing before us any +accountant who has been “[p]ermanently enjoined by any court of competent jurisdiction, by +reason of his or her misconduct in an action brought by the Commission, from violating any +provision of the federal securities laws . . . or of the rules and regulations thereunder.”20 Upon +the filing of a petition to lift a temporary suspension under Rule 102(e)(3)(ii),21 Rule +102(e)(3)(iii) requires us to lift the suspension, set the matter down for hearing, or both.22 Based +on the record currently before us, we find it appropriate here not to lift the suspension and to +instead set the matter down for a hearing. + +There is no dispute that a federal district court permanently enjoined Chen from violating +antifraud provisions of the federal securities laws in an action brought by the Commission. And, +in instituting this proceeding, we determined that, in view of the injunction, it was appropriate +and in the public interest that Chen be temporarily suspended from appearing or practicing +before the Commission.23 A suspension furthers the policy objectives Rule 102(e)(3) was +designed to serve, which include protecting the Commission’s processes and the investing public +from being harmed by accountants and other professionals who have demonstrated an +unwillingness or inability to comply with the requirements of the federal securities laws.24 + +18 Chen, 2022 WL 16900142, at *1. +19 Id. at *2. +20 17 C.F.R. § 201.102(e)(3)(i). +21 Id. § 201.102(e)(3)(ii). +22 Id. § 201.102(e)(3)(iii). +23 Chen, 2022 WL 16900142, at *1. +24 Suspension or Disbarment From Appearance or Practice Before the Commission, +Exchange Act Release No. 9164 (May 10, 1971), 36 Fed. Reg. 8933, 8933 (May 15, 1971); see +also Bruton, 2018 WL 6061351, at *3 (explaining that a temporary suspension “is a remedial +measure” that “protects the public and the Commission’s processes from an accountant who has +been enjoined from violating the federal securities laws pending a hearing to determine what, if +any, sanction is appropriate”); Amendment to Rule 102(e) of the Commission’s Rules of Practice, +Exchange Act Release No. 40567 (Oct. 19, 1998), 63 Fed. Reg. 57,164, 57,164 (Oct. 26, 1998) +(stating that “both the Commission and the investing public rely heavily on accountants to assure +corporate compliance with federal securities law requirements and disclosure of accurate and +reliable financial information”). +5 + +Considering the injunction against Chen from violations of the antifraud provisions, and the +findings underlying it, we find it appropriate to maintain Chen’s temporary suspension pending a +hearing.25 + +Chen argues that we should vacate the temporary suspension for various reasons, none of +which we find persuasive. Chen contends, for instance, that the Commission “lacks jurisdiction” +to suspend him under Rule 102 because, as a holder of a CPA-Inactive certificate, he is not +currently licensed to practice as a certified public accountant, and because, according to him, he +has never “practiced” before the Commission as that term is defined in Rule 102(f).26 Citing +Rule 102(e)(1)(iv), Chen argues that Rule 102(e) in its entirety applies to only those accountants +currently “licensed to practice” as certified public accountants.27 + +Chen’s argument ignores the language of Rule 102(e)(3)—the relevant provision here— +which specifies that the Commission may temporarily suspend “any . . . accountant,” not only +those accountants currently licensed to practice as certified public accountants.28 Chen instead +cites Rule 102(e)(1), which provides separate bases from those at issue here for the Commission +to censure or deny persons the privilege of appearing or practicing before it, including “persons +licensed to practice as accountants” who engage in “improper professional conduct.”29 But Rule +102(e)(3), which provides the authority for this proceeding, contains no similarly limiting +language.30 + +Chen similarly contends that Rule 102(e) applies only to those who have actually +practiced before the Commission as an accountant and that the Commission has never previously +suspended a person from practicing before it who had not done so. But nothing in the text of + +25 See Bruton, 2018 WL 6061351, at *4 (denying request to lift temporary suspension +where the fact that a respondent professional has been enjoined “from violating the antifraud +provisions has especially serious implications for the public interest” (quoting Marshall E. +Melton, Advisers Act Release No. 2151, 2003 WL 21729839, at *9 (July 25, 2003))); Suspension +or Disbarment From Appearance or Practice Before the Commission, 36 Fed. Reg. at 8933 +(stating that hearing process under Rule 102(e)(3) “assur[es] that . . . professionals and experts +will have a fair opportunity to show why the interests of the investing public will not materially +be jeopardized if they are permitted to continue to appear and practice before the Commission”). +26 17 C.F.R. § 201.102(f). +27 Id. § 201.102(e)(1)(iv). +28 Id. § 201.102(e)(3)(i) (emphasis added). +29 Id. § 201.102(e)(1)(ii), (iv); see also Robert W. Armstrong, III, Exchange Act Release +No. 51920, 2005 WL 1498425, at *13 (June 24, 2005) (explaining that Rule 103(e)(1)(iv) +“defines the term ‘improper professional conduct’ for purposes of Rule 102(e)(1)(ii)”). +30 Bruton, 2018 WL 6061351, at *4 (denying petition to lift Rule 102(e)(3) temporary +suspension filed by enjoined person whose CPA license was inactive); cf. Daniel S. Lezak, +Exchange Act Release No. 50729, 2004 WL 2721400, at *1 (Nov. 23, 2004) (denying petition to +lift temporary suspension by person who asserted that “although he obtained a license as a +certified public accountant . . . in the early 1960’s, he has not practiced as a CPA since then”). +6 + +Rule 102(e)(3) requires that an accountant have practiced before the Commission for the +Commission to suspend the accountant, and Chen cites nothing imposing such a requirement. +Although Chen notes that Rule 102(f) identifies examples of what constitutes “practicing before +the Commission,”31 that provision does not establish a precondition to the exercise of +Commission authority under Rule 102(e).32 Rather, Rule 102(f) identifies activities in which +persons suspended under Rule 102(e) may not engage.33 + +Chen also argues that the temporary suspension is “meaningless,” and thus not remedial, +because his CPA license is inactive. But without a suspension, Chen could appear or practice +before the Commission in the future should he become relicensed as a CPA.34 + +Chen further asserts that the suspension is “retaliatory” because the Commission was +“largely unsuccessful” in its action against him, since the court did not order disgorgement as the +Commission had requested. But Chen’s allegation does not present a legally cognizable basis to +challenge the Commission’s decision to institute proceedings.35 And the premise of Chen’s + +31 17 C.F.R. § 201.102(f) (defining “practicing before the Commission” to include, but +providing that it “shall not be limited to,” transacting any business with the Commission and the +“preparation of any statement, opinion or other paper by any attorney, accountant, engineer or +other professional or expert, filed with the Commission in any registration statement, +notification, application, report or other document with the consent of such” person). +32 Cf. Armstrong, 2005 WL 1498425, at *12 (addressing availability of relief under Rule +102(e)(1) and stating that “the text of Rule 102(e) contains no requirement that a person must be +appearing and practicing before the Commission at the time of the conduct on which the +Commission’s findings are based”); Bruton, 2018 WL 6061351, at *4 (denying petition to lift +temporary suspension where accountant submitted a declaration stating that she had not practiced +before the Commission in more than 30 years and had no present intention of doing so). +33 See Armstrong, 2005 WL 1498425, at *12 (explaining that “[d]enying the person the +privilege of appearing or practicing before the Commission is the authorized remedy once the +Commission makes one of the findings specified in Rule 102(e)(1)(i)-(iii); appearing or +practicing before the Commission at the time of the misconduct is not the precondition to +imposing that remedy”). +34 See generally Convert Your CPA-Inactive Certificate to a License, +https://acb.wa.gov/individual-licensing/move-cpa-inactive-certificate-license (discussing process +of converting CPA-inactive certificate to active CPA license). We take official notice of this +webpage. mPhase Techs., 2015 WL 412910, at *2 n.14. See also, e.g., Bruton, 2018 WL +6061351, at *4 (finding that temporary suspension was in the public interest when respondent +could “reactivate her CPA license at any time” and was “not bound by a present intention not to +appear or practice before the Commission”). +35 Cf. Shellenbach v. SEC, 989 F.2d 907, 911 (7th Cir. 1993) (stating “courts will not +inquire into a prosecutor’s ill motive unless there is a showing of selective enforcement” or “an +attempt to discriminate by arbitrary classification”); Busboom Grain Co., Inc. v. ICC, 830 F.2d +74, 75 (7th Cir. 1987) (stating that “[a] strong presumption of regularity supports any order of an +administrative agency”). +7 + +argument is incorrect, as the Commission’s enforcement action was not unsuccessful. The court +found that Chen and ASTI violated antifraud provisions of the federal securities laws, enjoined +them from future violations and participation in the EB-5 program, and ordered them to pay civil +money penalties.36 The court also appointed a receiver to protect investor interests.37 + +We thus find that, at this stage, the court’s injunction against Chen, and the findings +underlying it, “justify the continuance of his suspension until it can be determined what, if any, +action may be appropriate to protect the Commission’s processes.”38 During the hearing, the +parties may address any arguments, and present any evidence, that they believe relevant to the +final sanction, if any, that may be imposed. + +Accordingly, IT IS ORDERED that Chen’s petition to lift the temporary suspension is +denied, and that the temporary suspension will remain in effect pending a public hearing and +decision in this matter; and it is further + +ORDERED that this proceeding be set down for a hearing before the Commission in +accordance with Rule 110 of the Commission’s Rules of Practice, 17 C.F.R. § 201.110; and it is +further + +ORDERED that the Division of Enforcement and Chen 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 this order.39 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 is 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 Chen fails to appear at a hearing or conference after being duly notified, he may be +deemed in default and the proceedings may be determined against him as provided by Rules +155(a), 221(f), and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), +201.221(f), and 201.310. If in the statement filed with the Office of the Secretary either party +states an intent to file a motion for summary disposition under Rule of Practice 250, the +Commission shall issue a briefing schedule for such motion(s). + +36 SEC v. Chen, ECF No. 181; SEC v. Chen, 2022 WL 3370206; SEC v. Chen, 2019 WL +652360; SEC v. Chen, 2019 WL 652360. +37 SEC v. Chen, 2021 WL 4844716, at *7. +38 Williams D. Shovers, Exchange Act Release No. 59874, 2009 WL 1271170, at *2 +(May 6, 2009). +39 In addition to those matters specified in Rule 221 that are relevant to this proceeding, the +parties should discuss whether the caption should be amended to eliminate the suffix “CPA” +from Chen’s name and to clarify Chen’s full name. Cf. Bruton, 2018 WL 6061351, at *4 & n.25 +(granting Bruton’s request that “CPA” be stricken from the caption because the respondent’s +CPA license was inactive and she was thus prohibited from allowing anyone else to refer to her +as a certified public accountant). +8 + +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. + +Attention also is called to the OIP, in which the Commission found 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. + +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 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, +and that any motion for summary disposition shall be filed under Rule 250(a) or (b). + +The Commission also 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 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 +9 + +deemed subject to the provisions of Section 553 delaying the effective date of any final +Commission action. + +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.40 + +By the Commission (Chair GENSLER and Commissioners PEIRCE, CRENSHAW, +UYEDA and LIZÁRRAGA). + +Vanessa A. Countryman +Secretary + +40 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-4372.pdf b/raw/aaer/2023/AAER-4372.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b304394606cff9565833246002d2a94fadf7efae Binary files /dev/null and b/raw/aaer/2023/AAER-4372.pdf differ diff --git a/raw/aaer/2023/AAER-4373.txt b/raw/aaer/2023/AAER-4373.txt new file mode 100644 index 0000000000000000000000000000000000000000..a9d95a0428e216154ac6d67e470526b54345d1f1 --- /dev/null +++ b/raw/aaer/2023/AAER-4373.txt @@ -0,0 +1,389 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96819 / February 7, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4373 / February 7, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21296 + + +In the Matter of + +GENTEX CORPORATION +and KEVIN C. NASH, + +Respondents. + + +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 Gentex Corporation (“Gentex”) and Kevin C. +Nash (“Nash”) (collectively “Respondents”). + +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 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 Respondents’ Offers, the Commission finds that: + 2 + +Summary + +1. This matter involves deficiencies in Gentex’s accounting for its executive and +employee bonus compensation programs from the third quarter of 2015 through the second quarter +of 2018 (the “Relevant Period”). These deficiencies were caused by an ineffective system of +internal accounting controls, which made it possible for the company’s then-Chief Accounting +Officer, Nash, and others in the accounting group, to make certain adjustments to the bonus +compensation accruals without the required accounting analysis or without adequate supporting +documentation. + +2. As set forth herein, in certain quarters, Nash departed from Gentex’s procedure for +estimating the bonus compensation accruals. Additionally, because the bonuses were calculated +and paid based on pre-tax profits of the company, the adjustments were made late in Gentex’s +quarterly financial statement closing process. He also failed to sufficiently document the basis for +his accounting judgments related to certain accrual estimates. + +3. Further, during Gentex’s quarterly closing process for the third quarter of 2015, +after Gentex’s Chief Financial Officer (“CFO”) had instructed Nash to reserve funds for a potential +executive bonus program, Nash directed a $300,000 accrual for the program. Nash subsequently +determined that the accrual would cause Gentex to miss the consensus earnings per share (“EPS”) +estimates for the quarter, and the next day, he directed a reduction to the accrual by $200,000. As a +result, Gentex publicly reported EPS in line with consensus EPS estimates. If Nash had not +reduced the accrual, Gentex would have missed consensus EPS estimates by one penny. + +4. Nash directed the initial accrual for the executive bonus program and the +subsequent reduction to the accrual without performing an analysis of the relevant criteria under +generally accepted accounting principles in the U.S. (“GAAP”). As a result of his conduct, Nash +violated Section 13(b)(5) of the Exchange Act, which prohibits knowingly circumventing or +knowingly failing to implement a system of internal accounting controls. Nash further violated +Rule 13b2-1 under the Exchange Act, which prohibits any person from directly or indirectly +falsifying, or causing the falsification of, any book, record, or account required by the Exchange +Act. + +5. In addition, Gentex failed to devise and maintain a sufficient system of internal +accounting controls related to its closing process, including its accounting for bonus compensation, +and failed to maintain internal control over financial reporting. + +Respondents + +6. Gentex Corporation is a manufacturing company incorporated in Michigan and +headquartered in Zeeland, Michigan. Gentex provides digital vision, connected car, dimmable +glass, and fire protection products. Gentex’s common stock is registered with the Commission +pursuant to Section 12(b) of the Exchange Act, and is traded on NASDAQ under the symbol + 3 +“GNTX.” Gentex 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. + +7. Kevin C. Nash, age 48, resides in Zeeland, Michigan. Nash was Gentex’s Vice +President (“VP”) of Accounting and Chief Accounting Officer (“CAO”) from 2014 through 2018. +Nash became Gentex’s Chief Financial Officer in 2018. + +Facts + +Background + +8. Throughout the Relevant Period, Gentex maintained a discretionary quarterly +profit-sharing bonus paid to all employees. Prior to February 2016, it had been the company’s +practice to pay discretionary bonuses to certain executive officers and other key employees on an +annual basis. In February 2016 Gentex adopted a second bonus program, the Performance Based +Bonus Plan (“PB Bonus Plan”), for certain executive officers and other key employees. + +9. Gentex made monthly accruals for the expected discretionary quarterly profit- +sharing bonus expense based on the company’s adjusted pre-tax, pre-bonus income. During the +quarter closing process, shortly before the books closed, Nash typically determined whether the +previously entered monthly profit-sharing bonus accruals reflected the company’s expected profit- +sharing bonus payout for the quarter. If Nash determined that it did not, he would instruct +Gentex’s accounting staff to make adjustments to accruals to increase or decrease the reserve for +the profit-sharing bonus. + +10. Gentex recorded liabilities for its bonus programs in a single bonus liability account +in its general ledger. Gentex’s policies and procedures for the quarterly closing process required +reconciliations of all material balance sheet accounts, including the bonus account, to be completed +during the quarterly closing process, shortly after quarter end. Specific accountants at Gentex were +assigned to reconcile each balance sheet account, and all reconciliations were required to include +the reconciliation document along with all supporting and backup documentation. Once the +accountant performed the reconciliation, Gentex’s controller was required to review and verify the +reconciliations. + +11. In his role as Gentex’s VP and CAO, Nash, in part, was responsible for maintaining +and implementing the company’s internal accounting controls and policies on accounting and +financial reporting, including compliance with GAAP. For instance, Gentex’s Code of Business +Conduct and Ethics required accurate recording and reporting of financial information in +conformity with GAAP. + +12. Nash was also responsible for estimating the PB Bonus Plan and profit-sharing +bonus expenses and reconciling the bonus liability account. Nash’s judgment with respect to +estimating the accrual for the bonus was not subject to review by other Gentex employees. Nash +directed his staff to enter the bonus account journal entries, and then reviewed and approved those +same bonus account entries that he had directed and purportedly reconciled. + 4 + +PB Bonus Accrual in Third Quarter 2015 + +13. In 2015, Gentex’s CFO proposed to the Chief Executive Officer and Board of +Directors that the company adopt a new pay-for-performance executive bonus plan to address +management retention concerns identified by management and shareholders. The proposed PB +Bonus Plan would be tied to certain performance metrics and would be implemented in 2016. +Under the proposal, the PB Bonus would be paid to certain executives for 2015 performance. + +14. During the summer of 2015, before the PB Bonus Plan was approved, Gentex’s +CFO instructed Nash to reserve money for the plan so that bonuses for the 2015 time period would +be partially reserved. + +15. On October 7, 2015, during the closing process for the third quarter of 2015, Nash +directed the accrual of $300,000 for the PB Bonus Plan, which had not yet been approved by +Gentex’s Board of Directors. This journal entry was made without any supporting documentation. +Additionally, Nash did not maintain documentation of any purported analysis that was required to +be performed pursuant to Accounting Standards Codification (“ASC”) Topic 450, Contingencies, +concerning the loss contingency associated with the PB Bonus Plan.1 + +16. On October 8, 2015, Nash realized that the initial accrual of $300,000 would cause +Gentex to miss the consensus EPS estimate of $0.27 for the third quarter of 2015. He directed a +journal entry to reduce the $300,000 accrual to $100,000. The journal entry for the revised accrual +was again made without any supporting documentation and Nash did not conduct any analysis that +should have been performed pursuant to ASC 450-20 concerning the PB Bonus Plan. + +17. In an October 9, 2015 email exchange with the CFO, the CFO asked Nash if he had +reserved some money for the PB Bonus Plan. Nash responded, “100K. had [sic] 300K, but had to +reduce in order to keep .27 per share.” The CFO replied, “[g]ood call. That puts in line with +consensus, right?” to which Nash replied, “[y]es.” + +18. On October 21, 2015, Gentex reported its third quarter 2015 financial results. +Among the financial metrics that it reported was an EPS of $0.27, which met the consensus EPS +estimate. Had Nash not directed the partial reduction of the $300,000 accrual for the PB Bonus +Plan expense, Gentex would have missed the third quarter 2015 EPS consensus estimate by a +penny. + + + +1 ASC 450-20, Loss Contingencies, provides that a liability for a loss contingency is +required to be recognized when it is both probable that a loss has been incurred and the loss is +reasonably estimable. + 5 +Other Bonus Accrual Journal Entries + +19. Fourth Quarter 2015: In January 2016, Nash directed the accrual of an additional +$250,000 for the PB Bonus Plan, which was under review by senior management of the company +but still had not yet been approved by Gentex’s Board of Directors at the time of the accrual. Nash +did not maintain sufficient documentation of any accounting analysis supporting this accrual +amount. Gentex’s Board approved the PB Bonus Plan shortly before Gentex filed its 2015 Form +10-K, approximately a month after Nash had directed the accrual. + +20. First and Second Quarters of 2016: Nash directed an increase of monthly profit- +sharing bonus accruals by $400,000 in April 2016, followed by a $100,000 reduction in July 2016, +without maintaining sufficient documentation supporting those adjustments. These journal entries +were inconsistent with Gentex’s procedure for calculating the profit-sharing bonus expense at a +percentage of adjusted pre-tax, pre-bonus net income. + +21. Fourth Quarter 2016: In January 2017, Nash directed an additional profit-sharing +bonus accrual of $115,000, without adequate supporting documentation. This entry was +inconsistent with Gentex’s procedure for calculating the profit-sharing bonus expense. It was also +made after Gentex had already accrued more than the profit-sharing bonus payout which was made +during the fourth quarter, thus further increasing an already over-accrued liability for the profit- +sharing bonus. + +22. Second Quarter 2017: In July 2017, Nash failed to direct a reduction to the profit- +sharing bonus liability after realizing that it exceeded the expected payout. On July 13, 2017, Nash +sent the CFO an email with proposed bonus payouts. In that email, Nash indicated that Gentex had +built a cushion of $220,000 in the bonus account in the first quarter of 2017. Nash recommended a +payout of $8.8 million and further indicated that if the company paid out a profit-sharing bonus of +approximately $8.2 million, Gentex would build another $568,000 cushion in the account. Nash +concluded his email stating that Gentex could pay a slightly smaller profit-sharing bonus and still +build some cushion, which would not be bad to have for the third quarter and fourth quarter of +2017. The CFO ultimately selected a bonus payment of $8.2 million. + +23. Fourth Quarter 2017: In January 2018, as a result of changes to the tax laws, Nash +directed the accrual of $4 million for an incremental profit-sharing bonus of $1,000 for each +employee that was approved by Gentex’s Board of Directors and was paid in the first quarter of +2018. This journal entry was not supported by adequate documentation. + +24. Second Quarter 2018: In July 2018, Nash directed multiple journal entries resulting +in an additional $300,000 accrual for the profit-sharing bonus expense, and a $402,500 accrual for +the PB Bonus expense which was subsequently reduced by $200,000. None of these journal +entries had sufficient documentation supporting the adjustments. + + + + + 6 +Gentex’s Inaccurate Books and Records and Internal Accounting Controls Failures + +25. During the Relevant Period, Gentex did not keep books, records, and accounts, +which, in reasonable detail, accurately and fairly reflected the transactions and disposition of assets +by Gentex in connection with its bonus programs. + +26. In addition, Gentex failed to devise and maintain internal accounting controls that +were sufficient to provide reasonable assurances that transactions were recorded as necessary to +permit preparation of financial statements in conformity with GAAP. In particular, Gentex lacked +sufficient controls relating to its accounting for its bonus compensation programs, Gentex’s +internal accounting controls also did not provide for sufficient documentation and review of +accounting entries associated with the bonus compensation programs. + +Violations + +27. 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-11, and 13a-13 require issuers with securities registered +under Section 12 of the Exchange Act to file 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. See SEC v. Wills, 472 F. Supp. +1250, 1268 (D.D.C. 1978). + +28. Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make +and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires all +reporting companies, among other things, 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 +the books-and-records and internal accounting controls provisions. See Ponce v. SEC, 345 F.3d +722, 737 n.10 (9th Cir. 2003). Also, Exchange Act Rule 13a-15(a) requires issuers to maintain +internal control over financial reporting. + +29. Section 13(b)(5) prohibits any person from knowingly circumventing or knowingly +failing to implement a system of internal accounting controls or knowingly falsifying any book, +record, or account subject to Section 13(b)(2)(A). + +30. 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). A violation of Rule 13b2- +1 does not require scienter and may rest on a finding of negligence. SEC v. World-Wide Coin +Investments, 567 F. Supp. 724, 749 (N.D. Ga. 1983). + 7 + +Findings + +31. Based on the foregoing, the Commission finds that Gentex violated Exchange Act +Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Rules 13a-11, 13a-13, 13a-15, and 12b-20 +thereunder. + +32. Based on the foregoing, the Commission finds that Nash (a) violated Section +13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder and (b) caused Gentex’s violations of +Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Rules 13a-11, 13a-13, 13a-15, and +12b-20 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 that: + +A. Pursuant to Section 21C of the Exchange Act, Gentex cease and desist from +committing or causing any violations and any future violation of Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act, and Rules 13a-11, 13a-13, 13a-15 and 12b-20 thereunder. + +B. Pursuant to Section 21C of the Exchange Act, Nash cease and desist from +committing or causing any violations and any future violations of Exchange Act Sections 13(a), +13(b)(2)(A), 13(b)(2)(B), and 13(b)(5), and Rules 13a-11, 13a-13, 13a-15, 13b2-1, and 12b-20 +thereunder. + +C. Gentex shall, within 10 days of the entry of this Order, pay a civil money penalty in +the amount of $4,000,000 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. + +D. Nash 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 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; + + 8 +(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 +either Gentex or Nash 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 Mark Cave, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., +N.E., 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, 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. + + + + + + + + + + + + 9 +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, Nash stipulates that the findings in this Order are +true, and further stipulates that any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Nash 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 +Nash 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-4375.txt b/raw/aaer/2023/AAER-4375.txt new file mode 100644 index 0000000000000000000000000000000000000000..db4a0ed41bed766fb2efb338fd3e06a70fd18853 --- /dev/null +++ b/raw/aaer/2023/AAER-4375.txt @@ -0,0 +1,357 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11156 / February 14, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96909 / February 14, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4375 / February 14, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21301 + + + +In the Matter of + +Roadrunner Transportation +Systems, 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 +REMEDIAL SANCTIONS AND 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 Roadrunner Transportation Systems, Inc. (“Roadrunner” 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 Remedial Sanctions and 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: + +1. From at least July 2013 through January 2017, Roadrunner engaged in a multi-year +accounting fraud scheme by manipulating its financial reports to hit prior earnings guidance and +analyst projections. Among other things, Roadrunner hid incurred expenses by improperly +deferring them and spreading them over multiple quarters to minimize their impact on +Roadrunner’s net earnings, avoided writing down assets that were worthless and receivables that +were uncollectable, and manipulated earnout liabilities related to Roadrunner’s acquisitions which, +in practical effect, created an income “cushion” that could be accessed in future quarters to offset +expenses. Roadrunner also concealed its fraud from Roadrunner’s independent auditor. As a result +of this conduct, Roadrunner materially misstated its financial results in its earnings releases, +earnings calls, and quarterly and annual reports from at least the second quarter of 2013 through +the third quarter of 2016. + +Respondent + +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 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. + +Facts + +3. Between May 2010 and January 2017, Roadrunner acquired more than twenty +transportation companies. Roadrunner owned and operated those companies (“Operating +Companies”) and consolidated their financial results into its own public filings. +4. By no later than Q2 2013 (Roadrunner’s financial quarters are referred to as “Q1” +through “Q4”), Roadrunner faced several financial challenges that jeopardized its ability to meet its +consensus earnings per share (“EPS”) targets. Among other things, several of Roadrunner’s +recently acquired Operating Companies were underperforming and Respondent faced mounting +expenses that weighed on net earnings. +5. From at least July 2013 through January 2017, Roadrunner engaged in a fraudulent +scheme to (a) hide major expenses, (b) hide the poor performance of some of its recently acquired +Operating Companies, and (c) avoid the write off of significantly overstated or impaired assets and +accounts. This was done to create the illusion that Roadrunner was meeting its earnings goals +when, in reality, Roadrunner was consistently underperforming expectations. + +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 +6. To conduct the scheme, Roadrunner used several fraudulent accounting techniques. +Among other things, it (a) improperly deferred recognition of known expenses to future quarters, +(b) failed to write down assets and accounts that it knew were worthless (or overvalued), and (c) +manipulated contingent earnout liabilities related to Roadrunner’s purchase of Operating +Companies. +Roadrunner Improperly Deferred Expenses and Manipulated Contingent Earnout +Liabilities in Q2 and Q4 2013. +7. When Roadrunner bought an Operating Company, it typically agreed to pay the +sellers an earnout that was contingent on the Operating Company’s future performance. +Roadrunner recorded these earnouts – reduced to present value – as “contingent purchase +obligations” which appeared as liabilities on Roadrunner’s balance sheet. +8. Pursuant to generally accepted accounting principles (“GAAP”), the proper +accounting treatment for Roadrunner’s earnouts was to accrue a liability in the amount of the +earnout’s fair value at the acquisition date. For Roadrunner, this fair value calculation depended +on how well the Operating Company was expected to perform. Specifically, the earnout’s fair +value hinged on the Operating Company’s “EBITDA” – i.e., its earnings before interest, taxes, +depreciation, and amortization post-acquisition. In general, if the Operating Company’s EBITDA +fell short of the expectations on which the earnout was based, Roadrunner’s fair value estimate +for the earnout should have decreased. +9. GAAP required Roadrunner to remeasure the fair value of its earnouts at each +reporting date. If it became clear that an Operating Company could not meet the annual EBITDA +thresholds required to trigger the full earnout, Roadrunner was required to reduce the earnout +liability in that quarter to the amount that the sellers were likely to receive. Reducing the earnout +liability had two effects: (a) it provided a short-term boost to Roadrunner’s net income and +earnings per share for the period in which the adjustment was made, but (b) an earnout reduction +also signaled to investors that the Operating Company was not meeting its EBITDA projections. +10. Instead of reducing contingent earnout liabilities to reflect the Operating +Companies’ actual performance, Roadrunner fraudulently inflated Operating Companies’ +EBITDA projections to support overstated earnout valuations that would help Roadrunner meet +analysts’ consensus EPS estimates in future periods. This allowed Roadrunner to defer +recognition of income from earnout adjustments into future quarters, creating a “cushion” of +potential income that Roadrunner could access in future quarters to offset expenses. Further, by +not reducing earnout obligations when required, Roadrunner hid the fact that certain of its recent +acquisitions were underperforming. +11. Roadrunner also improperly deferred the recognition of known expenses so +Roadrunner could hit its EPS targets. GAAP requires that companies recognize expenses for +liabilities when it is probable that the liability has been incurred and the amount of the liability can +be reasonably estimated. To keep earnings in line with analysts’ expectations, Roadrunner +improperly deferred recognition of known expenses into future quarters. + 4 +12. In Q2 2013, Roadrunner should have reduced its earnout liabilities to reflect the +actual performance of one Operating Company. Instead Roadrunner fraudulently adjusted the +Operating Company’s earnings projections upward to support an inflated earnout valuation that +would help Roadrunner meet analyst EPS expectations in future periods. +13. Also in Q2 2013, Roadrunner improperly delayed the recognition of known +expenses that it had already incurred and therefore should have been recognized in the second +quarter. +14. As a result, Roadrunner’s operating expenses in its Q2 2013 Form 10-Q were +materially understated by $2.375 million, and its disclosed contingent earnout liabilities were +materially overstated by approximately $2.689 million, and the adjustments to the earnout +liabilities were understated by a corresponding amount. The combination of the improper deferral +of expenses and the earnout manipulation allowed Roadrunner to hit its EPS target while hiding +material expenses and concealing the underperformance of the Operating Company from the +investing public. Roadrunner used the earnout cushion it created in Q2 2013 to hit its EPS targets +in later quarters. + +15. On August 13, 2013, Roadrunner sold common stock off of a Form S-3 shelf +registration statement. The misleading Q2 2013 financial statements were incorporated into this +offering. Roadrunner sold 1.5 million shares at an offering price of $27, and raised net proceeds of +$38.4 million from the offering. +16. In Q4 2013, Roadrunner should have reduced the combined earnout liabilities for +two additional Operating Companies by $4,048,000 to reflect their actual performance. Doing so +would have resulted in a $4,048,000 increase in operating income – providing a temporary boost to +earnings, but would have deprived Roadrunner of the flexibility to use those reductions in future +quarters to offset expenses. The earnout manipulation also concealed underperformance of the two +Operating Companies. Roadrunner used the earnout cushion it created in Q4 2014 to hit its EPS +targets in later quarters. + +17. As a result, Roadrunner’s Q4 2013 financial statements – included in the 2013 +Form 10-K – were materially misleading. Among other things, Roadrunner’s disclosed contingent +liabilities related to acquisitions were overstated by over $4 million and adjustments to those +liabilities were understated by a corresponding amount. + +Roadrunner Improperly Delayed Recognition of Customer Cargo Claims from Q2 2014 +through 2016. +18. Beginning in Q2 2014, Roadrunner also failed to properly account for known +claims from Roadrunner customers for damaged shipments. Roadrunner should have accounted for +the claims that were probable and reasonably estimable. Instead, a Roadrunner executive +improperly delayed the recognition and payment of known claims, causing a backlog of claims that +were approved but not paid. The backlog was a known expense that was not properly disclosed on +Roadrunner’s financial statements, and it improperly reduced Roadrunner’s historical losses used +to estimate for future claims. + 5 +19. As a result, Roadrunner’s claims reserve was understated for almost every quarter +from Q2 2014 to Q3 2016 – by $56,000 in Q2 2014, $1,040,000 in Q3 2014, $416,000 in Q4 2014, +$457,000 in Q1 2015, $658,000 in Q2 2015, $73,000 in Q3 2015, $496,000 in Q4 2015, and +$410,000 in Q3 2016. As discussed below, these deferred claims contributed to material +misstatements in Roadrunner’s Forms 8-K, 10-K, and 10-Q throughout 2014, 2015 and 2016. +Roadrunner Failed to Properly Account for Overstated Accounts at Operating Companies +from Q2 2014 through Q4 2014. +20. In several instances, Roadrunner and its Operating Companies were carrying assets +on their balance sheet that either were significantly overstated or worthless. GAAP requires that – +when a receivable is deemed uncollectable or an asset is otherwise overstated – that asset should be +“written off,” i.e., the asset should be revalued and the portion that is deemed uncollectable or +overstated should be deducted from the company’s income. Roadrunner failed to take write-offs +that could drag down its earnings, instead planning to delay and spread the write-offs over several +quarters. +21. In May 2014, a former Roadrunner executive learned of issues on the balance sheet +of Roadrunner Intermodal Services, Inc. (“RRIS”), a group of Operating Companies, with a +potential exposure of nearly $4.5 million. A review identified several misstated accounts on the +RRIS balance sheet, including uncollectible receivables and other worthless assets. By September +2014, Roadrunner determined that RRIS’ balance sheet included accounts that were overstated by +more than $7.5 million. Instead of correcting and disclosing these misstated accounts, former +Roadrunner executives planned to arbitrarily write off $2 million of the overvalued accounts by +booking a $166,666 expense every month in 2015. Performance concerns led Roadrunner to delay +and then abandon the plan. +22. These accounts were never written off, and nearly all of the misstated accounts +remained on RRIS’ balance sheet until Roadrunner issued a restatement in January 2018. +Roadrunner’s plan to gradually write down the RRIS accounts was calibrated to conceal the write- +offs from its independent auditor. Roadrunner also sent false and misleading documents to the +independent auditor in an effort to hide the misstated accounts. +23. Roadrunner’s Q2 2014 Form 10-Q contained material misstatements as a result of +the failure to write off assets – combined with the manipulation of customer claims for the period. +Among other things, Roadrunner’s operating income was overstated by over $4.5 million; net +earnings for the quarter were overstated by at least $2.8 million; and EPS was overstated by at least +$0.07 per share. + +24. Roadrunner’s Q3 2014 Form 10-Q also contained material misstatements due to the +failure to write off the assets discussed above. By that time, Roadrunner knew that $7.5 million +should be written off. By keeping those assets on the balance sheet – and with the manipulation of +customer claims for that period – Roadrunner’s Q3 operating income was overstated by over $8.5 +million, its net earnings were overstated by approximately $5.7 million, and its EPS was overstated +by approximately $0.15 per share. + + 6 +25. In December 2014, Roadrunner learned of $500,000 in uncollectible receivables at +another Operating Company. Roadrunner devised a similar plan to write off the impaired +receivable in the future and recognize the bad debt expense gradually rather than immediately. +After delaying and then abandoning this plan, Roadrunner left $150,000 in uncollectible +receivables on the balance sheet. The fraudulent accounting entries for this impaired receivable +were incorporated into Roadrunner’s Q4 financial statements and 2014 Form 10-K. + +26. As a result, Roadrunner’s 2014 Form 10-K contained material misstatements. +Among other things, the results of the refusal to write off assets described above – combined with +the manipulation of customer claims for the quarter – were that Roadrunner’s operating income in +Q4 2014 was overstated by over $916,000; net earnings for the quarter were overstated by +$573,000; and EPS was overstated by $0.02 per share. + +Roadrunner Manipulated a Contingent Earnout Liability in Q4 2015. + +27. In Q4 2015, Roadrunner did not properly reduce an Operating Company’s earnout +reserve, even after learning that the Operating Company lost one of its largest customers and would +not collect a receivable from that customer. Roadrunner failed to write off the $986,000 receivable +and failed to reduce the earnout liability to zero, and reduced only a small portion of it, preserving +the remainder to bolster its earnings numbers in future quarters. Roadrunner also hid the loss of +this customer from its independent auditor. +28. As a result, Roadrunner’s 2015 Form 10-K was materially misleading. Among +other things, as a result of the improper deferral of expenses – combined with improper deferral of +claims identified above – Roadrunner’s Q4 operating expenses were understated by approximately +$1.48 million. Due to the fraudulent manipulation of earnouts, Roadrunner’s disclosed contingent +earnout liabilities were overstated by approximately $1.8 million and the adjustments to those +earnouts were understated by a corresponding amount. The combination of the improper deferral +of expenses and the earnout manipulation meant that Roadrunner was able to hit its EPS target +while hiding material expenses and concealing the underperformance of the Operating Company +from the investing public. Roadrunner used the earnout cushion it created in Q4 2015 to hit its +EPS targets in later quarters. + +Roadrunner Improperly Deferred Accrued Bonuses in Q3 2016. +29. In Q3 2016, an executive at Roadrunner altered bonus accruals in order to make +sure that it did not breach its debt covenants. Roadrunner’s loans required it to keep its cash flow +leverage ratio below 4.0. After forecasting that Roadrunner would violate the covenant +requirement, an executive instructed Operating Companies to increase their earnings calculations +by reversing annual bonus accruals in Q3 and reestablishing the entire annual bonus accrual the +following quarter. This reversal, in addition to others, was sufficient to bring Roadrunner in +compliance with its debt covenants in Q3 2016. +30. Roadrunner’s Q3 2016 Form 10-Q contained material misstatements. Among other +things, as a result of the improper deferral of accrued bonuses – combined with the manipulation of +customer claims for the period – Roadrunner’s operating income was overstated by over + 7 +$1,166,000; its net earnings for the quarter were overstated by $714,000; and its EPS was +overstated by $0.02 per share. +Roadrunner Restated Its Financial Statements. +31. On January 30, 2017, Roadrunner announced in a Form 8-K that it had commenced +an investigation concerning potential accounting discrepancies and that its audit committee +determined that certain previous financial reports had been misstated. +32. On January 31, 2018, Roadrunner announced in a Form 8-K that it had finished an +internal investigation and filed a Form 10-K/A for 2015 that restated financial statements dating +back to 2011, and Forms 10-Q/A for the quarterly periods ended March 31, 2016, June 30, 2016 +and September 30, 2016. Roadrunner’s restated financial statements reported that it overstated its +net income by more than $66 million from 2011 to Q3 2016, and a revaluation of Roadrunner’s +goodwill and other intangibles resulting in non-cash impairment charges of $373.7 million. These +changes reflected, among other things, the impact of the fraudulent conduct discussed above. +Roadrunner announced that it had identified accounting errors that impacted substantially all +financial statement line items and disclosures, and identified material weaknesses in its internal +control over financial reporting. Roadrunner also announced that information was withheld from +the independent directors, the Audit Committee, and independent auditor. +33. Roadrunner shared with the Commission staff the results of its internal +investigation and provided facts developed during that internal investigation. Roadrunner also +provided information regarding its remedial efforts, including termination of those responsible for +the misconduct and enhancements to its internal controls. + +34. Roadrunner has new management; strengthened its compliance organization; +enacted changes to its governance and structure; enhanced its policies and procedures; and +increased training of employees. Among other things, pursuant to Roadrunner’s agreement with its +current lender, Roadrunner has retained an outside consulting firm to provide additional financial +oversight with a focus on accounts receivable and payables. Roadrunner also implemented a new +compliance program that includes a whistleblower hotline, employee policy and training updates, a +new bad debt review process, and monthly reconciliation of accounts receivable aging to the +general ledger balance. + +35. On September 26, 2019, the Federal District Court for the Eastern District of +Wisconsin approved a settlement between Roadrunner and the plaintiffs who brought a class action +In re Roadrunner Transportation Systems, Inc. Securities Litigation, Case No. 2:17-cv-00144 +(E.D. Wisc. Jan. 31, 2017), alleging violations of securities laws based on the facts that gave rise to +Roadrunner’s restatement. Pursuant to the settlement, Roadrunner paid $20 million, +$16,377,877.33 of which was distributed to shareholders. +Violations + +36. As a result of the conduct described above, Roadrunner violated Section 17(a) of +the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit + 8 +fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of +securities. +37. Also as a result of the conduct described above, Roadrunner violated Section 13(a) +of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 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. +38. As a result of the conduct described above, Roadrunner 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. +39. As a result of the conduct described above, Roadrunner 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 +generally accepted accounting principles. +Disgorgement + +40. The disgorgement and prejudgment interest ordered, but deemed satisfied, as +described in Paragraph IV.B below is consistent with equitable principles and does not exceed +Roadrunner’s net profits from its violations. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Roadrunner’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 Roadrunner 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, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + 9 +B. Respondent Roadrunner shall pay disgorgement of $7,096,092 and prejudgment +interest of $2,539,819.71; however the disgorgement and prejudgment interest amounts shall be +deemed satisfied by Respondent’s payment described in Paragraph 35 above. + + + By the Commission. + + + Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4376.txt b/raw/aaer/2023/AAER-4376.txt new file mode 100644 index 0000000000000000000000000000000000000000..95a6c49815c5fe95931e868fc40b943529058da8 --- /dev/null +++ b/raw/aaer/2023/AAER-4376.txt @@ -0,0 +1,70 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96949 / February 17, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4376 / February 17, 2023 + +Admin. Proc. File No. 3-21298 + + +In the Matter of + +JIA ROGER QIAN WANG, CPA and WANG +CERTIFIED PUBLIC ACCOUNTANT, P.C. + + + +ORDER + +On February 8, 2023, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Jia Roger Qian Wang, CPA, and Wang +Certified Public Accountant, P.C., (together, “Respondents”), 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 +In compliance with the statutory provision governing cease-and-desist proceedings, the OIP +specified that a “public hearing before the Commission for the purpose of taking evidence . . . +shall be convened not earlier than 30 days and not later than 60 days” from service of the OIP.2 +The statute also provides that “an earlier or later date” for the hearing may be “set by the +Commission with the consent of any respondent so served.”3 +Respondents were served with the OIP on February 9, 2022.4 As a consequence, in the +absence of Respondents’ consent to a later hearing date, a public hearing will be set for a date on + +1 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96852, 2023 WL 1819154 (Feb. +8, 2023). +2 Id. at *8. +3 15 U.S.C. § 78u-3(b). +4 On February 14, 2023, the Division of Enforcement filed a proof of service of the OIP +with service declarations stating that on February 9, 2023, the OIP was personally served on +Wang in his own capacity and as an officer of Wang Certified Public Accountant, P.C. See 17 +C.F.R. § 201.141(a)(2) (providing that service on an individual can be made by “handing a copy +2 + +or before April 10, 2022. To facilitate the orderly and expeditious resolution of this matter, it is +ORDERED that the parties shall file a statement advising the Commission of any agreement to a +later hearing date (or a statement that no agreement could be reached) by March 3, 2023. In the +event the parties do not reach an agreement by that date, this order does not preclude the parties +from reaching such an agreement subsequently. The Commission will specify further +proceedings by subsequent order. +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.5 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + + +of the order to the individual” and that service on an entity can be made “by delivering a copy of +the order instituting proceedings to an officer, managing or general agent”). +5 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-4377.txt b/raw/aaer/2023/AAER-4377.txt new file mode 100644 index 0000000000000000000000000000000000000000..3b12581b7338b7fd7d014e2cee278c840a1bc394 --- /dev/null +++ b/raw/aaer/2023/AAER-4377.txt @@ -0,0 +1,302 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96960 / February 22, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4377 / February 22, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21309 + +In the Matter of + +AFRICAN GOLD +ACQUISITION CORP., + +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 African Gold Acquisition Corp. (“African Gold” +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. African Gold is a publicly traded special purpose acquisition company (“SPAC”). +Since the closing of its initial public offering (“IPO”) of securities on March 2, 2021 until late +2022, African Gold failed properly to devise and maintain a sufficient system of internal +accounting controls and also failed to maintain internal control over financial reporting (“ICFR”) +and disclosure controls and procedures (“DCP”) as required. African Gold’s failure to implement +sufficient internal controls enabled its former chief financial officer (“CFO”) to misappropriate +nearly all of the money in African Gold’s operating bank account and to otherwise effectively use +African Gold’s operating bank account as his own personal account for over one year.2 As a result, +African Gold materially misstated the financial information in several required financial filings +with the Commission. African Gold’s former CFO did not have access to African Gold’s trust +account and did not misappropriate any funds from the trust account. + + 2. According to disclosures in its public filings, African Gold’s activities are limited to +searching for a business combination target and its only liquid asset is the money held in its +operating bank account, which is designated to fund that search. The money that African Gold +raised in its IPO is secured in a trust account. As such, one of African Gold’s most significant risks +of material misstatement in its financial statements was the risk of fraud relating to African Gold’s +operating bank account and cash disbursements. + + 3. Notwithstanding this risk, African Gold failed to devise and maintain internal +accounting controls sufficient to provide reasonable assurance that transactions are recorded as +necessary to permit preparation of financial statements in conformity with generally accepted +accounting principles (“GAAP”). For example, African Gold failed to implement basic +segregation of duties or monitoring controls with respect to its operating bank account, cash +disbursements and financial reporting more generally. Rather, African Gold gave its former CFO + +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 On January 3, 2023, the Commission charged Cooper J. Morgenthau, African Gold’s former +CFO, with violating several provisions of the federal securities laws related to misappropriating +money from African Gold’s operating bank account and for lying to African Gold’s accountants +and auditor, circumventing and/or knowingly failing to implement internal accounting controls, +falsifying African Gold’s books and records, and filing false certifications with the +Commission. See Securities and Exchange Commission v. Cooper J. Morgenthau, 23-cv-00022- +NRB (S.D.N.Y. 2023). On January 6, 2023, the Court entered a consent judgment, which enjoined +Morgenthau from violating the relevant securities laws and rules and granted other relief sought by +the Commission. Relatedly, on January 3, 2023, Morgenthau pleaded guilty to one count of wire +fraud, in violation of 18 U.S.C. § 1343, based on the same conduct alleged in the Commission’s +complaint. See United States v. Cooper J. Morgenthau, 23-cr-002 (S.D.N.Y. 2023). + 3 +control over nearly all aspects of its financial reporting process with little to no oversight by or +involvement of other African Gold personnel. + + 4. African Gold’s failure to have sufficient internal accounting controls resulted in +African Gold’s failure to timely prevent and detect the misappropriation of its only liquid asset— +the money held in its operating bank account, which it needed to fund its search for a business +combination target. This resulted in African Gold filing material misstatements in its Form 10-K +filed with the Commission for the fiscal year ended December 31, 2021 and Forms 10-Q for the +periods ended June 30, 2021, September 30, 2021 and March 31, 2022 (the “Financial Filings”). +African Gold has since disclosed that the Financial Filings must be restated and should not be +relied upon, but has not yet filed any restatements. + + 5. As a result of the conduct described in this Order , African Gold violated Sections +13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-13, 13a-15(a)-(b), +and 12b-20 thereunder. +Respondent + +6. African Gold Acquisition Corp. is a publicly traded special purpose acquisition +company incorporated in the Cayman Islands with its principal place of business in New York, +New York. African Gold’s securities are registered with the Commission pursuant to Section +12(b) of the Exchange Act. African Gold is listed on the New York Stock Exchange under the +symbols AGAC.U, AGAC and AGAC.W. + +Facts + + 7. On March 2, 2021, African Gold closed its IPO. As of March 31, 2021, African +Gold had approximately $1.5 million in its operating bank account to fund its search for a business +combination target. According to disclosures in African Gold’s public filings, the money held in +African Gold’s operating bank account is its only liquid asset and is designated to fund its search +for a business combination target. + + 8. African Gold failed to establish internal accounting controls sufficient to provide +reasonable assurance that transactions are recorded as necessary to permit preparation of financial +statements in conformity with GAAP. + + 9. For example, African Gold failed to establish sufficient segregation of duties and +monitoring controls over its operating bank account and did not require African Gold personnel +other than its former CFO to periodically monitor bank account activity, reconcile the bank +account activity, or have responsibility for the record keeping of its assets, including in connection +with African Gold’s quarterly reviews or annual audit. Because African Gold failed to establish +sufficient internal accounting controls, African Gold’s former CFO was able to make unauthorized +withdrawals to himself and to otherwise use African Gold’s operating bank account as if it were his +own personal account for over one year without detection. African Gold’s insufficient internal +controls also enabled its former CFO to alter African Gold’s bank account statements in order to +conceal his unauthorized transactions and to fabricate the balance held in African Gold’s operating +bank account, among other transactional details. + 4 + + 10. African Gold also failed to establish sufficient segregation of duties and monitoring +controls over its cash disbursements. As with its operating bank account, African Gold delegated +all responsibility and control over its cash disbursements to its former CFO, with little to no +established monitoring controls. For example, only payments over $50,000 required the approval +of someone other than its former CFO—a largely ineffective requirement given the nature of +African Gold’s limited activities and expenses, as well as the lack of restrictions on the aggregate +amounts that its former CFO was able to transfer without any oversight. Indeed, with the +exception of expenses paid in March 2021 in connection with its IPO, African Gold had no +expenses over $50,000. As a result, African Gold’s former CFO was able to make unauthorized +withdrawals to himself totaling approximately $1.2 million and, with respect to various vendors +who were providing services to African Gold, selectively determine which vendors to pay to avoid +detection. + + 11. In addition, African Gold failed to maintain ICFR and DCP, and further failed to +evaluate DCP, as required for registrants like itself. See Exchange Act Rules 13a-15(a), (b), (e) +and (f). African Gold had limited activities, and its only liquid asset was the money held in its +operating bank account. Accordingly, African Gold’s most significant risk of material +misstatement stemmed from potential fraud by management. Yet, African Gold had insufficient +internal controls to timely prevent and detect fraud related to its operating bank account and cash +disbursements in order to provide reasonable assurance that its financial reporting and related +disclosures were accurate. + + 12. For example, African Gold had insufficient internal controls relating to the +oversight and governance of financial reporting and related disclosures, or clearly specified +financial reporting objectives and responsibilities. Instead, African Gold delegated all aspects of +its financial reporting processes to its former CFO—with no established monitoring controls or +involvement by other African Gold personnel. This enabled its former CFO to provide African +Gold’s accountants and external auditor with false information, which formed the basis of African +Gold’s financial filings and books and records. In addition, African Gold’s management failed to +evaluate the effectiveness of African Gold’s DCP, including with respect to the amount and +sufficiency of its cash on-hand and the accuracy of its related disclosures. + + 13. African Gold’s Forms 10-Q for the quarters ended June 30, 2021, September 30, +2021 and March 31, 2022 materially misstated the amount and sufficiency of cash available to +fund African Gold’s ongoing search for a business combination target. In addition, while African +Gold’s Form 10-K for the fiscal year ended December 31, 2021 accurately reflected the amount of +cash available to fund its ongoing search for a business combination target as of December 31, +2021, the disclosures were materially misleading in light of the fact that its operating bank account +held negative balances from December 1 until December 31, 2021, when its former CFO +temporarily deposited $549,146 into the account. African Gold’s CFO subsequently withdrew the +entire amount deposited on December 31, 2021 in a series of transactions beginning the following +business day, leaving African Gold with no money to fund its search for a business combination +target. In addition, African Gold’s Form 10-K for the fiscal year ended December 31, 2021 failed +to disclose the amount of losses due to its former CFO’s fraud, the impact of which was material to +its financial statements. + 5 +Summary of African Gold Quarterly Reported Cash vs. Actual Cash in Bank Account + + Q2 FY 2021 Q3 FY 2021 YE 2021 Q1 FY 2022 +Reported Cash $1,251,503 $932,771 $544,103 $432,819 +Actual Cash $101,303 $104,371 $544,103. $(1,761) +Overstatement $1,150,200 $828,400 $ - $434,580 +Overstatement as % +of Actual Cash +(Absolute Value) 1135.4% 793.7% 0.0% 24671.2% + + 14. African Gold has disclosed that the Financial Filings must be restated and should +not be relied upon, but has not yet filed any restated financials. African Gold has also failed to file +its Forms 10-Q for the quarters ended June 30, 2022 and September 30, 2022. + +15. African Gold did not discover the misappropriation of its assets through any form +of self-policing or as the result of its internal controls. African Gold only suspected issues with its +operating bank account when certain critical vendors refused to provide services because their +invoices remained unpaid, at which point African Gold personnel sought to confirm its former +CFO’s representations regarding the balance held in African Gold’s operating bank account and +transaction activity. However, no African Gold personnel other than its former CFO had active +access to the operating bank account, and the other personnel were unable to access the account to +assess the possibility of fraud. + +Violations + + 16. As a result of the conduct described above, African Gold violated Section 13(a) of +the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder, which require Exchange Act +reporting companies to file with the Commission complete and accurate annual and quarterly +reports and that such reports contain further material information as may be necessary to make the +required statements not misleading. + + 17. In addition, as a result of the conduct described above, African Gold violated +Section 13(b)(2)(A) of the Exchange Act, which requires Exchange Act 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. + + 18. In addition, as a result of the conduct described above, African Gold violated +Section 13(b)(2)(B) of the Exchange Act, which, among other things, requires Exchange Act +reporting companies to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurance that transactions are recorded as necessary to permit preparation of +financial statements in accordance with GAAP, or any other criteria applicable to such statements. + + 19. In addition, as a result of the conduct described above, African Gold violated +Exchange Act Rule 13a-15(a) which requires Exchange Act reporting companies to maintain ICFR + 6 +and DCP, as well as Exchange Act Rule 13a-15(b) which requires Exchange Act reporting +companies to evaluate the effectiveness of DCP. + +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 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 13a-1, 13a-13, 13a-15(a)-(b) and 12b-20 thereunder. + +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $103,591 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 +Respondent 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 John Dugan, Division of +Enforcement, Securities and Exchange Commission, 33 Arch Street, 24th Floor, Boston, MA +02110. + + 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 + 7 +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/2023/AAER-4379.txt b/raw/aaer/2023/AAER-4379.txt new file mode 100644 index 0000000000000000000000000000000000000000..39b185aadeeeea3f500aafe10d17f9cec52d9a82 --- /dev/null +++ b/raw/aaer/2023/AAER-4379.txt @@ -0,0 +1,72 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96994 / February 28, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4379 / February 28, 2023 + +Admin. Proc. File No. 3-21298 + + +In the Matter of + +JIA ROGER QIAN WANG, CPA and WANG +CERTIFIED PUBLIC ACCOUNTANT, P.C. + + + +ORDER GRANTING IN PART MOTION FOR EXTENSION OF TIME TO FILE AN +ANSWER + +On February 8, 2023, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Jia Roger Qian Wang, CPA, and Wang +Certified Public Accountant, P.C., (together, “Respondents”), 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 +The OIP was served on Respondents on February 9, 2023. Pursuant to the statutory provision +governing cease-and-desist proceedings, absent Respondents’ consent to a later hearing date, a +public hearing in the case will be set for a date on or before April 10, 2023.2 Accordingly, on +February 17, 2023, we issued an order directing the parties to file a statement advising the +Commission of any agreement to a later hearing date (or a statement that no agreement could be +reached) by March 3, 2023.3 +On February 22, 2023, Wang filed a motion for an extension of time to file an answer to +the OIP to March 31, 2023, and represented that “the Division of Enforcement of SEC will not + +1 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96852, 2023 WL 1819154 (Feb. +8, 2023). +2 15 U.S.C. § 78u-3(b). +3 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96949, 2023 WL 2069918 (Feb. +17, 2023). +2 + +oppose my request.”4 Without the consent of Respondents to a hearing date later than April 10, +2023, however, it would not be prudent to extend Respondents’ time to file an answer to March +31, 2023. Nevertheless, a short extension of the deadline to file an answer is appropriate to allow +the parties to confer and come to agreement, if possible, regarding a later hearing date. +Accordingly, it is ORDERED that the time for Respondents to file an answer to the OIP is +extended to March 8, 2023. The parties are advised that the statement due March 3, 2023, +should also address, if possible, any proposed dates for the filing of Respondents’ answer. The +Commission will specify further proceedings by subsequent order. +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.5 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + + + +4 As of the date of this order, the Division has neither confirmed nor challenged this +representation. +5 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-4382.txt b/raw/aaer/2023/AAER-4382.txt new file mode 100644 index 0000000000000000000000000000000000000000..960ff67f095f82e24796d2b7c9f37879a1b9e8ac --- /dev/null +++ b/raw/aaer/2023/AAER-4382.txt @@ -0,0 +1,125 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97005 / March 1, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4382 / March 1, 2023 + +Admin. Proc. File No. 3-20601 + + +In the Matter of + +CARLOS JAVIER MOCTEZUMA VELASCO + + + +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 Carlos Javier Moctezuma Velasco (“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 Carlos Javier Moctezuma Velasco, Exchange Act Release No. 93135, 2021 WL 4452768 +(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 Velasco, 2021 WL 4452768, 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 at his last known +address.”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 although in the underlying injunctive action the federal +district court permitted service via e-mail on certain defendants’ United States-based counsel, +that situation, too, did not implicate the Hague Service Convention because the complaint in +question was not “transmitted for service abroad.”12 In any event, Respondent is not currently +represented by counsel in this proceeding. +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.13 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 Volkswagen Aktiengesellschaft v. Schlunk, 486 U.S. 694, 701 (1988). +13 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.14 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + Vanessa A. Countryman + Secretary + + + +14 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.txt b/raw/aaer/2023/AAER-4383.txt new file mode 100644 index 0000000000000000000000000000000000000000..02268c9714d552ceee72e7d8f500ee11b622135f --- /dev/null +++ b/raw/aaer/2023/AAER-4383.txt @@ -0,0 +1,125 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97007 / March 1, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4383 / March 1, 2023 + +Admin. Proc. File No. 3-20603 + + +In the Matter of + +RAMÓN LAFARGA BÁTIZ + + + +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 Ramón Lafarga Bátiz (“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 Ramón Lafarga Bátiz, Exchange Act Release No. 93137, 2021 WL 4452772 (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 Bátiz, 2021 WL 4452772, 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 at his last known +address.”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 although in the underlying injunctive action the federal +district court permitted service via e-mail on Respondent, the court’s discussion, in pertinent +part, considered only the propriety of service under Fed. R. Civ. P. 4(f)(3), and did not consider +Mexico’s objection under Article 10 of the Hague Service Convention. +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-4384.txt b/raw/aaer/2023/AAER-4384.txt new file mode 100644 index 0000000000000000000000000000000000000000..6755b40b9739697b80c560aabe6d3c33433748a6 --- /dev/null +++ b/raw/aaer/2023/AAER-4384.txt @@ -0,0 +1,390 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97044 / March 6, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4384 / March 6, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21330 + + + +In the Matter of + +Flutter Entertainment plc, +as successor-in-interest to +The Stars Group, Inc. + +Respondent. + + + + +CORRECTED 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 Flutter Entertainment plc (“Respondent” or +“Flutter”), which is the successor in interest to The Stars Group Inc. (“The Stars Group” or the +“Company”). + +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. This matter concerns violations of the books and records and internal accounting +controls provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”) by the Company. +Between May 26, 2015 and May 15, 2020 while the Company’s shares were registered with the +Commission (the “Relevant Period”), the Company paid approximately $8.9 million to consultants +in Russia in support of the Company’s operations and its efforts to have poker legalized in that +country. The Company failed to devise and maintain a sufficient system of internal accounting +controls over its operations in Russia during the Relevant Period with respect to third party +consultants, certain of which the Company retained without adequate due diligence or written +contracts, and paid without adequate proof of services. The Company also failed to consistently +make and keep accurate books and records regarding consultant payments in Russia, including by +inaccurately recording certain payments as lobbying fees. + +2. As a result of the conduct described above, the Company violated Sections +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + +Respondent + +3. Flutter Entertainment plc, headquartered in Dublin, Ireland, is the successor in +interest to The Stars Group following Respondent’s acquisition of that company on May 5, 2020. +The Stars Group was, and Respondent is, a global gaming and sports betting company that operates +a number of brands, including the online poker website, PokerStars. The Stars Group was +headquartered in Montreal and, more recently, Toronto, Canada. From May 26, 2015 to May 15, +2020, The Stars Group’s shares were registered with the Commission pursuant to Section 12(b) of +the Exchange Act, and its shares traded on NASDAQ first under the ticker “AYA” (between June +8, 2015 and August 1, 2017, when the Company was known as Amaya, Inc.) and then under the +ticker “TSG” (between August 2, 2017 and Company’s delisting from NASDAQ on May 5, 2020, +when the Company was known as The Stars Group). + +Background + +4. Prior to its acquisition by the Respondent, the Company operated a number of +gaming and sports betting websites, including PokerStars, one of the largest online poker websites +in the world. The Company acquired PokerStars and other online gaming brands as part of its +acquisition of Oldford Group Ltd. (“Oldford Group”) on August 4, 2014 (the “PokerStars +Acquisition”). As part of the PokerStars Acquisition, the Company acquired Oldford Group’s + +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 +operations in Russia and inherited certain Russia-based consultants who had been engaged by +Oldford Group. + +5. During the Relevant Period, revenues originating from users in Russia were a +significant source of revenue for the Company. Russia was a so-called “gray market” where poker +was neither affirmatively permitted nor explicitly prohibited. The Company employed various +consultants to lobby Russian government officials as part of its efforts to promote the legalization +of poker in Russia and expand the Company’s operations in the Russian market. Despite the +Company’s efforts, poker was never legalized in Russia. In March 2022, following Russia’s +invasion of Ukraine, Respondent exited the Russian market. + +The Russian Consultants + +6. During the Relevant Period, the Company’s legalization strategy primarily relied on +services provided by three legacy Oldford Group consultants (Consultants “A,” “B,” and “C,” and +collectively, the “Russian Consultants”): + +a. Consultant A was a lobbyist initially retained to help establish the Company’s +business in Russia; + +b. Consultant B was an attorney retained to provide legal advice regarding Russian +gaming law; and + +c. Consultant C was head of a business interest group and a well-known +businessperson in Moscow whom the Company retained to support its business in +Russia, which included interacting with and lobbying Russian Government +officials. + +7. Throughout the Relevant Period, and as further detailed below, the Company failed +to devise and maintain a reasonable system of internal accounting controls governing its +relationship with and payments to the Russian Consultants and failed to adequately monitor and +record such payments in its books and records. + +Failure to Perform Adequate Due Diligence + +8. The predecessor parent company of PokerStars (a subsidiary of the Oldford Group) +initially retained the Russian Consultants prior to the PokerStars Acquisition in August 2014. Then +existing policies required employees to perform certain due diligence on third parties, including +background and reference checks and written contracts. Nevertheless, no due diligence was +performed on the Russian Consultants upon their initial retention, in connection with the +PokerStars Acquisition, or in the subsequent months as the Company maintained the predecessor +parent company’s compliance program while supplementing it with additional controls. + +9. By at least 2016, the Company’s Board undertook a review of whether the +Company, any of its subsidiaries, or any of its personnel had made improper payments, directly or + 4 +through external consultants, to government officials in certain foreign jurisdictions. As a result of +this review, the Company voluntarily contacted the Commission and other U.S. and Canadian +regulators and thereafter adopted a policy requiring risk-based due diligence, written contracts, and +approval by the CEO or general counsel of all consultants, lobbyists, and lawyers. The policy +prohibited payments to any such third party unless the aforementioned steps had been completed. + +10. Nevertheless, the Company continued to make payments to the Russian Consultants +in violation of this policy. The only due diligence performed on the Russian Consultants was for +Consultants B and C, consisting of a public records database search in 2016 – i.e., 18 months after +the PokerStars Acquisition – followed by more detailed background reports for Consultants B and +C in 2018. This after-the-fact diligence was insufficient according to the Company’s risk-based due +diligence policies, particularly for Consultant C, who was retained in part to advance the +Company’s commercial interests by liaising with foreign government officials. + +Failure to Obtain and Monitor Consultant Contracts + +11. Throughout the Relevant Period, the Company failed to adhere to internal policies +requiring that the Company maintain written contracts with its consultants. The Company did not +have a written contract with Consultant C until late 2017 despite Consultant C’s retention years +earlier. While existing contracts were in place between the Company and Consultants A and B +prior to 2017, such contracts were perfunctory documents and did not include anti-bribery and anti- +corruption provisions or safeguards despite internal requirements that all third-party agents and +consultants adhere to applicable Company policies. + +12. Even after the Company executed new contracts with the Russian Consultants in +2017 that included anti-bribery and anti-corruption provisions, the Company failed to effectively +enforce them. For example, while the Russian Consultant contracts required that each consultant +submit monthly invoices containing details of the services they provided, as well as any relevant +backup or supporting documents, this information was not provided or included on the invoices, +which contained only general statements including “consulting services” or “legal services” +without any further detail. Additionally, while the contracts required that the Russian Consultants +submit monthly reports detailing their activities, such reports were neither submitted to nor +requested by the Company. + +13. Further, the Company regularly paid Consultant C for office expenses incurred by a +poker-related non-profit organization, including charges related to that organization’s rent and staff +salaries, without a formal contractual requirement and without receiving supporting documents +evidencing the actual rent or expenses until 2019. + +Failure to Obtain and Review Invoices and Supervise Consultants + +14. As detailed above, the Russian Consultants submitted to the Company invoices +containing no details or information about the services they provided to the Company. +Additionally, invoices for Consultant C were prepared and submitted by a company employee, +rather than by Consultant C until 2019. Until 2019, no Company employee substantively reviewed + 5 +the invoices, i.e., to determine if the services were in fact provided. The invoices were simply +approved and paid as long as the amount fell within the overall budget allocated to the Russian +Consultants’ activities. + +15. In particular, with respect to Consultant C, from 2015 to 2018, the Company made +payments totaling approximately $461,000 for expense reimbursements that lacked documentation +and that the Company therefore could not substantively review. These payments included the +following: + +a. In June 2015, Consultant C submitted an invoice for the equivalent of $57,000, +which stated it was for “bill draft and submission.” Consultant C claimed the +request was an expense reimbursement to retain lawyers to draft legislation for the +Duma, Russia’s lower house of parliament. However, there is no record of what +attorneys were retained nor whether any draft legislation was provided to the Duma. +A contemporaneous email from a Company employee stated that the invoice “is +urgent now and needs to be paid this week. The bill is going to the Duma and could +be rejected if we don’t pay.” The Company employee responsible for reviewing and +approving the invoice made no further inquiries as to the nature of the expense and +the Company paid the invoice on June 10, 2015. + +b. In 2016, the Company made two separate payments totaling approximately $22,000 +to Consultant C as reimbursement for expenses described in supporting e-mails +alternatively as payments “regarding Roskomnadzor” or “to cover [Consultant C’s] +payment to Roskomnadzor” or “to cover [Consultant C’s] second payment to +RSKM” +2 – While these descriptions refer to “payments” to a Russian government +agency, no receipt or other proof of payment to RSKM was provided. Moreover, +the Company inaccurately recorded payments to Consultant C as “Lobbying Fees / +Rent – Offices.” + +c. From March 2017 to January 2018, the Company made six payments totaling +approximately $139,000 to Consultant C as lobbying fees or costs, without any +supporting documentation. Contemporaneous emails indicate that some funds were +to reimburse Consultant C for New Year’s gifts to individuals including Russian +government officials, which relevant Company policies prohibited. + +Failure to Accurately Record Consultant Payments + +16. During the Relevant Period, the Company consistently recorded payments to +Consultant B as “lobbying” expenses or “CIS MKTG” (Marketing), despite Consultant B’s having +been purportedly engaged to provide legal services. + + +2 “Roskomnadzor,” also abbreviated as “RSKM” or “Roskom,” is a Russian state agency responsible for, among +other things, administering Russian internet censorship filters. During the Relevant Period, Roskom on numerous +occasions blocked the Company’s online poker sites, thereby negatively affecting the Company’s operations in +Russia. + 6 +Consulting Company A + +17. In addition to the individual Russian Consultants, the Company in January 2015 +also retained Consulting Company A to, among other things, consult regarding Russian gaming +legislation and liaise with Russian government officials. Without any indication that Consulting +Company A provided any of its contracted-for services and despite numerous red flags around its +retention, the Company paid Consulting Company A a total of $2 million across multiple payments +in 2015, half of which the Company paid after registering its securities with the Commission. + +18. As early as August 2014, the Company considered proposals from Consultant A to +retain a new consultant to assist in the Company’s efforts to legalize poker in Russia; the Company +ultimately retained Consulting Company A at the urging of Consultant A and the Company’s local +regional manager. Numerous red flags regarding the retention existed at the time that the Company +retained Consulting Company A. For example, Consulting Company A was registered in Belize +and maintained its payment account in Latvia, two foreign jurisdictions unrelated to the services to +be provided. Further, the payments to be made by the Company to Consulting Company A were +initially described to the Company’s senior management as being for a “success fee” regarding +getting legislation passed in Russia but later were described as a retainer fee to employ lawyers and +other consultants to draft legislation. + +19. Nevertheless, the Company did almost no due diligence regarding Consulting +Company A, only performing a public records database search for Consulting Company A, and +taking no steps to investigate its principals or ultimate beneficial owner. + +20. Despite the aforementioned red flags and lack of diligence, the Company in January +2015 signed a services contract with Consulting Company A. That contract, which was never +counter-signed, did not contain any anticorruption provisions, in violation of relevant Company +policies. + +21. Following the retention of Consulting Company A, the Company performed little to +no follow-up or monitoring of the relationship. The only documentation submitted by Consulting +Company A to justify its payments were monthly invoices, perfunctory documents containing no +detail about any services provided by Consulting Company A or related expenses it may have +incurred. No one reviewing or approving those payments checked to ensure that Consulting +Company A was in fact providing services to the Company. + +22. Of the $2 million the Company paid to Consulting Company A, $1 million was +paid while the Company’s securities were registered with the Commission. The Company recorded +these payments as “lobbying fees” but, as detailed above, the Company was at no point provided +with documentary justification to support this accounting. + +Legal Standards and Violations + +23. Under Exchange Act Section 21C(a), 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 + 7 +the Exchange Act or any 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. + +24. As a result of the conduct described above, the Company violated Section +13(b)(2)(A) of the Exchange Act, which requires issuers with a class of securities registered +pursuant to Section 12 of the Exchange Act and issuers with reporting obligations 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. + +25. As a result of the conduct described above, the Company violated Section +13(b)(2)(B) of the Exchange Act, which requires issuers with a class of securities registered +pursuant to Section 12 of the Exchange Act and issuers with reporting obligations pursuant to +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. + +Flutter’s Cooperation and Remedial Efforts and Subsequent Events + +26. In determining to accept the Offer, the Commission considered the Company’s +and Flutter’s cooperation and remedial efforts. The Company’s and Flutter’s cooperation +included sharing facts developed in the course of its own internal investigation and forensic +accounting reviews, providing translated copies of various documents and relevant witness +statements, and encouraging parties outside of the Commission’s subpoena power to provide +relevant evidence and information. Flutter’s remedial measures have included taking steps +intended to enhance its internal accounting controls, global compliance organization, and its +policies and procedures regarding due diligence, use of third parties, and maintenance of +adequate records. Flutter has also terminated its relationship with Consultants A and C in March +2021; withdrawn from the Russian market following Russia’s invasion of Ukraine in early 2022; +and is winding down its relationship with Consultant B, who remains engaged for the limited +purpose of assisting with the closure of the Russia business. + +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Flutter’s Offer. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. Respondent shall 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. + 8 + +B. Respondents shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $4,000,000 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 +Flutter 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. + + + +* * * + + 9 + 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/2023/AAER-4385.txt b/raw/aaer/2023/AAER-4385.txt new file mode 100644 index 0000000000000000000000000000000000000000..ccb5237abdfe214749c40abbaaace506205019a7 --- /dev/null +++ b/raw/aaer/2023/AAER-4385.txt @@ -0,0 +1,273 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97050 / March 6, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4385 / March 6, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21332 + +In the Matter of + +BARRY D. LOVELESS, +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 Barry +D. Loveless (“Respondent” or “Loveless”) 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 + +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 +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.3 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. Loveless, age 56, is and has been a certified public accountant licensed to +practice in the State of Utah. He served as Chief Financial Officer of Spyr, Inc. from 2015 until his +resignation in September 2021. + + 2. Spyr was, at all relevant times, a Nevada corporation with its principal place +of business in Denver, Colorado, and operated as a holding company for a wholly-owned +subsidiary that developed and published mobile games and apps. At all relevant times, Spyr’s +common stock was registered with the Commission pursuant to Section 12(g) of the Securities +Exchange Act of 1934 (“Exchange Act”), and is quoted on OTC Link under the ticker symbol +“SPYR.” Spyr 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. The Commission +obtained a permanent injunction and monetary relief against Spyr and others in connection with a +prior SEC investigation. SEC v. Fiore et al., 18-CV-5474-KMK (S.D.N.Y. filed June 18, 2018). + + 3. On February 22, 2023, a final judgment was entered against Loveless, +permanently enjoining him from future violations of Sections 17(a)(2) and (3) of the Securities Act +of 1933 (“Securities Act”) and Exchange Act Rule 13b2-2, and aiding and abetting violations of +Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder, in the civil +action entitled Securities and Exchange Commission v. James R. Thompson, et al., Civil Action +Number 2:22-CV-01609, in the United States District Court for the District of Nevada. Loveless +was also prohibited for three (3) years from acting as an officer or director of a public company +and ordered to pay a $75,000 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Loveless +made materially false and misleading statements to Spyr’s auditors in connection with the audit +and review of Spyr’s 2017 Form 10-K and Form 10-Q for the first quarter of 2018, respectively. +These false statements were made in audit inquiry responses and management representation +letters and concerned the existence of an SEC investigation and its possible consequences to Spyr. +In addition, the complaint alleged Spyr failed to disclose in its 2017 Form 10-K and the 2018 first +quarter Form 10-Q a loss contingency required by Generally Accepted Accounting Principles +related to the investigation preceding the SEC v. Fiore action. + + + 3 + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Loveless’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent is suspended from appearing or practicing before the Commission as an +accountant. + +B. 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. + +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; + +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 + + 4 +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, including any orders in Securities +and Exchange Commission v. James R. Thompson, et al., Civil Action +Number 2:22-CV-01609, 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 + 5 +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. + +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 + 6 + +(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/2023/AAER-4386.txt b/raw/aaer/2023/AAER-4386.txt new file mode 100644 index 0000000000000000000000000000000000000000..de59f92ab923c65e89479483c0d22fbb7ddde18d --- /dev/null +++ b/raw/aaer/2023/AAER-4386.txt @@ -0,0 +1,364 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97049 / March 6, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4386 / March 6, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21335 + + +In the Matter of + +RIO TINTO PLC, + +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 and in the +public interest that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section +21C of the Securities Exchange Act of 1934 (“Exchange Act”), against Rio Tinto plc (“Rio Tinto” +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 Respondent 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. This matter concerns Rio Tinto’s violations of the books and records and internal +accounting controls provisions of the Foreign Corrupt Practices Act (the “FCPA”) in connection +with a bribery scheme involving a consultant to retain Rio Tinto’s existing mining rights in Guinea. +Rio Tinto is a dual-listed metal and mining company with headquarters in Australia and the United +Kingdom. On July 7, 2011, Rio Tinto hired a French investment banker and close friend of a +former senior Guinean government official (the “Senior Government Official”) as a consultant (the +“Consultant”) to help the company retain its mining rights in the Simandou mountain region in +Guinea, with one of the world’s largest undeveloped iron-ore deposits, by offering or paying money +to benefit a Guinean government official. The Consultant began working in March 2011, without +Rio Tinto having conducted adequate due diligence that was required for retaining third parties, +began representing Rio Tinto without a written agreement defining the scope of his services or +deliverables, and was paid $10.5 million notwithstanding certain red flags. The Consultant, acting +as Rio Tinto’s agent, offered and attempted to make an improper payment to a Guinean government +official in connection with Rio Tinto’s successful efforts to retain its mining rights. None of the +payments to the Consultant were accurately reflected in Rio Tinto’s books and records, and it failed +to have sufficient internal accounting controls in place to detect or prevent the misconduct. + +Respondent + + 2. Rio Tinto plc along with Rio Tinto Ltd makes up Rio Tinto Group (collectively +“Rio Tinto Group”). Rio Tinto plc is a UK company incorporated in England and Wales with +shares listed on the London Stock Exchange and with American Depository Shares that trade on +the NYSE. Rio Tinto Ltd is an Australian company incorporated in Victoria, Australia with +shares listed on the Australian Stock Exchange and with debt listed on the NYSE and registered +pursuant to Section 12(b) of the Exchange Act. Rio Tinto plc and Rio Tinto Ltd operate together +as a single economic enterprise known as Rio Tinto Group and pursuant to Section 13 of the +Exchange Act, jointly file annual reports on Form 20-F with consolidated financial statements +and current reports on Forms 6-K. The companies have a common board of directors, and +shareholders have a common economic interest in both companies. + + +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 +Other Relevant Individuals + + 3. Consultant is a former consultant to Rio Tinto and a French citizen. Rio Tinto +retained him in 2011 to help the company retain its mining rights in Guinea. During the relevant +time period, the Consultant was simultaneously a senior advisor at a French investment bank and +the director of his own consulting company. He was a former classmate of the Senior Government +Official at the Paris Institute of Political Studies. + +4. The Rio Tinto Executive (“Rio Tinto Executive”) oversaw Rio Tinto’s +involvement in the Simandou settlement negotiations with the Government of Guinea during the +relevant time period. He was also the principal point of contact for the Consultant at the company. +As a result of his conduct discussed herein, Rio Tinto terminated the Rio Tinto Executive’s +employment in November 2016. The Rio Tinto Executive is a dual UK and Australian citizen. + +Background + +5. Between 1997 and 2006, Rio Tinto was granted mining and exploration rights to +four section blocks of the Simandou mountain region in Guinea’s interior with one of the largest +iron-ore deposits in the world. In late 2008, after a change in administrations, the Government of +Guinea revoked Rio Tinto’s rights to two of the four sections—known as blocks one and two—for +what the government viewed as Rio Tinto’s failure to take proactive steps to develop the mine. +The Government of Guinea ultimately awarded blocks one and two to one of Rio Tinto’s +competitors. + +6. Thereafter, Rio Tinto deployed significant resources to try to develop the blocks it +retained—blocks three and four. High-level executives made frequent visits to the mine to +improve the company’s relationship with the government. In 2010, Guinea elected a new +administration that declared all mining contracts be reexamined. As a result of this review, one +of Rio Tinto’s competitors was stripped of its rights to blocks one and two in the Simandou +region. + +Rio Tinto Retains Consultant as its Agent + +7. In March 2011, while searching for an advisor to help the company retain its +mining rights, Rio Tinto executives identified a French investment banker and former classmate +of the Senior Government Official as a potential consultant. Email discussions amongst the +company’s senior executives highlighted the potential Consultant’s history and ongoing +friendship with the Senior Government Official as the main reasons for hiring him. At the time, +the potential Consultant had no direct work experience relating to the mining business generally +or in Guinea specifically. + + 8. The Rio Tinto Executive contacted the Consultant and confirmed his connection +to the Senior Government Official at the time. Afterward, a lower level Rio Tinto employee ran +a cursory background check on the Consultant, without any additional due diligence. The +Consultant began working on behalf of Rio Tinto—purportedly representing the company’s + 4 +interests during discussions with the Government of Guinea and routinely reporting information +back to the Rio Tinto Executive—before a written agreement was executed defining the scope of +his employment, fees, or deliverables. No written agreement of any sort was in place for the +majority of the Consultant’s employment and a written contract was only executed one day +before Rio Tinto paid the Consultant. + +9. With the Consultant’s influence by offering money to a Guinean government +official, Rio Tinto successfully secured its mining rights to blocks three and four by entering into +a Settlement Agreement with the Government of Guinea on April 22, 2011, pursuant to which it +paid $700 million to the Guinean Public Treasury. + +Rio Tinto Pays Consultant $10.5 Million + +10. The Consultant’s fees remained undetermined throughout the course of the +settlement negotiations with the Government of Guinea and even after the settlement was +reached on April 22, 2011. The Consultant negotiated his fees with the Rio Tinto Executive, +repeatedly stressing that the Senior Government Official often asked whether the company had +paid him yet. + +11. At times when working on behalf of Rio Tinto, there were red flags suggesting +that the Consultant may have also been providing advice to the Senior Government Official. +Specifically, in an April 26, 2011 email to the Rio Tinto Executive, the Consultant wrote, “[the +Senior Government Official] says I should remain on the Republic of Guinea’s side and not +become a RT’s [sic] employee. He says that if I sign a contract with RT, he cannot trust my +advice anymore…” In another email, the Consultant wrote “…I rendered a service that no +investment bank could have rendered. You are the only witness of it, with the [Senior +Government Official] himself, of course that is why he askes [sic] whether RT treats me well.” +A few days later, the Consultant wrote “…I was predestined to save RT’s skin in Guinea. +Without bragging, the [Senior Government Official’s] decision would probably have been +different if I had not happened to be there….” He followed up with, “[The Senior Government +Official] says I deserve a fee for the work I have done up to now, but the fee should be a lump +amount that does not compromise my independence in the future.” Finally, in a May 10, 2011 +email, he wrote, “the [Senior Government Official] is always asking: ‘did you find an +arrangement with RT? They owe you a lot because without you I would have signed with the +Chinese….’” + +12. The above emails presented red flags about whether the Consultant was working +for Rio Tinto or the Senior Government Official, and whether some portion of the Consultant’s +fees would be paid to the Senior Government Official. Other than these emails and other +feedback, it is unclear what services, if any, the Consultant provided to Rio Tinto over +approximately four months. + +13. Rio Tinto executives debated the amount and form of the Consultant’s payment, +with one executive expressing concern about issuing a lump sum payment that the Consultant +was demanding, allegedly with the Senior Government Official’s prompting, writing “tell [the + 5 +Consultant] one big lump looks like a bribe and people will wonder where the money went.” +Despite these concerns, Rio Tinto executives eventually approved two lump sum payments to the +Consultant for his alleged services. Executives debated how much the Consultant should be paid +in emails in which the Rio Tinto Executive described “very unique and unreplicable services and +closeness to the [Senior Government Official]” provided by the Consultant. The CEO responded +that, when considering the fees, they should “think about the optics to [the Government of +Guinea].” + +14. Notwithstanding the aforementioned concerns, the company agreed to pay the +Consultant $10.5 million in two tranches and entered into a written agreement with the +Consultant on July 7, 2011, four months after the Consultant purportedly began representing the +company’s interests and one day before Rio Tinto paid the Consultant the first tranche. + + 15. On July 8, 2011, Rio Tinto paid $7.5 million to the Consultant’s Swiss bank +account and, on July 12, 2011, placed the remaining $3 million in an escrow account at the same +Swiss bank to be released after December 31, 2015, provided that Rio Tinto continued to retain +its mining rights over blocks three and four. At the Consultant’s request, Rio Tinto authorized +the release of the $3 million from escrow to the Consultant on February 25, 2016. The Rio Tinto +Executive initiated both payments improperly using manual payment forms generally limited for +payments up to AUD $5,000, instead of going through the company’s prescribed process for +higher amounts. The payments also irregularly were made out of Hamersley Iron Pty Limited, +an Australian-based, wholly-owned subsidiary of Rio Tinto Limited, instead of Rio Tinto plc. +Lower level employees expressed concerns about the payments being accounted for out of +Hamersley instead of an entity on the Rio Tinto plc side of the dual-listed structure. In a July 21, +2011 email, another Rio Tinto executive explained the reason for paying out of Hamersley: “[a]s +you are aware, the urgency and confidentiality prescribed for the payment meant we needed to +make some quick decisions at the time on how to organize the payment and subsequent transfer.” +In 2011, Rio Tinto did not have a system in place to flag such irregularities. + +16. Rio Tinto ultimately never developed blocks three and four of the Simandou +region or extracted anything of value from them because, in part, declining iron ore prices made +mining in the Simandou region economically not viable. The company capitalized the $700 +million Settlement Agreement on the balance sheet as a prepayment for an intangible asset until +2014, when it was transferred into intangible assets for exploration, before being written off as +an expense in 2015, so that it has zero current carrying value. + +Consultant Attempts to Pay a Bribe to a Government Official + + 17. Days after Rio Tinto made the initial payment to the Consultant and placed the +remaining balance in the escrow account, the Consultant attempted to transfer $822,506 on July +15, 2011 from his Swiss bank account to a Hong Kong company owned by a Guinean national +with links to government officials. The bank held up the transaction over concerns about the +company’s ties to Guinean officials. When the bank questioned the Consultant, he explained that +he was making the payment on behalf of a second Guinean government official (the “Junior +Government Official”) to the Senior Government Official. The Junior Government Official was + 6 +a close advisor to the Senior Government Official. The attempted transaction was ultimately +blocked by the bank. + + 18. During an interview with the bank, the Consultant told bank employees that he +would make the payment out of one of his other accounts at another bank. Subsequently, the +Hong Kong company paid $200,000 for re-election campaign t-shirts to a t-shirt company in +China on July 29, 2011. That same t-shirt company eventually made shirts for the Senior +Government Official’s reelection campaign. Those shirts match the description on the invoice +the Consultant submitted to the Swiss bank when attempting the $822,506 payment, further +corroborating that the attempted payment from funds that Rio Tinto paid him was intended as a +political contribution to the Senior Government Official’s reelection campaign or, at the very +least, a payment to the Junior Government Official. + +LEGAL STANDARDS AND VIOLATIONS + + 19. 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 the cause of the violation, due to an act or omission the person knew or should have +known would contribute to such violation. + +Rio Tinto Violated Exchange Act Section 13(b)(2)(A) + + 20. As a result of the conduct described above, Rio Tinto violated Section +13(b)(2)(A) of the Exchange Act, which requires issuers to make and keep books, records, and +accounts, which, in reasonable detail, accurately and fairly reflect the transactions and +disposition of the assets of the issuer. + +Rio Tinto Violated Exchange Act Section 13(b)(2)(B) + + 22. In addition, as a result of the conduct described above, Rio Tinto violated Section +13(b)(2)(B) of the Exchange Act, which requires issuers 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. + + + + + 7 +COOPERATION AND REMEDIATION + + 23. In determining to accept the Offer of Settlement, the Commission considered +remedial acts promptly undertaken by Respondent and cooperation afforded the Commission +staff. Rio Tinto cooperated in the Commission’s investigation by identifying and timely +producing key documents identified in the course of its own internal investigation, providing the +facts developed in its internal investigation, and making current or former employees available to +the Commission staff. + + 24. Rio Tinto’s remedial efforts included termination of employees responsible for +the misconduct and enhancements to its internal accounting controls. Rio Tinto strengthened its +ethics and compliance organization; enhanced its code of conduct, policies and procedures +regarding, among other things, gifts, hospitality, due diligence, and the use of third parties; +enhanced its whistleblower program; improved its monitoring systems and internal controls +related to manual payments and third parties; enhanced its anticorruption risk assessments and +transaction testing of compliance controls; and increased training of employees and third parties +on anti-bribery issues. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent’s Offer of Settlement. + + 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 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. + +B. Respondent shall, within thirty days of the entry of this Order, pay a civil money +penalty in the amount of $15,000,000 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 three 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/ofin.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: + + 8 +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 +Rio Tinto 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 Ansu N. Banerjee, Assistant +Regional Director, Division of Enforcement, Securities and Exchange Commission, 444 South +Flower Street, Los Angeles, California 90071. + +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/2023/AAER-4388.txt b/raw/aaer/2023/AAER-4388.txt new file mode 100644 index 0000000000000000000000000000000000000000..723576e45a2a74447fea564e111efe39253ae874 --- /dev/null +++ b/raw/aaer/2023/AAER-4388.txt @@ -0,0 +1,84 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97074 / March 8, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4388 / March 8, 2023 + +Admin. Proc. File No. 3-21298 + + +In the Matter of + +JIA ROGER QIAN WANG, CPA and WANG +CERTIFIED PUBLIC ACCOUNTANT, P.C. + + + +ORDER EXTENDING TIME TO FILE AN ANSWER + +On February 8, 2023, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Jia Roger Qian Wang, CPA, and Wang +Certified Public Accountant, P.C., (together, “Respondents”), 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 +The OIP was served on Respondents on February 9, 2023. Pursuant to the statutory provision +governing cease-and-desist proceedings, absent Respondents’ consent to a later hearing date, a +public hearing in the case would be set for a date on or before April 10, 2023.2 Accordingly, on +February 17, 2023, we issued an order directing the parties to file a statement advising the +Commission of any agreement to a later hearing date (or a statement that no agreement could be +reached) by March 3, 2023.3 +On February 22, 2023, Wang, proceeding pro se, filed a motion for an extension of time +to file an answer to the OIP to March 31, 2023. On February 28, 2023, we issued an order +granting in part Wang’s motion by extending the time for Respondents to file an answer to +March 8, 2023.4 But we denied the full extension requested as not “prudent” because + +1 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96852, 2023 WL 1819154 (Feb. +8, 2023). +2 15 U.S.C. § 78u-3(b). +3 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96949, 2023 WL 2069918 (Feb. +17, 2023). +4 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96994, 2023 WL 2299513 (Feb. +28, 2023). +2 + +Respondents’ had not then consented to a hearing date later than April 10, 2023. On March 3, +2023, however, the Division of Enforcement filed a statement that the parties had agreed to +extend the time for a hearing to a date no earlier than June 10, 2023. And on March 7, 2023, the +Division filed a Consent to Extend Respondents’ Time to Answer, stating that the parties “have +agreed to March 31, 2023 as the date the Answer will be due.” +Under the circumstances, it is now appropriate to grant in full Wang’s unopposed +extension request. Accordingly, it is ORDERED that the time for Respondents to file an answer +to the OIP is extended to March 31, 2023. +As provided in the OIP, once Respondents file an answer, the parties shall conduct a +prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice within +fourteen days of service of the answer.5 Following the conference, the parties shall file a +statement advising the Commission of any agreements reached at the prehearing conference. If a +prehearing conference was not held, a statement shall be filed advising of that fact and of the + + +5 Wang, 2023 WL 1819154, at *8. +3 + +efforts made to meet and confer. Respondents are reminded that a failure to file an answer could +result in deeming them in default and determining the proceedings against them.6 +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.7 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + +6 See id. +7 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-4389.txt b/raw/aaer/2023/AAER-4389.txt new file mode 100644 index 0000000000000000000000000000000000000000..81e22a4fd893da7a4b5c6afc51f59950f9375f52 --- /dev/null +++ b/raw/aaer/2023/AAER-4389.txt @@ -0,0 +1,47 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97113 / March 10, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4389 / March 10, 2023 + +Admin. Proc. File No. 3-21314 + + +In the Matter of + +ALAN J. MARKOWITZ, CPA + + +ORDER REGARDING SERVICE + +On February 28, 2023, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Alan J. Markowitz, 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 It appears that since the issuance of the OIP, there have been +no filings regarding whether the OIP was served upon Markowitz. Accordingly, IT IS +ORDERED that the Division of Enforcement file a status report concerning service of the OIP +by March 17, 2023, and every 14 days thereafter until service is accomplished. +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.2 + +1 Alan J. Markowitz, CPA, Exchange Act Release No. 96995, 2023 WL 2299560 (February +28, 2023). +2 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. +2 + +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-4390.txt b/raw/aaer/2023/AAER-4390.txt new file mode 100644 index 0000000000000000000000000000000000000000..e46c43218842f7ed3ec5bcd11d7a12038ad12aef --- /dev/null +++ b/raw/aaer/2023/AAER-4390.txt @@ -0,0 +1,1403 @@ + + + + + + + + + + + + + + + + SEC.gov | Evoqua Water Technologies Corp. and Imran Parekh + + + + + + + + !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\/528586","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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Evoqua Water Technologies Corp. and Imran Parekh , No. 1:23-cv-00105 (D.R.I. filed Mar. 13, 2023) + + + + + + + + + The Securities and Exchange Commission charged Pittsburgh, Pennsylvania-based Evoqua Water Technologies Corp. and its former division-level finance director Imran Parekh for improper accounting practices that materially misstated Evoqua's revenue reported in the company's SEC filings during 2017 and 2018. Evoqua and Parekh have agreed to settle the charges by, among other things, agreeing to injunctions against future violations of the securities laws and Evoqua paying a civil penalty of $8.5 million. Monetary and other relief against Parekh will be left to later decision by the court. + + According to the SEC's complaint filed in federal court in Rhode Island, from at least the fourth quarter of 2016 through August 2018, Parekh, as the Finance Director of one of Evoqua's divisions based in Rhode Island, engaged in fraudulent accounting practices that resulted in Evoqua improperly reporting materially false revenue amounts in its financial statements filed with the Commission. The SEC's complaint alleged that Parekh inflated the revenue Evoqua reported quarterly and at year-end by counting revenue from sales much earlier than accounting principles permitted. The complaint alleged that Parekh improperly accounted for so-called "bill-and-hold" transactions (where a company bills a purchaser for a product but the seller does not deliver the product to the purchaser until some future date), for which Evoqua recognized revenue from the sale of filtration products earlier than permitted and without meeting the criteria found in accounting principles to be able to immediately recognize the revenue. + + The complaint further alleges that negligent conduct at Evoqua's corporate level in managing the financial reporting and accounting controls processes facilitated Parekh's improper accounting practices. As a result of the fraudulent scheme, the complaint alleges, Evoqua improperly reported nearly $12 million of additional expected revenue for its fiscal year 2017 in its registration statement and its initial public offering (IPO) Prospectus filed with the Commission in October and November 2017; that the misconduct continued through Evoqua's first year as a public company, resulting in inaccurate books and records and material misstatements of Evoqua's financial condition in subsequent filings with the Commission; and that by failing to disclose to investors (or in filings with the Commission) that Evoqua reported uncompleted sales as revenue by misapplying bill-and-hold accounting criteria, Evoqua misled investors and potential investors about the true financial picture of the company. + + Evoqua has consented to the entry of a final judgment that permanently enjoins it from violating the antifraud provisions of Section 17(a)(2) and (3) of the Securities Act of 1933 ("Securities Act"); the periodic reporting provisions of Section 13(a) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rules 12b-20, 13a-l, 13a-11, and 13a-13 thereunder; and the books and records and internal accounting controls provisions of Sections 13(b)(2)(A) and (B) of the Exchange Act. The final judgment would also order Evoqua to comply with certain undertakings, including an agreement to implement recommended improvements to its system of internal accounting controls, and to pay a civil penalty of $8.5 million. + + Parekh has consented to the entry of a judgment that permanently enjoins him from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10(b)(5) thereunder; from aiding and abetting the periodic reporting provisions of Section 13(a) of the Securities Act and Rules 12b-20, 13a-l, 13a-11, and 13a-13 thereunder; from aiding and abetting the books and records and internal accounting controls provisions of Sections 13(b)(2)(A) and (B) of the Exchange Act; and from knowingly circumventing an issuer's system of accounting controls or knowingly falsifying an issuer's books and records in violation of Section 13(b)(5) of the Exchange Act. The judgment also orders that Parekh will be ordered to pay disgorgement, prejudgment interest, and a civil penalty, the amounts of which will be determined by the court, and that the court will determine whether Parekh should be barred from serving as an officer or director of a public company and if so the duration of such a bar. The settlements with Evoqua and Parekh are subject to court approval. + + The case was handled by Kerry Vasta, Jonathan Allen, Peter Moores, David London, and Amy Gwiazda of the Boston Regional Office. + + + + + + + + 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/2023/AAER-4391.txt b/raw/aaer/2023/AAER-4391.txt new file mode 100644 index 0000000000000000000000000000000000000000..0a1b62aa3aeb2cbc2dcc1fb560da087a3bd924ef --- /dev/null +++ b/raw/aaer/2023/AAER-4391.txt @@ -0,0 +1,434 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 11166 / March 14, 2023 +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97140 / March 14, 2023 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4391 / March 14, 2023 +ADMINISTRATIVE PROCEEDING +File No. 3-21342 +In the Matter of +DXC TECHNOLOGY COMPANY, +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 DXC Technology Company (“DXC” 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. + + +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +Summary +1. This matter concerns material misstatements made by DXC in its reporting and +disclosures of non-GAAP financial performance measures, including non-GAAP net income and +non-GAAP diluted earnings per share (“EPS”), in multiple quarterly and annual Exchange Act +reports and earnings releases. From the end of the company’s fiscal year 2018 through the third +quarter of its fiscal year 2020 (“relevant period”),2 DXC disclosed that it excluded transaction, +separation, and integration-related (“TSI”) costs from its non-GAAP net income, non-GAAP +EPS, and other non-GAAP measures. DXC described TSI costs as those “related to integration +planning, financing, and advisory fees associated with” the merger that formed DXC, other +acquisitions, and the spin-off of a business. But on a quarterly basis, DXC materially increased +its non-GAAP earnings by negligently misclassifying tens of millions of dollars of expenses as +TSI costs and improperly excluding them in its reporting of non-GAAP measures. As a result, in +multiple periods, DXC failed to describe accurately the scope of expenses included in the +company’s adjustment for TSI costs in its disclosure, and therefore its non-GAAP net income +and non-GAAP diluted EPS in periodic reports and earnings releases were materially misleading. +2. Throughout the relevant period, the company presented non-GAAP measures for +the stated purpose of providing investors with meaningful supplemental financial information to +evaluate its core operating performance, excluding one-time or non-recurring expenses. +However, DXC did not have a non-GAAP policy or adequate disclosure controls and procedures +in place specific to its non-GAAP financial measures. DXC also had insufficient processes to +ensure that its business practices for classifying costs as TSI were consistent with the plain +meaning of the company’s own description of those costs in its periodic reports filed with the +Commission and in its earnings releases. The absence of a non-GAAP policy and specific +disclosure controls and procedures caused employees within the business units and in the +Financial Planning & Analysis area (“FP&A”) to make subjective determinations about whether +expenses were related to an actual or contemplated transaction, regardless of whether the costs +were actually consistent with the description of the adjustment included in the company’s public +disclosures. As a result, DXC negligently misclassified certain internal labor costs, data center +relocation costs that were unrelated to the merger, and other expenses as TSI costs. +3. During the relevant period, DXC’s controller’s group (“controllership”) was +responsible for reviewing and approving TSI costs for inclusion in the company’s quarterly and +annual Exchange Act filings and earnings releases. However, the controllership was unable to +perform adequate reviews concerning the classification of such costs as TSI, in part, because +DXC had insufficient disclosure controls and procedures concerning the review, approval, and +classification of TSI costs. In two quarters during the relevant period, the controllership was + +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 DXC’s fiscal year is three quarters ahead of the calendar year. For example, DXC’s fiscal year 2018 ended on +March 31, 2018, with the company filing its Form 10-K for that year on May 29, 2018. + + +unable to obtain supporting information about certain TSI costs from FP&A, yet DXC still +issued its earnings releases and filed its Forms 10-Q that included those costs in its non-GAAP +measures. +4. During the relevant period, DXC’s controllership and disclosure committee +negligently failed to evaluate the company’s non-GAAP disclosures adequately, particularly +concerning TSI costs, and failed to implement an appropriate non-GAAP policy and to maintain +disclosure controls and procedures. TSI costs were, therefore, not identified, reviewed, approved, +or disclosed in a manner consistent with a plain reading of the description of the TSI adjustment +included in earnings releases and in periodic filings. As a result, DXC’s non-GAAP disclosures +did not comply with Rule 100(b) of Regulation G of the Exchange Act. Both the controllership +and the disclosure committee failed even to recognize that, for years, DXC did not have a non- +GAAP policy and adequate disclosure controls and procedures. + Respondent +5. DXC Technology Company, a Nevada corporation, with its principal executive +offices in Ashburn, Virginia, is a multi-national information technology company. DXC stock is +registered under Section 12(b) of the Exchange Act. In April 2017, DXC was created by the +merger of Computer Sciences Corporation (“CSC”) with most of the Enterprises Services (“ES”) +business of Hewlett Packard Enterprise Company (“CSC-ES Merger”). In June 2015, in a matter +unrelated to the conduct at issue in this Order, CSC was charged with violating anti-fraud and +other provisions of the federal securities laws, and ordered to cease and desist from future +violations. Since the CSC-ES Merger, DXC stock has traded on the New York Stock Exchange +under the ticker “DXC.” +Facts +Background +6. After the completion of the CSC-ES Merger, most of CSC’s then-senior +executives, as well as the former controller, filled the same roles at DXC. Before the CSC-ES +Merger, CSC had a practice of reporting non-GAAP measures, which excluded transaction and +integration-related costs. Following the CSC-ES Merger, DXC continued that practice and +adopted disclosure language concerning such costs that was similar to CSC’s disclosures. +7. In May 2018, in reporting its fiscal year 2018 (“FY2018”) results, DXC amended +its TSI disclosure to include certain costs associated with the then-pending separation of its U.S. +Public Sector business (“USPS”). As a result, during the relevant time period, DXC included the +following description of TSI costs in its filings with the Commission and in its earnings releases: +Transaction, separation and integration-related costs – reflects costs related to +integration planning, financing, and advisory fees associated with the HPES +Merger and other acquisitions and costs related to the separation of USPS. +8. DXC management understood that the non-GAAP measures, and the company’s +related guidance, were material to market participants when evaluating the company’s earnings +releases and results of operations. In its Commission filings and earnings releases, DXC noted + + +that management believed “these non-GAAP measures allow investors to better understand the +financial performance of DXC exclusive of the impacts of corporate-wide strategic decisions. . . +[and provide] investors with additional measures to evaluate the financial performance of our +core business operations on a comparable basis from period to period.” DXC management also +believed that “the non-GAAP measures provided are also considered important measures by +financial analysts covering DXC, as equity research analysts continue to publish estimates and +research notes based on our non-GAAP commentary, including our guidance around non-GAAP +EPS.” +DXC’s Identification and Review of TSI Costs +9. After the CSC-ES Merger, DXC’s controllership recognized the need for a non- +GAAP policy that included disclosure controls and procedures specific to non-GAAP reporting. +During DXC’s FY2018, the controllership circulated numerous non-GAAP policy drafts +internally and to DXC’s independent auditor. However, neither the controllership nor the +disclosure committee approved or adopted a policy or disclosure controls and procedures specific +to such non-GAAP measures. +10. During the relevant period, DXC had no formal guidance that employees could +consult to determine which costs could be classified as TSI, to ensure that such costs were +appropriate to exclude from its non-GAAP measures, and to ensure consistency with the +company’s own disclosure language. Instead, DXC relied on an informal process under which +expenses could be included as TSI costs even though they were beyond the scope of costs +described in the company’s disclosures. +11. As described below, although DXC’s public description of TSI costs remained +unchanged for two full years, the company had no process by which its employees evaluated +whether proposed TSI costs were consistent with the description of TSI costs included in its non- +GAAP disclosure. In turn, there was similarly no process by which the individuals and reviewers +responsible for the TSI disclosure actually assessed the nature of specific TSI costs to determine +whether the description in the disclosure matched DXC’s practices. +12. During the relevant period, DXC’s FP&A group was responsible for the initial +approval of the classification of expenses that were proposed by the company’s business units as +potential TSI costs, which were excluded from the units’ internal profit-and-loss figures. Thus, if +FP&A approved a cost as TSI, that expense would be removed from a unit’s financial +performance, thereby increasing the unit’s internally-reported profitability. +13. FP&A did not require the business units to document the basis on which a +proposed expense might be classified as a TSI cost, how the expense related to a transaction or +integration project, or the expected amount or duration of the cost. FP&A also did not +consistently document the reason for its own approvals of TSI cost classification. Consequently, +and because of turnover within business units and FP&A, previously-approved TSI cost +classifications were not reassessed from year-to-year to determine if the continued classification +was appropriate. It was unclear on what basis some costs had been approved as being TSI, when, +or by whom; approved costs were coded as “integration” or related to a “transaction,” and the + + +expenses simply rolled up in FP&A’s quarter-end aggregation of company-wide TSI costs that +FP&A provided to the controllership. +14. In this process, FP&A did not evaluate whether the classification of such costs +was consistent with the description of TSI costs in the company’s public disclosures or if the +costs otherwise should not have been included in the company’s non-GAAP measures. In fact, +some employees in FP&A who were responsible for initially approving the classification and +aggregation of TSI costs believed that FP&A’s role involved limited or no oversight and +analysis, and that the controllership was responsible for determining which costs were +appropriate to include as TSI in the company’s filings with the Commission and in its public +disclosures. Within the controllership, the individuals responsible for reviewing and approving +the classification of TSI costs for non-GAAP reporting purposes believed that FP&A had more +robust procedures than it actually did for analyzing and vetting the TSI costs before forwarding +the aggregated costs to the controllership. +DXC Controllership Failed to Perform Adequate Reviews of TSI Costs +15. During the relevant period, DXC’s controllership reviewed the company’s various +non-GAAP measures, including TSI costs, for accuracy and compliance with SEC requirements. +After the end of each fiscal quarter, FP&A provided a large spreadsheet with tens of thousands +of TSI cost line items for review and approval by the controllership before the inclusion of such +costs in DXC’s public non-GAAP measures. Given the sheer number of TSI cost line items, the +lack of project and cost descriptions in the spreadsheets, and the limited period within which to +scrutinize the costs, the controllership was unable to perform adequate reviews during the +relevant period. +16. Further, some controllership employees, particularly the former Assistant +Corporate Controller for External Reporting (“ACC”), questioned certain costs that had been +characterized as TSI, but they either did not receive supporting documentation or, at times, were +provided with inaccurate or incomplete information. Communications related to the +controllership’s questions about certain TSI costs were often addressed only orally, without +adequate written records of how particular issues were resolved. In some periods, the former +ACC also noted concerns about certain TSI cost issues in responding to the company’s quarterly +sub-certification surveys, though the former ACC ultimately certified, with comments, the +company’s financial reporting in those periods. +17. During the company’s FY2019, DXC’s former ACC questioned tens of millions +of dollars in quarterly costs that were characterized as TSI and raised concerns to the former +controller. During the review of TSI costs for Q2FY2019, for example, the former ACC emailed +the former controller: +I know I bring this up every quarter but it is concerning to see branding and other +integration efforts included in non-gaap as add backs. They continue to include +internal labor for which this quarter is $19 [million] of labor and $5.2 [million] of +tax expense. We requested additional details and support on how these +adjustments are in compliance with the SEC requirements and the breakdown by +project. + + +18. The former ACC did not receive the requested additional details or the breakdown +by project. In a sub-certification for Q2FY2019, which was executed after DXC issued its +earnings release and the day before it filed its Form 10-Q, the former ACC noted: +We have not received all supporting documentation surrounding non-gaap +adjustments to assess appropriateness of adjustments in the financials but this +would not impact GAAP numbers. [W]hen brought to the Controllers attention, +[the Controller] agreed to require a thorough review of the process for the parties +compiling the information and its compliance with SEC regs. +19. For the controllership’s review of TSI costs for Q3FY19, the former ACC again +questioned tens of millions in quarterly expenses that were included in FP&A’s quarter-end TSI +costs spreadsheet. The result was the same as in the prior quarter: the controllership did not +complete an adequate review, and in a sub-certification executed after DXC issued its earnings +release and the day before it filed its Form 10-Q, the former ACC wrote: +I have asked again for supporting information to address the non-gaap +adjustments and how they meet the CDI to ensure compliance with non-GAAP +SEC Regs. I have not received responses and these non-gaap measures are heavily +relied upon by investors. We simply require an explanation for the items as +outlined in several requests to Management/FPA. I have provided this information +to [the controller] for his assessment. +20. Beginning in Q4FY19, DXC enhanced the process to require earlier review of +non-GAAP items, including more regular information exchanges between FP&A and the +controllership. However, DXC still did not implement a policy for the classification of TSI costs +or for non-GAAP disclosures. In addition, DXC’s review and approval of the classification of +TSI costs continued to be untethered from the plain language of the company’s description of +those costs in its public disclosures. Although FP&A provided the controllership with TSI cost +spreadsheets before quarter-end, the data in those spreadsheets was insufficient to determine +whether many costs were appropriately characterized as TSI. +21. In performing the controllership’s review for Q4FY19, the former ACC again +questioned the classification of tens of millions in TSI costs, including expenses that the former +ACC had questioned—and did not receive adequate documentation for—in previous quarters. +Although FP&A provided more timely responses for Q4FY19, the information on some costs +was inaccurate, incomplete, or not consistent with the descriptions of work set forth in the actual +vendor contracts and project descriptions. For example, DXC had hired a consulting firm to +evaluate and calculate historic research-and-development tax credits so that DXC could amend +its earlier tax returns to claim credits going back to 2015. FP&A informed the controllership that +this work was to standardize the tax credit methodology for the merged company and, on that +basis, included the costs as TSI. However, the contractual statement of work referred to +identifying incremental tax credits, and contained no work related to policy or methodology +standardization. +22. Other “integration” projects were included as TSI costs even though they were +unrelated to the CSC-ES Merger, an acquisition, or the separation of USPS. In six consecutive + + +quarters during the relevant period, DXC included a total of over $38m in “integration” expenses +– and thus, TSI costs – related to the closure of a legacy CSC data center and transition of its +operations to a nearby legacy ES data center. However, before the merger, the landlord of the +data center informed CSC that it was redeveloping the property and would not renew the lease. +Thus, CSC—and, subsequently, DXC—was forced to relocate the data center and incur related +expenses, regardless of whether the merger occurred. At some point in FY2018, FP&A approved +the classification of the relocation expenses as TSI costs, though there was no documentation of +a request, evaluation, or the bases for the approval. +23. In reviewing TSI costs during FY2019, the former ACC asked multiple times +about the data center relocation costs and was informed that the costs were previously approved +as an integration of two legacy facilities following the merger. Although this explanation was +technically correct, it omitted the fact that, before the merger, the relocation expense was a +known, future, operating cost that was required whether or not a merger or acquisition occurred. +This information, if known to the former ACC, would have impacted the former ACC’s +assessment of including the relocation expenses as TSI costs. +24. In Q1FY20, DXC continued to classify recurring expenses from earlier quarters +as TSI costs, including “special audit fees” (part of which were fees above a certain level paid to +its independent accountant for the company’s required integrated audit), costs for complying +with a new GAAP leasing standard, and expenses in connection with potential divestitures that +never closed. In Q1FY20, DXC also classified as a TSI cost a portion of a litigation settlement +with a former executive who had been terminated. These costs were inconsistent with DXC’s +public disclosure of TSI costs. +DXC Made Material Misstatements +25. As a result of its negligence, DXC made materially misleading statements about +its TSI costs during the relevant period by misstating the nature and scope of those costs. As +DXC disclosed in its periodic reports to the Commission and in earnings releases issued during +the relevant period, the company recognized that the non-GAAP measures were material because +they allowed investors to better understand the core performance of the company. +26. DXC’s misclassification of certain expenses as TSI costs materially impacted its +reported non-GAAP net income for three quarters as follows: (1) Q2FY19: non-GAAP net +income of $573 million overstated by at least $29 million; (2) Q4FY19: non-GAAP net income +of $589 million overstated by at least $30 million; and (3) Q1FY20: non-GAAP net income of +$472 million was overstated by at least $24 million. +27. Reasonable investors would have considered the foregoing information to have +been material in deciding whether to purchase DXC securities during the relevant period. +DXC Offered and Sold Securities during the Relevant Period +28. During the relevant period, DXC offered and sold securities, including offering +shares to employees in employee benefit plans, issuing restricted stock as compensation to +certain employees under incentive plans, and public offerings of debt securities. + + +DXC’s Disclosure Controls and Procedures Failures +29. Exchange Act Rule 13a-15(a) requires issuers such as DXC to “maintain +disclosure controls and procedures . . . as defined in paragraph (e) of this section.” Paragraph (e) +defines disclosure controls and procedures to include, among other things, “procedures . . . +designed to ensure that information required to be disclosed by the issuer in the reports that it +files or submits under the [Exchange] Act . . . is recorded, processed, summarized, and reported[] +within the time periods specified in the Commission’s rules and forms.” As described above, +DXC lacked company-wide disclosure controls and procedures to ensure that TSI costs were +identified, reviewed, and approved for appropriate inclusion in the TSI adjustment in a manner +consistent with their disclosure. +Violations +30. As a result of the conduct described above, DXC violated Sections 17(a)(2) and +17(a)(3) of the Securities Act. Section 17(a)(2) prohibits any person from obtaining money or +property in the offer or sale of securities by means of an 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 prohibits any person from engaging in any transaction, practice, or course of +business which operates or would operate as a fraud or deceit upon the purchaser. Negligence is +sufficient to establish violations of Sections 17(a)(2) and 17(a)(3). Aaron v. SEC, 446 U.S. 680, +697 (1980). +31. As a result of the conduct described above, DXC 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 +Commission may require, and mandate that periodic reports contain such further material +information as may be necessary to make the required statements not misleading. +32. As a result of the conduct described above, DXC violated Rule 13a-15(a) of the +Exchange Act, which requires that every issuer of a security registered pursuant to Section 12 of +the Exchange Act maintain disclosure controls and procedures as defined in Rule 13a-15(e) of +the Exchange Act. +33. As a result of the conduct described above, DXC violated Rule 100(b) of +Regulation G of the Exchange Act, which prohibits registrants from making public a non-GAAP +financial measure that contains an untrue statement of material fact or omits to state a material +fact necessary in order to make the presentation of the non-GAAP financial measure, in light of +the circumstances under which it is presented, not misleading. +DXC’s Cooperation and Remedial Efforts +34. In determining to accept DXC’s Offer, the Commission considered the +cooperation it provided during the Commission’s investigation, as well as remedial measures +undertaken by DXC. + + +35. Respondent provided substantial cooperation during the course of the +investigation. Respondent voluntarily undertook a robust review of its TSI practices, voluntarily +and promptly produced documents and made witnesses available, and compiled and presented +information in the form requested by the staff on multiple occasions. +36. Respondent also undertook affirmative remedial steps in response to the issues +identified during the investigation, which included reviewing and supplementing its procedures +concerning non-GAAP adjustments and reporting, and proactively enhancing its disclosures of +TSI costs. Subsequent to the relevant period, DXC also reduced the volume of its TSI costs in +more recent quarters. DXC has replaced nearly all of its senior executive and financial +leadership personnel who were present during the relevant period. +Undertakings +37. Respondent has undertaken to develop and implement policies and disclosure +controls and procedures: +a. for the disclosure of its non-GAAP financial performance such that its +non-GAAP financial measures, including expenses, are described +accurately in future periodic filings and public statements, and that its non- +GAAP disclosures are consistent with the company’s actual processes for +identifying, reviewing, and approving non-GAAP adjustments, including, +but not limited to costs; +b. for its disclosure committee, or other charged committee, to review and +document, on a periodic basis, the company’s non-GAAP policy to assess +consistency with its non-GAAP disclosures and its publicly-reported non- +GAAP financial performance measures; +c. for controllership staff who are familiar with SEC reporting requirements +and DXC’s non-GAAP policy and non-GAAP disclosures to approve and +document the classification of items included in non-GAAP adjustments; +and +d. for timely reviewing, considering, and addressing negative Sub- +Certification Survey comments relating to GAAP and non-GAAP +financial results or disclosures, or that may impact Management’s +Discussion and Analysis of Operations. +38. DXC will comply with these undertakings within 120 calendar days from the +entry of this Order. DXC will then certify, in writing, compliance with these undertakings. 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 Jeff Leasure, Assistant Director, 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 and in the public interest +to impose the sanctions agreed to in Respondent DXC’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 DXC cease and desist from committing or causing any violations and any +future violations Section 17(a)(2) and (3) of the Securities Act and of Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a) thereunder, and Rule +100(b) of Regulation G. +B. Respondent shall comply with the undertakings enumerated in Section III, +paragraphs 37 and 38, above. +C. Respondent shall, within 28 days of the entry of this Order, pay a civil money +penalty in the amount of $8,000,000.00, 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 +DXC Technology Company 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 Mark Cave, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., +NE, Washington, DC 20549-6561. +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, 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/2023/AAER-4392.txt b/raw/aaer/2023/AAER-4392.txt new file mode 100644 index 0000000000000000000000000000000000000000..ed785626d76787d6a52912637928e9a918c69772 --- /dev/null +++ b/raw/aaer/2023/AAER-4392.txt @@ -0,0 +1,1401 @@ + + + + + + + + + + + + + + + + SEC.gov | Philip R. 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Jacoby, Jr., et al. + + + + + + + + + + + + Philip R. Jacoby, Jr., et al. + + + + + + + + + + + + + + + + + + + + + --> + + SEC Obtains Final Judgment Against Former CFO Charged with Fraud and Lying to Auditors + + Litigation Release No. 25671 / March 21, 2023 + + Accounting and Auditing Enforcement Release No. 4392 / March 21, 2023 + + Securities and Exchange Commission v. Philip R. Jacoby, Jr., et al. , Civil Action No. 17-cv-03230-SAG (D. Md. filed Nov. 2, 2017) + + + + + + + + + On March 17, 2023, the U.S. District Court for the District of Maryland entered a final consent judgment against Philip R. Jacoby, a former Chief Financial Officer of biotech company Osiris Therapeutics, Inc., for his role in Osiris's fraudulent conduct. + + The SEC's complaint, filed November 2, 2017, charged Osiris with routinely overstating company performance and issuing fraudulent financial statements for a period of nearly two years. The SEC alleged that Jacoby caused Osiris to book fictitious and premature revenue and provided false information to Osiris's auditors. On February 2, 2021, the District Court found that Jacoby violated provisions of the federal securities laws prohibiting: fraud in connection with the offer, purchase, or sale of securities; false certifications of SEC filings; aiding and abetting false SEC filings; and lying to auditors. + + Jacoby consented to a final judgment enjoining him from future violations of: Section 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934, and Rules 10b-5, 13a-14, and 13b2-2 promulgated thereunder; as well as aiding and abetting violations of Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The judgment further prohibits Jacoby from acting as an officer or director of a public company, and finds Jacoby liable for reimbursement of $223,965.88 in Osiris stock sale profits pursuant to Section 304 of the Sarbanes-Oxley Act of 2002, but waives payment of all but $45,000 of this amount, and does not impose a civil penalty, based on his sworn statement of financial condition. + + Osiris previously settled the SEC's charges and paid a $1.5 million civil penalty. One of Osiris's former Chief Financial Officers, Gregory I. Law, was dismissed from the case in September 2019. In October 2019, Bobby Dwayne Montgomery, Osiris's former Chief Business Officer, consented to a judgment enjoining him from future violations of the provisions of the federal securities laws that prohibit falsifying books and records and lying to auditors, and ordering him to pay a civil penalty of $40,000. Osiris's former Chief Executive Officer, Lode Debrabandere, was dismissed from the case in November 2022. The final judgment entered against Jacoby concludes this litigation. + + The SEC's investigation was conducted by Laura Ordaz, Anne Romero, and Danielle Voorhees, and was supervised by Laura Metcalfe and Jason Burt. The SEC's litigation was led by Nicholas Heinke, Zachary Carlyle, and Polly Atkinson, and was supervised by Greg Kasper and Mr. Burt. + + + + + + + + Judgment + + + + + + + + + + + + Resources + + + + + Judgment + + + + + + + + + + + + + + + + + + + + + + + + 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/2023/AAER-4393.txt b/raw/aaer/2023/AAER-4393.txt new file mode 100644 index 0000000000000000000000000000000000000000..f052d8af99b8c380275beca650d746cf42108601 --- /dev/null +++ b/raw/aaer/2023/AAER-4393.txt @@ -0,0 +1,64 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97209 / March 28, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4393 / March 28, 2023 + +Admin. Proc. File No. 3- 21314 + + +In the Matter of + +ALAN J. MARKOWITZ, CPA + + +ORDER SETTING DEADLINE FOR MARKOWITZ’S ANSWER + +On February 28, 2023, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Alan J. Markowitz, 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 March 24, 2023, Markowitz filed a motion seeking a +twenty-day extension of time to file his answer. Citing Commission Rule of Practice 161,2 the +motion states that Markowitz’s answer is currently due April 7, 2023, because service was +complete when the Division of Enforcement mailed the OIP to his counsel by certified mail +postmarked March 15, 2023. The motion states further that the Division consents to the +extension. + +1 Alan J. Markowitz, CPA, Exchange Act Release No. 96995, 2023 WL 2299560 (February +28, 2023). +2 17 C.F.R. § 201.161 (providing procedure for seeking extensions of time). +2 + +In light of the parties’ agreement, it is appropriate to grant Markowitz’s request that his +answer to the OIP be due April 27, 2023.3 As the OIP stated, if Markowitz fails to file an +answer, he may be deemed in default and the proceeding may be determined against him.4 +Accordingly, IT IS ORDERED that Markowitz’s motion for an extension of time to file +his answer is GRANTED. +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.5 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + + +3 See In re Pending Administrative Proceedings, Securities Act Release No. 10767, 2020 +WL 1322001 (Mar. 18, 2020), https://www.sec.gov/litigation/opinions/2020/33-10767.pdf +(providing that, pending further order of the Commission, reasonable requests for extensions of +time will not be disfavored as stated in Commission Rule of Practice 161); Rule of Practice +161(a), 17 C.F.R. § 201.161(a) (requiring good cause showing for extensions). +4 Markowitz, CPA, 2023 WL 2299560, at *14. +5 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-4394.txt b/raw/aaer/2023/AAER-4394.txt new file mode 100644 index 0000000000000000000000000000000000000000..f82671e08846c3f26b92c688ec2e3a226863b74f --- /dev/null +++ b/raw/aaer/2023/AAER-4394.txt @@ -0,0 +1,714 @@ + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97216 / March 29, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4394 / March 29, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21353 + + + + +In the Matter of + +SPICER JEFFRIES LLP and +SEAN P. TAFARO, 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 Spicer Jeffries LLP (“Spicer +Jeffries”) and Sean P. Tafaro (“Tafaro”) (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 matter arises out of the audits of two private funds – Fund A and Fund B +(“Funds”) – completed in 2019 by audit firm Spicer Jeffries and engagement partner Tafaro. Spicer +Jeffries was engaged by an SEC-registered investment adviser (the “Adviser”) to audit the financial +statements of the Funds so that the Adviser could comply with Section 206(4) of the Investment +Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-2 thereunder (the “Custody Rule”). +Respondents engaged in improper professional conduct under Rule 102(e) during these audits by +failing to conduct the audits in accordance with U.S. generally accepted auditing standards +(“GAAS”).4 +2. Specifically, Tafaro, the engagement partner, and Spicer Jeffries did not +(i) adequately respond to significant risks identified during the planning stage of the audits, +(ii) obtain sufficient appropriate audit evidence to support the audit opinions, (iii) prepare sufficient +audit documentation, or (iv) exercise due care and professional skepticism. Tafaro, as the +engagement partner, also did not adequately supervise the audit engagement. +3. Spicer Jeffries also did not adhere to American Institute of Certified Public +Accountants (“AICPA”) quality control standards. + + 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. + +4 Citations to GAAS in the Order are to those standards in existence at the time of the conduct. + +3 +B. RESPONDENTS +4. Spicer Jeffries LLP is a limited liability partnership and public accounting firm +registered with the Public Company Accounting Oversight Board (“PCAOB”). Spicer Jeffries has +three offices, including its headquarters in Denver, Colorado and provides accounting, tax, auditing, +and consulting services to a variety of clients including investment advisers and funds registered +with the Commission. +5. Sean P. Tafaro, CPA, age 46, is a resident of Highlands Ranch, Colorado. He has +worked at Spicer Jeffries since 1999 and became an equity partner in 2014. Tafaro was the +engagement partner for the audits of the Funds and had final responsibility over the audits. Tafaro +has held an active certified public accountant (“CPA”) license in Colorado since 2001 and also +holds active CPA licenses in Florida, California, New York, New Jersey, and Massachusetts. +C. OTHER RELEVANT ENTITIES +6. Fund A is a private fund founded as a Delaware limited liability limited partnership +in 2015. +7. Fund B is a private fund founded as a Delaware limited liability limited partnership +in 2002. +8. Adviser is a Colorado limited liability company that was most recently registered +with the Commission as an investment adviser in July 2016. The Adviser provides investment +management services to privately offered limited partnerships and corporate investment vehicles. +The Adviser is the investment adviser to the Funds. +D. FACTS +Background + +9. Between at least January 1, 2018 and December 31, 2018, the Adviser had custody +of client funds or securities and, as such, was required to comply with the Custody Rule. +10. 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). The Adviser sought to use the audit provision of the Custody Rule, which required that +the Funds’ financial statements be prepared in accordance with generally accepted accounting +principles (“GAAP”) and that they be audited by an independent public accountant that is +registered with, and subject to regular inspection by, the PCAOB. See Advisers Act Rule 206(4)- +2(b)(4). +11. To comply with the audit provision of the Custody Rule, the Adviser engaged Spicer +Jeffries to perform annual audits for the Funds’ fiscal years ended December 31, 2018 (the +“Audits”) and then distributed audited financial statements to each investor in the Funds. Spicer +Jeffries stated that the Audits were performed in accordance with GAAS. + +4 +12. The Audits included audit procedures on certain of the Funds’ hard-to-value +investment assets for which fair values were not readily-determinable, described herein as “Level 3” +investments. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification +820, Fair Value Measurement (“ASC 820”) sets forth three categories of inputs for use in +determining an asset’s fair value.5 Assets valued using Level 3 inputs are often difficult to value +because of the unobservable nature of such inputs. +13. ASC 820 defines fair value as “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 measurement +date.” Under ASC 820-10-35-36, the methods used to measure fair value “shall maximize the use +of relevant observable inputs and minimize the use of unobservable inputs.” +14. The Audits involved three Level 3 investments in the preferred stock of two +portfolio companies that contained preference rights structured to return to the Funds a multiple of +the Funds’ original investments if there was a qualifying liquidation event (e.g., dissolution, +bankruptcy, or reorganization) (“Liquidation Preference Rights”). In such cases, the Funds, through +their preferred stock investments, would be first in line to receive back a multiple of their original +investments prior to remaining liquidation proceeds being distributed to common shareholders. +15. To determine the value of the three Level 3 investments at issue here, the Adviser +calculated fair value based on a “waterfall approach” that attempted to forecast how the +undiscounted cash proceeds from a hypothetical sale of the portfolio company would be +sequentially distributed to each class of shareholder based on the seniority and Liquidation +Preference Rights of each class. The undiscounted cash proceeds allocated to the Funds’ three +Level 3 investments per the Adviser’s waterfall approach were recorded to the Funds’ financial +statements as the fair value of those investments. +16. Here, the Adviser’s waterfall calculations assumed that the Liquidation Preference +Rights were triggered despite the fact that no qualifying liquidation event had occurred or was +expected to occur in the near future. This valuation assumption led to an instantaneous increase in +the recorded value of these Level 3 investments. Thus, almost immediately after the Funds’ +purchase of these preferred shares (i.e., on the same day or day after), the Adviser recorded fair +value based on the price that the Funds had recently paid increased by the Liquidation Preference +Rights multiple ranging from 150% to 200%. +17. Spicer Jeffries and Tafaro received an email describing this valuation practice prior +to the Audits. As discussed below, in a subsequent email in October 2018, Tafaro wrote the + +5 ASC 820 prioritizes inputs used to measure fair value into three levels based on the observability of the +inputs. The highest, and generally most reliable, level of inputs – Level 1 – are “quoted prices (unadjusted) in active +markets for identical assets or liabilities that the reporting entity can access at the measurement date.” ASC 820-10- +35-40. Level 2 inputs are “inputs other than quoted prices included within Level 1 that are observable for the asset +or liability, either directly or indirectly.” ASC 820-10-35-47. Level 3 inputs are “unobservable inputs for the asset +or liability.” ASC 820-10-35-52. ASC 820-10-35-53 further notes as follows: “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 is little, if any market activity for the asset or liability at the measurement date.” + +5 +Adviser that he “would have no problem signing an audit opinion” supporting the Adviser’s +valuation methodology of an immediate mark-up corresponding to Liquidation Preference Rights +“with careful documentation” explaining why alternative techniques were considered but not +equally weighted. Moreover, in planning the Audits of the Funds, the Spicer Jeffries engagement +team, including Tafaro, identified valuation of investments as a “Significant/Fraud” risk. +Respondents Did Not Conduct the Audits of the Funds in Accordance with GAAS +18. Despite acknowledging the risk associated with the valuation of investments, the +Respondents failed to meet professional standards in a number of respects throughout the Audits. +As further detailed below, Spicer Jeffries and Tafaro did not (i) adequately respond to significant +risks identified during the planning stage of the Audits, (ii) obtain sufficient appropriate audit +evidence to support the audit opinions, (iii) prepare sufficient audit documentation, or (iv) exercise +due care and professional skepticism. Tafaro, as the engagement partner, also did not adequately +supervise the audit engagement. Spicer Jeffries also did not adhere to quality control standards. +Spicer Jeffries and Tafaro Failed to Adequately Respond to Fraud Risks Identified +19. In the planning stage for each of the Audits, Spicer Jeffries and Tafaro assessed the +risks of material misstatement and identified that valuation of investments was a +“Significant/Fraud” risk. However, Respondents did not implement the planned audit approach to +respond to this fraud risk. Beyond recalculating the Adviser’s models for mathematical accuracy +and confirming the existence and amount of various quantitative model inputs, such as Liquidation +Preference Rights multiples, no other audit procedures were performed to test valuation of these +Level 3 investments. While other procedures were planned, such as assessing whether the +Adviser’s accounting valuation method was appropriate, developing independent expectations of +fair value for corroborative purposes, testing or analyzing assumptions used in the valuation models, +and assessing the Adviser’s potential bias in its estimates of fair value, none of these procedures +were performed. +Spicer Jeffries and Tafaro Failed to Obtain Sufficient Appropriate Audit Evidence +20. In each of the Audits, Spicer Jeffries and Tafaro did not obtain sufficient appropriate +audit evidence regarding the valuation of the three Level 3 investments discussed herein as of fiscal +year-end. Respondents did not critically analyze whether the Adviser’s valuation models and +assumptions for these Level 3 investments were in conformity with generally accepted accounting +principles (“GAAP”), specifically, fair value measurement under ASC 820. +21. Spicer Jeffries and Tafaro failed to evaluate or obtain sufficient appropriate audit +evidence about whether the Adviser’s method of measuring fair value was in conformity with ASC +820, such as, among other aspects, whether the method maximized the use of relevant observable +inputs such as the actual known recent purchase price. +22. Spicer Jeffries and Tafaro also failed to obtain sufficient appropriate audit evidence +about whether the Adviser considered alternative valuation assumptions and why it rejected them. +For example, Tafaro received an email from the Adviser in October 2018 that specifically asked + +6 +whether Spicer Jeffries would “sign off on” a valuation methodology “where we take a Day 1 mark- +up of security [greater than] Transaction Price.” Tafaro replied that he “would have no problem +signing an audit opinion” supporting such an approach, but that Spicer Jeffries “would definitely +require a write-up . . . about factors why the recent transaction price is considered but not equally +weighted” in arriving at the valuation. Respondents never obtained the required “write-up”. +23. Moreover, Spicer Jeffries and Tafaro failed to obtain sufficient appropriate audit +evidence about significant valuation assumptions imbedded in the Adviser’s valuation models, such +as whether the Funds had the right to require liquidation of the portfolio companies underlying the +Level 3 investments, or whether a liquidating event had actually been triggered, despite these +assumptions being key to the models’ assumption that full undiscounted liquidation cash proceeds +could be immediately received. +24. Spicer Jeffries and Tafaro failed to evaluate or obtain sufficient appropriate audit +evidence about the Adviser’s valuation judgments and decisions to determine whether indicators of +possible management bias existed. +Spicer Jeffries and Tafaro Failed to Prepare Sufficient Audit Documentation +25. In each of the Audits, Spicer Jeffries and Tafaro failed to prepare audit +documentation sufficient to enable an experienced auditor to understand the nature, timing, and +extent of the procedures performed; results of those procedures and the evidence obtained; and +conclusions reached. +26. For example, despite documenting in the risk assessment work papers that Spicer +Jeffries had reviewed significant accounting estimates for evidence of management bias, there was +no indication elsewhere in the work papers that the engagement team had actually undertaken such +an analysis, what specific evidence had been analyzed, or what the results of any such analysis may +have been. +27. As another example, despite documenting via sign-offs in the audit program that +procedures had been performed to determine the appropriateness of the accounting valuation +method used, to test or analyze assumptions used in the valuation models, and to develop +independent estimates of fair value for corroborative purposes, there was no indication in the work +papers that the engagement team had actually performed any of these procedures, what specific +evidence had been analyzed, or what the results of any such analysis may have been. +28. In addition, Spicer Jeffries and Tafaro failed to prepare sufficient documentation +regarding procedures performed to analyze whether these Level 3 investments were properly +presented in the notes to the financial statements. By way of example, Tafaro failed to analyze +whether engagement staff documented which specific Fund holdings corresponded to which +valuation techniques disclosed in the notes and also failed to document his basis for concluding that + +7 +it was reasonable to categorize the Level 3 investments at issue here in the valuation technique +grouping labeled as “Recent Transaction Price” in the notes to the financial statements. +Spicer Jeffries and Tafaro Failed to Exercise Due Care, Including Professional Skepticism +29. In each of the Audits, Spicer Jeffries and Tafaro did not exercise due care, including +professional skepticism, because they did not conduct the Audits in accordance with GAAS, as +evidenced by the failures noted above to adequately respond to significant risks identified, to obtain +sufficient appropriate audit evidence, and to prepare sufficient audit documentation. +30. In failing to critically analyze whether the Adviser’s valuation models and imbedded +assumptions for these Level 3 investments were in conformity with GAAP, Spicer Jeffries and +Tafaro failed to exercise due care and professional skepticism. +31. As a result of Tafaro’s deficient and improper professional conduct, Spicer Jeffries +issued unqualified audit reports for the Funds’ fiscal years ended December 31, 2018 which stated +that the Audits had been conducted in accordance with GAAS, when in fact, the Audits were not +performed in accordance with GAAS. +Tafaro Failed to Adequately Supervise the Audits +32. Tafaro, as the engagement partner, did not adequately supervise the audit +engagements to ensure compliance with GAAS standards. As evidenced by the failures noted +above, Tafaro’s supervision and review were inadequate to ensure that sufficient appropriate audit +evidence was obtained to support the conclusions reached and for the audit reports to be issued; to +ensure that significant risks identified, including fraud risks, were adequately responded to; and to +ensure that the nature and extent of the procedures performed, the evidence obtained, and the +conclusions reached were sufficiently documented. +Spicer Jeffries Failed to Adhere to Quality Control Standards +33. Spicer Jeffries established a documented system of quality control policies and +procedures, which was intended to provide it with assurance that engagements were performed in +accordance with professional standards and regulatory requirements. +34. However, Spicer Jeffries did not provide adequate guidance or specificity within its +quality control policies and procedures with respect to engagement performance and documentation +or regarding how the engagement partner should perform supervision and audit review +responsibilities to ensure that audit engagements were properly performed. +Violations +35. 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) of the Commission’s Rules of Practice provide, in pertinent part, that the Commission + +8 +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. +36. Under Section 4C(b) of the Exchange Act and Rule 102(e)(1)(iv)(B) of the +Commission’s Rules of Practice, 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, each +resulting in a violation of applicable professional standards, that indicate a lack of competence to +practice before the Commission. +37. As set forth in more detail below, Respondents engaged in repeated violations of +GAAS professional standards including in areas that, for reasons stated in paragraphs 18–34 above, +indicate a lack of competence to practice before the Commission. +Failure to Adequately Respond to Fraud Risks Identified (AU-C 240)6 +38. AU-C Section 240, Consideration of Fraud in a Financial Statement Audit (“AU-C +240”) provides that the objectives of the auditor include “sufficient appropriate audit evidence +regarding the assessed risks of material misstatement due to fraud, through designing and +implementing appropriate responses.” AU-C 240.10b. It further provides that in response to the +assessed risks of material misstatement, audit documentation should include “(a.) The overall +responses to the assessed risks of material misstatement due to fraud at the financial statement level +and the nature, timing, and extent of audit procedures, and the linkage of those procedures with the +assessed risks of material misstatement due to fraud at the assertion level,” and “(b.) The results of +the audit procedures, including those designed to address the risk of management override of +controls.” AU-C 240.44. +39. As a result of Respondents’ conduct described above, each failed to adequately +respond to identified fraud risks associated with the valuation of investments in the Audits. +Failure to Obtain Sufficient Appropriate Audit Evidence (AU-C 500A, AU-C 200, AU-C 540A, and +AU-C 501A) +40. AU-C Section 500A, Audit Evidence (“AU-C 500A”) requires an auditor to “design +and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining +sufficient appropriate audit evidence.” AU-C 500A.06. +41. Additionally, AU-C Section 200, Overall Objectives of the Independent Auditor and +the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards (“AU-C 200”) +further requires an auditor to “obtain sufficient appropriate audit evidence to reduce audit risk to an + +6 AICPA professional auditing standards use the nomenclature “AU-C” (AICPA Auditing Standard Codification). + +9 +acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to +base the auditor’s opinion.” AU-C 200.19. +42. Separately, AU-C Section 540A, Auditing Accounting Estimates, Including Fair +Value Accounting Estimates, and Related Disclosures (“AU-C 540A”) details that “[f]or +accounting estimates that give rise to significant risks . . . , the auditor should evaluate the +following: (a) How management has considered alternative assumptions or outcomes and why it +has rejected them or how management has otherwise addressed estimation uncertainty in making +the accounting estimate[.] . . . (b) Whether the significant assumptions used by management are +reasonable[.] . . . (c) When relevant to the reasonableness of the significant assumptions used by +management or the appropriate application of the financial reporting framework, management’s +intent to carry out specific courses of action and its ability to do so[.]” AU-C 540A.15a-c. +Furthermore, for accounting estimates that give rise to significant risks, “[t]he auditor should +obtain sufficient appropriate audit evidence about whether … (b) the selected measurement basis +for the accounting estimates… are in accordance with the requirements of the applicable financial +reporting framework.” AU-C 540A.17b. And additionally, “[t]he auditor should review the +judgments and decisions made by management in the making of accounting estimates to identify +whether indicators of possible management bias exist…” AU-C 540A.21. +43. In addition, AU-C Section 501A, Audit Evidence – Specific Considerations for +Selected Items (“AU-C 501A”) sets forth parameters for “investments in derivative instruments and +securities measured or disclosed at fair value” noting that if securities are “valued by the entity +using a valuation model, the auditor should obtain sufficient appropriate audit evidence supporting +management’s assertions about fair value determined using the model.” AU-C 501A.09 +44. As a result of Respondents’ conduct described above, each failed to obtain sufficient +appropriate audit evidence to support Spicer Jeffries’ audit opinions for the Audits. +Failure to Prepare Sufficient Audit Documentation (AU-C 230, AU-C 330, and AU-C 540A) +45. AU-C Section 230, Audit Documentation (“AU-C 230”) provides that the “auditor +should prepare audit documentation that is sufficient to enable an experienced auditor, having no +previous connection with the audit, to understand. . . (a) the nature, timing, and extent of the audit +procedures performed to comply with GAAS and applicable legal and regulatory requirements; (b) +the results of the audit procedures performed, and the audit evidence obtained; and (c) significant +findings or issues arising during the audit, the conclusions reached thereon, and significant +professional judgments made in reaching those conclusions.” AU-C 230.08. It further provides that +“[i]n documenting the nature, timing, and extent of audit procedures performed, the auditor should +record (a) the identifying characteristics of the specific items or matters tested…” AU-C 230.09a. +46. AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks and +Evaluating the Audit Evidence Obtained (“AU-C 330”) provides that “The auditor should perform +audit procedures to evaluate whether the overall presentation of the financial statements, including +the related disclosures, is in accordance with the applicable financial reporting framework.” AU-C +330.26. + +10 +47. AU-C 540A further notes that the “auditor should include in the audit +documentation (a) for those accounting estimates that give rise to significant risks, the basis for the +auditor’s conclusions about the reasonableness of accounting estimates and their disclosure and (b) +indicators of possible management bias, if any.” AU-C 540A.22. +48. As a result of Respondents’ conduct described above, each failed to prepare +sufficient audit documentation during the Audits. +Failure to Exercise Due Care, Including Professional Skepticism (AU-C 200) +49. AU-C 200 requires that “[t]he auditor should plan and perform an audit with +professional skepticism, recognizing that circumstances may exist that cause the financial +statements to be materially misstated.” AU-C 200.17. Professional skepticism includes “being +alert to,” for example “[a]udit evidence that contradicts other audit evidence obtained; Information +that brings into question the reliability of documents and responses to inquiries to be used as audit +evidence; Conditions that may indicate possible fraud; [and] Circumstances that suggest the need +for audit procedures in addition to those required by GAAS.” AU-C 200.A22. + +50. AU-C 200 further requires that “[d]ue 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.A19. + +51. Furthermore, AU-C 200 states that “[t]he auditor should not represent compliance +with GAAS in the auditor’s report unless the auditor has complied with the requirements of this +section and all other AU-C sections relevant to the audit.” AU-C 200.22. + +52. As a result of Respondents’ conduct described above, each failed to exercise due +care, including professional skepticism, in the Audits. + +Tafaro’s Failure to Adequately Supervise the Audit Engagement (AU-C 220) +53. Under AU-C Section 220, Quality Control for an Engagement Conducted in +Accordance with Generally Accepted Auditing Standards (“AU-C 220”), it is the responsibility of +the engagement partner to ensure proper “direction, supervision, and performance of the audit +engagement in compliance with professional standards, applicable legal and regulatory +requirements, and the firm’s policies and procedures.” AU-C 220.17a. Additionally, “[t]he +engagement partner should take responsibility for reviews being performed in accordance with the +firm’s review policies and procedures.” AU-C 220.18. Further, before the audit report is issued, +“the engagement partner should, through a review of the audit documentation and discussion with +the engagement team, be satisfied that sufficient appropriate audit evidence has been obtained to +support the conclusions reached and for the auditor’s report to be issued.” AU-C 220.19. + +54. As a result of Tafaro’s conduct described above, he failed to adequately supervise +the work of the audit engagement for the Audits. + +11 +Failure to Adhere to Quality Control Standards (AU-C 220 and QC 10) +55. AU-C 220 states that “[t]he objective of the auditor is to implement quality control +procedures at the engagement level that provide the auditor with reasonable assurance that (a) the +audit complies with professional standards and applicable legal and regulatory requirements and (b) +the auditor’s report issued is appropriate in the circumstances.” AU-C 220.08. +56. AICPA Quality Control Standards Section 10, A Firm’s System of Quality Control +(“QC 10”), states, “[t]he firm should establish policies and procedures designed to promote an +internal culture based on the recognition that quality is essential in performing engagements” and +that “[s]uch policies and procedures should require the firm’s leadership (managing partner or board +of managing partners, CEO, or equivalent) to assume ultimate responsibility for the firm’s system of +quality control.” QC 10.19. It further states that “[t]he firm should establish policies and +procedures designed to provide it with reasonable assurance that engagements are performed in +accordance with professional standards and applicable legal and regulatory requirements and that +the firm issues reports that are appropriate in the circumstances.” It further states that “[s]uch +policies and procedures should include the following: (a) Matters relevant to promoting consistency +in the quality of engagement performance, (b) Supervision responsibilities, and (c) Review +responsibilities.” QC 10.35. +57. As a result of Spicer Jeffries’ conduct described above, Spicer Jeffries’ policies and +procedures with respect to engagement performance, including (i) responding to significant risks +identified in the audit, (ii) obtaining sufficient appropriate audit evidence, (iii) preparing sufficient +audit documentation, (iv) exercising due care and professional skepticism, and (v) engagement +partner supervision and review responsibilities, failed to comply with quality control standards. +Findings + +58. Based on the foregoing, the Commission finds that Spicer Jeffries and Tafaro +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. + +12 +Undertakings + + Spicer Jeffries has undertaken to complete the following actions: +59. Within ten (10) business days after the entry of this Order, Spicer Jeffries shall issue +a firm-wide announcement, not unacceptable to the staff of the Commission, describing this case +and providing a copy of this Order to all audit partners and professional staff. +60. 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 Spicer Jeffries’ audit, review, and quality control policies and procedures +(“Spicer Jeffries’ Policies”) as to, among other aspects, their sufficiency, adequacy, design, +implementation, and effectiveness for all audits regarding the following: +a. exercising due care and professional skepticism in the performance of the +audit; +b. performing audit procedures on accounting estimates, including fair value +accounting estimates; +c. obtaining sufficient appropriate audit evidence; +d. preparing sufficient audit documentation; +e. supervising engagement personnel; and +f. reviewing audit documentation. +61. The Independent Consultant shall assess the foregoing areas to determine whether +Spicer Jeffries’ Policies are adequate and sufficient to provide reasonable assurance of compliance +with all relevant Commission regulations and relevant audit standards and rules. +62. Spicer Jeffries shall cooperate fully with the Independent Consultant and shall +provide the Independent Consultant with full access to its own files, books, records, and personnel +as reasonably requested for the review. +63. Require that the Independent Consultant issue a report, within ninety (90) days of +being retained, summarizing the review and recommending changes to Spicer Jeffries’ Policies, if +any, to provide reasonable assurance of compliance with all relevant Commission regulations and +relevant audit standards and rules. +64. Adopt all recommendations in the report of the Independent Consultant; provided, +however, that within thirty (30) days after the Independent Consultant serves that report, Spicer +Jeffries 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 Spicer Jeffries considers unnecessary, unduly + +13 +burdensome, impractical or costly, Spicer Jeffries 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 Spicer Jeffries and the Independent +Consultant do not agree, such parties shall attempt in good faith to reach an agreement within thirty +(30) days after Spicer Jeffries serves the written advice. In the event Spicer Jeffries and the +Independent Consultant are unable to agree on an alternative proposal, Spicer Jeffries will abide by +the determinations of the Independent Consultant. +65. 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 Spicer Jeffries, 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 Spicer Jeffries, 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. +66. For the period of engagement and for a period of two years from completion of the +engagement, Spicer Jeffries shall not (i) retain the Independent Consultant for any other professional +services outside of the services described in this Order; (ii) enter into any other professional +relationship with the Independent Consultant, including any employment, consultant, attorney- +client, auditing or other professional relationship; or (iii) enter, without prior written consent of the +Commission staff, into any such professional relationship with any of the Independent Consultant’s +present or former affiliates, directors, officers, employees, or agents acting in their capacity as such. +67. 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 (i) pursuant to court order, (ii) as +agreed to by the parties in writing, (iii) 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 (iv) is otherwise required by law. +68. Within two years of entry of this Order, Spicer Jeffries shall ensure that each audit +professional who performs audits, and has been employed by Spicer Jeffries for at least one year, +has completed a minimum of 24 hours of audit-related training. The audit-related training shall +cover the topics specified above in paragraph 60 with at least 4 hours covering the topic of +performing audit procedures on accounting estimates, including fair value accounting estimates. +The audit-related training requirement may be fulfilled by completing courses conducted in +accordance with the applicable state boards of accountancy. + +14 +69. Spicer Jeffries’ 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 Kimberly Frederick, Assistant Regional Director, Division of +Enforcement, U.S. Securities and Exchange Commission, 1961 Stout Street, Suite 1700, Denver, +Colorado, 80294, with a copy to the Office of Chief Counsel of the Enforcement Division, U.S. +Securities and Exchange Commission, 100 F Street NE, Washington DC, 20549, no later than sixty +(60) days from the date of the completion of the undertakings. +70. Spicer Jefferies will provide Commission staff with a copy of the Independent +Consultant’s engagement letter and will provide staff with the Independent Consultant’s work plan +including staffing and qualifications of the personnel assigned to the engagement by the +Independent Consultant. If requested by Commission staff, Spicer Jefferies will make the +Independent Consultant available to make presentations, give updates, and explain its work, +progress, and conclusions. +71. 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, +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. +72. In determining whether to accept the Offer, the Commission has considered these +undertakings. +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 Spicer Jeffries is hereby censured. +B. Sean P. Tafaro is denied the privilege of appearing or practicing before the +Commission as an accountant. +C. After one year from the date of the Order, Tafaro 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 + +15 +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Tafaro shall +submit a written statement attesting to an undertaking to have work by Tafaro reviewed by the +independent audit committee of any public company for which Tafaro works or in some other +manner acceptable to the Commission, as long as Tafaro 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, Tafaro shall submit a +statement prepared by the audit committee(s) with which Tafaro will be associated, including the +following information: +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Tafaro will be associated; + +2. A description of Tafaro’s role on the specific audit committee(s) with which +Tafaro 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 Tafaro’s service on the specific audit +committee; and + +5. A statement noting whether Tafaro 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, Tafaro must be +associated with a public accounting firm registered with the PCAOB, and Tafaro shall submit the +following additional information: +1. A statement from the public accounting firm (the “Firm”) with which Tafaro 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 Tafaro 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 Tafaro will not receive appropriate supervision; and + + +16 +3. A statement from Tafaro indicating that the PCAOB has taken no disciplinary +actions against Tafaro 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, Tafaro shall provide documentation +showing that Tafaro is currently licensed as a CPA and that he has resolved all other disciplinary +issues with any applicable state boards of accountancy. If Tafaro is not currently licensed as a CPA, +he shall provide documentation showing that his licensure is dependent upon reinstatement by the +Commission. +H. In support of any application for reinstatement, Tafaro shall also submit a signed +affidavit truthfully stating, under penalty of perjury: +1. That Tafaro 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 Tafaro 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 Tafaro, 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 Tafaro, 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 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) 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; + + +17 +(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 Tafaro’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 Tafaro 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. Tafaro shall also provide a detailed description of: +1. Tafaro’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 +Tafaro reported for such work; and + +2. Tafaro’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 Tafaro provides the documentation and attestations required in this Order and the +Commission (1) discovers no contrary information therein, and (2) determines that Tafaro truthfully +and accurately attested to each of the items required in Tafaro’s affidavit, and the Commission +discovers no information, including under Paragraph J, indicating that Tafaro has violated a federal +securities law, rule or regulation or rule of professional conduct applicable to Tafaro since entry of +the Order (other than by conduct underlying Tafaro’s original Rule 102(e) suspension), then, unless + +18 +the Commission determines that reinstatement would not be in the public interest, the Commission +shall reinstate the respondent for cause shown. +L. If Tafaro 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 Tafaro to provide an explanation as to the facts +and circumstances pertaining to the matter setting forth why Tafaro believes cause for reinstatement +nonetheless exists and reinstatement would not be contrary to the public interest. The Commission +may then, in its discretion, reinstate Tafaro for cause shown. +M. If the Commission declines to reinstate Tafaro pursuant to Paragraphs K and L, it +may, at Tafaro’s request, hold a hearing to determine whether cause has been shown to permit +Tafaro 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/2023/AAER-4395.txt b/raw/aaer/2023/AAER-4395.txt new file mode 100644 index 0000000000000000000000000000000000000000..02133a61dddb86449dee81e7a68c4ff178b66607 --- /dev/null +++ b/raw/aaer/2023/AAER-4395.txt @@ -0,0 +1,88 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97246 / April 4, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4395 / April 4, 2023 + +Admin. Proc. File No. 3-21241 + + +In the Matter of + +JASON JIANXUN TANG, CPA + + + +POSTPONEMENT ORDER + +On November 17, 2022, we issued an order instituting public administrative and cease- +and-desist proceedings (“OIP”), against Jason Jianxun Tang, CPA, pursuant to Sections 4C and +21C of the Securities Exchange Act of 1934 and Commission Rule of Practice 102(e)(1)(ii), +which also made findings, imposed remedial sanctions and a cease-and-desist order, and +provided a notice of hearing.1 As relevant here, the OIP stated that Tang had agreed to a cease- +and-desist order and to be barred from appearing or practicing before the Commission as an +accountant, with the right to reapply after three years.2 Tang also agreed to additional +proceedings to determine what, if any, civil penalties are appropriate under Exchange Act +Section 21C, and the OIP set a public hearing before an Administrative Law Judge to take +evidence on that question.3 + +1 Jason Jianxun Tang, CPA, Exchange Act Release No. 96347, 2022 WL 17080793 (Nov. +17, 2022). +2 Id. at *1, *12. +3 Id. at *12, *15. +2 + +The parties now file a joint motion to “postpone or stay” the proceeding.4 According to +their joint motion, Tang is currently cooperating with a related ongoing investigation by the +Division of Enforcement, and the full extent of his cooperation likely will impact the parties’ +positions regarding what, if any, civil penalties against Tang are appropriate. +We consider such requests under Rule of Practice 161(b), which 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.5 In +addition, our rules make it clear that postponements are “strongly disfavor[ed]”, except “where +the requesting party makes a strong showing” that denial “would substantially prejudice their +case.”6 +Here, this proceeding was instituted less than five months ago; we have not previously +granted any postponements, adjournments, or extensions in this proceeding; and, as yet, no +evidentiary hearings have been held. We further consider it significant that the public interest +should not be harmed by postponing the proceeding because the OIP already imposed a cease- +and-desist order and barred Tang from appearing or practicing before the Commission. For +those reasons, and in consideration of the Rule 161(b) factors outlined above, 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 given the circumstances identified in the +parties’ joint request.7 +Accordingly, it is ORDERED that the parties’ request is GRANTED and that this +proceeding is postponed until Tang’s cooperation with the Division’s investigation has +concluded. It is further ORDERED that the parties shall file a status report with the ALJ by July +5, 2023 concerning whether Tang’s cooperation with the Division’s investigation is still ongoing, +and every 90 days thereafter until Tang’s cooperation with the Division’s investigation has +concluded. In addition, it is ORDERED that, within two weeks of the conclusion of Tang’s +cooperation in the investigation and any related enforcement litigation or proceedings, the parties + +4 The ALJ has granted three brief postponements to allow for the parties’ submission, and +our consideration, of the pending stay motion before the Commission. See Jason Jianxun Tang, +CPA, Administrative Proceedings Rulings Release No. 6899 (Mar. 15, 2023), +https://www.sec.gov/alj/aljorders/2023/ap-6899.pdf (granting two-month postponement); Jason +Jianxun Tang, CPA, Administrative Proceedings Rulings Release No. 6895 (Jan. 13, 2023), +https://www.sec.gov/alj/aljorders/2023/ap-6895.pdf (same); Pre-Hearing Conference +Transcript 7, Dec. 12, 2022 (granting one-month postponement). +5 17 C.F.R. § 201.161(b). +6 Rule of Practice 161(b)(1), 17 C.F.R. § 201.161(b)(1). +7 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.”). +3 + +shall file a motion or status update with the ALJ about whether further postponement will be +necessary. +By the Commission. + + + + Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4396.txt b/raw/aaer/2023/AAER-4396.txt new file mode 100644 index 0000000000000000000000000000000000000000..d6ca5a9ea728a9a1ceb05e89dad563a3cdbfdcfc --- /dev/null +++ b/raw/aaer/2023/AAER-4396.txt @@ -0,0 +1,562 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97259 / April 6, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4396 / April 6, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21361 + + + +In the Matter of + +James Fitts, 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 James Fitts, +CPA (“Respondent” or “Fitts”) 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 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. + + +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 Remedical 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. In July 2021, the Commission filed a settled cease-and-desist proceeding against Tandy +Leather Factory, Inc. (“Tandy”) and its former CEO finding accounting, reporting, and control +failures related to inventory that resulted in a multi-year restatement by Tandy. These failures +stemmed in part from Tandy’s use of a manual inventory valuation system (“manual system”) that +failed to properly track inventory on a first-in, first out (“FIFO”) basis, which Tandy disclosed as a +significant accounting policy. The manual system was a key source of information for the +inventory figure that Tandy inaccurately reported in its financial statements. + +2. Fitts was the audit engagement partner on Tandy’s fiscal year 2018 audit (“2018 audit”), in +which a restatement was necessary. During the 2018 audit, Fitts never obtained a sufficient +understanding of the design or implementation of Tandy’s manual system. Fitts failed to follow +several Public Company Accounting Oversight Board (“PCAOB”) auditing standards when he +failed to: (1) obtain sufficient understanding of Tandy’s internal control over financial reporting +(“ICFR”) regarding inventory valuation, including to sufficiently evaluate the design effectiveness +of those controls; (2) evaluate, respond to, and/or resolve inconsistent audit information; (3) +sufficiently evaluate company-produced audit evidence; and (4) exercise due professional care, as +required by the PCAOB. + + + +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 + + +3. As a result, Fitts engaged in improper professional conduct within the meaning of Section +4(C)(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice +(“Rule 102(e)”). + +4. Fitts prepared and approved the audit report for fiscal year 2018 that misstated that the +audit was conducted in accordance with PCAOB standards. Tandy filed the audit report with its +annual report on Form 10-K for fiscal year 2018. Thus, Fitts was a cause of Tandy’s violations of +Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. + +B. RESPONDENT + +5. Fitts, age 49, of Grapevine, TX, is a Certified Public Accountant (“CPA”) licensed to +practice in Texas. Fitts is a partner in a national audit firm (“Outside Audit Firm”). Fitts served +as the engagement partner responsible for the quarterly reviews and audit of Tandy’s financial +statements for fiscal year 2018. + +C. OTHER RELEVANT ENTITIES + +6. Outside Audit Firm is a certified public accounting firm registered with the PCAOB. +Outside Audit Firm was the auditor for Tandy’s 2018 financial statements. + +7. Tandy is a Fort Worth-based retailer of leather goods and leathercraft related items. +Tandy’s common stock was traded on Nasdaq under the ticker “TLF” until August 13, 2020. +Tandy’s shares are currently trading on the OTC Link under the symbol “TLFA.” + +D. FACTS + +8. On July 21, 2021, the Commission filed a settled cease-and-desist proceeding (Adm. Proc. +File No. 3-20403) against Tandy and its former CEO finding accounting, reporting, and control +failures related to inventory that resulted in a multi-year restatement. + +9. Because Tandy’s inventory tracking systems were incapable of maintaining historical costs, +Tandy did not maintain inventory valuations consistent with FIFO. Tandy used at least three +information systems as a basis for its external reporting, including to track and value its inventory. +A key issue with one system, known to Tandy, was that it could only track a single price per stock +keeping unit (“SKU”) at a time and was unable to retain any details about the historical price for +each SKU. As a workaround, and in an attempt to value inventory on a FIFO cost basis, Tandy’s +management implemented the manual system. However, this manual system failed to value +inventory at FIFO. The data and information maintained within the manual system was a key +source of information for the inventory figure that Tandy inaccurately reported in its financial +statements, including for 2018. As a result, these inaccurate inventory valuations impacted +Tandy’s calculations for inventory, net income, and gross profit. + + +4 + + +10. Fitts, the engagement partner for Tandy’s 2018 audit, failed to sufficiently understand this +manual system and failed to comply with multiple PCAOB auditing standards, as discussed further +below. Fitts failed to (1) obtain sufficient understanding of Tandy’s ICFR regarding inventory +valuation, including to sufficiently evaluate the design effectiveness of those controls; (2) evaluate, +respond to, and/or resolve inconsistent audit information; (3) sufficiently evaluate company- +produced audit evidence; and (4) exercise due professional care, as required by the PCAOB. Fitts +engaged in repeated instances of unreasonable conduct indicating a lack of competence to practice +before the Commission. + +Failure to Obtain Sufficient Understanding of Tandy’s ICFR Regarding Inventory +Valuation, Including to Sufficiently Evaluate the Design Effectiveness of Those Controls + +11. PCAOB Auditing Standard No. (“AS”) 2110, Identifying Risks of Material Misstatement, +states in section 2110.18 that an auditor should obtain a sufficient understanding of internal control +to (a) identify the types of potential misstatements, (b) assess the factors that affect the risks of +material misstatement, and (c) design further audit procedures. Further, under AS 2110.20, +obtaining an understanding of internal control includes evaluating the design of controls that are +relevant to the audit and determining whether the controls have been implemented. + +12. The 2018 audit team’s workpapers did not demonstrate sufficient understanding of Tandy’s +ICFR regarding inventory valuation as required by AS 2110. The AS 2110 standard notes that +procedures the auditor performs to obtain evidence about design effectiveness include inquiry of +appropriate personnel, observation of the company’s operations, and inspection of relevant +documentation. In addition, it states that a walkthrough that includes these procedures is ordinarily +sufficient to evaluate design effectiveness. The Fitts-led audit team did not conduct sufficient +procedures to understand Tandy’s inventory process, including the manual system. + +13. There was no audit documentation indicating that Fitts understood the procedures, data, or +information input into and transferred from Tandy’s manual system, as required. Neither Fitts nor +others on the 2018 audit team obtained sufficient understanding of the design of the manual system +used to value Tandy’s inventory during the audit. + +14. Fitts failed to perform sufficient audit procedures to obtain evidence sufficient to +understand Tandy’s manual system for inventory. Regarding the manual system, there is no +mention in the audit workpapers about: (1) whether the 2018 audit team spoke to any of the +relevant individuals at Tandy about the manual system, (2) the date of any such inquiry and +responses provided, (3) the identifying characteristics of any documents inspected, and (4) the +audit team’s observations. Other than the mention of a walkthrough in the inventory control risk +memo, there is no evidence that the team actually performed sufficient audit procedures, +walkthrough or otherwise, to understand Tandy’s manual system. + + + +5 + +15. In the risk assessment phase for inventory, the audit team identified deficiencies in Tandy’s +controls with this internal notation: + +[W]hile it appears these controls are being performed, based on discussions with +client, no formal documentation exists that these controls have been performed. No +initials or sign-offs are evident in review in all situations, therefore these controls +are not able to be verified and are considered an MLC.4 + +Tandy’s lack of review and evidence of the performance of the control should have been a red flag +to Fitts, yet he failed to follow-up or evaluate whether this deficiency extended to how Tandy +mitigated its risk of improper inventory valuation. + +16. As a result, Fitts failed to obtain a sufficient understanding of Tandy’s ICFR regarding +inventory valuation, including his failure to evaluate the design effectiveness of those controls, in +violation of AS 2110. + +Failure to Evaluate, Respond to, and/or Resolve Inconsistent Audit Information + +17. There are at least two instances in which Fitts failed to evaluate, respond to, or resolve +inconsistent audit information within the 2018 audit file. First, during the risk assessment phase of +the audit, the Fitts-led 2018 audit team documented that Tandy had inventory differences that +represented either an inventory gain or inventory loss, and cited to an internal Tandy email chain +noting the CFO’s “approval to book inventory gain/loss.” The possible existence of inventory +gains at Tandy could have been a red flag for potential non-compliance with FIFO. There is not +sufficient further documentation in the audit file that Fitts investigated this to determine the cause +of any gains and the potential effect on other aspects of the audit. + +18. Second, Fitts testified that he was vaguely aware that Tandy used a manual system +involving supplemental records to help determine inventory valuation. This information was +contradictory to the inventory process the Fitts-led audit team evaluated during the audit. Fitts, +however, failed to document the existence of this manual system in the audit file, or revise the +audit procedures in light of his knowledge of a manual system. The existence of a manual system +to determine inventory valuation was a red flag that Fitts should have investigated further to +determine the potential effect on other aspects of the audit, but he failed to follow-up. + +19. In both instances, Fitts failed to perform sufficient additional audit procedures, revise the +risk assessment to consider inventory valuation as an elevated risk, or modify the overall audit +strategy over inventory valuation. Thus, Fitts failed to (1) perform auditing procedures necessary +to resolve differences in conclusions that were inconsistent and contradictory, and (2) modify the +overall audit strategy, revise its risk assessment, and/or modify the planned audit procedures as +required by AS 1105.29, AS 2101.15, AS 2110.74, and AS 2301.46. + +4 The engagement quality reviewer defined “MLC” as a control deficiency. + + +6 + + +Failure to Sufficiently Evaluate Company-Produced Audit Evidence + +20. AS 1105 states that when using information produced by the company as audit evidence, +the auditor should evaluate whether the information is sufficient and appropriate for purposes of +the audit by performing procedures to (1) test the accuracy and completeness of the information, or +test the controls over the accuracy and completeness of that information; and (2) evaluate whether +the information is sufficiently precise and detailed for purposes of the audit. + +21. As detailed above, Fitts failed to obtain sufficient understanding of Tandy’s ICFR +regarding the manual system, yet used data and information derived from this manual system +during the substantive testing phase for inventory (e.g., price testing). Fitts relied on this +information even though it was not sufficiently evaluated for accuracy, completeness, and +precision for use as audit evidence, in accordance with AS 1105. + +Failure to Exercise Due Professional Care + +22. AS 1015 states that auditors are required to exercise due professional care throughout the +audit. In the 2018 audit, Fitts did not act with due professional care because he did not sufficiently +understand and document Tandy’s manual system. As a result, Fitts violated AS 1015. + +E. VIOLATIONS + +23. 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. + +24. Based on the conduct described above, the Commission finds that Fitts engaged in +improper professional conduct as defined under Rule 102(e)(1)(iv)(B)(2) pursuant to Section +4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +25. Based on the conduct described above, Fitts was a cause of Tandy’s violations of Section +13(a) of the Exchange Act and Rule 13a-l thereunder. Section 13(a) of the Exchange Act and Rule +13a-1 thereunder require issuers of securities registered under Section 12 of the Exchange Act to +file with the Commission accurate annual reports that have been audited by an independent public + + +7 + +accountant registered with the PCAOB. Tandy filed an annual report on Form 10-K for fiscal year +2018 and included the audit report that was ultimately prepared and approved by Fitts. This audit +report misstated that the audit was conducted in accordance with PCAOB standards. + +F. FINDINGS + +26. Based on the foregoing, the Commission finds that Fitts 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. + +27. Based on the foregoing, the Commission finds that Fitts was a cause of Tandy’s +violations of Sections 13(a) of the Exchange Act and Rule 13a-1 promulgated thereunder. + + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Fitts’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Fitts 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 promulgated thereunder. + + B. Fitts is denied the privilege of appearing or practicing before the Commission as an +accountant. + +C. After one year from the date of the Order, Fitts may request that the Commission +consider Fitts’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 + + +8 + +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. + +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 + + +9 + +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 In the Matter +of James Fitts, CPA, 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 + + +10 + +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. + +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 + + +11 + +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, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $25,000 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 Fitts +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, Division of Enforcement, +Securities and Exchange Commission, 801 Cherry Street, Suite 1900, Fort Worth, Texas 76102. + + + +12 + + O. 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/2023/AAER-4397.txt b/raw/aaer/2023/AAER-4397.txt new file mode 100644 index 0000000000000000000000000000000000000000..51bd5f35557863914bb0487a495b279dab4975c3 --- /dev/null +++ b/raw/aaer/2023/AAER-4397.txt @@ -0,0 +1,279 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97269 / April 7, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4397 / April 7, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21362 + +In the Matter of + +BOBBY PEAVLER, +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 Bobby +Peavler (“Respondent” or “Peavler”) 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, 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.3. 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. Peavler, age 43, is a resident of Pendleton, Indiana. He served as Chief Financial +Officer of Celadon Group, Inc. (“CGI”) from June 2016 until he was replaced as CFO in October +2017. Peavler resigned from Celadon in March 2018. + +2. CGI was, at all relevant times, a Delaware corporation with its principal place of +business in Indianapolis, Indiana. CGI was engaged in the business of providing truckload freight. +At all relevant times, CGI’s common stock was registered with the Commission pursuant to Section +12(g) of the Securities Exchange Act of 1934 (“Exchange Act”), and traded on the NYSE before +being delisted on April 30, 2018, after which the stock traded on the OTC Pink Marketplace. + +3. On March 27, 2023, a final judgment was entered against Peavler, permanently +enjoining him from aiding and abetting future violations of Sections 10(b), 13(a), and 13(b)(2)(A) +of the Exchange Act and Rule 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and from +future violations of Section 13b2-2 and Rule 13a-14 of the Exchange Act in the civil action entitled +Securities and Exchange Commission v. Bobby Peavler and William Eric Meek, Civil Action +Number 1:19-cv-4804-TWP-TAB in the United States District Court for the Southern District of +Indiana, Indianapolis Division. Peavler was also ordered to pay a $50,000 civil money penalty and +barred from serving as an officer or director of a public company for a period of three years. + + 4. The Commission’s complaint alleged, among other things, that Peavler, along +with CGI’s then-president and chief operating officer engaged in a fraudulent scheme which +resulted in CGI filing materially false and misleading financial statements in the company’s +annual report on Form 10-K filed for the fiscal year ended June 30, 2016, filed on September 13, +2016, in the company’s quarterly reports on Form 10-Q filed on November 9, 2016 and +February 10, 2017, and financial information in their earnings releases included in Forms 8-K +filed on September 2, 2016 and February 2, 2017. The Complaint alleged that Peavler engaged +in improper accounting practices that materially overstated the value of CGI’s assets, and, by +extension, CGI’s income before taxes, net income and earnings per share in a departure from +generally accepted accounting principles. These practices included, among other things, failing + 3 +to recognize impairment charges, and holding assets on CGI’s books at materially inflated values +after failing to record trucks classified as held for sale assets at market value. In addition, the +complaint alleged that Peavler did not disclose information in response to questions by CGI’s +independent auditor about the existence of an undisclosed third-party agreement. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Peavler’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Bobby Peavler is suspended from appearing or practicing before the Commission as +an accountant. + +B. 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. + +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 +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, including any orders in SEC v. +Peavler and Meek, 1:19-cv-04804-TWP-TAB (S.D. Ind.), 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; + 5 + +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. + +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/2023/AAER-4398.txt b/raw/aaer/2023/AAER-4398.txt new file mode 100644 index 0000000000000000000000000000000000000000..d8396f5110c464fa69ee54535dd8fb8eaf2a46cc --- /dev/null +++ b/raw/aaer/2023/AAER-4398.txt @@ -0,0 +1,283 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97270 / April 7, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4398 / April 7, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21363 + +In the Matter of + +WILLIAM ERIC MEEK, +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 William +Eric Meek (“Respondent” or “Meek”) 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, 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.3. 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. Meek, age 42, is a resident of New Palestine, Indiana. He served as President and +Chief Operating Officer of Celadon Group, Inc. (“CGI”) from 2015 until he resigned in April 2017. + +2. CGI was, at all relevant times, a Delaware corporation with its principal place of +business in Indianapolis, Indiana. CGI was engaged in the business of providing truckload freight. +At all relevant times, CGI’s common stock was registered with the Commission pursuant to Section +12(g) of the Securities Exchange Act of 1934 (“Exchange Act”), and traded on the NYSE before +being delisted on April 30, 2018, after which the stock traded on the OTC Pink Marketplace. + +3. On March 27, 2023, a final judgment was entered against Meek, permanently +enjoining him from aiding and abetting future violations of Sections 10(b), 13(a), and 13(b)(2)(A) +of the Exchange Act and Rule 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and from +future violations of Section 13b2-2 of the Exchange Act in the civil action entitled Securities and +Exchange Commission v. Bobby Peavler and William Eric Meek, Civil Action Number 1:19-cv- +4804-TWP-TAB in the United States District Court for the Southern District of Indiana, +Indianapolis Division. Meek was also ordered to pay a $50,000 civil money penalty and barred +from serving as an officer or director of a public company for a period of three years. + + 4. The Commission’s complaint alleged, among other things, that Meek, along with +CGI’s then-chief financial officer engaged in a fraudulent scheme which resulted in CGI filing +materially false and misleading financial statements in the company’s annual report on Form 10- +K filed for the fiscal year ended June 30, 2016, filed on September 13, 2016, in the company’s +quarterly reports on Form 10-Q filed on November 9, 2016 and February 10, 2017, and financial +information in their earnings releases included in Forms 8-K filed on September 2, 2016 and +February 2, 2017. The Complaint alleged that Meek engaged in improper accounting practices +that materially overstated the value of CGI’s assets, and, by extension, CGI’s income before +taxes, net income and earnings per share in a departure from generally accepted accounting +principles. These practices included, among other things, failing to recognize impairment + + 3 +charges, and holding assets on CGI’s books at materially inflated values after failing to record +trucks classified as held for sale assets at market value. In addition, the complaint alleged that +Meek did not disclose information in response to questions by CGI’s independent auditor about +the existence of an undisclosed third-party agreement. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Meek’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. William Eric Meek is suspended from appearing or practicing before the +Commission as an accountant. + +B. 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. + +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 + +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, including any orders in SEC v. +Peavler and Meek, 1:19-cv-04804-TWP-TAB (S.D. Ind.), 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 + + 5 +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. + + + 6 +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. + + 7 + +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/2023/AAER-4399.txt b/raw/aaer/2023/AAER-4399.txt new file mode 100644 index 0000000000000000000000000000000000000000..445d4c12575a407e996b6c37ba5297d207fbad64 --- /dev/null +++ b/raw/aaer/2023/AAER-4399.txt @@ -0,0 +1,1375 @@ + + + + + + + + + + + + + + + + SEC.gov | Bobby Peavler and William Eric Meek + + + + + + + + !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\/904526","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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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Bobby Peavler and William Eric Meek + + + + + + + + + + + + Bobby Peavler and William Eric Meek + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + + Litigation Release No. 25690 / April 10, 2023 + + Accounting and Auditing Enforcement Release No. 4399 / April 10, 2023 + + + + Securities and Exchange Commission v. Bobby Peavler and William Eric Meek , No. 1:19-cv-04804 (S.D. Ind. filed Dec. 5, 2019) + + + + SEC Obtains Judgment After Executives Settle Case Alleging an Inflated Truck Pricing Scheme + + + + + The Securities and Exchange Commission today announced the resolution of its accounting fraud action against former Celadon Group Inc. executives William Eric Meek and Bobby Peavler. Meek and Peavler agreed, without admitting or denying the allegations, to the entry of a final judgment that requires them to each pay a $50,000 civil penalty and bars them from acting as an officer or director of a public company for a period of three years. + + The SEC's complaint alleged that Meek, the former president and chief operating officer of Celadon Group, Inc., and Peavler, the former chief financial officer of Celadon Group Inc., participated in a scheme to buy and sell trucks at inflated prices, in some cases double or triple the trucks' fair market value. The complaint alleged these transactions were intended to conceal Celadon's failure to write down the trucks' net book values and take impairment charges. The complaint further alleged that as a result, Celadon overstated its pre-tax income, net income, and earnings per share in its annual report for the period ending June 30, 2016, and in its subsequent filings through the period ending December 31, 2016. Additionally, the complaint alleged Meek and Peavler lied to auditors about the true nature of these transactions. + + Meek and Peavler, without admitting or denying the SEC's allegations, consented to the entry of a final judgment in which they agreed to be permanently enjoined from aiding and abetting future violations of Sections 10(b), 13(a), 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder and from committing future violations of Rule 13b2-2. Peavler also agreed to be enjoined from future violations of Exchange Act Rule 13a-14. The final judgment requires Meek and Peavler to pay a civil penalty of $50,000 each and bars them from acting as an officer or director of a public company for a period of three years. + + Meek and Peavler also agreed to be suspended from appearing and practicing before the SEC as an accountant. The SEC's orders, issued on April 7, 2023, permit Meek and Peavler to apply for reinstatement after three years. + + The SEC's investigation was conducted by Jaclyn Janssen and Trevor Schumacher and supervised by Amy S. Cotter of the Chicago Regional Office. The litigation was conducted by Jonathan Polish and Ms. Janssen. + + + + + + + + + + + + + + + + + + + + + + + + + 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/2023/AAER-4401.txt b/raw/aaer/2023/AAER-4401.txt new file mode 100644 index 0000000000000000000000000000000000000000..1d5740183bb58483cc120253c6f1c59cc0a162f7 --- /dev/null +++ b/raw/aaer/2023/AAER-4401.txt @@ -0,0 +1,78 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97317 / April 17, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4401 / April 17, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21372 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +MARTHA PATRICIA : TO RULE 102(e)(2) OF THE +BUSTOS, CPA : COMMISSION’S RULES OF PRACTICE +: +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate to issue +an order of forthwith suspension of Martha Patricia Bustos (“Bustos”) 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. Bustos was a certified public accountant in California in 2016 and 2017, but her +license is now listed as “cancelled” by the California Board of Accountancy. + +2. On June 9, 2022, a judgment of conviction was entered against Bustos in United +States v. Bustos, Crim. No. 19-482, in the United States District Court for the Southern District +of New York (the “Court”), finding her guilty of one count of conspiracy to commit securities +fraud, one count of securities fraud, and one count of conspiracy to commit wire fraud. + + +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.” + + + + +2 + +3. As a result of this conviction, Bustos was sentenced to time served, two years of +supervised release including 250 hours of community service, and ordered to pay a fine in the +amount of $20,000. The Court further required Bustos to pay $12,000 in criminal forfeiture. + +III. + +In view of the foregoing, the Commission finds that Bustos 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 Martha Patricia Bustos 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-4402.txt b/raw/aaer/2023/AAER-4402.txt new file mode 100644 index 0000000000000000000000000000000000000000..4fb50045cb36bc7aec96b0b4db20df04fe341851 --- /dev/null +++ b/raw/aaer/2023/AAER-4402.txt @@ -0,0 +1,1393 @@ + + + + + + + + + + + + + + + + SEC.gov | SAExploration Holdings, 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\/906676","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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SAExploration Holdings, Inc., et al. , No. 1:20-CV-08423 (S.D.N.Y. filed Oct. 8, 2020) + + + + SEC Obtains Final Judgment from Former Executive for His Role in $100 Million Accounting Fraud + + + + On April 21, 2023, the U.S. District Court for the Southern District of New York entered final judgment against Jeffrey Hastings for his role in a multi-year accounting fraud engaged in while he was CEO of Houston-based seismic data company SAExploration Holdings, Inc. (SAE). The SEC's amended complaint alleges that Hastings and three other former SAE executives falsely inflated the revenue of SAE by approximately $100 million and concealed their theft of millions of dollars from the company. + + According to the SEC's amended complaint, Hastings, along with his co-defendants, caused SAE to enter into a series of seismic data acquisition contracts totaling approximately $140 million with a purportedly unrelated Alaska-based company that was in fact controlled by Hastings and co-defendant Brent Whiteley. The amended complaint alleges that SAE improperly recorded approximately $100 million in revenue in light of the Alaskan company's inability to pay and the SAE executives' control of the company. As also alleged, Hastings and his co-defendants misappropriated $12 million from SAE and routed approximately half of those funds back to SAE to create the false impression that the related Alaskan company was actually paying SAE for seismic data, and then kept the remainder of the misappropriated funds for themselves. + + Without denying the SEC's allegations, Hastings consented to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934, Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, 13b2-2, and 13a-14 thereunder, and Section 304(a) of the Sarbanes-Oxley Act of 2002 ("SOX"). The final judgment also orders Hastings to pay $1,116,987.27 in disgorgement plus $194,835.52 in prejudgment interest, for a total of $1,311,822.79, which shall be deemed satisfied by the Order of Restitution entered against Hastings in the criminal case of United States v. Hastings, No. 1:20-cr-534-GHW-1 (S.D.N.Y.). Hastings was also ordered to reimburse SAE $1,206,626 pursuant to Section 304(a) of the SOX. + + On December 17, 2020, the U.S. District Court for the Southern District of New York entered a final consent judgment against SAE. + + The SEC's ongoing litigation against other defendants is being conducted by Nick Margida, Peter Lallas and Yael Berger, and supervised by James Connor. + + + + + + + + + + Resources + + + + + Final Judgment - Jeffrey A. 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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/2023/AAER-4404.pdf b/raw/aaer/2023/AAER-4404.pdf new file mode 100644 index 0000000000000000000000000000000000000000..631c484537458b557e7d37fd7076d77e30278119 Binary files /dev/null and b/raw/aaer/2023/AAER-4404.pdf differ diff --git a/raw/aaer/2023/AAER-4404.txt b/raw/aaer/2023/AAER-4404.txt new file mode 100644 index 0000000000000000000000000000000000000000..190620bd73ebc482ec355499eef0fac7cc84c38b --- /dev/null +++ b/raw/aaer/2023/AAER-4404.txt @@ -0,0 +1,41 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97413 / May 1, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4404 / May 1, 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 July 31, 2023.1 + + By the Commission. + + + + +Vanessa A. Countryman +Secretary + + +1 July 30, 2023, is a Sunday. \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4405.txt b/raw/aaer/2023/AAER-4405.txt new file mode 100644 index 0000000000000000000000000000000000000000..fe5855e9c287a627aa65134546ea54a4c51eed8f --- /dev/null +++ b/raw/aaer/2023/AAER-4405.txt @@ -0,0 +1,68 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97414 / May 1, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4405 / May 1, 2023 + +Admin. Proc. File No. 3-21314 + + +In the Matter of + +ALAN J. MARKOWITZ, CPA + + +ORDER + +On February 28, 2023, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Alan J. Markowitz, 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 In compliance with the statutory provision governing cease- +and-desist proceedings, the OIP specified that a “public hearing before the Commission for the +purpose of taking evidence . . . shall be convened not earlier than 30 days and not later than 60 +days” from service of the OIP.2 The statute also provides that “an earlier or later date” for the +hearing may be “set by the Commission with the consent of any respondent so served.”3 +The Division of Enforcement served Markowitz with the OIP on March 20, 2023.4 As a +consequence, in the absence of Markowitz’s consent to a later hearing date, a public hearing will + +1 Alan J. Markowitz, CPA, Exchange Act Release No. 96995, 2023 WL 2299560 (February +28, 2023). +2 Id. at *13. +3 15 U.S.C. § 78u-3(b). +4 On April 11, 2023, the Division filed a notice stating that it mailed a copy of the OIP to +Markowitz’s counsel at the counsel’s address in New York City. The notice appended tracking +information showing delivery of the certified mailing on March 20, 2023. This information is +sufficient for us to conclude that service was effected. See Rule of Practice 141(a)(2)(i), 17 +C.F.R. § 201.141(a)(2)(i) (providing that service on an individual can be made by delivering a +2 + +be set for a date on or before May 19, 2023. To facilitate the orderly and expeditious resolution +of this matter, it is ORDERED that the parties shall file a statement advising the Commission of +any agreement to a later hearing date (or a statement that no agreement could be reached) by +May 8, 2023. In the event the parties do not reach an agreement by that date, this order does not +preclude the parties from reaching such an agreement subsequently. The Commission will +specify further proceedings by subsequent order. +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.5 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + + +copy of the OIP to the individual’s “agent authorized by appointment or by law to receive such +notice” and “obtaining confirmation of receipt” of the mailing). +5 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-4406.txt b/raw/aaer/2023/AAER-4406.txt new file mode 100644 index 0000000000000000000000000000000000000000..4f0119cc4a7be55e983c46b543d0fa81090ba7bb --- /dev/null +++ b/raw/aaer/2023/AAER-4406.txt @@ -0,0 +1,417 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97479 / May 11, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4406 / May 11, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21411 + + +In the Matter of + + KONINKLIJKE PHILIPS N.V., + +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 Koninklijke Philips N.V. (“Philips” 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. These proceedings arise from violations of the books and records and internal +accounting controls provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”). [15 +U.S.C. § 78dd]. Philips, headquartered in the Netherlands, is a global manufacturer of health +technology products, including diagnostic imaging equipment and patient monitoring systems. +Between 2014 and 2019, Philips China employees, distributors, or sub-dealers engaged in +improper conduct to influence foreign officials in connection with tender specifications in certain +public tenders to increase the likelihood that Philips’ products were selected. In some cases, +Philips China’s employees, distributors, or sub-dealers also engaged in improper bidding practices +to create the appearance of legitimate public tenders by preparing additional bids with other +manufacturers’ products to meet the minimum bids requirement under Chinese public tender +rules. As a result, Philips was unjustly enriched by approximately $41 million. + +2. In connection with some of these transactions, Philips China provided special +pricing discounts to distributors, which created a corruption risk that the increased margins +could be used to fund improper payments to employees of government-owned hospitals. During +the relevant period, Philips China had insufficient internal accounting controls to prevent and +detect the conduct described above and to provide reasonable assurances that certain +transactions were recorded accurately in the books and records of Philips China, which were +consolidated into the books and records of Philips. These deficiencies in China also created an +environment that facilitated the conduct. + +Respondent + +3. Philips is a Dutch multinational corporation founded in Eindhoven, Netherlands +and headquartered in Amsterdam. The company employs approximately 79,000 people in more +than 100 countries. The company’s securities are listed on the Euronext Amsterdam stock +exchange. As a foreign private issuer during the relevant period, Philips’ common stock was also +registered with the Commission under Exchange Act Section 12(b) and publicly traded through a +secondary listing on the New York Stock Exchange (symbol: PHG). Philips files annual reports +on Form 20-F with the Commission. In 2013, Philips settled books and records and internal +accounting controls charges by the Commission in connection with similar misconduct in Poland +between 1999 and 2007. In the Matter of Koninklijke Philips Electronics N.V., Rel. No. 34- +69327 (April 5, 2013). + +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 + + +Other Relevant Individuals and Entities + +4. Philips China refers to Philips’ healthcare business in China. Two Philips China +subsidiaries, Philips Electronics Hong Kong Ltd. and Philips (China) Investment Co., Ltd., sold +diagnostic imaging equipment through distributors and sub-dealers contracting with +government-owned hospitals. Philips consolidates Philips China’s financial results into its +financial statements that are included in its filings with the Commission. + +Facts + +5. Philips entered the Chinese market in 1920 and established its first joint venture +in 1985. Operating through Philips China, Philips has several wholly owned subsidiaries and +representative offices in the region. In China, the majority of hospitals and other healthcare +providers are state-owned enterprises. These government-owned entities purchase the majority +of their diagnostic imaging equipment through public tenders. By 2016, the majority of Philips +China’s sales were made indirectly through authorized distributors or sub-dealers engaged by +the authorized distributors. By 2018, 91% of Philips’ diagnostic imaging revenue in China was +earned through this indirect sales channel. + +6. In this same timeframe, Philips China sought to grow its diagnostic imaging +business and win public tenders in an increasingly competitive market. In some transactions, at +the request of distributors, Philips China provided special pricing discounts on the health +technology equipment that it sold to its distributors. However, Philips China’s approval +processes and its recording of the special pricing discounts were not subject to sufficient internal +accounting controls to ensure appropriate management authorization of the discounts. + +Philips China Employees and Distributors +Improperly Influenced Public Hospital Tenders + +7. In numerous transactions occurring from 2014 through 2019, Philips China +employees, distributors, or sub-dealers engaged in improper bidding practices to increase the +likelihood that Philips China’s distributors or their sub-dealers were awarded public tenders to sell +medical equipment to government-owned hospitals. + +8. Each of the relevant transactions included, in whole or in part, elements of +the following types of misconduct in public tenders: + +(a) The hospital employee responsible for writing the technical specifications, +in consultation with a manufacturer’s employees, a distributor, or sub- +dealer, determined the hospital’s technical preferences and drafted technical + + +4 + +specifications that would provide a manufacturer with a competitive +advantage in the public tender prior to the opening of the bidding period; + +(b) The hospital employee drafted the specifications to increase the +likelihood that the selected manufacturer would qualify for the winning +bid; and + +(c) The hospital employee directed the winning bidder or its distributor or +sub-dealer to prepare the manufacturer’s bid and also two additional +accompanying bids to meet the three-bid requirement of public tenders +and give the appearance of legitimacy. + +9. The improper conduct occurred in several regions of China. The Philips China +employees who participated in the conduct described above included district sales managers, sales +employees, and employees in the technical group that supported sales. + +10. One example of the conduct is a 2017 public tender in which a Philips China +distributor won a procurement award for two Philips devices valued at $4.6 million. At the time +of the bid submission in March 2017, the hospital had already taken steps to increase the +likelihood that Philips China’s equipment would be selected for the award. The Philips China +district sales manager for Hainan Province had delivered approximately $14,500 USD +equivalent to the home of a director of the hospital’s radiology department in return for the +director’s assistance in the procurement process. The sales team discussed the specifications to +be included in the bid with the relevant hospital director, and its distributor prepared an +accompanying bid with another manufacturer’s products. There also was at least one additional +transaction involving improper conduct in which the Hainan district sales manager’s team was +involved. + +11. A second example involved Philips China improperly influencing a public tender +valued at $475,000. Prior to the award, the decision-making directors at the tendering hospital +discussed tailoring the technical specifications with Philips China employees so that only +Philips China and two other manufacturers would qualify to compete in the bidding process. In +October 2017, a Philips China distributor won the bid to sell two Philips devices to the hospital. +This tender was won as a result of inappropriately influencing the tender specifications. + +12. During the relevant period, Philips China’s use of special price discounts with +distributors created the risk that excessive distributor margins could be used to fund improper +payments to employees of government-owned hospitals. Philips China maintained inadequate +books, records, and accounts concerning special price discounts, as the discounts were +unsupported by adequate documentation to ensure their business justification and management’s +approval of them. The company’s books and records also contained certain inaccurate +documents relating to the special price discounts. The special price discounts granted by Philips +China were consolidated into Philips’ books and records. In addition, Philips did not devise and + + +5 + +maintain an adequate system of internal accounting controls with respect to the approval process +and recording of the special pricing discounts to provide reasonable assurances of appropriate +management authorization of the discounts. This deficiency, combined with pressure to win +additional sales, created an environment in which there was a risk that excessive distributor +margins could be used to fund improper payments to employees of government-owned +hospitals. + +13. In addition, during the relevant period, Philips China did not enforce certain of +its due diligence and training procedures for the engagement of distributors or conduct adequate +testing in high risk areas of sales to identify control failures. + +Legal Standards and Violations + +14. Under Exchange Act Section 21C(a), 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. + +15. Exchange Act Section 13(b)(2)(A) requires every issuer with a class of securities +registered pursuant to Exchange Act 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. [15 U.S.C. § 78m(b)(2)(A)]. + +16. Philips violated Exchange Act Section 13(b)(2)(A) by keeping books and records +relating to the special price discounts to its distributors that contained inaccurate documentation +and failed to include adequate documentation to ensure their business justification and +management’s approval of them. + +17. Exchange Act Section 13(b)(2)(B) requires every issuer with a class of securities +registered pursuant to Exchange Act Section 12 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)]. + +18. Philips violated Exchange Act Section 13(b)(2)(B) by failing to devise and +maintain an adequate system of internal accounting controls regarding distributor transactions + + +6 + +and the use of these third parties. In addition, Philips’ internal accounting controls were not +sufficient to provide reasonable assurances that transactions were executed in accordance with +management’s general or specific authorization and that access to assets was permitted only in +accordance with management’s general or specific authorization. + +Disgorgement and Civil Penalties + +19. The disgorgement and prejudgment interest ordered in paragraph IV.B is +consistent with equitable principles and does not exceed Respondent ’s net profits from its +violations, and permitting Respondent to retain those profits would be inconsistent with equitable +principles. Therefore, in these circumstances, distributing disgorged funds to the United States +Treasury is the most equitable alternative. The disgorgement and prejudgment interest ordered in +paragraph IV.B shall be transferred to the general fund of the U.S. Treasury, subject to Section +21F(g)(3) of the Exchange Act. + +Commission Consideration of Philips’ Cooperation and Remedial Efforts + +20. In determining to accept the Offer, the Commission considered the ongoing +remedial efforts undertaken by Respondent and cooperation afforded the Commission staff. +Philips undertook an internal investigation and regularly shared with Commission staff the facts +developed in its inquiry, including facts previously unknown to the staff, and identified and +voluntarily provided translations of key non-privileged documents. + +21. Philips’ ongoing remediation has included: structural improvements to its +policies and procedures; improving its tone at the top and the middle, with a focus on Philips +China; increased accountability for enforcing compliance policies by its business leaders; +highlighting compliance as a key component of ethical business practices; terminating or +disciplining Philips China employees involved in the conduct described above; and +terminating business relationships with distributors involved in the conduct described above. +The company also improved its internal accounting controls relating to distributors, bidding +practices, and the use of discounts and special pricing. Additionally, Philips has revised its +compliance training. + +Undertakings + +Respondent has undertaken to: + +22. Report to the Commission staff periodically during a two-year term, on the status +of its ongoing remediation and implementation of compliance measures. The reports will focus +particularly on due diligence on prospective and existing third-party consultants and vendors, +FCPA training, and the testing of relevant controls, including the collection and analysis of +compliance data. During this period, if Respondent discovers credible evidence, not already + + +7 + +reported to Commission staff, that corrupt payments or corrupt transfers of value to a foreign +official may have been offered, promised, paid, or authorized by Respondent, or any entity or +person while acting on behalf of Respondent, or that related false books and records have been +maintained, Respondent shall promptly report such conduct to the Commission staff. During +this two-year period, Respondent shall: (1) conduct an initial review and submit an initial report +and (2) conduct and prepare a follow-up review and report, as described below: + +a. Respondent shall submit to the Commission staff a written report within +360 calendar days of the entry of this Order setting forth a complete description of +its FCPA and anti-corruption related remediation efforts to date, its proposals +reasonably designed to improve the policies and procedures of Respondent for +ensuring compliance with the FCPA and other applicable anti-corruption laws, +and the parameters of the subsequent review (the “Initial Report”). The Initial +Report shall be transmitted to Charles E. Cain, Chief, FCPA Unit, Division of +Enforcement, United States Securities and Exchange Commission, 100 F Street, +NE, Washington, DC, 20549-5631. Respondent may extend the time period for +issuance of the Initial Report with prior written approval of the Commission staff. + +b. Respondent shall undertake one follow-up review, incorporating any +comments provided by the Commission staff on the previous report, to further +monitor and assess whether the policies and procedures of Respondent are +reasonably designed to detect and prevent violations of the FCPA and other +applicable anti-corruption laws (the “Follow-Up Report”). + +c. The Follow-Up Report shall be completed by no later than 360 days after +the Initial Report. Respondent may extend the time period for issuance of the +Follow-up Report with prior written approval of the Commission staff. + +d. The periodic reviews and reports submitted by Respondent 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 and other reasons, the reports +and the contents thereof are intended to remain and shall remain nonpublic, +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. + +e. During this two-year period of review, Respondent shall provide its +external auditors with its annual internal audit plan and reports of the results of +internal audit procedures and, subject to Respondent’s attorney-client privilege + + +8 + +and work product protections, its assessment of its FCPA compliance policies +and procedures. + +f. During this two-year period of review, Respondent shall provide +Commission staff with any written reports or recommendations provided by +Respondent’s external auditors in response to Respondent’s annual internal audit +plan, reports of the results of internal audit procedures, and its assessment of its +FCPA compliance policies and procedures. + +23. 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 Charles E. Cain, Chief, FCPA Unit, Division of Enforcement, United States +Securities and Exchange Commission, 100 F Street, NE, Washington, DC, 20549-5631, 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 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(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. + +B. Respondent shall, within 14 days of the entry of this Order, pay disgorgement +of $41,126,170, prejudgment interest of $6,047,633, and a civil monetary penalty of +$15,000,000 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 +of disgorgement and prejudgment interest is not made, additional interest shall accrue +pursuant to SEC Rule of Practice 600, and if timely payment of a civil money penalty 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; + + + +9 + +(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 +Philips 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 E. Cain, Chief, FCPA Unit, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549-5631. + +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. +D. Respondent shall comply with the undertakings enumerated in paragraphs III.22- +23 above. + + By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4407.txt b/raw/aaer/2023/AAER-4407.txt new file mode 100644 index 0000000000000000000000000000000000000000..100e6d0f72464ce23dd7395b09ac54d852fd49cb --- /dev/null +++ b/raw/aaer/2023/AAER-4407.txt @@ -0,0 +1,112 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97509 / May 16, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4407 / May 16, 2023 + +Admin. Proc. File No. 3-20601 + + +In the Matter of + +CARLOS JAVIER MOCTEZUMA VELASCO + + + +ORDER GRANTING IN PART MOTION FOR LEAVE TO USE ALTERNATE MEANS OF +SERVICE + +The Securities and Exchange Commission issued an order instituting proceedings +(“OIP”) on September 27, 2021, pursuant to Commission Rule of Practice 102(e)(3),1 against +Carlos Javier Moctezuma Velasco (“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. According to the motion, the Division +attempted to serve Respondent—who is a citizen and resident of Mexico—by sending “sets of +Hague Service Convention documents to Mexico’s Central Authority” on November 22, 2021, +and April 27, 2022. Because the Division had not yet received confirmation of a service attempt +by the Mexico Central Authority, the Division sought leave to serve Respondent (a) by e-mail at +an e-mail address known to be used by Respondent or (b) by publication. On March 1, 2023, the +Commission issued an order requesting additional briefing regarding whether service of the OIP +on Respondent using e-mail would constitute a “means not prohibited by international + +1 17 C.F.R. § 201.102(e)(3). +2 Carlos Javier Moctezuma Velasco, Exchange Act Release No. 93135, 2021 WL 4452768 +(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 Velasco, 2021 WL 4452768, at *2. +2 +agreement” under the circumstances of this case.5 Respondent did not file a response to the +Division’s supplemental brief. Based on the additional briefing submitted by the Division, we +find it appropriate to grant the Division’s motion to the extent it seeks leave to serve Respondent +by e-mail. +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.”6 Although Mexico has lodged an +objection to Article 10 of the Hague Service Convention, and thus objects to service “by postal +channels,”7 service by e-mail is not expressly prohibited by the Convention.8 Thus, “according +to a majority of courts,” service by e-mail is not a method of service prohibited by international +agreement even where the foreign country has objected to service by mail under Article 10.9 We +find the analysis in these cases persuasive and applicable here.10 +In any case, the Hague Service Convention is inapplicable because Respondent’s address +is not currently known.11 The Division received notice from the Mexico Central Authority that +service on Respondent could not be completed at his last known address because the residents +there stated to the official attempting to serve the documents “that [Respondent] does not live +there.” The Division stated that it “is not currently and does not expect to become aware of any + +5 Carlos Javier Moctezuma Velasco, Exchange Act Release No. 97005, 2023 WL 2313255 +(Mar. 1, 2023). +6 17 C.F.R. § 201.141(a)(2)(iv)(D). +7 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 May 8, 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 May 8, 2023). +8 See Bazarian Int’l Fin. Assocs., LLC v. Desarrollos Aerohotelco, C.A., 168 F. Supp. 3d 1, +17 (D.D.C. 2016) (stating that “a country’s objection to Article 10 does not constitute an express +rejection of service by email”). +9 Chanel, Inc. v. Handbagstore, Case No. 20-cv-62121, 2021 WL 3060329, at *8–9 (S.D. +Fla. June 30, 2021) (collecting cases); Bazarian Int’l Fin., 168 F. Supp. 3d at 17 (same); see, +e.g., Vaswani, Inc. v. Manjunathamurthy, Civil Action No. 2:20-cv-20288-KSH-CLW, 2021 WL +1541071, at *4 (D.N.J. Apr. 19, 2021) (“What is clear is that those courts holding objections to +Article 10 do not prohibit service by email represent the majority view.”). +10 Precedent construing the service requirements under the Federal Rules of Civil +Procedure, although not binding on the Commission when construing our Rules of Practice, can +be persuasive authority. See Velasco, 2023 WL 2313255, at *1 n.9. +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.”). +3 +other potential address for Respondent.” For this reason as well, we find that service by e-mail is +appropriate. +Accordingly, IT IS ORDERED that the Division’s motion is granted in part. The +Division is hereby directed to serve Respondent by e-mail and file a status report concerning +service of the OIP by June 13, 2023, and every 28 days thereafter until service by e-mail is +accomplished. The remainder of the Division’s motion concerning its request to serve +Respondent by publication is denied, without prejudice, as moot.12 +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 + + + + +12 Cf. Velasco, 2023 WL 2313255, at *1 n.6 (deferring consideration of the Division’s +request to serve Respondent by publication). +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-4408.txt b/raw/aaer/2023/AAER-4408.txt new file mode 100644 index 0000000000000000000000000000000000000000..e71dad3dfe200c63a0a124735f6f12d6fb664055 --- /dev/null +++ b/raw/aaer/2023/AAER-4408.txt @@ -0,0 +1,100 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97510 / May 16, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4408 / May 16, 2023 + +Admin. Proc. File No. 3-20602 + + +In the Matter of + +NOE CORRALES REYES + + + +ORDER GRANTING IN PART MOTION FOR LEAVE TO USE ALTERNATE MEANS OF +SERVICE + +The Securities and Exchange 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. According to the motion, the Division +attempted to serve Respondent—who is a citizen and resident of Mexico—by sending “sets of +Hague Service Convention documents to Mexico’s Central Authority” on November 22, 2021, +and April 27, 2022. Because the Division had not yet received confirmation of a service attempt +by the Mexico Central Authority, the Division sought leave to serve Respondent (a) by e-mail at +an e-mail address known to be used by Respondent or (b) by publication. On March 1, 2023, the +Commission issued an order requesting additional briefing regarding whether service of the OIP +on Respondent using e-mail would constitute a “means not prohibited by international + +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 +agreement” under the circumstances of this case.5 Respondent did not file a response to the +Division’s supplemental brief. Based on the additional briefing submitted by the Division, we +find it appropriate to grant the Division’s motion to the extent it seeks leave to serve Respondent +by e-mail. +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.”6 Although Mexico has lodged an +objection to Article 10 of the Hague Service Convention, and thus objects to service “by postal +channels,”7 service by e-mail is not expressly prohibited by the Convention.8 Thus, “according +to a majority of courts,” service by e-mail is not a method of service prohibited by international +agreement even where the foreign country has objected to service by mail under Article 10.9 We +find the analysis in these cases persuasive and applicable here.10 +Accordingly, IT IS ORDERED that the Division’s motion is granted in part. The +Division is hereby directed to serve Respondent by e-mail and file a status report concerning +service of the OIP by June 13, 2023, and every 28 days thereafter until service by e-mail is +accomplished. The remainder of the Division’s motion concerning its request to serve +Respondent by publication is denied, without prejudice, as moot.11 + +5 Noe Corrales Reyes, Exchange Act Release No. 97004, 2023 WL 2313230 (Mar. 1, +2023). +6 17 C.F.R. § 201.141(a)(2)(iv)(D). +7 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 May 8, 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 May 8, 2023). +8 See Bazarian Int’l Fin. Assocs., LLC v. Desarrollos Aerohotelco, C.A., 168 F. Supp. 3d 1, +17 (D.D.C. 2016) (stating that “a country’s objection to Article 10 does not constitute an express +rejection of service by email”). +9 Chanel, Inc. v. Handbagstore, Case No. 20-cv-62121, 2021 WL 3060329, at *8–9 (S.D. +Fla. June 30, 2021) (collecting cases); Bazarian Int’l Fin., 168 F. Supp. 3d at 17 (same); see, +e.g., Vaswani, Inc. v. Manjunathamurthy, Civil Action No. 2:20-cv-20288-KSH-CLW, 2021 WL +1541071, at *4 (D.N.J. Apr. 19, 2021) (“What is clear is that those courts holding objections to +Article 10 do not prohibit service by email represent the majority view.”). +10 Precedent construing the service requirements under the Federal Rules of Civil +Procedure, although not binding on the Commission when construing our Rules of Practice, can +be persuasive authority. See Reyes, 2023 WL 2313230, at *1 n.9. +11 Cf. id. at *1 n.6 (deferring consideration of the Division’s request to serve Respondent by +publication). +3 +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.12 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + Vanessa A. Countryman + Secretary + + +12 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-4409.txt b/raw/aaer/2023/AAER-4409.txt new file mode 100644 index 0000000000000000000000000000000000000000..3e84716e8f50379b366fb832523c8ab3b8b5c471 --- /dev/null +++ b/raw/aaer/2023/AAER-4409.txt @@ -0,0 +1,103 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97512 / May 16, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4409 / May 16, 2023 + +Admin. Proc. File No. 3-20603 + + +In the Matter of + +RAMÓN LAFARGA BÁTIZ + + + +ORDER GRANTING IN PART MOTION FOR LEAVE TO USE ALTERNATE MEANS OF +SERVICE + +The Securities and Exchange Commission issued an order instituting proceedings +(“OIP”) on September 27, 2021, pursuant to Commission Rule of Practice 102(e)(3),1 against +Ramón Lafarga Bátiz (“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. According to the motion, the Division +attempted to serve Respondent—who is a citizen and resident of Mexico—by sending “sets of +Hague Service Convention documents to Mexico’s Central Authority” on November 22, 2021, +and April 27, 2022. Because the Division had not yet received confirmation of a service attempt +by the Mexico Central Authority, the Division sought leave to serve Respondent (a) by e-mail at +an e-mail address known to be used by Respondent or (b) by publication. On March 1, 2023, the +Commission issued an order requesting additional briefing regarding whether service of the OIP +on Respondent using e-mail would constitute a “means not prohibited by international + +1 17 C.F.R. § 201.102(e)(3). +2 Ramón Lafarga Bátiz, Exchange Act Release No. 93137, 2021 WL 4452772 (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 Bátiz, 2021 WL 4452772, at *2. +2 +agreement” under the circumstances of this case.5 Respondent did not file a response to the +Division’s supplemental brief. Based on the additional briefing submitted by the Division, we +find it appropriate to grant the Division’s motion to the extent it seeks leave to serve Respondent +by e-mail. +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.”6 Although Mexico has lodged an +objection to Article 10 of the Hague Service Convention, and thus objects to service “by postal +channels,”7 service by e-mail is not expressly prohibited by the Convention.8 Thus, “according +to a majority of courts,” service by e-mail is not a method of service prohibited by international +agreement even where the foreign country has objected to service by mail under Article 10.9 We +find the analysis in these cases persuasive and applicable here.10 +Accordingly, IT IS ORDERED that the Division’s motion is granted in part. The +Division is hereby directed to serve Respondent by e-mail and file a status report concerning +service of the OIP by June 13, 2023, and every 28 days thereafter until service by e-mail is +accomplished. The remainder of the Division’s motion concerning its request to serve +Respondent by publication is denied, without prejudice, as moot.11 + +5 Ramón Lafarga Bátiz, Exchange Act Release No. 97007, 2023 WL 2313275 (Mar. 1, +2023). +6 17 C.F.R. § 201.141(a)(2)(iv)(D). +7 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 May 8, 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 May 8, 2023). +8 See Bazarian Int’l Fin. Assocs., LLC v. Desarrollos Aerohotelco, C.A., 168 F. Supp. 3d 1, +17 (D.D.C. 2016) (stating that “a country’s objection to Article 10 does not constitute an express +rejection of service by email”). +9 Chanel, Inc. v. Handbagstore, Case No. 20-cv-62121, 2021 WL 3060329, at *8–9 (S.D. +Fla. June 30, 2021) (collecting cases); Bazarian Int’l Fin., 168 F. Supp. 3d at 17 (same); see, +e.g., Vaswani, Inc. v. Manjunathamurthy, Civil Action No. 2:20-cv-20288-KSH-CLW, 2021 WL +1541071, at *4 (D.N.J. Apr. 19, 2021) (“What is clear is that those courts holding objections to +Article 10 do not prohibit service by email represent the majority view.”). +10 Precedent construing the service requirements under the Federal Rules of Civil +Procedure, although not binding on the Commission when construing our Rules of Practice, can +be persuasive authority. See Bátiz, 2023 WL 2313275, at *1 n.9. +11 Cf. id. at *1 n.6 (deferring consideration of the Division’s request to serve Respondent by +publication). +3 +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.12 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + Vanessa A. Countryman + Secretary + + + + + +12 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-4410.txt b/raw/aaer/2023/AAER-4410.txt new file mode 100644 index 0000000000000000000000000000000000000000..62873a6e5448a90840bc5f9a04e6d9db26bf4f97 --- /dev/null +++ b/raw/aaer/2023/AAER-4410.txt @@ -0,0 +1,85 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97590 / May 25, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4410 / May 25, 2023 + +Admin. Proc. File No. 3-21298 + + +In the Matter of + +JIA ROGER QIAN WANG, CPA and WANG +CERTIFIED PUBLIC ACCOUNTANT, P.C. + + + +ORDER + +On February 8, 2023, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Jia Roger Qian Wang, CPA, and Wang +Certified Public Accountant, P.C., (together, “Respondents”), 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 +Respondents filed an answer to the allegations contained in the OIP on March 30, 2023. +On May 11, 2023, the parties filed a joint statement, stating that, after a prehearing +conference, they had reached agreement on a proposed schedule with a hearing (which the +parties anticipated would last no longer than five days) to commence on December 1, 2023. +Accordingly, it is ORDERED, based on the parties’ representations, that the parties adhere to the +following schedule: +June 9, 2023 Last date to exchange name and contact information of +individuals likely to have discoverable information. +June 16, 2023 Last date for parties to meet and confer on discovery plan. +June 23, 2023 Last date to exchange identity of any expert witness and +expected topics of testimony. + +1 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96852, 2023 WL 1819154 (Feb. +8, 2023). +2 + +July 17, 2023 Last date to exchange identity of any rebuttal expert +witness and expected topics of testimony. +July 31, 2023 Close of fact discovery. +August 11, 2023 Last date to serve expert reports. +August 25, 2023 Last date to serve rebuttal expert reports. +September 8, 2023 Close of expert discovery. +September 22, 2023 Last date to file any motions for summary disposition, if +leave for any such motions is granted. +October 13, 2023 Last date to file oppositions to any motions for summary +disposition. +October 27 2023 Last date to file replies to any motions for summary +disposition. +November 3, 2023 Parties exchange and file final witness lists. +November 10, 2023 Parties exchange and file final exhibit lists and pre-marked +exhibits. +November 17, 2023 Parties file any motions in limine, prehearing briefs, and +any proposed stipulations of fact. +November 24, 2023 Final prehearing conference. +December 1, 2023 Hearing commences. +It is further ORDERED that the parties shall seek leave to file any motions for summary +disposition pursuant to Rule of Practice 250(c) by August 4, 2023, by filing a concise statement, + +3 + +which also addresses whether the parties consent to any modifications of the prehearing schedule +as a result of such motion for summary disposition.2 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + + + +2 See 17 C.F.R. § 201.250(c) (requiring leave to be sought to file motions for summary +disposition in 120-day proceedings and articulating that summary disposition may be granted as +to a claim or defense when there is “no genuine issue with regard to any material fact” and “the +movant is entitled to summary disposition as a matter of law”); see also Jia Roger Qian Wang, +CPA, 2023 WL 1819154, at *9 (designating this proceeding one under the “120-day +timeframe”). \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4411.txt b/raw/aaer/2023/AAER-4411.txt new file mode 100644 index 0000000000000000000000000000000000000000..acf06cf6b7ec1661e181410ba1b5ae5c357f477b --- /dev/null +++ b/raw/aaer/2023/AAER-4411.txt @@ -0,0 +1,351 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97609 / May 26, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4411 / May 26, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21470 + +In the Matter of + +Gartner, 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 Gartner, Inc. (“Gartner” 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 Gartner’s violations of the anti-bribery, books and records, +and internal accounting control provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”), +as a result of a scheme to obtain and retain business from a South African government entity, the +South Africa Revenue Service (“SARS”). + +2. At the direction of SARS senior officials, a manager of Gartner’s consulting +segment (the “Gartner Consulting Manager”) authorized Gartner to enter into sub-contracts with a +South African information technology consulting company (the “Private Company”). At the time +of the sub-contracts, the manager knew or consciously disregarded the possibility that all or part of +the money paid to the Private Company would be offered, given, or promised, directly or +indirectly, to those SARS officials, to induce the officials, in violation of their lawful duty, to +award multi-million dollar sole-source contracts to Gartner. + +3. The purported justification for hiring the Private Company offered by the Gartner +Consulting Manager was that (1) Gartner needed to sub-contract with the Private Company in +order to meet the requirements of South Africa’s Broad-Based Black Economic Empowerment +legislation (“B-BBEE”) and (2) neither Gartner nor its local sub-agents qualified under the +applicable law. This justification was false because Gartner, through its local sub-agents, did in +fact qualify under the B-BBEE. + +Respondent + +4. Gartner, Inc. is a U.S. public company incorporated in Delaware and with +headquarters in Connecticut. Gartner has three primary business segments: Gartner Research, +Gartner Consulting, and Gartner Conferences. In 2015, Garner Consulting’s revenue was +approximately 15% of the company’s total revenue of $2.2 billion. Prior to 2017, Gartner operated +in South Africa through its exclusive sales agent, Future Trends Ltd., and sub-agents, IT +Management Advisory Services Pty. Ltd. (“ITMAS”) and Zimeleyo Research & Consulting Pty +Ltd (“Zimeleyo”). Beginning in 2017, after it incorporated and operated directly in South Africa, +Gartner allowed these agency relationships to lapse. Gartner stock is now, and was during the +relevant time period, registered under Section 12(b) of the Exchange Act and trades on the New +York Stock Exchange under the ticker symbol “IT.” + +Other Relevant Entities and Individuals + +5. Gartner Consulting Manager was responsible for Gartner Consulting’s public +sector business covering Europe, the Middle East, and Africa, including oversight of the SARS +engagement. + +6. Private Company is a private South African information technology consulting +company formed in 2009. The Executive Director of the Private Company was a close friend of a +SARS senior official. + +3 + + +Facts + +7. On December 10, 2014, the Private Company’s executive director advised +Zimeleyo’s General Manager that SARS wanted to conduct an assessment of its information +technology systems, and that SARS had offered to meet to discuss the scope of the work. The two +executives drafted proposed “terms of reference” for the SARS project, which sought to define the +mandate for the work that the project would entail and was based on information that SARS +provided to the Private Company’s executive director. + +8. On December 18, 2014, senior officers at SARS invited other Zimeleyo +representatives to discuss the potential engagement. The SARS representatives provided the +Zimeleyo representatives with a draft request for proposal that included the substantive terms +contained in the “terms of reference” referenced above. + +9. On January 1, 2015, Zimeleyo provided SARS with Gartner’s response to the +proposal, which did not make any mention of the Private Company or its executive director. + +10. On January 9, 2015, SARS requested to expand the scope of the proposal and +suggested that Gartner use the Private Company in order to qualify for the contract under South +Africa’s B-BBEE legislation. + +11. The Gartner Consulting Manager explained in an email to Gartner management +that, in order to win the contract, Gartner had no option but to agree to SARS’ request to use the +Private Company: “[B]oth the client and the [Private Company] [are] quite sav[v]y . . . The +[Private Company] knows that we cannot bid without them.” + +12. SARS signed a Master Consulting Services Agreement with Gartner on February 5, +2015. The contract, which had a value of approximately $1 million, contained no reference to the +Private Company or any provisions regarding B-BBEE qualifications or requirements, and Gartner +did not enter into a sub-contract with the Private Company. Rather, Gartner’s agent Zimeleyo +directly engaged as consultants four individuals affiliated with the Private Company to conduct +work on Gartner’s behalf with the full knowledge of key personnel within SARS’s procurement +division, notwithstanding the fact that the contract contained no reference to the Private Company. + +13. In April 2015, the Gartner Consulting Manager and Zimeleyo’s General Manager +met with the SARS Commissioner and several top officers to discuss Gartner’s report on its +completion of the service agreement (“Phase I”). The SARS Commissioner suggested a follow-up +project to implement Gartner’s recommendations and asked the Gartner Consulting Manager for a +rough estimate of the cost. The Gartner Consulting Manager advised that the work would cost +approximately $10 million. + +14. On June 1, 2015, the Gartner Consulting Manager and the Zimeleyo General +Manager exchanged emails regarding Gartner’s draft proposal to SARS for the follow-up project +(“Phase II”). Zimeleyo’s General Manager advised that the Private Company’s executive director +was working with SARS officials “to set the expectations with them” regarding the pricing for +Phase II of the SARS project in advance of Gartner submitting its formal proposal to SARS. + +4 + + +15. The Gartner Consulting Manager did not question whether there was possible +collusion between the Private Company and SARS officials. When the Gartner Consulting +Manager provided senior Gartner management with an update on the Phase II contract, he referred +to the Private Company’s executive director as “extremely well connected within Government and +SARS.” Weeks before Gartner submitted its formal proposal, the Gartner Consulting Manager +conveyed to other senior Gartner management his expectation that the Phase II contract would be +made on a sole-source basis. + +16. SARS signed the Phase II Master Consulting Services Agreement on July 31, 2015, +on a sole-source basis. The value of the contract was approximately $10 million to be paid over 18 +months. In a communication to a colleague, the Gartner Consulting Manager described the Private +Company as a “client mandated partner to meet Black Empowerment Legislation.” He further +advised that the Private Company was to receive 40% of the contract: “Client directed 50% +workshare with [Private Company] – we have negotiated this down to 40% on the basis that we +own the risk and key skills.” + +17. The Phase II contract required Gartner to meet B-BBEE qualifications and to +provide a “Verification Certificate” to SARS on an annual basis. Gartner satisfied this requirement +through its South African sub-agent, ITMAS, which at that time held a B-BBEE certification. A +provision of the SARS Phase II contract specifically defined “Gartner” to include ITMAS. + +18. Prior to signing the Phase II contract, a SARS procurement officer requested to see +Gartner’s B-BBEE certificate. In response, Zimeleyo’s General Manager sent SARS the B-BBEE +verification certificate that ITMAS had been issued on April 17, 2015, and emailed a blind carbon +copy of the communication to the Private Company. + +19. Gartner did not enter into a sub-contract with the Private Company for Phase II of +the SARS project. Rather, Gartner’s agent Zimeleyo directly engaged as consultants several +individuals affiliated with the Private Company to conduct Phase II work on Gartner’s behalf with +the full knowledge of key personnel within SARS’s procurement division, notwithstanding the fact +that the contract contained no reference to the Private Company or to the approximately 40% of the +contract that the Private Company was to be paid, pursuant to the instructions that SARS officials +had made to Gartner. + +20. Gartner’s invoices, like the other official transaction documents, omitted any +reference to the participation of the Private Company. As a condition of Gartner’s right to bid on +the contract, SARS officials had instructed Gartner to manage its subcontractor, the Private +Company. Gartner’s invoices to SARS contained only a single line item for “Professional Fees.” +Zimeleyo invoiced Gartner monthly through a single invoice containing two line entries with +different hourly rates. The Zimeleyo invoice did not identify the hourly rates as pertaining to +Zimeleyo and the Private Company. Gartner made its payments to Zimeleyo, which in turn paid +the Private Company. The Gartner Consulting Manager approved all invoices submitted by +Zimeleyo. Gartner’s payments to South Africa were initiated from its operations facility in Fort +Myers, Florida. + +21. During the relevant time period, Gartner’s internal FCPA risk assessments +identified the company’s “[s]ales agent, consultant or third party relationships with public sector + +5 + + +clients” as a potential “bribery red flag[].” Gartner’s policy regarding the hiring of third party +consultants did not adequately address anti-corruption risks. At the time of the SARS engagement, +the company lacked risk-based screening procedures for hiring third party contractors, had no anti- +corruption related vendor onboarding procedures, and lacked adequate monitoring procedures. + +Legal Standards and Violations + +22. Under Exchange Act Section 21C(a), 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 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. + +23. As described above, the Gartner Consulting Manager authorized multiple +payments to the Private Company in connection with the Phase I and Phase II contracts with +SARS. The Gartner Consulting Manager had been advised of (i) the Private Company’s +executive director’s close relationship to a senior SARS official; (ii) his role in introducing +Gartner to SARS and in setting expectations with SARS officials; and (iii) SARS’ directives to +Gartner to hire the Private Company and pay it fixed percentages of the SARS contracts in +order to win the contracts on a sole-source basis. The Gartner Consulting Manager also knew +or consciously avoided knowing that the purported justification for hiring the Private Company +– Gartner was told by SARS to hire the Private Company in order to qualify for the contracts +under South Africa’s B-BBEE legislation – was false. Gartner’s Consulting Manager knew or +consciously disregarded the high probability that the Private Company’s executive director +would offer, provide or promise the payments his company received, or a portion thereof, to +SARS officials for the purpose of influencing such officials to obtain or retain business for +Gartner. As a result, Gartner was awarded the Phase I and Phase II SARS contracts and +received ill-gotten net profits associated with the contracts of $675,974. + +24. As a result of the conduct described above, Gartner violated Section 30A of the +Exchange Act, which prohibits, in relevant part, any issuer with a class of securities registered +pursuant to Section 12 of the Exchange Act, or any officer, director, employee, or agent acting on +behalf of such issuer, or any stockholder acting on behalf of an issuer, in order to obtain or retain +business, from corruptly giving or authorizing the giving of anything of value to any person, while +knowing that all or a portion of such thing of value will be offered, given, or promised, directly or +indirectly, to any foreign official for the purposes of influencing the official or inducing the +official to act in violation of his or her lawful duties, or to secure any improper advantage, or to +induce a foreign official to use his influence with a foreign governmental instrumentality to +influence any act or decision of such government or instrumentality. + +25. As a result of the conduct described above, Gartner 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. + +26. Gartner failed to devise and maintain sufficient internal accounting controls +around identified FCPA risks relating to sales agents, consultants and third party relationships +with public sector clients. As a result of the conduct described above, Gartner violated + +6 + + +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 generally accepted accounting principles. + +Gartner’s Remedial Efforts and Cooperation + +27. In determining to accept the Offer, the Commission considered Gartner’s self- +disclosure following press reports in South Africa, cooperation, and remedial efforts. Its +cooperation included providing regular updates and sharing facts identified in the course of its +own internal investigation, making foreign-based employees available for interviews in the +United States, and encouraging cooperation by former employees. Gartner’s remediation +included revising and enhancing relevant policies and procedures and training programs, +increasing both financial and human resources for compliance, and enhancing its due diligence +procedures. + +Disgorgement + +28. The disgorgement and prejudgment interest ordered in paragraph IV is consistent +with equitable principles, does not exceed Respondent’s net profits from its 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 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 Gartner’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent Gartner 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. + +B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of +$675,974 and prejudgment interest of $180,790 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. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $1,600,000 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: + +7 + + +(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 +Gartner 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 E. Cain, Chief, FCPA Unit, +Division of Enforcement, Securities and Exchange Commission, 100 F Street, NE, Washington, +DC 20549-5631. + +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/2023/AAER-4412.txt b/raw/aaer/2023/AAER-4412.txt new file mode 100644 index 0000000000000000000000000000000000000000..643a6dc70ca6d1c59e7fb5a509e9567f3bddfc45 --- /dev/null +++ b/raw/aaer/2023/AAER-4412.txt @@ -0,0 +1,275 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 6320 / June 1, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4412 / June 1, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21476 + +In the Matter of + +CARL S. SCHWARTZ 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 Carl S. +Schwartz (“Respondent” or “Schwartz”) 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 + +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 +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. Schwartz, age 67, is and has been a certified public accountant licensed to +practice in the State of New Jersey. He served as the president, chief compliance officer, managing +member and 49% owner of RRBB Asset Management, Inc. (“RRBBAM”), an investment adviser +registered with the Commission. + + 2. On September 10, 2020 Commission filed a complaint against Schwartz in +SEC v. Carl S. Schwartz, et al. (Civil Action No. 2:20-cv-12523) in the United States District +Court of the District of New Jersey. On May 9, 2023, the court entered an order permanently +enjoining Schwartz, by consent, from future violations of Section 10(b) of the Exchange Act of +1934 (“Exchange Act”) and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933 +(“Securities Act”), Section 206(1), 206(2) and 207 of the Investment Advisers Act of 1940 +(“Advisers Act”), and from aiding and abetting violations of Section 206(4) of the Advisers Act +and Rule 206(4)-7 thereunder. Schwartz was also ordered to pay $50,000.00 in disgorgement, and +$13,754.12 in prejudgment interest; and a $100,000.00 civil money penalty. + + 3. The Commission’s complaint alleged that from at least August 2016 +through April 2017, Schwartz engaged in a fraudulent trade allocation or “cherry-picking” scheme +in breach of his and RRBBAM’s fiduciary duties to their advisory clients. The Commission’s +complaint alleged that Schwartz, who was the only person at RRBBAM with the authority to +determine trades and allocations, used RRBBAM’s omnibus trading account to disproportionately +allocate a number of favorable trades (i.e., trades that had a positive first day return) to accounts +held by a new client, who was one of RRBBAM’s largest and most lucrative clients in terms of +assets under management (the “Favored Accounts”), while disproportionately allocating a number +of unfavorable trades (i.e., trades that had negative first day returns) to six accounts held by two +long-term clients (the “Disfavored Accounts”). The Complaint alleged that as a result, for the time +period at issue, the Favored Accounts enjoyed first day positive returns, while the Disfavored +Accounts suffered negative first day returns. The Complaint alleged that through this scheme, +RRBBAM and Schwartz earned substantial management fees, misled the advisory client who +received the favorable trades into thinking RRBBAM and Schwartz were better at managing their +money than they really were so as to induce the favored client to invest additional sums with +RRBBAM upon which RRBBAM and Schwartz would earn additional management fees, and +disadvantaged their other clients by failing to allocate the trades in a fair and equitable manner, +consistent with their fiduciary obligations to all of their advisory clients and their representations in + 3 +RRBBAM’s brochures and other disclosures in which they claimed trades would be fairly and +equitably allocated among all client accounts. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Schwartz is suspended +from appearing or practicing before the Commission as an accountant. + + +B. After 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; + +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 + + 4 +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, including any orders in SEC v. +Carl S. Schwartz, et al. (Civil Action No. 2:20-cv-12523), 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 + 5 +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. + +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 + 6 + +(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. + + 7 +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/2023/AAER-4413.txt b/raw/aaer/2023/AAER-4413.txt new file mode 100644 index 0000000000000000000000000000000000000000..606f2a8471fbb834db6eb9d9a42b90eaacb81b47 --- /dev/null +++ b/raw/aaer/2023/AAER-4413.txt @@ -0,0 +1,185 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 11198 / June 2, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97640 / June 2, 2023 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 6323 / June 2, 2023 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 34933 / June 2, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4413 / June 2, 2023 + + +In re +Pending Administrative Proceedings + + +ORDER DISMISSING PROCEEDINGS + +On April 5, 2022, the Securities and Exchange Commission issued a Statement Relating +to Certain Administrative Adjudications (the “April 5 Statement”) describing a control +deficiency related to the separation of enforcement and adjudicatory functions within our system +for administrative adjudications. The April 5 Statement explained that the Chair of the +Commission had initiated a comprehensive internal review to assess the scope and potential +impact of the control deficiency, which review was conducted by experienced investigative staff +from the Division of Examinations under the supervision of the Commission’s General Counsel. +The April 5 Statement further disclosed the review team’s findings regarding SEC v. Cochran +1 +and SEC v. Jarkesy.2 As part of the April 5 Statement, the Commission further committed to +release information about additional affected matters. + +On June 2, 2023, we released a Second Commission Statement Relating to Certain +Administrative Adjudications (the “June 2 Statement”) regarding Cochran and Jarkesy, as well + +1 Admin. Proc. File No. 3-17228; see also Axon Enters., Inc. v. FTC, 598 U.S. ___, 143 S. +Ct. 890 (2023). +2 Admin. Proc. File No. 3-15255; see also Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022), +pet. for rev. filed (Mar. 8, 2023). +2 + +as findings about additional adjudicatory matters currently pending before the Commission that +were affected by the control deficiency identified in the April 5 Statement. Those include 28 +adjudicatory matters in which Division of Enforcement administrative staff accessed one or more +memoranda drafted by our Office of the General Counsel’s Adjudication Group that was specific +to a particular matter (the “Affected Matters”) and 61 additional adjudicatory matters in which +Enforcement administrative staff accessed only memoranda that described procedural actions +that Adjudication staff recommended that the Commission take in many (or all) pending +adjudicatory proceedings (“Omnibus Memoranda”). + +As detailed in the June 2 Statement, the review team found no evidence that any +Enforcement staff assigned to investigate and prosecute any of the Affected Matters accessed +any case-specific Adjudication memoranda before the Commission approved the action +recommended in those memoranda. And the review team found no evidence that any individuals +assigned to investigate and prosecute any of the Affected Matters contacted or communicated +with the Adjudication staff advising the Commission in its decision-making in any of those +matters. With respect to the eight Omnibus Memoranda accessed by administrative staff, the +review team found that only one was uploaded to the Enforcement case management database. +And the review team found no evidence that the administrative staff member who accessed the +Omnibus Memoranda contacted any Enforcement staff responsible for investigating and +prosecuting the relevant matters about any of these memoranda. + +The review team’s investigation thus uncovered no evidence that the control deficiency +resulted in harm to any respondent or affected the Commission’s adjudication in any +proceeding. +3 We have nevertheless determined to dismiss, as a matter of discretion, all pending +proceedings that the review team found to be connected to the control deficiency, as to which the +Commission is seeking relief, and in which there is no final order against a respondent.4 The +respondents as to whom proceedings are being dismissed are listed in Exhibit A to this order.5 + +3 https://www.sec.gov/news/statement/second-commission-statement-relating-certain- +administrative-adjudications. +4 See, e.g., John A. Carley, Exchange Act Release No. 61966, 2010 WL 1638721, at *1 +(Apr. 23, 2010) (exercising our discretion to dismiss certain allegations); Nicholas P. Howard, +Exchange Act Release No. 50633, 2004 WL 2480716, at *1 (Nov. 4, 2004) (same); cf. Heckler v. +Chaney, 470 U.S. 821, 831 (1985) (“This Court has recognized on several occasions over many +years that an agency’s decision not to prosecute or enforce, whether through civil or criminal +process, is a decision generally committed to an agency’s absolute discretion.”). +5 In dismissing these proceedings, we set aside any initial decision or Commission opinion +and order not yet final as to a respondent listed in Exhibit A. But we do not disturb any such +decision or order that has been previously resolved in its entirety. Nor do we disturb any final +resolution already reached as to any co-respondents in any of the proceedings listed in Exhibit A, +or any orders previously issued as to those co-respondents. This includes Matthew R. Rossi and +SJL Capital, LLC, and Timothy C. Scarpino in which we set aside the pending proceedings to +determine what, if any, monetary sanctions are appropriate, but do not disturb the settled orders +(continued . . .) +3 + +We find that taking this action is appropriate to preserve the Commission’s resources.6 In doing +so, we take no view on the merits of Enforcement’s allegations and claims or any defenses raised +by the respondents, including the extent to which statutes, Commission Rules, and other +precedent would be determinative or relevant to those allegations, claims, or defenses.7 + +Accordingly, IT IS ORDERED that the proceedings against respondents listed in +Exhibit A are dismissed. + +By the Commission. + +Vanessa Countryman +Secretary + + +finding violations and imposing other sanctions. Exchange Act Release No. 85683 (Apr. 17, +2019); Exchange Act Release No. 83236 (May 15, 2018). +The proceedings that we are hereby dismissing similarly do not include the 47 matters +identified in the June 2 Statement that were resolved upon issuance of a final Commission order, +but were reopened due to one or more requests to vacate a remedial bar. We address those 47 +matters in separate orders issued concurrently with this order. +6 See, e.g., Glob. Digit. Sols., Inc., Exchange Act Release No. 85364, 2019 WL 1274911, +at *2 (Mar. 19, 2019) (dismissing proceeding to, in part, preserve the Commission’s resources); +see also Thomas C. Trauger, CPA, Exchange Act Release No. 51435, 2005 WL 701204, at *1 +(Mar. 25, 2005) (same). +7 Cf. Warren G. Trepp, Exchange Act Release No. 41913, 1999 WL 753922, at *1 +(Sept. 24, 1999) (dismissing sua sponte without reaching merits). + +Exhibit A + +Respondent(s) Administrative Proceeding Number +Michelle L. Helterbran Cochran, CPA 3-17228 +Mark Feathers 3-15755 +The Robare Group, Ltd., Mark L. Robare, and Jack +L. Jones, Jr. 3-16047 +Laurie Bebo 3-16293 +Alexandre S. Clug 3-16318 +Timothy W. Carnahan and CYIOS Corporation 3-16386 +Edward M. Daspin, a/k/a “Edward (Ed) Michael” 3-16509 +Charles R. Kokesh 3-16517 +Christopher M. Gibson 3-17184 +James A. Winkelmann, Sr., and Blue Ocean +Portfolios LLC 3-17253 +Saving2Retire, LLC, and Marian P. Young 3-17352 +Digital Brand Media & Marketing Group, Inc. and +Intellicell Biosciences, Inc. 3-17990 +INTREorg Systems, Inc. 3-18733 +Toda International Holdings Inc. 3-18746 +Joseph S. Amundsen, CPA, Michael T. Remus, +CPA, and Michael Remus, CPA 3-18994 +Matthew R. Rossi and SJL Capital, LLC 3-19145 +ERHC Energy, Inc. 3-19419 +Genoil Inc. 3-19661 +Barton W. Stuck 3-19685 +5 + +EliteSoft Global Inc. 3-19868 +Spectrascience, Inc. 3-20308 +UBI Blockchain Internet Ltd. 3-20309 +Traqer Corp. 3-20312 +Rystar Communications Ltd. 3-20344 +Spongetech Delivery Systems, Inc. 3-20345 +Globesat Holding Corp. 3-20355 +Golden Goliath Resources Ltd. 3-20356 +Biovest International, Inc., Olie, Inc. (n/k/a +Syndicate Business Development Corp.), and +StarGate Entertainment, Inc. +3-17935 +Atomic Paintball, Inc., North American Oil & Gas +Corp., and VelaTel Global Communications, Inc. 3-17991 +A.C. Simmonds and Sons, Inc., Game Plan +Holdings, Inc., and HashingSpace Corp. 3-17999 +StationDigital Corp. 3-18004 +New Western Energy Corp. and Primco +Management, Inc. 3-18007 +Evolucia, Inc., and OSL Holdings, Inc. 3-18014 +Huixin Waste Water Solutions, Inc. 3-18187 +Gregory A. Wahl, CPA, Michael Deutchman, CPA, +and Georgia Chung, CPA 3-18292 +Jeffrey Wada, CPA, and David Middendorf, CPA 3-18346 +China Energy Technology Corp., Ltd. 3-18378 +Timothy C. Scarpino 3-18483 +Heidi Wivolin 3-18774 +6 + + + + +Jennifer R. Johnson 3-18780 +Susan E. Walker 3-18781 +Daniel Joseph Touizer 3-18867 \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4414.txt b/raw/aaer/2023/AAER-4414.txt new file mode 100644 index 0000000000000000000000000000000000000000..52ab868df306d5b979cc90dae234b4dd3a3636a7 --- /dev/null +++ b/raw/aaer/2023/AAER-4414.txt @@ -0,0 +1,717 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 11199 / June 2, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97641 / June 2, 2023 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 6324 / June 2, 2023 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 34934 / June 2, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4414 / June 2, 2023 + + +In re + +Pending Administrative Proceedings + + +ORDER VACATING CERTAIN ASSOCIATIONAL BARS + +In 2017, in Bartko v. SEC, the United States Court of Appeals for the District of +Columbia Circuit held that it was “impermissibly retroactive” to impose a collateral bar based on +conduct that pre-dated the effective date of the Dodd-Frank Wall Street Reform and Consumer +Protection Act. +1 As a result of that decision, the Securities and Exchange Commission +announced a program allowing persons subject to collateral bars to request that the Commission +exercise its discretion to vacate certain of those bars. In doing so, the Commission emphasized +that “[t]his process applies only to collateral bars, which are bars that prohibit you from +associating in a capacity in the securities industry with which you were not associated or were +not attempting to associate at the time of your securities law violations.” +2 + +On April 5, 2022, the Commission issued a Statement Relating to Certain Administrative +Adjudications (the “April 5 Statement”) describing a control deficiency related to the separation + +1 845 F.3d 1217, 1225 (D.C. Cir. 2017). +2 https://www.sec.gov/news/statement/commission-statement-regarding-bartko-v-sec. +2 + +of enforcement and adjudicatory functions within our system for administrative adjudication.3 +The April 5 Statement explained that the Chair of the Commission had initiated a comprehensive +internal review to assess the scope and potential impact of the control deficiency, which review +was conducted by experienced investigative staff from the Division of Examinations under the +supervision of the Commission’s General Counsel. The April 5 Statement further disclosed the +review team’s findings regarding SEC v. Cochran +4 and SEC v. Jarkesy.5 As part of the April 5 +Statement, the Commission further committed to the release of information about additional +affected matters. + +On June 2, 2023, we released a Second Commission Statement Relating to Certain +Administrative Adjudications (the “June 2 Statement”) regarding Cochran and Jarkesy, as well +as findings about additional adjudicatory matters currently pending before the Commission that +were affected by the control deficiency identified in the April 5 Statement. +6 Those include 28 +matters in which Division of Enforcement administrative staff accessed one or more memoranda +drafted by our Office of the General Counsel’s Adjudication Group that was specific to a +particular matter (the “Affected Matters”), and 61 adjudicatory matters—including 46 pending +petitions for relief under the Commission’s Bartko program—in which Enforcement +administrative staff accessed only memoranda that described procedural actions that +Adjudication staff recommended that the Commission take in many (or all) pending adjudicatory +proceedings (“Omnibus Memoranda”). + +As detailed in the June 2 Statement, the review team found no evidence that any +Enforcement staff assigned to investigate and prosecute any of the Affected Matters accessed +any case-specific Adjudication memoranda before the Commission approved the action +recommended in those memoranda. And the review team found no evidence that any individuals +assigned to investigate and prosecute any of the Affected Matters communicated with the +Adjudication staff advising the Commission in its decision-making in any of those matters. With +respect to the eight Omnibus Memoranda accessed by administrative staff, the review team +found that only one was uploaded to the Enforcement case management database. And the +review team found no evidence that the administrative staff member who accessed the Omnibus +Memoranda contacted any Enforcement staff responsible for investigating and prosecuting the +relevant matters about any of these memoranda. + +The review team’s investigation thus uncovered no evidence that the control deficiency +resulted in harm to any respondent or affected the Commission’s adjudication in any proceeding. +We have nevertheless determined to grant, as a matter of discretion, the pending petitions + +3 https://www.sec.gov/news/statement/commission-statement-relating-certain- +administrative-adjudications. +4 Admin. Proc. File No. 3-17228; see also Axon Enters., Inc. v. FTC, 598 U.S. ___, 143 S. +Ct. 890 (2023). +5 Admin. Proc. File No. 3-15255; see also Jarkesy v. SEC , 34 F.4th 446 (5th Cir. 2022), +pet. for rev. filed (Mar. 8, 2023). +6 https://www.sec.gov/news/statement/second-commission-statement-relating-certain- +administrative-adjudications. +3 + +requesting that the Commission vacate collateral bars from certain industry associations that are +identified in the June 2 Statement and listed in Exhibit A to this order. We have determined that +granting these petitions is appropriate to preserve the Commission’s resources.7 We otherwise +leave unmodified the orders identified in Exhibit A (the “Orders”). In doing so, we take no view +on the merits of the petitioners’ claims for relief, including the extent to which statutes, +Commission Rules, and other precedent would be determinative or relevant to those claims.8 + +Accordingly, IT IS ORDERED that the bars identified in Exhibit A against petitioners are +vacated, and that the Orders are otherwise unmodified. + +By the Commission. + + + +Vanessa A. Countryman +Secretary + +7 See, e.g., Glob. Digit. Sols., Inc., Exchange Act Release No. 85364, 2019 WL 1274911, +at *2 (Mar. 19, 2019) (dismissing proceeding to, in part, preserve the Commission’s resources); +Thomas C. Trauger, CPA, Exchange Act Release No. 51435, 2005 WL 701204, at *1 (Mar. 25, +2005) (same). +8 Cf. Warren G. Trepp, Exchange Act Release No. 41913, 1999 WL 753922, at *1 +(Sept. 24, 1999) (dismissing sua sponte without reaching merits). +4 + +Exhibit A + +Petitioner Order Imposing Collateral +Bar(s) Collateral Bars Vacated +Dennis B. Levine, Admin. +Proc. File No. 3-6673 +Exchange Act Release No. +23300, 1986 WL 626169 (June 5, +1986) +Investment adviser, +investment company, +municipal securities +dealer +Andrew A. Srebnik, Admin. +Proc. File No. 3-12893 +Exchange Act Release No. +56823, Advisers Act Release No. +2677, 2007 WL 4116174 (Nov. +20, 2007) +Investment adviser +William B. Blount, Admin. +Proc. File No. 3-13974 +Exchange Act Release No. +62549, 2010 WL 2886388 (July +22, 2010) +Municipal securities +dealer +Stuart E. Rawitt, Admin. +Proc. File No. 3-16357 +Initial Decision Release No. 782, +2015 WL 1907623 (Apr. 28, +2015) (Initial Decision); +Exchange Act Release No. +75133, 2015 WL 3562617 (June +9, 2015) (Finality Notice) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Joseph DeVito, Admin. Proc. +File No. 3-16737 +Exchange Act Release No. +75654, 2015 WL 4720297 (Aug. +10, 2015) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Roman Lyniuk, Admin. Proc. +File No. 3-14304 +Securities Act Release No. 9236, +Exchange Act Release No. +64877, Advisers Act Release No. +3238, Investment Company Act +Release No. 29724, 2011 WL +2705695 (July 13, 2011) +Municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Dean Zinon Pinard, Admin. +Proc. File No. 3-14655 +Exchange Act Release No. +65909, Advisers Act Release No. +3331, 2011 WL 6095107 (Dec. 8, +2011); see also Exchange Act +Release No. 76934, Advisers Act +Release No. 4319, 2016 WL +231541 (Jan. 19, 2016) (order +vacating municipal advisor bar) +Municipal securities +dealer +5 + +Eric David Wanger, Admin. +Proc. File No. 3-14676 +Securities Act Release No. 9331, +Exchange Act Release No. +67335, Advisers Act Release No. +3427, Investment Company Act +Release No. 30126, 2012 WL +2524953 (July 2, 2012); see also +Advisers Act Release No. 3- +5621, 2020 WL 6286295 (Oct. +26, 2020) (order granting consent +to associate with an investment +adviser). +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Walter V. Gerasimowicz, +Admin. Proc. File No. 3- +15024 +Securities Act Release No. 9401, +Exchange Act Release No. +69506, Advisers Act Release No. +3601, Investment Company Act +Release No. 30505, 2013 WL +1856014 (May 3, 2013) (OIP), +Securities Act Release No. 9583, +Exchange Act Release No. +72133, Advisers Act Release No. +3832, Investment Company Act +Release No. 31041, 2014 WL +1826641 (May 8, 2014) (Order +Denying Motion for Permission +to File Late Petition for Review), +aff’d, SEC v. Gerasimowicz, No. +142392 (2d Cir. Jan. 5, 2015). +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Lyman J. Bruhn, Admin. +Proc. File No. 3-15074 +Advisers Act Release No. 3492, +2012 WL 5210802 (Oct. 23, +2012) +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Russell K. Cannon, Admin. +Proc. File No. 3-15314 +Advisers Act Release No. 3599, +2013 WL 1856025 (May 3, 2013) + +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization, with +the right to reapply after +two years +6 + +Jon Harvey Deal, Admin. +Proc. File No. 3-15380 +Advisers Act Release No. 3630, +2013 WL 3754825 (July 18, +2013) +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Huakang Zhou (a/k/a David +Zhou), Admin. Proc. File No. +3-15586 +Exchange Act Release No. +70749, 2013 WL 5740454 (Oct. +23, 2013) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Lee Heiss, Admin. Proc. File +No. 3-15823 +Exchange Act Release No. +71871, Investment Company Act +Release No. 31007, 2014 WL +1338258 (Apr. 4, 2014) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization + Jason Medvin, Admin. Proc. +File No. 3-15823 +Exchange Act Release No. +71871, Investment Company Act +Release No. 31007, 2014 WL +1338258 (Apr. 4, 2014) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Michael H. Johnson, Admin. +Proc. File No. 3-15874 +Exchange Act Release No. +72186, Investment Company Act +Release No. 31049, 2014 WL +2038878 (May 19, 2014) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization, with +the right to reapply after +five years +Everett C. Miller, Admin. +Proc. File No. 3-15896 +Advisers Act Release No. 3840, +2014 WL 2418766 (May 30, +2014) +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Demosthenes Dritsas, Admin. +Proc. File No. 3-16032 +Exchange Act Release No. +79200, 2014 WL 4160069 (Aug. +22, 2014) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +7 + +Duncan J. MacDonald, III , +Admin. Proc. File No. 3- +16181 +Exchange Act Release No. +74805, 2015 WL 1873125 (Apr. +24, 2015) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Bill C. (Billy) Crafton, Jr. +Admin. Proc. File No. 3- +16343 +Exchange Act Release No. +74070, Advisers Act Release No. +3998, 2015 WL (Jan. 15, 2015) +Municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Michael J. Salovay, Admin. +Proc. File No. 3-16354 +Exchange Act Release No. +75810, 2015 WL 5139107 (Sept. +2, 2015) (OIP settling proceeding +except for financial sanctions); +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Glen Allan Galemmo, Admin. +Proc. File No. 3-16359 +Exchange Act Release No. +74124, Advisers Act Release No. +4006, 2015 WL 300404 (Jan. 23, +2015) +Municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Todd J. Bergeron, Admin. +Proc. File No. 3-16366 +Securities Act Release No. 9717, +Exchange Act Release No. +74172, Investment Company Act +Release No. 31437, 2015 WL +365381 (Jan. 29, 2015) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Stephen A. Colangelo, Jr., +Admin. Proc. File No. 3- +16556 +Advisers Act Release No. 4189, +2015 WL 5172952 (Sept. 3, +2015) +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Mark G. Brickman, Admin. +Proc. File No. 3-16576 +Exchange Act Release No. +75113, Investment Company Act +Release No. 31661, 2015 WL +3526041 (June 5, 2015) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Mark E. Baratto, Admin. +Proc. File No. 3-16576 +Exchange Act Release No. +75113, Investment Company Act +Release No. 31661, 2015 WL +3526041 (June 5, 2015) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +8 + +Toby D. Hunter, Admin. Proc. +File No. 3-16687 +Advisers Act Release No. 4139, +2015 WL 4237640 (July 14, +2015) +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Gregory Bied, Admin. Proc. +File No. 3-16714 +Advisers Act Release No. 4154, +Investment Company Act Release +No. 31737, 2015 WL 4624261 +(Aug. 4, 2015) +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Murat M. Dorkan, Admin. +Proc. File No. 3-16725 +Securities Act Release No. 9878, +Exchange Act Release No. +75616, Advisers Act Release No. +4158, Investment Company Act +Release No. 31740, 2015 WL +4639725 (Aug. 5, 2015) +Municipal securities +dealer, transfer agent +Dean A. Esposito, Admin. +Proc. File No. 3-16736 +Exchange Act Release No. +75653, 2015 WL 4720296 (Aug. +10, 2015) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Shawn A. Becker, Admin. +Proc. File No. 3-16805 +Exchange Act Release No. +75891, 2015 WL 5305990 (Sept. +10, 2015) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Douglas J. Anisky, Admin. +Proc. File No. 3-16845 +Exchange Act Release No. +76012, 2015 WL 5693100 (Sept. +29, 2015) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Edward T. Borg, Admin. +Proc. File No. 3-16875 +Securities Act Release No. 9957, +Exchange Act Release No. +76055, Investment Company Act +Release No. 31853, 2015 WL +5718219 (Sept. 30, 2015) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Brian J. Mulkeen, Admin. +Proc. File No. 3-16875 +Securities Act Release No. 9957, +Exchange Act Release No. +76055, Investment Company Act +Association in a +supervisory capacity with +an investment adviser, +municipal securities +9 + +Release No. 31853, 2015 WL +5718219 (Sept. 30, 2015) +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +James Goodland, Admin. +Proc. File No. 3-16878 +Advisers Act Release No. 4213, +2015 WL 5729489 (Sept. 30, +2015) +Association in a +supervisory capacity or +compliance capacity with +any broker, dealer, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Arthur F. Jacob, CPA, LLC, +Admin. Proc. File No. 3- +16883 +Exchange Act Release No. +77618, Advisers Act Release No. +4367, Investment Company Act +Release No. 32072, 2016 WL +1460299 (Apr. 14, 2016) +Municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Jonathan Warren Brooks, +Admin. Proc. File No. 3- +16936 +Exchange Act Release No. +76896, Advisers Act Release No. +4313, 2016 WL 683558 (Jan. 13, +2016). +Municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Joseph A. Giordano, Admin +Proc. File No. 3-17137 +Exchange Act Release No. +77244, Advisers Act Release No. +4345, 2016 WL 792220 (Feb. 26, +2016) +Municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Bruce A. Hartshorn, Admin. +Proc. File No. 3-17216 +Exchange Act Release No. +77648, Advisers Act Release No. +4371, Investment Company Act +Release No. 32075, 2016 WL +1569651 (Apr. 19, 2016) +Municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Jose Alejandro Hurtado, +Admin. Proc. File No. 3- +17232 +Exchange Act Release No. +77729, 2016 WL 1660188 (Apr. +27, 2016) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +John Steven Blount, Admin. +Proc. File No. 3-17251 +Exchange Act Release No. +78398, Advisers Act Release No. +4462, 2016 WL 4363839 (July +22, 2016) +Municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +10 + +William Emery Matthews, +Admin. Proc. File No. 3- +17334 +Advisers Act Release No. 4449, +2016 WL 4363883 (July 11, +2016) +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization, with +the right to apply for +reentry after three years +Timothy A. Nemeckay, +Admin. Proc. File No. 3- +17360 +Exchange Act Release No. +78411, 2016 WL 4363846 (July +25, 2016) +Investment adviser, +municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Brad R. Hawkins, Admin. +Proc. File No. 3-17373 +Advisers Act Release No. 4478, +2016 WL 4363891 (Aug. 10, +2016) +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Pamella B. Watson, Admin. +Proc. File No. 3-17511 +Exchange Act Release No. +79079, Advisers Act Release No. +4547, 2016 WL 5903242 (Oct. +11, 2016) +Municipal securities +dealer, municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Mario Pincheira, Admin. +Proc. File No. 3-17521 +Advisers Act Release No. 4516, +2016 WL 4537733 (Aug. 31, +2016) +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +David Kayatta, Admin. Proc. +File No. 3-17522 +Advisers Act Release No. 4517, +2016 WL 4537680 (Aug. 31, +2016) +Broker, dealer, municipal +securities dealer, +municipal advisor, +transfer agent, nationally +recognized statistical +rating organization +Dennis Duban, CPA, Admin. +Proc. File No. 3-17612 +Exchange Act Release No. +79020, Advisers Act Release No. +4544, Accounting and Auditing +Enforcement Release No. 3812, +2016 WL 5673149 (Sept. 30, +2016) +Broker, dealer, municipal +securities dealer, transfer +agent + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4415.txt b/raw/aaer/2023/AAER-4415.txt new file mode 100644 index 0000000000000000000000000000000000000000..d0c63eda093de19e4f524cec2b8853835e57b1e8 --- /dev/null +++ b/raw/aaer/2023/AAER-4415.txt @@ -0,0 +1,395 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11200 / June 5, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97649 / June 5, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4415 / June 5, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21481 + +In the Matter of + + MICHAEL K. LAWLOR + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND 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 Michael K. Lawlor (“Lawlor” 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, Respondent consents to the entry of this Order Instituting Public +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 arises from Michael K. Lawlor’s role in the improper revenue +recognition practices by USA Technologies, Inc., the predecessor entity of Cantaloupe, Inc., +(“USAT”), between the fourth quarter fiscal year-end (“FY”) 2017 and third quarter-end FY 2018. +As a result, USAT, a Malvern, Pennsylvania-based manufacturer and distributor of cashless +payment devices, filed with the Commission materially misstated financial statements in its annual, +quarterly, and current reports filed with the Commission during the period. + +2. As USAT’s then-Chief Services Officer, Lawlor participated in USAT’s efforts to +maximize end-of-quarter revenue and meet internal sales targets – in contravention of its publicly- +stated sales and revenue recognition policies and generally accepted accounting principles +(“GAAP”). Lawlor facilitated USAT’s use of purported “bill and hold” sales transactions, a type +of sale that, if certain criteria are met, may properly result in a company recognizing revenue for a +transaction before shipping the product to the customer, without conforming those transactions to +GAAP principles. In addition, Lawlor participated in the shipment of certain devices to USAT +customers, who had not ordered or had explicitly told USAT that they wanted other devices that +were not available at the time, which led USAT to report inflated quarterly sales revenue. + +3. On September 11, 2018, the Company issued a Form 8-K filing announcing that it +was currently unable to file its 10-K for FY 2018. On October 9, 2019, the Company announced +the results of an Audit Committee internal investigation. As a result of that investigation, the +Company restated its FY 2017 Form 10-K and its Form 10-Q filings for the first three quarters of +FY 2018. The company overstated revenue by $2.56 million, or 2.53%, for FY 2017, and an +additional $2.05 million cumulatively for first three quarters of FY 2018, resulting in a total +overstatement of $4.61 million or 3.5%, for the entire period. + +4. Accordingly, Lawlor violated Sections 17(a)(2) and 17(a)(3) of the Securities Act +and Rule 13b2-1 of the Exchange Act and was a cause of USAT’s violations of Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13, and 12b-20 +thereunder. A violation of Section 17(a)(2) or 17(a)(3) does not require scienter and may be +established by a showing of negligence. Aaron v. SEC, 446 U.S. 680, 697 (1980); SEC v. Glt. Dain +Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001). + +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 + +Respondent + +5. Michael K. Lawlor, age 61, is a resident of Paoli, Pennsylvania. At all relevant +times, Lawlor was employed by USAT as Chief Services Officer until his resignation in January +2019. +Related Entity + +6. Cantaloupe, Inc. is a Pennsylvania corporation with its principal place of business +in Malvern, Pennsylvania. Its common stock is registered pursuant to Section 12(b) of the +Exchange Act and trades on the NASDAQ Stock Market under the symbol “CTLP.” Prior to April +15, 2021, and at all times relevant to this Order, the Company operated and traded under the name +“USA Technologies, Inc.” + +Facts + +USAT’s Business + +7. USAT facilitates electronic payment transactions primarily within the unattended +point of sale market and operates primarily within the small ticket beverage and food vending +industry in the United States. The company generates the majority of its revenues from the sale or +lease of its point of sale electronic payment devices and accompanying license, transaction and +service fees. + +USA Technologies’ Revenue Recognition Policy + +8. USA Technologies stated in its FY 2017 Form 10-K and its FY 2018 Form 10-Qs +for the relevant periods that it prepared its financial statements in accordance with GAAP. + +9. The relevant GAAP revenue recognition rules are set forth in Accounting Standards +Codification (“ASC”) Subtopic 605-10-25, Revenue Recognition - Recognition. Specifically, ASC +605-10-25-1 states that revenue is generally recognized when it is (1) earned and (2) realized or +realizable. Consistent with this GAAP principle, USAT stated in its FY 2017 10-K that “[i]n all +cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has +occurred or services have been rendered, the price is fixed and determinable, and collection of the +resulting receivable is reasonably assured.” + +Lawlor Contributes to USAT’s Improper Recognition of Revenue from Bill and Hold +Transactions that Did Not Meet the Requirements for Revenue Recognition + +10. On two occasions within days of the end of certain fiscal quarters in FY 2017 and +2018, Lawlor participated in the facilitation of transactions that led USAT to recognize revenue +from sales that had not been completed in contravention of both GAAP and USAT’s own revenue +recognition policies. As a result, USAT misrepresented the revenue USAT had earned by +improperly treating purported sales of its devices as “bill and hold” transactions. In this manner, + + 4 +USAT recognized revenue from the sale of payment devices before delivering those products to its +customers and before USAT expected its customers to pay for those products. + +11. In other words, on these occasions USAT recognized revenue from uncompleted +sales as if they were bona fide “bill and hold” transactions. That is, USAT would “bill” its +customers for payment (sending a bill that it did not expect to collect upon until after delivery) and +would “hold” the devices, if it even had them in stock, for future delivery (often at some indefinite +date). + +12. Generally, the criteria to recognize revenue from bona fide bill and hold +transactions require that: (i) the risks of ownership pass to the buyer; (ii) the buyer makes a fixed +commitment to purchase the goods; (iii) the buyer, not the seller, requests that the transaction be on +a bill and hold basis; (iv) the buyer has a substantial business purpose for the bill and hold +arrangement; (v) there is a fixed schedule for delivery of the goods; (vi) the seller does not retain +any specific performance obligations related to the sale; and (vii) the goods are complete and ready +for shipment at the time of the bill and hold transaction.2 USAT did not publicly disclose its use of +bill and holds and did not have a written policy regarding the use of bill and holds. + +13. The purported bill and hold transactions did not meet several of these criteria for +properly recording revenue. For example, late in the fourth quarter of FY 2017, Lawlor and +another USAT representative (“Executive A”) participated in an effort to persuade a customer to +purchase 5,000 devices despite the customer’s lack of an immediate need for the devices. When the +customer advised that it would not take possession of the devices by quarter-end, Lawlor consulted +with Executive A and approved a plan to temporarily ship the devices to a third party, to extend the +payment terms indefinitely, and to allow the customer to cancel the transaction within 90 days. +Lawlor never ensured that USAT’s finance function was informed of this arrangement for review +and proper accounting treatment. USAT improperly recognized approximately $1.17 million in +revenue as a result of this transaction – approximately one-quarter of the total amount of restated +revenue. + +14. In the third quarter of FY 2018, Lawlor participated in convincing a customer to +purchase 2,000 devices when the customer lacked an immediate need for the entire order. USAT, +in turn, arranged to hold the devices in its warehouse on behalf of the customer. The agreement, +which was signed by Lawlor on behalf of the Company, provided payment terms that allowed the +customer to withhold payment until the devices were delivered to the customer and installed on the +customer’s machines. Although USAT recognized revenue on the sale of all 2000 devices within +the third quarter of FY 2018, it only shipped 560 devices before quarter-end. USAT improperly +recognized approximately an additional $415,000 in revenue as a result of this transaction. + +15. Although USAT recorded these transactions as bill and hold sales, they failed to +meet the accounting criteria required for proper revenue recognition under GAAP and USAT’s +own revenue recognition policy because, among other reasons: USAT, through Lawlor, Executive + +2 See In re Stewart Parness, SEC Exchange Act Release No. 23507 (Aug. 5, 1986) + + 5 +A, and others, initiated the bill and hold treatment, not the customer; the customers did not have a +fixed commitment to purchase the goods in light of Lawlor’s modification to provide nonstandard, +flexible payment terms and/or return policy; and the devices lacked a fixed delivery date. As a +result, USAT improperly recognized revenue from these incomplete sales. + +Lawlor Contributes to USAT’s Improper Recognition +of Revenue Relating to the Shipment of Wrong Inventory + +16. In the second quarter of FY 2018, USAT lacked sufficient inventory to meet +customer demand for a certain type of cashless payment device (called “Seed”) and would not have +sufficient inventory to meet such demand until at least the following quarter. The Company, +however, had an excess inventory of a different type of device (called “ePort”). + +17. Lawlor and Executive A participated in an effort to solicit customers to purchase +the in-stock ePort devices and enable the Company to ship the goods before quarter-end. +However, two large USAT customers expressed that they wanted the Seed devices. Nonetheless, +USAT shipped ePort devices to those customers, with the explicit understanding that they could +exchange them for Seeds when they received new inventory. + +18. Late in the second quarter FY 2018, a customer who required Seed devices agreed +to purchase several thousand ePorts on the condition that the shipped order also included available +Seed devices and that the ePorts could be exchanged without penalty when inventory became +available. During the ensuing months, the customer exchanged a portion of the devices as USAT +Seed inventory became available. Lawlor signed the sales contract on behalf of USAT and advised +Executive A and others to ship the ePorts to the customer with the expressed promise to “swap +them out” with Seed units if the customer requested. + +19. During that same fiscal quarter, Lawlor and Executive A participated in a plan to +convince a customer to purchase 2,700 ePort devices before quarter-end instead of the desired Seed +devices. The customer, however, did not intend to accept delivery – a fact that was known to +Lawlor. USAT, with Lawlor’s approval, nevertheless shipped the devices to a third party who held +the devices until returning them to USAT during the following quarter. These two transactions +resulted in approximately $1.497 million in improperly recognized revenue for the second quarter +of FY 2018. + +20. On another occasion late in the third quarter of FY 2018, USAT incurred another +inventory shortage involving different versions of its ePort device. Faced with that shortage, +Lawlor approved the shipment of unwanted versions of its ePort to a customer to complete an +order without notifying the customer. Lawlor signed the agreement on behalf of USAT and helped +coordinate the return of the unwanted devices the following quarter. This transaction resulted in +approximately $861,000 in improperly recognized revenue for the quarter. + +21. In all of these transactions, USAT improperly recorded revenue because it expected +that the shipped devices would be returned by their customers when inventory of a different + + 6 +product became available. For this reason, USAT had not completed its sale by the end of that +quarter and could not properly realize income at the time of shipment. + +Lawlor Contributes to Material Errors in USAT’s Financial +Statements Included in Commission Filings + +22. As demonstrated in the table below, USAT materially misstated its consolidated +financial statements as of and for the FY ending June 30, 2017 included in the Company’s Form +10-K, filed on August 23, 2017, as well its consolidated financial statements for the quarterly +periods ended September 30, 2017, December 31, 2017, and March 30, 2018, included in the +Company’s 2017 and 2018 Forms 10-Q. + + (Amounts in 000s) FY 2017 Q1 2018 Q2 2018 Q3 2018 +Revenue as Reported 104,093 25,617 32,506 35,832 +Adjustment (2,568) (411) (866) (768) +Overstatement % 2.53% 1.63% 2.74% 2.19% + +Gross Profit as Reported 26,646 7,201 9,201 11,944 + Adjustment (1,405) (576) 359 (475) + Over/(under)statement % 5.57% 8.69% (3.76)% 4.14% + +Operating (loss) Income as +Reported 135 (552) (3,200) (500) +Adjustment (1,405) (576) 359 (9) +Over/(under)statement % 110.63% 51.06% (12.64)% 1.77% + +23. Lawlor signed internal certifications regarding the Company’s financial statements +despite failing to timely or fully apprise the Company’s finance function of the salient transaction +terms known to him, as described in this Order to allow for the proper accounting treatment of the +transactions. + +24. USAT’s internal accounting control “RE-03” required contract signers to notify the +Company’s Controller of any unusual terms and conditions or customer arrangements at the time +of signing. On multiple occasions when he signed sales agreements on USAT’s behalf, Lawlor +failed to comply with control RE-03. + +25. Lawlor received a cash bonus and stock award for FY 2017 based, in part, on the +Company’s improperly reported revenue figure. Lawlor voluntarily repaid USAT the portion of +his bonus attributable to the improperly reported revenue. + + + 7 + +USAT Offered and Issued Securities During the Relevant Time Period + +26. The Company conducted a public offering in May 2018. The offering prospectus, +filed with the SEC on May 23, 2018, incorporated by reference its SEC filings, which included the +materially misstated consolidated financial statements in the 2017 Form 10-K and the subsequent +Forms 10-Q. + +Violations + +27. As a result of the conduct described above, Lawlor 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. + +28. As a result of the conduct described above, Lawlor also violated Rule 13b2-1 of the +Exchange Act, which prohibits any person from, directly or indirectly, falsifying or causing to be +falsified, any book, record, or account subject to Exchange Act Section 13(b)(2)(A). + +29. As a result of the conduct described above, Lawlor also was a cause of USAT’s +violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 +thereunder, which require issuers to file accurate annual, current and quarterly reports, which +include such further information as may be necessary to make the required statements not +misleading.). + +30. As a result of the conduct described above, Lawlor also was a cause of USAT’s +violations of Section 13(b)(2)(A) of the Exchange Act, which requires an issuer to make and keep +books, records, and accounts which, in reasonable detail, accurately and fairly reflect the issuer’s +transactions and disposition of assets. + +31. As a result of the conduct described above, Lawlor also was a cause of USAT’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 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 and in the public interest to +impose the sanctions agreed to in Respondent Lawlor’s Offer. + + 8 + + Accordingly, pursuant to Section 8A of the Securities Act and Sections 15(b) and 21C of +the Exchange Act, is hereby ORDERED that: + +A. Respondent Lawlor 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), of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, +13a-13, and 13b2-1 thereunder. + +B. 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 +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 +Lawlor 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 Scott A. Thompson, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 1617 JFK Blvd., Suite 520, +Philadelphia, PA 19103. + + +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, he shall not argue that he is entitled to, nor shall he benefit by, + + 9 +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. + + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4416.txt b/raw/aaer/2023/AAER-4416.txt new file mode 100644 index 0000000000000000000000000000000000000000..de595904fc02c80f28b2e94bbf8b7046aa8ab42a --- /dev/null +++ b/raw/aaer/2023/AAER-4416.txt @@ -0,0 +1,381 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11201 / June 5, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97650 / June 5, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4416 / June 5, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21482 + +In the Matter of + + MAEVE M. DUSKA + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND 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 Maeve M. Duska. (“Duska” 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 her and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +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 arises from Maeve M. Duska’s role in the improper revenue recognition +practices by USA Technologies, Inc., the predecessor entity of Cantaloupe, Inc., (“USAT”), +between the fourth quarter fiscal year-end (“FY”) 2017 and second quarter-end FY 2018. As a +result, USAT, a Malvern, Pennsylvania-based manufacturer and distributor of cashless payment +devices, filed with the Commission materially misstated financial statements in its annual, +quarterly, and current reports filed with the Commission during the period. + +2. As USAT’s then-Vice President for Sales and Marketing, Duska participated in +USAT’s efforts to maximize end-of-quarter revenue and meet internal sales targets – in +contravention of its publicly-stated sales and revenue recognition policies and generally accepted +accounting principles (“GAAP”). Duska facilitated USAT’s use of a purported “bill and hold” +sales transaction, a type of sale that, if certain criteria are met, may properly result in a company +recognizing revenue for a transaction before shipping the product to the customer, without +conforming those transactions to GAAP principles. In addition, Duska participated in the shipment +of certain devices to USAT customers who had explicitly told USAT that they wanted other +devices that were not available at the time, which led USAT to report inflated quarterly sales +revenue. + +3. On September 11, 2018, the Company issued a Form 8-K filing announcing that it +was currently unable to file its 10-K for FY 2018. On October 9, 2019, the Company announced +the results of an Audit Committee internal investigation. As a result of that investigation, the +Company restated its FY 2017 Form 10-K and its Form 10-Q filings for the first three quarters of +FY 2018. The company overstated revenue by $2.56 million, or 2.53%, for FY 2017, and an +additional $2.05 million cumulatively for first three quarters of FY 2018, resulting in a total +overstatement of $4.61 million or 3.5%, for the entire period. + +4. Accordingly, Duska violated Sections 17(a)(2) and 17(a)(3) of the Securities Act +and Rule 13b2-1 of the Exchange Act and was a cause of USAT’s violations of Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13, and 12b-20 +thereunder. A violation of Section 17(a)(2) or 17(a)(3) does not require scienter and may be +established by a showing of negligence. Aaron v. SEC, 446 U.S. 680, 697 (1980); SEC v. Glt. Dain +Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001). + + + +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 +Respondent + +5. Maeve M. Duska, age 47, is a resident of Devon, Pennsylvania. At all relevant +times, Duska was employed by USAT as Vice President for Sales and Marketing. Duska resigned +as a full-time employee with USAT in May 2020. + +Related Entity + +6. Cantaloupe, Inc. is a Pennsylvania corporation with its principal place of business +in Malvern, Pennsylvania. Its common stock is registered pursuant to Section 12(b) of the +Exchange Act and trades on the NASDAQ Stock Market under the symbol “CTLP.” Prior to April +15, 2021, and at all times relevant to this Order, the Company operated and traded under the name +“USA Technologies, Inc.” + +Facts + +USAT’s Business + +7. USAT facilitates electronic payment transactions primarily within the unattended +point of sale market and operates primarily within the small ticket beverage and food vending +industry in the United States. The company generates the majority of its revenues from the sale or +lease of its point of sale electronic payment devices and accompanying license, transaction and +service fees. + +USA Technologies’ Revenue Recognition Policy + +8. USA Technologies stated in its FY 2017 Form 10-K and its FY 2018 Form 10-Qs +for the relevant periods that it prepared its financial statements in accordance with GAAP. + +9. The relevant GAAP revenue recognition rules are set forth in Accounting Standards +Codification (“ASC”) Subtopic 605-10-25, Revenue Recognition - Recognition. Specifically, ASC +605-10-25-1 states that revenue is generally recognized when it is (1) earned and (2) realized or +realizable. Consistent with this GAAP principle, USAT stated in its FY 2017 10-K that “[i]n all +cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has +occurred or services have been rendered, the price is fixed and determinable, and collection of the +resulting receivable is reasonably assured.” + +Duska Contributes to USAT’s Improper Recognition of Revenue from Bill and Hold +Transaction that Did Not Meet the Requirements for Revenue Recognition + +10. In the closing days of the fourth quarter of FY 2017, Duska participated in the +facilitation of a USAT sales contract that led USAT to improperly recognize revenue from a “bill +and hold” transaction that had not been completed in contravention of both GAAP and USAT’s +own revenue recognition policies. In this manner, USAT recognized revenue from the sale of +payment devices before delivering those products to its customer and before USAT expected its +customer to pay for those products. + 4 + +11. In other words, USAT recognized revenue from an uncompleted sale as if it were a +bona fide “bill and hold” transaction. That is, USAT would “bill” its customers for payment +(sending a bill that it did not expect to collect upon until after delivery) and would “hold” the +devices, if it even had them in stock, for future delivery (often at some indefinite date). + +12. Generally, the criteria to recognize revenue from bona fide bill and hold +transactions require that: (i) the risks of ownership pass to the buyer; (ii) the buyer makes a fixed +commitment to purchase the goods; (iii) the buyer, not the seller, requests that the transaction be on +a bill and hold basis; (iv) the buyer has a substantial business purpose for the bill and hold +arrangement; (v) there is a fixed schedule for delivery of the goods; (vi) the seller does not retain +any specific performance obligations related to the sale; and (vii) the goods are complete and ready +for shipment at the time of the bill and hold transaction.2 USAT did not publicly disclose its use of +bill and holds and did not have a written policy regarding the use of bill and holds. + +13. The purported bill and hold transaction did not meet several of these criteria for +properly recording revenue. Late in the fourth quarter of FY 2017, Duska and another USAT +representative (“Executive A”) participated in an effort to persuade a customer to purchase 5,000 +devices despite the customer’s lack of an immediate need for the devices. When the customer +advised that it would not take possession of the devices by quarter-end, Duska consulted with +Executive A to facilitate a plan to temporarily ship the devices to a third party, to extend the +payment terms indefinitely, and to allow the customer to cancel the transaction within 90 days. +USAT improperly recognized approximately $1.17 million in revenue as a result of this transaction +– approximately one-quarter of the total amount of restated revenue. + +14. Although USAT recorded this transaction as a bill and hold sale, it failed to meet +the accounting criteria required for proper revenue recognition under GAAP and USAT’s own +revenue recognition policy because, among other reasons: USAT, through Duska, Exectuive A, +and others, initiated the bill and hold treatment, not the customer; the customer did not have a fixed +commitment to purchase the goods in light of the Amendment, signed by Duska, to provide +nonstandard, flexible payment terms and return policy; and the devices lacked a fixed delivery +date. As a result, USAT improperly recognized revenue from these incomplete sales. + +Duska Contributes to USAT’s Improper Recognition of Revenue +Relating to the Shipment of Wrong Inventory + +15. In the second quarter of FY 2018, USAT lacked sufficient inventory to meet +customer demand for a certain type of cashless payment device (called “Seed”) and would not have +sufficient inventory to meet such demand until at least the following quarter. The Company, +however, had an excess inventory of a different type of device (called “ePort”). + +16. Duska and Executive A participated in an effort to solicit customers to purchase the +in-stock ePort devices and enable the Company to ship the goods before quarter-end. However, + +2 See In re Stewart Parness, SEC Exchange Act Release No. 23507 (Aug. 5, 1986) + 5 +two large USAT customers expressed that they wanted the Seed devices. Nonetheless, USAT +shipped ePort devices to those customers, with the explicit understanding that they could exchange +them for Seeds when they received new inventory. + +17. Late in the second quarter FY 2018, a customer who required Seed devices agreed +to purchase several thousand ePorts on the condition that the shipped order also included available +Seed devices and that the ePorts could be exchanged without penalty when inventory became +available. During the ensuing months, the customer exchanged a portion of the devices as USAT +Seed inventory became available. Duska, Executive A, and others arranged for the shipment of +ePorts to the customer with the expressed promise to “swap them out” with Seed units if the +customer requested. + +18. During that same fiscal quarter, Duska, and Executive A participated in a plan to +convince a customer to purchase 2,700 ePort devices before quarter-end instead of the desired Seed +devices. The customer, however, did not intend to accept delivery – a fact that was known to +Duska. USAT nevertheless shipped the devices to a third party who held the devices until +returning them to USAT during the following quarter. These two transactions resulted in +approximately $1.497 million in improperly recognized revenue for the second quarter of FY 2018. + +19. In each of these transactions, USAT improperly recorded revenue because it +expected that the shipped devices would be returned by their customers when inventory of a +different product became available. For this reason, USAT had not completed its sale by the end +of that quarter and could not properly realize income at the time of shipment. + +Duska’s Conduct Contributed to Material Errors to USAT’s Financial +Statements Included in Commission Filings + +20. As demonstrated in the table below, USAT materially misstated its consolidated +financial statements as of and for the FY ending June 30, 2017 included in the Company’s Form +10-K, filed on August 23, 2017, as well its consolidated financial statements for the quarterly +periods ended September 30, 2017 and December 31, 2017, included in the Company’s 2017 and +2018 Forms 10-Q. + + 6 + + (Amounts in 000s) FY 2017 Q1 2018 Q2 2018 +Revenue as Reported 104,093 25,617 32,506 +Adjustment (2,568) (411) (866) +Overstatement % 2.53% 1.63% 2.74% + +Gross Profit as Reported 26,646 7,201 9,201 + Adjustment (1,405) (576) 359 + Over/(under)statement % 5.57% 8.69% (3.76)% + +Operating (loss) Income as +Reported 135 (552) (3,200) +Adjustment (1,405) (576) 359 +Over/(under)statement % 110.63% 51.06% (12.64)% + +21. Duska signed internal certifications regarding the Company’s financial statements +despite failing to timely or fully apprise the Company’s finance function of the salient transaction +terms known to her, as described in this Order, to allow for the proper accounting treatment of the +transactions. + +22. USAT’s internal accounting control “RE-03” required contract signers to notify the +Company’s Controller of any unusual terms and conditions or customer arrangements at the time +of signing. On multiple occasions when she signed sales agreements on USAT’s behalf, Duska +failed to comply with control RE-03. + +23. Duska received a cash bonus for FY 2017 based, in part, on the Company’s +improperly reported revenue figure. + +USAT Offered and Issued Securities During the Relevant Time Period + +24. The Company conducted a public offering in May 2018. The offering prospectus, +filed with the SEC on May 23, 2018, incorporated by reference its SEC filings, which included the +materially misstated consolidated financial statements in the 2017 Form 10-K and the subsequent +Forms 10-Q. + +Violations + +25. As a result of the conduct described above, Duska 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. + + 7 +26. As a result of the conduct described above, Duska also violated Rule 13b2-1 of the +Exchange Act, which prohibits any person from, directly or indirectly, falsifying or causing to be +falsified, any book, record, or account subject to Exchange Act Section 13(b)(2)(A). + +27. As a result of the conduct described above, Duska also was a cause of USAT’s +violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 +thereunder, which require issuers to file accurate annual, current and quarterly reports, which +include such further information as may be necessary to make the required statements not +misleading.). + +28. As a result of the conduct described above, Duska also was a cause of USAT’s +violations of Section 13(b)(2)(A) of the Exchange Act, which requires an issuer to make and keep +books, records, and accounts which, in reasonable detail, accurately and fairly reflect the issuer’s +transactions and disposition of assets. + +29. As a result of the conduct described above, Duska also was a cause of USAT’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 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 and in the public interest to +impose the sanctions agreed to in Respondent Duska’s Offer. + + Accordingly, pursuant to Section 8A of the Securities Act and Sections 15(b) and 21C of +the Exchange Act, is hereby ORDERED that: + +A. Respondent Duska 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), of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, +13a-13, and 13b2-1 thereunder. + +B. Respondent shall pay disgorgement of $9,816, prejudgment interest of $1,933, and a +civil money penalty in the amount of $15,000 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: + + Due within 10 days of the entry of this Order: disgorgement of $9,816, prejudgment +interest of $1,933 and $5,000 of the civil money penalty + Due 180 days after the entry of this Order: $5,000; and + 8 + Due 360 days after the entry of this Order, $5,000, plus all remaining unpaid +principal and accrued interest. + +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 +Duska 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 Scott A. Thompson, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 1617 JFK Blvd., Suite 520, +Philadelphia, PA 19103. + + +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, 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 + 9 +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/2023/AAER-4417.txt b/raw/aaer/2023/AAER-4417.txt new file mode 100644 index 0000000000000000000000000000000000000000..041d5e74fd2718d1980646b44934e68d865ca8ad --- /dev/null +++ b/raw/aaer/2023/AAER-4417.txt @@ -0,0 +1,381 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11202 / June 5, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97651 / June 5, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4417 / June 5, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21483 + +In the Matter of + +CANTALOUPE, INC. +(formerly d/b/a USA +TECHNOLOGIES, INC.) + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND 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 Cantaloupe, Inc., formerly d/b/a USA Technologies, Inc. (“USA Technologies”, +“USAT”, or the “Company”). + +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 +Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section + 2 +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: + +Summary + +1. This matter concerns improper revenue recognition by USA Technologies, Inc., a +Malvern, Pennsylvania-based manufacturer and distributor of cashless payment devices beginning +in the fourth quarter of fiscal year (“FY”) 2017 and continuing through the third quarter of FY +2018. As a result, USAT filed with the Commission materially misstated financial statements in its +annual, quarterly, and current reports filed with the Commission during the period. + +2. The misstatements primarily resulted from USAT’s efforts to maximize end-of- +quarter revenue and meet internal sales targets – in contravention of its publicly-stated sales and +revenue recognition policies and generally accepted accounting principles (“GAAP”) – in two +ways. First, USAT entered into purported “bill and hold” sales transactions, a type of sale that, if +certain criteria are met, may properly result in a company recognizing revenue for a transaction +before shipping the product to the customer, without conforming those transactions to GAAP +principles. Second, USAT inflated its quarterly sales revenue by deliberately shipping to its +customers devices the customers had not ordered or had explicitly told USAT they did not want. + +3. On September 11, 2018, the Company issued a Form 8-K filing announcing that it +was currently unable to file its 10-K for Fiscal Year 2018. On October 9, 2019, the Company +announced the results of an Audit Committee internal investigation. As a result of that +investigation, the Company restated its FY 2017 Form 10-K and its Form 10-Q filings for the first +three quarters of FY 2018. The company overstated revenue by $2.56 million, or 2.53%, for Fiscal +Year 2017, and an additional $2.05 million cumulatively for first three quarters of FY 2018, +resulting in a total overstatement of $4.61 million or 3.5%, for the entire period. + +4. Accordingly, USAT violated Sections 17(a)(2) and 17(a)(3) of the Securities Act +and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-11, +13a-13, and 12b-20 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 +Respondent + +5. Cantaloupe, Inc. is a Pennsylvania corporation with its principal place of business +in Malvern, Pennsylvania. Its common stock is registered pursuant to Section 12(b) of the +Exchange Act and trades on the NASDAQ Stock Market under the symbol “CTLP.” Prior to April +15, 2021, and at all times relevant to this Order, the Company operated and traded under the name +“USA Technologies, Inc.” + +Facts + +USAT’s Business + +6. USAT facilitates electronic payment transactions primarily within the unattended +point of sale market and operates primarily within the small ticket beverage and food vending +industry in the United States. The company generates the majority of its revenues from the sale or +lease of its point of sale electronic payment devices and accompanying license, transaction and +service fees. + +USA Technologies’ Revenue Recognition Policy + +7. USA Technologies stated in its 2017 Form 10-K and its 2018 Form 10-Qs for the +relevant periods that it prepared its financial statements in accordance with GAAP. + +8. The relevant GAAP revenue recognition rules are set forth in Accounting Standards +Codification (“ASC”) Subtopic 605-10-25, Revenue Recognition - Recognition. Specifically, ASC +605-10-25-1 states that revenue is generally recognized when it is (1) earned and (2) realized or +realizable. Consistent with this GAAP principle, USAT stated in its Fiscal Year 2017 10-K that +“[i]n all cases, revenue is only recognized when persuasive evidence of an arrangement exists, +delivery has occurred or services have been rendered, the price is fixed and determinable, and +collection of the resulting receivable is reasonably assured.” + +USAT Improperly Recognizes Revenue from Bill and Hold Transactions That Did Not Meet the +Requirements for Revenue Recognition + +9. On two occasions within days of the end of certain fiscal quarters in FY 2017 and +2018, USAT recognized revenue for sales that had not been completed or otherwise never occurred +in contravention of both GAAP and USAT’s own revenue recognition policies. USAT +misrepresented the revenue USAT had earned by improperly treating purported sales of its devices +as “bill and hold” transactions. In this manner, USAT recognized revenue from the sale of +payment devices before delivering those products to its customers and before USAT expected its +customers to pay for those products. + +10. In other words, on these occasions USAT recognized revenue from uncompleted +sales as if they were bona fide “bill and hold” transactions. That is, USAT would “bill” its +customers for payment (sending a bill that it did not expect to collect upon until after delivery) and + 4 +would “hold” the devices, if it even had them in stock, for future delivery (often at some indefinite +date). + +11. Generally, the criteria to recognize revenue from bona fide bill and hold +transactions require that: (i) the risks of ownership pass to the buyer; (ii) the buyer makes a fixed +commitment to purchase the goods; (iii) the buyer, not the seller, requests that the transaction be on +a bill and hold basis; (iv) the buyer has a substantial business purpose for the bill and hold +arrangement; (v) there is a fixed schedule for delivery of the goods; (vi) the seller does not retain +any specific performance obligations related to the sale; and (vii) the goods are complete and ready +for shipment at the time of the bill and hold transaction.2 USAT did not publicly disclose its use of +bill and holds and did not have a written policy regarding the use of bill and holds. + +12. The purported sales that USAT counted as bill and hold transactions did not meet +several of these criteria for properly recording revenue. For example, late in the fourth quarter of +FY 2017, USAT representatives, in an effort to meet quarter-end sales projections, convinced a +customer to purchase 5,000 devices despite the customer’s lack of an immediate need for the +devices. When the customer informed USAT that it would not take possession of the devices by +quarter-end, USAT elected to ship the devices to a third party who agreed to hold the devices. +USAT also extended the payment terms indefinitely and allowed for the cancellation of the +transaction within 90 days. USAT improperly recognized approximately $1.17 million in revenue +as a result of this transaction – approximately one-quarter of the total amount of restated revenue. + +13. Similarly, late in the third quarter of FY 2018, USAT convinced a customer to +purchase 2,000 devices when the customer lacked an immediate need for the entire order. USAT, +in turn, arranged to hold the devices in its warehouse on behalf of the customer, and provided +payment terms that allowed the customer to withhold payment until the devices were delivered to +the customer and installed on the customer’s machines. Although USAT recognized revenue on +the sale of all 2000 devices within the third quarter of FY 2018, it only shipped 560 devices before +quarter-end. USAT improperly recognized approximately an additional $415,000 in revenue as a +result of this transaction. + +14. Although USAT recorded these transactions as bill and hold sales, they failed to +meet the accounting criteria required for proper revenue recognition under GAAP and USAT’s +own revenue recognition policy because, among other reasons: USAT initiated the bill and hold +treatment, not the customer; the customers did not have a fixed commitment to purchase the goods +in light of nonstandard, flexible payment terms and/or return policy; and the transactions lacked a +fixed delivery date. As a result, USAT improperly recognized revenue from these incomplete +sales. + +USAT’s Recognition of Revenue Relating to the Shipment of Wrong Inventory + +15. In the second quarter of FY 2018, USAT lacked sufficient inventory to meet +customer demand for a certain type of cashless payment device (called “Seed”) and would not have + +2 See In re Stewart Parness, SEC Exchange Act Release No. 23507 (Aug. 5, 1986) + 5 +sufficient inventory until at least the following quarter. The Company, however, had an excess of +a different type of device (called “ePort”). + +16. In order to meet its sales goals for that quarter, USAT solicited customers to +purchase the in-stock ePort devices and enable the Company to ship the goods before quarter-end. +However, two large USAT customers made it clear to Company representatives that they had no +interest in using ePorts. USAT convinced those customers to order ePort devices anyway, with the +explicit understanding that they could exchange them for Seeds when they received new inventory. + +17. Late in the second quarter FY 2018, a customer who required Seed devices agreed +to purchase several thousand ePorts on the condition that the shipped order also included available +Seed devices and that the ePorts could be exchanged without penalty when inventory became +available. During the ensuing months, the customer exchanged the devices as USAT Seed +inventory became available. + +18. During that same fiscal quarter, after weeks of attempting to convince a customer to +agree to purchase 2,700 ePort devices before the end of the quarter when the customer actually +wanted Seed devices, the customer acquiesced and agreed to arrangement that included the +purchase of ePort” devices before quarter-end. The customer, however, never intended to accept +delivery – a fact that was known to certain USAT executives. In fact, USAT shipped the devices +to a third party who held the devices until returning them to USAT during the following quarter. +These two transactions resulted in approximately $1.497 million in improperly recognized revenue +for the second quarter of FY 2018. + +19. On another occasion late in the third quarter of FY 2018, USAT faced another +inventory shortage involving different versions of its ePort device. Faced with that shortage, +USAT intentionally sent unwanted versions of its ePort to a customer to complete an order without +notifying the customer. When the customer inquired about the shipment, USAT blamed “shipping +mistakes” and accepted the return of the devices the following quarter. This transaction resulted in +approximately $861,000 in improperly recognized revenue for the quarter. + +20. In all of these transactions, USAT improperly recorded revenue because it expected +that the shipped devices would be returned by their customers when inventory of a different +product became available. For this reason, USAT had not completed its sale and could not +properly realize income at the time of shipment. + +USAT Restated Multiple Financial Statements Included in Commission Filings + +21. As demonstrated in the table below, USAT materially misstated its consolidated +financial statements as of and for the fiscal year ended June 30, 2017 included in the Company’s +Form 10-K, filed on August 23, 2017, as well its consolidated financial statements for the quarterly +periods ended September 30, 2017, December 31, 2017, and March 30, 2018, included in the +Company’s 2017 and 2018 Forms 10-Q. + + + 6 + + (Amounts in 000s) FY 2017 Q1 2018 Q2 2018 Q3 2018 +Revenue as Reported 104,093 25,617 32,506 35,832 +Adjustment (2,568) (411) (866) (768) +Overstatement % 2.53% 1.63% 2.74% 2.19% + +Gross Profit as Reported 26,646 7,201 9,201 11,944 + Adjustment (1,405) (576) 359 (475) + Over/(under)statement % 5.57% 8.69% (3.76)% 4.14% + +Operating (loss) Income as +Reported 135 (552) (3,200) (500) +Adjustment (1,405) (576) 359 (9) +Over/(under)statement % 110.63% 51.06% (12.64)% 1.77% + + +22. In the restatement, USAT acknowledged that, among other things: (a) pressure to +achieve sales targets gave rise to the premature and/or inappropriate recognition of revenues, +typically occurring at or near the end of financial reporting periods; (b) on multiple occasions, the +Company’s finance function was not timely or fully apprised of the salient transaction terms in +order to permit them to properly evaluate the accounting treatment of a given transaction; and (c) +the Company’s internal controls failed and/or were not adequate to ensure that there was effective +communication between the sales and finance functions of the Company so as to allow proper and +timely evaluation of the accounting treatment of the examined transactions. The Company also +acknowledged that senior management did not timely or fully report or investigate certain +employee concerns relating to compliance or financial reporting matters. + +USAT Offered and Issued Securities During the Relevant Time Period + +23. The Company conducted a public offering in May 2018. The offering prospectus, +filed with the SEC on May 23, 2018, incorporated by reference its SEC filings, which included the +materially misstated consolidated financial statements in the 2017 Form 10-K and the subsequent +Forms 10-Q. + +USAT’s Self-Reporting and Remedial Efforts + +24. In determining to accept USAT’s Offer, the Commission considered the +cooperation it provided during the staff’s investigation. The company promptly self-reported, +voluntarily provided information to the Commission staff, and undertook remedial and disciplinary +measures relating to the conduct described in this Order. + + + + + 7 +Violations + +25. As a result of the conduct described above, USAT 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. + +26. As a result of the conduct described above, USAT also violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder, which require issuers to +file accurate annual, current and quarterly reports, which include such further information as may +be necessary to make the required statements not misleading.). + +27. As a result of the conduct described above, USAT also violated Section 13(b)(2)(A) +of the Exchange Act, which requires an issuer to make and keep books, records, and accounts +which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of +assets. + +28. As a result of the conduct described above, USAT violated 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 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 and in the public interest to +impose the sanctions agreed to in Respondent USA Technologies’ Offer. + + Accordingly, pursuant to Section 8A of the Securities Act and Sections 15(b) and 21C of +the Exchange Act, is hereby ORDERED that: + +A. Respondent USA Technologies 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), of the Exchange Act and Rules 12b- +20, 13a-1, 13a-11, and 13a-13 thereunder. + +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money penalty +in the amount of $1,500,000 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. + 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 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 +USA Technologies 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 Scott +A. Thompson, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 1617 JFK Blvd., Suite 520, Philadelphia, PA 19103. + + +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, he, 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 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 + + 9 +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/2023/AAER-4418.txt b/raw/aaer/2023/AAER-4418.txt new file mode 100644 index 0000000000000000000000000000000000000000..8f69f80fa8a399b82119be71e0d8dce8db2c21f7 --- /dev/null +++ b/raw/aaer/2023/AAER-4418.txt @@ -0,0 +1,743 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97685 / June 9, 2023 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4418 / June 9, 2023 +ADMINISTRATIVE PROCEEDING +File No. 3-21486 +In the Matter of +Boyle CPA, LLC and +Robert Allan Boyle, 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 +Boyle CPA, LLC (“Boyle CPA”) and Robert Allan Boyle (“R. Boyle”) (collectively, +“Respondents”) 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 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, 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 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 + +A. SUMMARY + +1. This matter involves improper professional conduct by Boyle CPA and R. Boyle, +its sole member and employee, in conducting multiple audits of seven public issuers - Client A, +Client B, Client C, Client D, Client E, Client F, and Client G (collectively, “Issuer Clients”). + +2. From January 2020 through April 2022 (“relevant period”), Respondents failed to +comply with the professional standards of the Public Company Accounting Oversight Board +(“PCAOB”) in conducting audits of the Issuer Clients because they did not, for one or more of +the Issuer Clients: (1) complete and maintain adequate audit documentation; (2) communicate +with clients’ boards of directors; (3) communicate with clients’ predecessor auditors; (4) +adequately audit inventory; (5) have adequate and timely engagement quality reviews (“EQRs”) +conducted; and (6) exercise due professional care. As a result, Respondents violated 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 Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +3. During the relevant period, Client C, Client D, and Client G filed periodic reports +with the Commission pursuant to Section 13(a) of the Exchange Act, and Client A, Client B, +and Client F filed periodic reports with the Commission pursuant to Section 15(d) of the +Exchange Act. These reports stated that their financial statements were audited by Boyle CPA +in conformity with PCAOB standards. R. Boyle, on behalf of Boyle CPA, failed to conduct +these clients’ audits pursuant to PCAOB standards. Accordingly, Respondents caused Client C, + +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 - + +Client D, and Client G to violate Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, +and caused Client A, Client B, and Client F to violate Section 15(d) of the Exchange Act and +Rule 15d-1 thereunder. + +B. RESPONDENTS + +4. Boyle CPA, LLC (“Boyle CPA”) is a New Jersey limited liability company +formed in May 2016 with its principal place of business in Red Bank, New Jersey. Boyle CPA +has been registered with the PCAOB since June 2016. Robert A. Boyle is the sole member of +Boyle CPA. Boyle CPA has no employees. For the Issuer Clients’ audits referenced herein, +Boyle CPA retained independent contractors to assist with the audits. + +5. Robert A. Boyle (“R. Boyle”), age 50, resides in Bayville, New Jersey. R. Boyle +is a certified public accountant registered in the state of New Jersey and is the sole member of +Boyle CPA. + +C. RELEVANT INDIVIDUAL AND ENTITIES + +6. Engagement Quality Reviewer, age 33, currently resides in Pakistan. +Engagement Quality Reviewer is a certified public accountant registered in the state of +California. Boyle CPA contracted with the Engagement Quality Reviewer to conduct +engagement quality reviews for certain Issuer Clients. + +7. Client A is a Nevada corporation with its principal place of business in Los +Angeles, California. Client A purports to produce and sell cannabis products to California +licensed cannabis retailers and distributors. Client A’s common stock is traded on OTC Link +whose parent company is OTC Markets Group Inc. Client A files periodic reports with the +Commission pursuant to Section 15(d) of the Exchange Act. Boyle CPA audited its financial +statements for the years ended August 31, 2015 through August 31, 2021. Client A included +these audited annual financial statements in certain Form S-1 filings. + +8. Client B is a Nevada corporation with its principal place of business in Liverpool, +New York. Client B is a non-operating shell company. Client B’s common stock is traded on +OTC Link. Client B files periodic reports with the Commission pursuant to Section 15(d) of the +Exchange Act. Boyle CPA audited Client B’s financial statements for the years ended December +31, 2019 and 2020. + +9. Client C is a Nevada corporation with its principal place of business in Sarasota, +Florida. Client C purports to conduct business involving financial services technology and +wireless telecommunications infrastructure. Client C’s common stock is registered with the +Commission pursuant to Section 12(g) of the Exchange Act and is traded on OTC Link. Client C +files periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act. Boyle +CPA audited its financial statements for the years ended July 31, 2019, 2020, and 2021. + +10. Client D is a New Jersey corporation with its principal place of business in +Gaithersburg, Maryland. Client D purports to operate an artificial intelligence and machine + +- 4 - + +learning business. Client D’s common stock is registered with the Commission pursuant to +Section 12(g) of the Exchange Act and traded on OTC Link. Client D files periodic reports with +the Commission pursuant to Section 13(a) of the Exchange Act. Boyle CPA audited its financial +statements for the years ended June 30, 2020, and 2021. Client D included these financial +statements in a Form S-1 dated February 4, 2022, which was declared abandoned by the +Commission on January 11, 2023. + +11. Client E is a Nevada corporation with its principal place of business in El Cajon, +California. Client E purports to be an integrated single-source power HVAC and roofing systems +installation company. Client E’s common stock is traded on OTC Link. Boyle CPA audited its +financial statements for the year ended February 29, 2020, which were included in a Form 10 +Registration Statement filed in March 2021. Client E subsequently withdrew the offering. + +12. Client F is a Nevada corporation with its principal place of business in Neptune, +New Jersey. Client F purports to distribute and sell rubber seal products. Client F’s common +stock is traded on OTC Link. Client F files periodic reports with the Commission pursuant to +Section 15(d) of the Exchange Act. Boyle CPA audited its financial statements for the years +ended December 31, 2018, 2019, 2020, and 2021. + +13. Client G is a Delaware corporation with its principal place of business in +Stafford, Texas. Client G purports to be an international supplier of consumer food products. +Client G’s common stock is registered with the Commission pursuant to Section 12(g) of the +Exchange Act and is traded on OTC Link. Client G files periodic reports with the Commission +pursuant to Section 13(a) of the Exchange Act. Boyle CPA audited its financial statements for +the years ended October 31, 2020, and 2021. + +D. FACTS + +Background Regarding Boyle CPA and R. Boyle + +14. As the sole member of Boyle CPA, R. Boyle performed substantially all of its +audit work during the relevant period. Boyle CPA’s clients largely consist of small publicly +traded companies. Boyle CPA engaged independent contractors to assist with Issuer Clients’ +audits. Boyle CPA also contracted with the Engagement Quality Reviewer to conduct +engagement quality reviews for certain of the Issuer Clients’ audits. +Respondents Failed to Maintain Adequate Audit Documentation +15. AS 1215 requires auditors to prepare audit documentation for each engagement +conducted. Such audit documentation includes, for example, records of the planning and +performance of the work, the procedures performed, evidence obtained, and conclusions reached +by the auditor. AS 1215.02. The documentation must: (a) demonstrate that the engagement +complied with PCAOB standards; (b) support the basis for the auditor’s conclusions concerning +every relevant financial statement assertions; and (c) demonstrate that the underlying accounting +records agreed or reconciled with the financial statements. AS 1215.05. + +- 5 - + +16. In connection with the Client D audit for the year ended June 30, 2021, +Respondents failed to document or adequately document their audit procedures concerning: (a) +how Respondents tested accounts receivable; (b) calculations of depreciation and expenses for +property and fixed assets; (c) complete vouching, including references to supporting documents +of invoices and disbursements for other assets; (d) steps taken to assess the disclosed prepaid +expenses; and (e) analysis or conclusions of accrued interest, notes payable, or professional fees. +17. In connection with the Client G audit for the year ended October 31, 2020, +Respondents failed to document or adequately document their audit procedures concerning: (a) +conclusions regarding the adequacy of a reserve for slow moving or obsolete inventory; and (b) +analysis and testing of the year-end inventory balance. +18. In connection with the Client G audit for the year ended October 31, 2021, +Respondents failed to document or adequately document their audit procedures concerning: (a) +conclusions regarding the adequacy of a reserve for slow moving or obsolete inventory; (b) +observation of year-end physical inventory; (c) timing of the year-end physical inventory; (d) +basis for conducting year-end physical inventory observation via Zoom; (e) calculations and +supporting documentation for payroll taxes and corporate business taxes; and (f) discussions with +the client’s predecessor auditor. +19. In connection with the Client F audit for the year ended December 31, 2020, +Respondents failed to document or adequately document their audit procedures concerning: (a) +how Respondents tested accounts receivable; (b) conclusions regarding the adequacy of a reserve +for slow moving or obsolete inventory; and (c) testing and supporting documentation for income +taxes. +20. In connection with the Client A audit for the year ended August 31, 2020, +Respondents failed to document or adequately document their audit procedures concerning +conclusions regarding the adequacy of a reserve for slow moving or obsolete inventory. +21. In connection with the Client A audit for the year ended August 31, 2021, +Respondents failed to document or adequately document their audit procedures concerning: (a) +how Respondents tested accounts receivable; and (b) conclusions regarding the adequacy of a +reserve for slow moving or obsolete inventory. +Respondents Failed to Communicate with Issuer Clients’ Boards of Directors +22. AS 1301 requires auditors to communicate with the client’s audit committee or, if +there is no audit committee, the board of directors. The communications should discuss certain +matters related to the conduct of the audit such as, for example, significant transactions that are +outside the normal course of business for the company. AS1301.12(d). The auditor should +include documentation in the work papers that addresses the form of communication held with +the audit committee or board of directors, and the topics addressed. +23. During the relevant period, Client A, Client B, and Client F lacked audit +committees. + +- 6 - + +24. Respondents failed to communicate with Client A’s board of directors in +connection with the audits for years ended August 31, 2020 and 2021. +25. Respondents failed to communicate with Client B’s board of directors in +connection with the audit for year ended December 31, 2019. +26. Respondents failed to communicate with Client F’s board of directors in +connection with the audit for year ended December 31, 2020. +Respondents Failed to Communicate with Issuer Clients’ Predecessor Auditors +27. AS 2101 requires the auditor to communicate with the predecessor auditor when +there has been a change of auditors. AS 2101.18(b). AS 2610 provides an auditor must +communicate with the predecessor auditor and evaluate those communications before +determining whether to accept an audit engagement. AS 2610.03; AS 2610.07 - AS 2610.10. The +successor auditor should make specific and reasonable inquiries of the predecessor auditor, such +as disagreements with management as to accounting principles, auditing procedures, and the +predecessor auditor’s understanding as to the reasons for the change of auditors. AS 2610.09. +28. Respondents accepted Client D’s audit engagement without making specific or +reasonable inquiries of Client D’s predecessor auditor. Likewise, during the relevant period, +Respondents never communicated with Client D’s predecessor auditor. +29. Respondents accepted Client E’s audit engagement without making specific or +reasonable inquiries of Client E’s predecessor auditor. Likewise, during the relevant period, +Respondents never communicated with Client E’s predecessor auditor. +Respondents Failed to Adequately Audit Inventory for Issuer Clients +30. AS 2510 requires auditors to adequately audit inventory, stating that +“[o]bservation of inventories is a generally accepted auditing procedure. The independent auditor +who issues an opinion when he has not employed them must bear in mind that he has the burden +of justifying the opinion expressed.” AS 2510.01. During the COVID-19 pandemic, auditors +continued to be responsible for assessing inventory and obtaining sufficient audit evidence in +accordance with PCAOB standards and rules. +31. Before the COVID-19 pandemic, Respondents did not perform an inventory +observation and did not sufficiently justify the determination for not performing such procedures +or how they obtained sufficient appropriate audit evidence as to inventory for certain of Boyle +CPA’s clients. For example, neither R. Boyle, nor anyone else on behalf of Boyle CPA, ever +personally visited California-based Client A and Client E. +32. During the COVID-19 pandemic and the relevant time period, Respondents did +not document or adequately document their procedures, analysis, recalculations, or tests used, if +any, to conduct physical inventory observations, including the adequacy of inventory reserves, +for Client A’s audits for the years ended August 31, 2020 and 2021, Client F’s audit for year +ended December 31, 2020, and Client G’s audit for years ended October 31, 2020 and 2021. + +- 7 - + +Respondents Failed to Obtain Timely and Adequate Engagement Quality Reviews +33. AS 1220 requires an auditor to obtain an EQR for each audit and to sufficiently +document the activities performed by the engagement quality reviewer before issuing a final +audit report. “The objective of the engagement quality reviewer is to perform an evaluation of +the significant judgments made by the engagement team and the related conclusions reached in +forming the overall conclusion on the engagement and in preparing the [auditor’s] . . . report . . . +in order to determine whether to provide concurring approval of issuance.” AS 1220.02. +34. During the relevant period, Boyle CPA retained Engagement Quality Reviewer +for certain of the Issuer Clients. None of the Issuer Clients’ workpapers reflect what steps and +procedures, if any, Engagement Quality Reviewer used to conduct and complete adequate EQRs. +35. Engagement Quality Reviewer did not sign the workpapers for Client D’s audit +for the year ended June 30, 2020, Client E’s audit for the year ended February 29, 2020, and +Client F’s audit for the year ended December 31, 2019. +36. Boyle CPA issued final audit reports before the Engagement Quality Reviewer +finalized and signed EQRs or provided a concurring approval of issuance for Client A’s audit for +the years ended August 31, 2020 and August 31, 2021, Client B’s audit for the year ended +December 31, 2020, Client C’s audit for the year ended July 31, 2020, and Client G’s audit for +the year ended October 31, 2020. +Failure to Exercise Due Professional Care +37. AS 1015 states that auditors are required to exercise due professional care, +including an attitude of professional skepticism throughout the audit. In the Issuer Clients’ +audits, Respondents did not exercise due professional care, including an attitude of skepticism. +38. As a result of Respondents’ conduct described above, Respondents failed to +exercise due professional care and an attitude of professional skepticism as required by AS 1015. +Issuer Clients Reported Boyle CPA Conducted Audits Pursuant to PCAOB Standards +39. During the relevant period, Client C, Client D, and Client G had reporting +obligations under Section 13(a) of the Exchange Act. During the relevant period, they filed +periodic reports with the Commission which contained audit reports prepared by Boyle CPA +which stated that their financial statement audits were conducted in accordance with PCAOB +standards. +40. During the relevant period, Client A, Client B, and Client F had reporting +obligations under Section 15(d) of the Exchange Act. As a result, each of these clients filed +periodic reports with the Commission which contained audit reports prepared by Boyle CPA +which stated that their financial statement audits were conducted in accordance with PCAOB +standards. + + +- 8 - + +41. R. Boyle and Boyle CPA knew, or should have known, that these clients with +reporting obligations would include in their relevant filings audit reports which stated that Boyle +CPA’s financial statement audits were performed in accordance with PCAOB standards when, in +fact, they were not. In light of the audit failures discussed above, R. Boyle and Boyle CPA also +knew that the audits failed to adhere to PCAOB standards. +Violations + +42. 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). +An auditor violates Rule 2-02(b)(1) of Regulation S-X if it issues a report stating it has +conducted its audit in accordance with PCAOB standards when it has not. +43. Based on the foregoing conduct, Boyle CPA committed violations of Rule 2- +02(b)(1) of Regulation S-X and R. Boyle caused Boyle CPA’s violations of Rule 2-02(b)(1) of +Regulation S-X. +44. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require all issuers +with securities registered under Section 12 of the Exchange Act to file annual reports with the +Commission in conformity with the Commission’s rules and regulations. The obligation to file +such reports embodies the requirement that they be true and correct. +45. Based on the foregoing conduct, Respondents caused violations of Section 13(a) +of the Exchange Act and Rule 13a-1 thereunder committed by Client C, Client D, and Client G. +In order to establish that a person caused a non-scienter based violation, a showing of negligence +will suffice. +46. Section 15(d) of the Exchange Act and Rule 15d-1 thereunder require all issuers +with an effective registration statement pursuant to the Securities Act to file with the +Commission annual reports in conformity with the Commission’s rules and regulations. The +obligation to file such reports embodies the requirement that they be true and correct. +47. Based on the foregoing, Respondents caused violations of Section 15(d) of the +Exchange Act and Rule 15d-1 thereunder committed by Client A, Client B, and Client F. +48. 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 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). + + +- 9 - + +49. Based on the foregoing, Respondents 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. + +Disgorgement and Civil Penalties + +50. The disgorgement and prejudgment interest ordered in paragraph IV.Y is +consistent with equitable principles and does not exceed Respondents net profits from their +violations, and returning the money to Respondents 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.Y 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 Respondents’ Offers. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Respondents shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02(b)(1) of Regulation S-X and Sections 13(a) and 15(d) of the +Exchange Act and Rules 13a-1 and 15d-1 promulgated thereunder. +B. R. Boyle and Boyle CPA are denied the privilege of appearing or practicing +before the Commission as accountants. +C. After three years from the date of the Order, R. Boyle may request that the +Commission consider R. Boyle’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, +R. Boyle shall submit a written statement attesting to an undertaking to have R. Boyle’s work +reviewed by the independent audit committee of any public company for which R. Boyle works +or in some other manner acceptable to the Commission, as long as R. Boyle 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, R. + +- 10 - + +Boyle shall submit a statement prepared by the audit committee(s) with which Respondent R. +Boyle will be associated, including the following information: +1. A summary of the responsibilities and duties of the specific audit +committee(s) with which R. Boyle will be associated; +2. A description of R. Boyle’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 R. Boyle’s service on the specific +audit committee; and +5. A statement noting whether R. Boyle 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, R. Boyle must be +associated with a public accounting firm registered with the PCAOB and R. Boyle shall submit +the following additional information: +1. A statement from the public accounting firm (the “Firm”) with which R. +Boyle 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 R. Boyle 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 R. Boyle will not receive appropriate supervision; and +3. A statement from R. Boyle indicating that the PCAOB has taken no +disciplinary actions against R. Boyle 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, R. Boyle shall provide +documentation showing that R. Boyle is currently licensed as a certified public accountant +(“CPA”) and that R. Boyle has resolved all other disciplinary issues with any applicable state +boards of accountancy. If R. Boyle is not currently licensed as a CPA, R. Boyle shall provide +documentation showing that R. Boyle’s licensure is dependent upon reinstatement by the +Commission. +H. In support of any application for reinstatement, R. Boyle shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + + +- 11 - + +1. That R. Boyle has complied with the Commission suspension Order, and with +any related orders and undertakings, including any orders in the Matter of +Boyle CPA, LLC and Robert Allan Boyle, CPA or any related Commission +proceedings, including any orders requiring payment of disgorgement or +penalties; +2. That R. Boyle 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. R. Boyle, 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 R. Boyle, 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. + + +- 12 - + +5. That R. Boyle’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. R. Boyle 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. R. Boyle shall also provide a detailed description of: + +1. R. Boyle’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 +R. Boyle reported for such work; and +2. R. Boyle’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 R. Boyle provides the documentation and attestations required in this Order and +the Commission (1) discovers no contrary information therein, and (2) determines that R. Boyle +truthfully and accurately attested to each of the items required in R. Boyle’s affidavit, and the +Commission discovers no information, including under Paragraph J, indicating that R. Boyle has +violated a federal securities law, rule or regulation or rule of professional conduct applicable to +R. Boyle since entry of the Order (other than by conduct underlying R. Boyle’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 R. Boyle 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 R. Boyle to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why R. Boyle 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 R. Boyle for cause shown. +M. If the Commission declines to reinstate R. Boyle pursuant to Paragraphs K and L, +it may, at R. Boyle’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. After three years from the date of this order, Boyle CPA may request that the +Commission consider its reinstatement by submitting an application to the attention of the Office +of the Chief Accountant. + +- 13 - + +O. 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, +Boyle CPA shall submit a written statement attesting to an undertaking to have Boyle CPA’s +work reviewed by the independent audit committee of any public company for which Boyle CPA +works or in some other manner acceptable to the Commission, as long as Boyle CPA 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. +P. 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, Boyle CPA shall submit a statement prepared by the audit +committee(s) with which Boyle CPA will be associated, including the following information: +1. A summary of the responsibilities and duties of the specific audit +committee(s) with which Boyle CPA will be associated; +2. A description of Boyle CPA’s role on the specific audit committee(s) with +which Boyle CPA 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 Boyle CPA’s service on the specific +audit committee; and +5. A statement noting whether Boyle CPA will be able to act unilaterally on +behalf of the Audit Committee as a whole. +Q. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Boyle CPA must be +registered with the PCAOB and Boyle CPA shall submit the following additional information: +1. A statement regarding Boyle CPA’s legal status and whether it has merged or +become affiliated with any other legal entity; +2. A statement that Boyle CPA is registered with the PCAOB in accordance with +the Sarbanes-Oxley Act of 2002; +3. A statement that Boyle CPA has, within the prior one (1) year period hired an +independent CPA consultant (the “Consultant”) who is not unacceptable to the +staff of the Division of Enforcement of the Commission (the “Staff”) and is +affiliated with a public accounting firm registered with the PCAOB, that has +conducted a review of Boyle CPA’s quality control system, including the +inspection and review of selected audit and review engagements of the firm + +- 14 - + +over the past two annual periods preceding the commencement of the review, +and other testing of the audit, supervisory, and quality control procedures of +the firm as are necessary. The statement should further provide that the review +did not identify any criticisms of or potential defects in Boyle CPA’s quality +control system that would indicate that any of Boyle CPA’s associated +persons will not receive appropriate supervision. Boyle CPA agrees to require +the Consultant, if and when retained, to enter into an agreement that provides +that for the period of review and for a period of two (2) years from completion +of the review, the Consultant shall not enter into any employment, consultant, +attorney-client, auditing or other professional relationship with Boyle CPA, 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 they are affiliated or of which they are a +member, and any person engaged to assist the Consultant in performance of +their duties under this Order shall not, without prior consent of the Staff, enter +into any employment, consultant, attorney-client, auditing or other +professional relationship with Boyle CPA, or any of its present or former +affiliates, directors, officers, employees, or agents acting in their capacity as +such for the period of the review and for a period of two (2) years after the +review; and +4. A statement from Boyle CPA indicating that the PCAOB has taken no +disciplinary actions against Boyle CPA since seven (7) years prior to the date +of the Order other than for the conduct that was the basis for the Order. +R. In support of any application for reinstatement, Boyle CPA shall provide +documentation showing that Boyle CPA is currently licensed as a certified public accountant +(“CPA”) and that Boyle CPA has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Boyle CPA is not currently licensed as a CPA, Boyle CPA shall +provide documentation showing that Boyle CPA’s licensure is dependent upon reinstatement by +the Commission. +S. In support of any application for reinstatement, Boyle CPA shall also submit a +signed affidavit truthfully stating, under penalty of perjury: +1. That Boyle CPA has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in the Matter +of Boyle CPA, LLC and Robert Allan Boyle, CPA, or any related Commission +proceedings, including any orders requiring payment of disgorgement or +penalties; +2. That Boyle CPA 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; + +- 15 - + +3. That Boyle CPA, 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 Boyle CPA, 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 Boyle CPA’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 none of Boyle CPA’s employees, partners, or professional staff’s +conduct is 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. + +- 16 - + +7. That Boyle CPA 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. + +T. Boyle CPA shall also provide a detailed description of: + +1. Boyle CPA’s professional history since the imposition of the Order, including + +(a) all engagements including audit and attestation work; +(b) the identification and description of any work performed for +entities regulated by the Commission, and the primary contact +person at such regulated entity; and +2. Boyle CPA’s plans for any future appearance or practice before the +Commission. +U. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. +V. If Boyle CPA provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that Boyle +CPA truthfully and accurately attested to each of the items required in Boyle CPA’s affidavit, +and the Commission discovers no information, including under Paragraph U, indicating that +Boyle CPA has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Boyle CPA since entry of the Order (other than by conduct underlying +Boyle CPA’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. +W. If Boyle CPA 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 U, the burden shall be on Boyle CPA to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Boyle CPA believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public +interest. The Commission may then, in its discretion, reinstate Boyle CPA for cause shown. +X. If the Commission declines to reinstate Boyle CPA pursuant to Paragraphs V and +W, it may, at Boyle CPA’s request, hold a hearing to determine whether cause has been shown to +permit Boyle CPA to resume appearing and practicing before the Commission as an accountant. +Y. Respondents shall, within ten days of the entry of this Order, pay, jointly and +severally, disgorgement of $166,581 and prejudgment interest of $10,282 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. + +- 17 - + +Z. Boyle CPA shall, within ten days of the entry of this Order, pay a civil money +penalty in the amount of $50,000 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) 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 +Boyle CPA and R. Boyle 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 +Paul A. Montoya, Associate Regional Director, Division of Enforcement, Securities and +Exchange Commission, 175 W. Jackson Boulevard, Chicago, Illinois 60604. +AA. 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, Boyle CPA 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 Boyle CPA’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Boyle CPA 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 Boyle CPA 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. + + + +- 18 - + +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 R. Boyle, and further, any debt for disgorgement, prejudgment interest, civil penalty +or other amounts due by R. Boyle 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 R. Boyle 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-4419.txt b/raw/aaer/2023/AAER-4419.txt new file mode 100644 index 0000000000000000000000000000000000000000..f3728e02865a3317891a47f9693ccaf87d64d1fd --- /dev/null +++ b/raw/aaer/2023/AAER-4419.txt @@ -0,0 +1,311 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97740 / June 16, 2023 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4419 / June 16, 2023 +ADMINISTRATIVE PROCEEDING +File No. 3-21491 + +In the Matter of + + DAVID DICKSON + + and + + STUART ANDREW + SPENCE, + +Respondents. +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 David Dickson (“Dickson”) and +Stuart Andrew Spence (“Spence”) (together, the “Respondents”). +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 Respondents 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 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. These proceedings arise out of Respondents’ role in the approval of an estimate- +at-completion (“EAC”) loss forecast recorded by McDermott International Inc. (“McDermott”) +for its Cameron LNG project (“Cameron” or the “Cameron Project”) for the second quarter of +2018 (“Q2 2018”) and related disclosures concerning Cameron. Then McDermott CEO David +Dickson and then CFO Stuart Spence approved a $490 million loss for the Q2 2018 Cameron +EAC even though it was developed outside of the regular process for EAC cost forecasts and the +initial draft EAC loss was over $1.1 billion, thereby indirectly causing McDermott to maintain +incorrect books and records and to file an inaccurate quarterly report. The related disclosures, in +a Form 8-K press release, also did not fairly present the prospect that Cameron’s new execution +strategy could result in higher losses and longer scheduling delays. +2. Cameron was a closely-watched $6.7 billion-dollar long-term, joint venture +construction contract to build a liquefied natural gas export facility in Hackberry, Louisiana. +McDermott acquired Cameron as part of its May 10, 2018 merger with Chicago Bridge & Iron +Company (“CB&I”). The Cameron Project was the largest of several CB&I loss contracts that +had been highlighted by McDermott and CB&I in their public disclosures leading up to the +merger. +Respondents +3. David Dickson (“Dickson”), age 55, was the President and Chief Executive +Officer of McDermott International, Inc. Dickson resides in Houston, Texas. +4. Stuart Andrew Spence (“Spence”), age 54, was the Executive Vice President and +Chief Financial Officer of McDermott International, Inc. Spence resides in Houston, Texas. +Other Relevant Entity +5. McDermott International Inc. (“McDermott”), during the relevant period, was a +Republic of Panama corporation headquartered in Houston, Texas. McDermott’s common stock +was registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded +on the NYSE under the trading symbol MDR until June 30, 2020 when it terminated its +registration by filing a Form 15-12B. McDermott was required to file 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. On May 10, 2018, McDermott merged with CB&I. On January 21, +2020, McDermott and certain of its affiliates filed voluntary petitions for bankruptcy relief under +Chapter 11. + +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 +Background +6. At year-end 2017, CB&I disclosed that its Cameron Project had become a loss +contract, meaning its expected total costs at completion were estimated to exceed the contract +price. Once deemed a loss contract, CB&I’s share of Cameron’s EAC loss and increases thereto +would have to be accrued in the current period, which would negatively impact CB&I’s financial +condition and future liquidity. +7. In Q1 2018, prior to the merger between McDermott and CB&I, the Project Cost +Team forecasted a roughly $438 million EAC loss for Cameron. However, CB&I management +subjected this forecast to management challenges, which resulted in the Project Cost Team’s +EAC forecast being reduced to $160 million—a $278 million difference. The $160 million EAC +loss forecast was entered into CB&I’s accounting software by the Project Cost Team and was +used by CB&I in preparing its financial statements for Q1 2018. +8. On May 10, 2018, McDermott acquired CB&I in a merger and took over +accounting and reporting obligations for Cameron. After the merger, McDermott took over +CB&I’s 50% interest in the Cameron contract and worked with CB&I’s 50/50 joint-venture +partner (the “JV Partner”) to complete the Cameron Project. +The Q2 2018 Cameron Loss Forecast +9. CB&I, and then McDermott, had an internal cost-estimating unit (the “Project +Cost Team”) assigned to the Cameron Project and working on-site. The Project Cost Team +followed standard industry project control guidelines, as well as extensive CB&I written +processes and procedures in determining the EAC, that is, the total estimated cost of the +Cameron Project when all work is completed and all future deliverables have been made to the +customer. Among other things, to determine the EAC, the group tracked historical trends for the +Cameron Project, including quantities of materials used, wage rates, labor performance factors, +physical progress, purchase orders, and subcontract orders, as well as other data. After the +merger, the Project Cost Team data and forecasts were reviewed in detail by on-site Cameron +Project management, North, Central and South America (“NCSA”) area management (that is, the +business unit responsible for managing and overseeing of the Cameron Project and other projects +in the region), and Project Execution & Delivery (“PED”) management, and then finally at an +executive summary level by Dickson and Spence. The Cameron Project EAC was also subject to +internal audits and review by external auditors. +10. On June 25, 2018, a McDermott PED executive emailed the Project Cost Team’s +draft executive cost forecast presentation for the Cameron Project to Dickson and Spence. The +Cameron Project Director reviewed it with them later that day. According to the presentation, as +a result of an increase in expected costs related in part to a Q2 2018 execution strategy change +implemented prior to the merger, the Project’s total estimated loss at completion had increased +from the $160 million reported by CB&I in Q1 2018 to $1.252 billion, an increase of more than +$1 billion from what CB&I had estimated and recorded approximately two months earlier. +11. On July 2, 2018, the Project Cost Team circulated a revised draft of its EAC loss +forecast, which reported the EAC loss for Cameron as $1.147 billion. Later that day, the Project +4 +Cost Team met with Spence and representatives from NCSA and PED management to, among +other things, present the Project Cost Team’s final draft forecast. +12. Dickson and Spence, together with certain NCSA and PED executives, expressed +skepticism of the Project Cost Team’s final draft $1.147 billion EAC loss forecast because, +among other things, they sought to use a different, less costly contract execution strategy going +forward. That different execution strategy involved a reduction in workforce on site over time. +Specifically, in June and July 2018, McDermott management initiated a reduction in workforce +of over 1,800 direct/sub-contracted workers and planned to implement further reductions in Q3 +2018 from a high of roughly 11,400 workers to an expected optimum level of roughly 9,000 to +9,500 workers. McDermott also implemented, among other things, a 15% reduction in +Cameron’s “project and construction management team.” In addition, the JV Partner told +McDermott executives that it lacked confidence in the $1.147 billion EAC loss amount and +preferred to complete a review before reflecting increases of that magnitude in the Cameron +EAC. +13. On July 3, 2018, an NCSA executive, after consulting with PED management, +proposed an alternative Cameron $490 million Q2 2018 EAC loss forecast (the “$490 million +EAC”). The NCSA executive calculated the $490 million EAC by taking the Q1 2018 Cameron +EAC loss forecast of $160 million and adding $330 million, consisting of $200 million in actual +cost overruns during Q2 2018 and additional expected cost overruns of $130 million for all +future reporting periods. The NCSA executive calculated the $490 million EAC outside of the +routine cost-estimating process, using a methodology that was inconsistent with the regular +process for a project of this complexity and magnitude. One quarter later, at the end of the third +quarter, after completing an EAC for the Cameron project consistent with the routine cost +estimating process, McDermott booked a significantly higher loss increase. +14. On July 9, 2018, the NCSA and PED executives presented the $490 million EAC +to Dickson and Spence for their review and approval. Although Dickson and Spence were aware +of information indicating that the $490 million EAC was prepared outside of the Project Cost +Team’s normal cost-estimating process, they approved the $490 million EAC. +15. The $490 million EAC was not calculated by modifying and aggregating the +underlying detailed cost estimates forecasted by the Project Cost Team. As a result, the Project +Cost Team did not know how the $490 million EAC was determined or how that forecast was +supposed to be allocated to specific cost categories. Instead, beginning on July 10, 2018, the +Project Controls Manager, the Project Cost Team Leader, and the Project Director for Cameron +made top-level cuts from each cost category, mainly in areas where they thought actual expenses +would not soon exceed the forecast. The Project Controls Manager, the Project Cost Team +Leader, and the Project Director then directed the project cost analysts in charge of the affected +cost categories to figure out how to make the cuts in their sub-cost categories. This process +caused the project cost analysts to input amounts unsupported by a detailed sub-cost category +build up into McDermott’s accounting software. +16. On July 12, 2018, McDermott’s Internal Audit distributed a report to management +and audit committee members, including Dickson and Spence. The report featured an audit +observation that CB&I management had reduced the Cameron Project Cost Team’s Q1 2018 cost +5 +estimate by approximately $278 million (effectively, reducing the Q1 $438 million estimated +loss at completion for Cameron to $160 million) without any plans in place to achieve those +reductions. On July 12 and July 18, Dickson and Spence received preliminary and final versions +of this internal audit report, and on July 13, they attended one meeting to review its findings. +The report noted that the “Risk/Implication” for the Q1 2018 cost estimate was “high” because +“[i]f total project costs are not captured in the forecast, cost and profit ratios may be misstated +thereby affecting the project’s revenue recognition and financial reporting.” +17. McDermott also sought to study the possible effects of the workforce reduction +and productivity factors. On July 19, 2018, Dickson, Spence, and others received an executive +presentation (the “July 19 Analysis”) that included a high-level hypothetical modelling “Scenario +Analysis” of various alternative workforce reduction scenarios and associated anticipated effects +on the Cameron Project’s estimated gross loss. On July 24, 2018, Dickson and Spence received +a revised scenario analysis (the “July 24 Analysis”). Taken together, the July 19 Analysis and +July 24 Analysis showed that even under significant workforce reductions (ranging from 17% to +36%) and varying productivity factors, the Cameron Project could suffer losses ranging from +$1.05 billion to $1.7 billion, with the exception of one of the scenarios which resulted in an +estimated loss at completion of $702 million based upon using aggressive assumptions of labor +productivity as necessary to meet contract completion dates. +McDermott’s Quarter-End Press Release and Form 8-K +18. On July 31, 2018, McDermott filed a Current Report on Form 8-K, with a +McDermott press release as an exhibit. The press release stated that McDermott was “currently +targeting completion dates of Q1 2019 for Phase 1, Q3 2019 for Train 2, and very early Q1 2020 +for Train 3, in accordance with the customer requirements.” The press release also contained a +quote from Dickson stating that: +“We are clearly disappointed with the increased cost estimates from three of the legacy +CB&I projects. The increases are within the bounds of the scenarios we contemplated +during our due diligence, and we believe that by applying our disciplined One +McDermott Way to these projects, we can bring them to successful completion. We have +already made significant changes to personnel, reporting structures, stakeholder +relationships and execution plans on Cameron, for example, since the combination +closed, and there are encouraging signs that these changes have made a difference. More +importantly, we have moved forward to further strengthen our relationships with +stakeholders. Going forward, we plan to continue to aggressively apply our McDermott +approach to ensure appropriate risk evaluation and mitigation across the combined +Company’s portfolio – from bidding to execution.” +19. The statements concerning Cameron’s targeted schedule dates and “encouraging +signs” were inconsistent with some content included in the July 19 Analysis and July 24 +Analysis. The hypothetical modelling scenarios in those presentations did not, in large part, +match the target schedule dates in McDermott’s press release. Moreover, the press release +statement that McDermott was seeing “encouraging signs” did not fairly present the fact that the +scenarios showed potential schedule delays and increased losses for Cameron if certain project +execution assumptions were unsuccessful in future periods. +6 +Financial Statement Impact +20. McDermott reported an additional $165 million EAC loss (representing +McDermott’s share of the increase in the loss amount from the Q1 2018 amount) in the notes to +the financial statements and in the MD&A section filed with its Q2 2018 Form 10-Q. +21. The Q2 2018 Form 10-Q included certain materially inaccurate Cameron Project +specific information. +Applicable Law +22. As a result of the conduct described above, Respondents caused McDermott to +violate: +a. Section 13(a) of the Exchange Act and Rules 13a-11, 13a-13 and 12b-202 +thereunder, which require every issuer of with a class of securities 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 current reports, including reports on Form 8-K, and +periodic reports, including quarterly reports on Form 10-Q, contain such further +material information as may be necessary to make the required statements not +misleading +b. Section 13(b)(2)(A)3 of the Exchange Act, which requires every issuer of with a +class of securities registered pursuant to Section 12 of the Exchange Act to make +and keep books, records, and accounts that, in reasonable detail, accurately and +fairly reflect the transactions and dispositions of their assets; +c. Sections 13(b)(2)(B)4 of the Exchange Act, which requires every issuer of with a +class 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 recorded as necessary to permit +preparation of financial statements in accordance with generally accepted +accounting principles and +d. Rule 13b2-1, which prohibits directly or indirectly falsifying or causing to be +falsified, any book, record, or account subject to Section 13(b)(2)(A). A violation +of Rule 13b2-1 does not require scienter and may rest on a finding of negligence. + +2 An issuer’s violation of these reporting provisions does not require scienter. See SEC v. Wills, 472 F. Supp. 1250, +1268 (D.D.C. 1978). + +3 Scienter is not an element of an issuer’s violation 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”). + +4 Scienter is not an element of an issuer’s violation of the internal accounting controls provision. See id. +7 +See McConville v. SEC, 465 F.3d 780, 789 (7th Cir. 2006) (finding no scienter +requirement for Rule 13b2-1). +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents Dickson’s and Spence’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondents Dickson and Spence +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-11, 13a-13, and +13b2-1 thereunder. +B. Respondent Dickson shall, within 30 days of the entry of this Order, pay a civil +money penalty in the amount 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). Respondent Spence shall, within 30 days of the entry of this Order, pay a civil +penalty in the amount of $40,000 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) 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 +David Dickson or Stuart Spence 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 +R. Hodgman, Division of Enforcement, Securities and Exchange Commission, 100 F Street, NE, +Washington, DC 20549-5553. +8 +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, each 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, each 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 a 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/2023/AAER-4421.txt b/raw/aaer/2023/AAER-4421.txt new file mode 100644 index 0000000000000000000000000000000000000000..745d8dd5338506128a3921c9cfcccc523697607b --- /dev/null +++ b/raw/aaer/2023/AAER-4421.txt @@ -0,0 +1,229 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97760 / June 20, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4421 / June 20, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21498 + +In the Matter of + +JEFFERY D. ANSELL, + +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 Jeffery D. Ansell (“Ansell” 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. +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 arises from Jeffery D. Ansell’s role in Stanley Black & Decker, Inc.’s +(“SBD”) failure to disclose in its definitive proxy statements certain perquisites and personal +benefits that it provided to Ansell from 2017 through 2020, while he was a senior officer at SBD. +As a result of his conduct, Ansell caused SBD to violate Sections 13(b)(2)(A) and 14(a) of the +Exchange Act and Rule 14a-3 thereunder. +Respondent + 2. Respondent Jeffery D. Ansell was Executive Vice President of SBD and President +of SBD’s Tools & Storage segment from October 2016 through June 2020, Executive Vice +President of SBD from July 2020 through December 31, 2021, and a strategic advisor to SBD from +January 1, 2022 until February 4, 2022. +Relevant Entity +3. Stanley Black & Decker, Inc. is a Connecticut corporation headquartered in New +Britain, Connecticut. SBD is a diversified global provider of hand tools, power tools, and other +products and services. SBD’s common stock is registered under Section 12(b) of the Exchange +Act and trades on the New York Stock exchange under the ticker symbol “SWK.” +Background + 4. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +Act in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits issuers with securities registered pursuant to Section 12 of the Exchange Act from +soliciting proxies without furnishing proxy statements containing the information specified in +Schedule 14A, including executive compensation disclosures pursuant to Item 402 of Regulation +S-K. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and other +personal benefits provided to named executive officers who receive at least $10,000 worth of such +items in a given year. Item 402 of Regulation S-K also requires identification of all perquisites and +personal benefits by type, and quantification of any perquisite or personal benefit that exceeds the +greater of $25,000 or 10% of total perquisites. + + 5. In 2006, the Commission adopted amendments to executive compensation +disclosure rules, including Item 402 of Regulation S-K. See Commission’s Executive +Compensation and Related Person Disclosure Final Rule adopting release, Release Nos. 33- +8732A; 34-54302A; IC-27444A; File No. S7-03-06 (August 29, 2006) (the “Adopting Release”). +According to the Adopting Release, “an item is not a perquisite or personal benefit,” and does not +need to be reported, “if it is integrally and directly related to the performance of the executive’s +duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit +that has a personal aspect, without regard to whether it may be provided for some business reason +or for the convenience of the company, unless it is generally available on a non-discriminatory +basis to all employees.” The Adopting Release also states that “the concept of a benefit that is + 3 +‘integrally and directly related’ to job performance is a narrow one,” which “draws a critical +distinction between an item that a company provides because the executive needs it to do the job, +making it integrally and directly related to the performance of duties, and an item provided for +some other reason, even where that other reason can involve both company benefit and personal +benefit.” + + 6. According to the Adopting Release, even where the company “has determined that +an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an +expense is for the benefit or convenience of the company,” that determination “is not responsive to +the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure +purposes.” Indeed, “business purpose or convenience does not affect the characterization of an +item as a perquisite or personal benefit where it is not integrally and directly related to the +performance by the executive of his or her job.” +Facts +7. In definitive proxy statements disclosing executive compensation earned for 2017 +through 2020, which were filed in 2018 through 2021, SBD disclosed an annual average of +approximately $167,000 in “All Other Compensation” for Ansell. + + 8. However, these same definitive proxy statements failed to disclose a total of over +$647,000 worth of perquisites and personal benefits provided to Ansell, thereby understating the +“All Other Compensation” portion of his compensation by an annual average of approximately +$162,000. + +9. This undisclosed compensation consisted, in part, of approximately $280,000 in +personal expenses Ansell charged to SBD, including, but not limited to, chauffer services, other +travel items, meals, apparel, and car repair services. The remainder of the undisclosed +compensation included approved use of the corporate aircraft and other authorized items, such as +personal services provided to Ansell by SBD employees, and certain gifts and products. +10. In connection with the preparation of its definitive proxy statements, SBD required +Ansell to complete Questionnaires for Executive Officers, which included requests for information +regarding perquisites, and SBD personnel sent Ansell communications providing him the +opportunity to review drafts of proxy statements. In his responses to these materials, Ansell did +not identify the undisclosed perquisites and personal benefits referenced herein. + 11. From at least 2018 through 2020, SBD incorrectly recorded payments for the +benefit of Ansell as business expenses and not compensation, based at least in part on Ansell’s +submission of expense reimbursement requests and his approval of certain payments to vendors. +As a result, SBD’s books, records, and accounts did not, in reasonable detail, accurately and fairly +reflect its disposition of assets. + + 12. Pursuant to a separation agreement, Ansell’s employment at SBD ended on +February 4, 2022. In connection with his separation, Ansell reimbursed SBD for personal +expenses SBD incurred on his behalf. + 4 + +Violations + 13. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +Act in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits issuers with securities registered pursuant to Section 12 of the Exchange Act from +soliciting proxies without furnishing proxy statements containing the information specified in +Schedule 14A, including executive compensation disclosures pursuant to Item 402 of Regulation +S-K. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and other +personal benefits provided to named executive officers who receive at least $10,000 worth of such +items in a given year. Item 402 of Regulation S-K also requires disclosure of all perquisites and +personal benefits by type, and specific identification of any perquisite or personal benefit that +exceeds the greater of $25,000 or 10% of the total perquisites. No showing of scienter is required +to establish a violation of Section 14(a) of the Exchange Act and Rule 14a-3 thereunder. See, e.g., +Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1299-1300 (2d Cir. 1973). As a result of the +conduct described above, Ansell caused SBD to violate Section 14(a) of the Exchange Act and +Rule 14a-3 thereunder. + + 14. As a result of the conduct described above, Ansell caused SBD to violate 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. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Ansell’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Ansell cease and desist +from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +14(a) of the Exchange Act and Rule 14a-3 thereunder. + + B. 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 +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; + + 5 +(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 +Jeffery D. Ansell 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 Brendan P. McGlynn, Assistant +Regional Director, Division of Enforcement, Securities and Exchange Commission, 1617 JFK +Blvd., Suite 520, Philadelphia, PA 19103. + + 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, 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. + 6 + +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-4422.txt b/raw/aaer/2023/AAER-4422.txt new file mode 100644 index 0000000000000000000000000000000000000000..1646399a4c732ab649e797ee1f4abcd4110f8e3d --- /dev/null +++ b/raw/aaer/2023/AAER-4422.txt @@ -0,0 +1,200 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97761 / June 20, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4422 / June 20, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21497 + +In the Matter of + +STANLEY BLACK & +DECKER, 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 Stanley Black & Decker, Inc. (“SBD” 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 arises from Stanley Black & Decker, Inc.’s failure to disclose in its +definitive proxy statements at least $1.3 million worth of perquisites and personal benefits paid to, +or on behalf of, four of its named executive officers and one of its directors from 2017 through +2020. The perquisites predominantly consisted of expenses associated with the executives’ use of +corporate aircraft. In connection with this conduct, SBD violated Sections 13(a) and 14(a) of the +Exchange Act and Rules 12b-20, 13a-1, and 14a-3 thereunder. + +Respondent + 2. Stanley Black & Decker, Inc. is a Connecticut corporation headquartered in New +Britain, Connecticut. SBD is a diversified global provider of hand tools, power tools, and other +products and services. SBD’s common stock is registered under Section 12(b) of the Exchange +Act and trades on the New York Stock Exchange under the ticker symbol “SWK.” +Background + 3. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +Act in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits issuers with securities registered pursuant to Section 12 of the Exchange Act from +soliciting proxies without furnishing proxy statements containing the information specified in +Schedule 14A, including executive compensation disclosures pursuant to Item 402 of Regulation +S-K. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and other +personal benefits provided to named executive officers who receive at least $10,000 worth of such +items in a given year. Item 402 of Regulation S-K also requires identification of all perquisites and +personal benefits by type, and quantification of any perquisite or personal benefit that exceeds the +greater of $25,000 or 10% of total perquisites. + + 4. In 2006, the Commission adopted amendments to executive compensation +disclosure rules, including Item 402 of Regulation S-K. See Commission’s Executive +Compensation and Related Person Disclosure Final Rule adopting release, Release Nos. 33- +8732A; 34-54302A; IC-27444A; File No. S7-03-06 (August 29, 2006) (the “Adopting Release”). +According to the Adopting Release, “an item is not a perquisite or personal benefit,” and does not +need to be reported, “if it is integrally and directly related to the performance of the executive’s +duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit +that has a personal aspect, without regard to whether it may be provided for some business reason +or for the convenience of the company, unless it is generally available on a non-discriminatory +basis to all employees.” The Adopting Release also states that “the concept of a benefit that is +‘integrally and directly related’ to job performance is a narrow one,” which “draws a critical +distinction between an item that a company provides because the executive needs it to do the job, +making it integrally and directly related to the performance of duties, and an item provided for +some other reason, even where that other reason can involve both company benefit and personal +benefit.” + + 3 + 5. According to the Adopting Release, even where the company “has determined that +an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an +expense is for the benefit or convenience of the company,” that determination “is not responsive to +the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure +purposes.” Indeed, “business purpose or convenience does not affect the characterization of an +item as a perquisite or personal benefit where it is not integrally and directly related to the +performance by the executive of his or her job.” +Facts +6. Contrary to Item 402 of Regulation S-K and the Commission’s guidance in the +Adopting Release, SBD’s system for identifying, tracking and calculating perquisites did not apply +an integrally-and-directly-related standard when characterizing certain items as perquisites. + + 7. In definitive proxy statements disclosing executive compensation paid for 2017 +through 2020, which were filed in 2018 through 2021, SBD disclosed a total annual average of +approximately $1 million worth of “All Other Compensation” for the four named executive +officers and one director at issue. The proxy statements listed zero dollars in compensation +attributable to the officers’ and director’s use of corporate aircraft. + + 8. However, these same definitive proxy statements failed to disclose at least $1.3 +million worth of perquisites and personal benefits, predominantly related to corporate aircraft +usage, that were provided to these four named executive officers and the director, thereby +understating the “All Other Compensation” portion of their compensation by a total annual average +of at least $325,000. + + 9. From 2018 through 2021, SBD incorporated its definitive proxy statements into its +annual reports by reference. + + 10. On March 9, 2022, SBD filed a definitive proxy statement, which, among other +things, provided revised disclosures regarding perquisites and personal benefits provided to certain +named executive officers in 2019 and 2020. + +Violations + 11. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +Act in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits issuers with securities registered pursuant to Section 12 of the Exchange Act from +soliciting proxies without furnishing proxy statements containing the information specified in +Schedule 14A, including executive compensation disclosures pursuant to Item 402 of Regulation +S-K. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and other +personal benefits provided to named executive officers who receive at least $10,000 worth of such +items in a given year. Item 402 of Regulation S-K also requires disclosure of all perquisites and +personal benefits by type, and specific identification of any perquisite or personal benefit that +exceeds the greater of $25,000 or 10% of the total perquisites. No showing of scienter is required + 4 +to establish a violation of Section 14(a) of the Exchange Act and Rule 14a-3 thereunder. See, e.g., +Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1299-1300 (2d Cir. 1973). As a result of the +conduct described above, SBD violated Section 14(a) of the Exchange Act and Rule 14a-3 +thereunder. + + 12. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require every issuer +of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission, +among other things, annual reports as the Commission may require. The Commission need not +prove scienter to establish a violation of Section 13(a) of the Exchange Act (or Exchange Act +Rules 12b-20 and 13a-1). See, e.g., SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1998). As a +result of its incorporation of deficient proxy statements by reference in its annual reports, SBD +violated Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. + + 13. As a result of the conduct described above, SBD violated Rule 12b-20 under the +Exchange Act, which 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. +SBD’s Self-Reporting, Cooperation and Remedial Efforts +14. In determining to accept the Offer, the Commission considered the following: +a. After learning of potential misconduct, SBD promptly acted to ensure that +outside counsel conducted an internal investigation under the direction and +oversight of a Special Committee of independent directors. Prior to +completing its internal investigation, SBD self-reported to the +Commission staff the failure to disclose perquisites referred to herein and +other conduct potentially implicating the federal securities laws. +b. SBD cooperated with the Commission’s investigation, including by +providing to Commission staff facts developed through the internal +investigation and compilations of relevant documents, information, and +data. +c. SBD implemented remedial measures designed to ensure compliance with +Item 402 of Regulation S-K and Commission guidance. SBD also made +disclosures in the Form 10-K for its fiscal year ended January 1, 2022 +concerning expenses it had identified that constituted undisclosed +perquisites, and made additional disclosures thereafter. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + 5 + 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 and any future violations of Sections 13(a) and 14(a) of the +Exchange Act and Rules 12b-20, 13a-1, and 14a-3 thereunder. +B. Respondent acknowledges that the Commission is not imposing a civil penalty +based in part 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/2023/AAER-4423.txt b/raw/aaer/2023/AAER-4423.txt new file mode 100644 index 0000000000000000000000000000000000000000..fff95b015d421d26ca6d0e34331946bbb3e229dd --- /dev/null +++ b/raw/aaer/2023/AAER-4423.txt @@ -0,0 +1,1447 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97773 / June 21, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4423 / June 21, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21500 + + +In the Matter of +MARCUM 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 and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted against Marcum LLP (“Respondent” or “Marcum”) 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 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 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. + + 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 +1. This matter involves systemic quality control failures and violations of audit +standards by Marcum from at least 2020. The violations of Public Company Accounting Oversight +Board (“PCAOB”) professional standards identified in this Order were primarily in connection with +audit work for special purpose acquisition companies (“SPACs”). However, the nature of these +professional standard violations—including their volume and range—reflects deficiencies relevant +to and impacting Marcum’s entire public company audit practice. +2. Marcum’s quality control and audit standard failures permeated most stages of +engagement work—from client acceptance to risk assessments, audit committee communications, +audit documentation, assembly and retention of audit documentation, engagement quality reviews, +technical consultations, due professional care, and engagement partner supervision and review. At +nearly every stage, Marcum lacked sufficient policies and procedures to provide reasonable +assurance that engagements were conducted in accordance with professional standards. Further, +Marcum did not sufficiently monitor the effectiveness of its policies and procedures and did not +adequately communicate those policies and procedures to engagement teams. In sum, Marcum’s +quality controls system failed and, as a result, certain audits were not conducted in compliance with +PCAOB audit standards.4 + +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 Throughout this Order, unless otherwise specified, references to “audit standards” refer to audit +standards promulgated by the PCAOB. + + 3 +3. 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. As +described, Marcum repeatedly failed to sufficiently establish key foundational policies and +procedures, leading to multiple violations of applicable professional standards and corresponding +misstatements to investors that Marcum audits were conducted in compliance with those standards. +B. RESPONDENT +4. 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. +C. OTHER RELEVANT ENTITIY—MARCUM ASIA CPAs LLP +5. Marcum Asia CPAs LLP (“Marcum Asia”), a New York limited liability partnership +headquartered in New York, NY, is a public accounting firm in the United States. Marcum Asia has +137 accounting personnel, with offices also in China and Singapore. Marcum Asia has been +registered with the PCAOB since 2011, including, until September 2022, under the name Marcum +Bernstein & Pinchuk LLP. +6. Marcum holds a 50 percent interest in Marcum Asia, and all partners of Marcum +have a partnership interest in Marcum Asia. The majority of Marcum Asia partners also hold a +partnership interest in Marcum. Marcum has referred prospective clients, including SPAC clients, +to the entity now known as Marcum Asia. +7. Marcum Asia relies substantially upon Marcum for its quality control system. +Specifically, Marcum Asia’s quality control system relies upon many of Marcum’s quality control +policies, procedures, and monitoring systems. Many of Marcum Asia’s quality control functions— +such as client acceptance, internal inspections, PCAOB reporting and inspections, engagement +quality reviews, and audit documentation and binder monitoring—are managed in parallel with +Marcum’s quality control functions, by the same personnel, partners, and management. +D. FACTS +MARCUM’S SPAC PRACTICE +8. 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. +This vaulted Marcum to the fifth largest public company auditing firm, as measured by number of +clients. + + 4 +9. 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. In the period immediately preceding the SPAC market’s +explosion, Marcum’s annual inspections by the PCAOB had revealed an increasing number of +deficiencies. Marcum was also subject to consecutive PCAOB enforcement orders—in 2019 and +2020—related to quality control failures concerning independence and client acceptance. +10. Starting at least in 2018 and continuing through 2021, Marcum’s own inspections +also repeatedly revealed deficiencies, but Marcum failed to adequately remediate them. Marcum’s +2018 internal inspection, for example, found that 8 out of 13 public company audits inspected were +missing documentation. The following year, in 2019, Marcum’s internal inspection report noted: +“there are still too many documentation misses,” including “three engagements [which] included +work papers that were signed off after the report was issued.” In 2020, Marcum’s internal +inspection identified numerous documentation deficiencies, and concluded that in many instances, +these deficiencies were caused by engagement partners, managers, and EQRs not spending enough +time on the engagements.5 Despite repeated inspection findings, Marcum failed to take sufficient +remediative action. +CLIENT ACCEPTANCE AND STAFFING CAPACITY +11. Marcum’s client acceptance process lacked sufficient quality control policies, +procedures, and monitoring related to evaluating personnel capacity, as required by PCAOB Quality +Control (“QC”) 20.15(a), as well as QC 20.03 and QC 20.20. +12. Marcum’s firm policy required that any new public company client must be +accepted by its Client Acceptance Committee. Yet, Marcum’s client acceptance process, as +conducted by its Client Acceptance Committee, did not evaluate the firm’s personnel capacity in +connection with accepting new SPAC clients. Additionally, the engagement partners responsible +for submitting prospective new SPAC clients to the Client Acceptance Committee were also not, at +the time of client acceptance, adequately evaluating capacity. Engagement partners submitted +SPAC clients for acceptance on the assumption that capacity and staffing could be managed at a +later date, and that they would not remain obligated to serve as engagement partner. Marcum had +no other policies or procedures, at the time of client acceptance, that provided “reasonable +assurance” that the firm would have sufficient personnel capacity to take on a new SPAC client or +clients. +13. Rather, 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. Throughout 2020 and + +5 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 +review procedures (an “engagement quality review”) performed by such partner in connection +with providing his or her concurring approval. + + 5 +2021, Marcum continued to assume it could manage based upon some combination of triaging +staffing and deadlines. This assumption became more problematic, and ultimately untenable, given +the ever-escalating volume of SPAC clients accepted by the firm. +14. Marcum’s SPAC client acceptances increased dramatically. 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. Each SPAC client also typically generated multiple audit +engagements—first an IPO engagement, then an engagement in connection with periodic reporting +obligations as a public company. In the first three months of 2021 alone, Marcum sent out 345 new +SPAC engagement letters. +15. The impact these new clients and engagements had on Marcum’s SPAC client roster +was significant. Marcum went from a total of 113 SPAC clients in September 2020 to a total of 882 +SPAC clients in June 2021. The figures of 113 and 882 total SPAC clients include clients to whom +Marcum had only sent out a draft engagement letter—yet such prospective clients were never +subsequently turned away. Marcum also never turned away its SPAC IPO clients who, upon +becoming effective public companies, needed additional audit services in connection with their +periodic reporting obligations. Notably, however, in connection with SPAC clients, fulfilling +periodic reporting obligations—including audits and reviews in connection with Form 10-K and +Form 10-Q filings—typically required substantially more hours, and unlike IPO engagement work, +was subject to specific reporting deadlines, both factors which further exacerbated strains in +Marcum’s capacity at all personnel levels. +16. As a consequence of the exponential escalation in its SPAC clients and +engagements, Marcum faced difficulty in staffing engagements, difficulty and delays in completing +work within requisite deadlines, and non-compliance with numerous PCAOB audit standards. +These difficulties were raised to firm management by Marcum personnel. At the beginning of +February 2021, for example, a national office partner alerted firm leadership that managers in the +SPAC practice were “working 90+ hour weeks,” noting that “I think many, many of them are at +their breaking point and just simply need more help and more resources.” Nonetheless, over the +course of February 2021, Marcum accepted a record 114 new SPAC clients. At the beginning of +March 2021, the partner again advised firm leadership, noting the “disconnect between how the +practice is running and what we are putting in place to make sure we’re in compliance with +professional standards” and highlighting concerns that Marcum was “setting ourselves up to fail at +our own policies.” Nonetheless, Marcum accepted another 159 new SPAC clients in March 2021. +17. During 2020 and 2021, Marcum repeatedly had difficulty obtaining staffing at all +levels. Additionally, as staffing became more constrained, managers and engagement partners were +assigned later in the engagement process, rather than immediately upon receipt of a client-signed +engagement letter. Staffing of engagement quality reviews (“EQRs”) became especially difficult. +In particular, in early 2021, a substantial portion (20%) of engagement quality reviews were +reallocated—by firm leadership—to public company audit partners who did not typically perform +engagement quality reviews. + + 6 +18. One area in which delays and the failure to satisfy audit standards was particularly +acute was in the timely completion, assembly, and retention of audit documentation. Between +October 2020 and early June 2021, the number of work paper binders that were not finalized and +assembled for retention within the PCAOB-required 45-day period (measured from report release +date) increased from 23 to 687. Marcum personnel repeatedly attributed these delinquencies, and +the growth in delinquencies, to the overall volume of engagements and lack of personnel capacity. +In particular, memos drafted by manager and staff-level personnel in connection with delinquent +binder archiving repeatedly attributed the delinquencies to “time constraints associated with the +volume of SPACs”; such language was used in connection with engagements dating back to July +2020, and continued to be cited in memos through August 2021. +19. The difficulties in staffing and delays in completing work within requisite deadlines, +as well as non-compliance with PCAOB audit standards, reflect that Marcum could not have +reasonably expected to complete all accepted SPAC engagements in accordance with professional +standards. +CLIENT ACCEPTANCE AND MANAGEMENT INTEGRITY +20. Marcum’s client acceptance process lacked sufficient quality control policies, +procedures, and monitoring to evaluate the management integrity of prospective clients, including +insufficient documentation and communication of such policies and procedures, as required by QC +20.14, as well as QC 20.03, QC 20.20, QC 20.23, and QC 20.24. +21. Marcum’s firm policy provided that, prior to the acceptance of any new public +company client, Marcum must obtain and review background reports on any key personnel, +including the company’s CEO, CFO, and Audit Committee Chair. This policy required that the +background reports were included among the materials sent to the Client Acceptance Committee for +its review. The Client Acceptance Committee reviewed such reports in connection with its +acceptance decisions. +22. For prospective SPAC clients, however, Marcum deviated from its policy and did +not require receipt and review of background reports prior to client acceptance. Instead, Marcum +required only that relevant client personnel submit a form authorizing a background check, and the +form relied upon client personnel to self-disclose relevant facts. Marcum personnel relied on that +form completed by their clients and also conducted cursory internet searches related to the relevant +client personnel. The completed background reports were required to be received and reviewed +prior to the effective date of the SPAC’s IPO. +23. Marcum’s SPAC-specific background report “policy” was not memorialized in any +relevant policy document or form; internal communications reflect that the lack of any written +policy may have resulted in this policy and corresponding procedures not being sufficiently +understood and consistently applied across the SPAC practice. + + 7 +24. Marcum’s SPAC-specific “policy” also lacked guidance regarding how requisite +internet searches were to be conducted. As a result, searches conducted relied upon protocols that +may have been insufficient to provide relevant information. +25. Marcum relied solely on engagement teams for compliance with the requirement +that background reports were received and reviewed prior to IPO effectiveness. This was a contrast +to the firm-wide procedure, in which the Client Acceptance Committee would both ensure reports +were received prior to client acceptance, and substantively review the reports. +26. Marcum also had insufficient monitoring of compliance with the SPAC-specific +“policy.” As early as August 2020 and through the fall of 2021, multiple SPAC managers and both +Client Acceptance Committee co-chairs voiced the need for additional resources and processes to +monitor the timely receipt of background reports. Sufficient additional resources and processes, +however, were not provided. +27. The weakness of Marcum’s process was reflected in a one-time monitoring exercise, +conducted in July 2021, which revealed that a substantial portion of SPAC work paper binders did +not include documentation of one or more required background reports. This monitoring exercise +found that, among SPAC clients that had completed the IPO process, over one-third were missing +reports required under Marcum’s SPAC-specific policy. +AUDIT DOCUMENTATION +28. In documenting engagement work, Marcum lacked sufficient policies, procedures, +and monitoring to provide reasonable assurance that audit documentation reflected when procedures +were performed, the date work was completed, and the date of relevant reviews, as well as reflected +that audit procedures were completed and sufficient evidence obtained prior to the release of the +respective audit report, as required by QC 20.03, QC 20.17, and QC 20.20. In particular, Marcum +lacked sufficient policies, procedures, and monitoring related to work paper sign offs, including the +timing and dating thereof, as well as related to the timely assembly and retention of audit +documentation, resulting in numerous engagements in violation of the underlying audit standard, +AS 1215, within the SPAC practice and throughout the firm. Marcum also lacked sufficient +policies, procedures, and monitoring related to the assembly and retention of audit documentation, +including in connection with policies related to email retention, as well as sufficient policies, +procedures, and monitoring related to audit documentation added subsequent to AS 1215.15’s 45- +day documentation completion date (as specified in AS 1215.16), as required by QC 20.03, QC +20.17, QC 20.20, QC 20.23, and QC 20.24. +Work Paper Sign Offs +29. Marcum lacked sufficient policies, procedures, and monitoring related to work paper +sign offs, including the timing thereof, resulting in widespread violations of the underlying audit +standard, AS 1215, based on Marcum engagement partners, EQRs, managers, and staff-level + + 8 +personnel performing work paper sign offs only subsequent to the release of audit reports and other +issuances. +30. Prior to the release of an audit report, Marcum’s firm policy required engagement +managers, engagement partners, and EQRs to sign off on a “routing slip” work paper, which +represented that all requisite reviews had been performed. EQRs were also required, prior to the +release of an audit report, to sign off on an “EQR memo” work paper, which provided information +regarding the EQR’s review procedures. Marcum policy also required sign off on certain other +work papers, but did not require that such work paper sign offs be conducted prior to the report +release date; Marcum required only that these sign offs were done prior to the documentation +completion date prescribed by AS 1215.15 (45 days from report release date). +31. Marcum’s written policies failed to address explicit requirements of AS 1215.06(b), +including that audit documentation reflect “the date such work was completed” and “the date of +such review.” +32. In early 2021, Marcum conducted post-issuance inspections of its SPAC IPO work +paper binders (the “Post-Issuance IPO Review”). These inspections, conducted between one and +three days after the relevant audit report was released, revealed that approximately three-fourths of +work paper binders contained one or more work papers lacking both “preparer” and “reviewer” sign +offs. These same inspections revealed that many work papers required to be signed off on by +engagement partners and EQRs—required per Marcum’s own policy—were not yet signed off on; +depending upon the work paper, across these inspections, the percentage of missing sign offs +identified ranged from at least 10% to as high as 50%. +33. Also in early 2021, Marcum conducted a post-issuance inspection of 25 SPAC IPO +audits whose work papers binders had already been archived. Of these 25 binders, only 8 were in +compliance with Marcum’s documentation and sign off policies. +34. Additionally, a sampling review of 28 SPAC audit binders conducted by SEC staff +in the Division of Enforcement (the “SEC Review”) revealed that over 25% of Marcum-required +engagement partner sign offs were either conducted post-issuance or entirely missing. Among +Marcum-required EQR sign offs, approximately one-third were either conducted post-issuance or +entirely missing. The SEC Review revealed post-issuance and/or missing sign offs in every one of +28 SPAC audit binders reviewed. The SEC Review also revealed that many post-issuance sign offs +were conducted only in connection with binder assembly and retention (or “archiving”) procedures, +frequently conducted at or around 45 days post-issuance, if not later. Indeed, among the audit +binders reviewed, half were archived outside of AS 1215.15’s 45-day “documentation completion +date,” and contained sign offs by the engagement partners and EQRs that were executed post-45 +days. The SEC Review, and in particular the time-stamps associated with the sign offs, also +revealed that sign offs were frequently conducted in quick succession. Similar findings were +observed outside the SPAC practice. +“Routing Slips” + + 9 +35. Marcum lacked sufficient policies, procedures, and monitoring related to sign offs +on its “routing slip” work paper, including the timing and dating thereof. Marcum engagement +partners, EQRs, and managers engaged in widespread violations of the underlying audit standard, +AS 1215, including signing routing slips only subsequent to the release of audit reports and other +issuances, often also signing routing slips using only manually input date entries. +36. Although Marcum purported to require that its “routing slips” were signed pre- +issuance, at Marcum there was a long-standing and known practice of post-issuance routing slip +sign offs. This included routing slips signed weeks or even 45 or more days post-issuance. In 2020 +and through mid-2021, within the SPAC practice, up to 50% of routing slips were not fully signed +prior to issuance. +37. Marcum’s routing slip sign offs were also frequently conducted manually, and +signed with dates that did not reflect the actual date on which Marcum personnel conducted their +sign offs. While firm management was aware that routing slips were often signed post-issuance, +firm policy nonetheless explicitly allowed the use of manual signatures—with only manually input +date entries—that often had the effect of obscuring the actual date upon which routing slips were +signed by Marcum personnel. +38. A sampling review of SPAC routing slips conducted by SEC staff in the Division of +Enforcement reflected this practice in connection with approximately 20% to 50% of routing slips. +In these instances, the manually input date on the routing slip’s signature line corresponded to the +date the audit report was released, and pre-dated the date upon which Marcum personnel actually +signed the routing slip. +39. By contrast, some Marcum personnel, although signing only after the audit report’s +release, signed with an electronic, time-stamped signature. Marcum policy at the time, however, did +not require personnel use an electronic time stamp signature. +40. In 2021, Marcum implemented an electronic routing slip system. While this system +removed the ability to manually input sign off dates, Marcum continued to lack sufficient policies, +procedures, and monitoring related to routing slips. Marcum did not amend its formal policy +documents regarding the timing and documentation of routing slip sign offs; while Marcum +management sent an email announcing a policy revision, its 2017 policy on “routing slips” was not +revised, and remained posted on Marcum’s intranet. Additionally, the timeliness of sign offs +remained not subject to sufficient monitoring protocols. +Audit Documentation Assembly and Retention (Archiving) +41. Marcum lacked sufficient policies, procedures, and monitoring related to the +assembly and retention (also referred to as “archiving”) of audit documentation, including its +routing slip policies and procedures, its email retention policies and procedures, and policies and +procedures related to assembly and retention of audit documentation in connection with departed +personnel. + + 10 +42. Marcum’s procedures for ensuring compliance with assembly and retention +requirements—including that audit documentation was identified for retention, archived, and +archived timely—were based on its routing slips. Marcum logged each routing slip, and used such +logs to monitor the timely assembly and retention of work paper binders. Therefore, to the extent +that a routing slip was not yet generated, Marcum was not yet monitoring whether the related audit +documentation was being assembled and retained—meaning Marcum could not have reasonable +assurance that audit documentation was being archived for retention, on a timely basis or at all. No +routing slip was generated, however, until engagement team personnel requested a routing slip. +43. Within Marcum’s SPAC practice in 2020 and 2021, in many instances, not only was +a routing slip not fully signed off prior to issuance—at times, no routing slip record had been +generated at all. Instead, the routing slip record was not generated until weeks or months after the +release of the audit report or other issuance. Internal communications in January through August of +2021—including communications to Marcum’s firm management—reflect that routing slip records +were missing for issuances dating back as many as nine months prior. These routing slips were +missing because engagement team personnel failed to request a routing slip. +44. Marcum’s procedures for ensuring compliance with assembly and retention +requirements also failed to monitor the assembly and retention of documentation created in +connection with engagements for which no report or other issuance was ultimately released. +Marcum’s procedures were based on monitoring routing slips, yet routing slips were typically not +generated prior to the day a report or issuance was to be released. +45. Within Marcum’s SPAC practice, engagement teams often performed work in +connection with reports or other issuances that were not ultimately released, including when clients +chose to withdraw a registration statement. The fact that not all SPAC clients would complete the +IPO process was a known and foreseeable fact in the industry, yet Marcum, despite its substantial +volume of SPAC clients, failed to adopt policies, procedures, and monitoring sufficient to provide +reasonable assurance that such audit documentation was assembled and retained in a timely fashion, +or at all. Marcum did not archive numerous work paper binders, despite the work papers reflecting +that months had passed since any procedures and work had been performed on the engagement; +among such binders, many lacked any indication that a routing slip had ever been generated. +46. Email “Auto Delete” Policy. Marcum’s policies and procedures were additionally +insufficient to provide reasonable assurance that audit documentation for SPAC engagements was +appropriately and timely retained and archived due to its email “auto delete” policy. At Marcum, +audit documentation was frequently not saved into the engagement binder software until archiving +procedures were conducted. In the interim, documentation was frequently maintained only within +engagement team members’ email communications. In 2021, Marcum did not archive a notable +number of work paper binders—SPAC binders in particular—until six months or more following +the date of the report or other issuance. Notwithstanding such facts, in March 2021, Marcum + + 11 +implemented a six-month “auto delete” policy on email communications for the SPAC practice.6 +Given the facts and circumstances, Marcum’s implementation of a six-month email “auto delete” +policy failed to provide reasonable assurance that audit documentation would be appropriately and +timely archived for retention. +47. Assembly and Retention of Audit Documentation in Connection with Departed +Personnel. At Marcum, numerous work paper binders were not archived prior to the departure of +relevant engagement team personnel. Not infrequently, such binders were not archived timely, but +lingered on “delinquency lists” for several months. Internal communications also reflect instances +in which, upon initiation of archiving procedures, there were difficulties in locating audit +documentation due to the personnel’s departure. +Timeliness of Audit Documentation Assembly and Retention (Archiving) +48. Marcum also lacked sufficient policies, procedures, and monitoring related to the +timely assembly and retention of audit documentation, resulting in widespread violation of the +underlying audit standard, AS 1215, particularly within the SPAC practice. +49. Particularly within the SPAC practice, Marcum frequently did not assemble a +complete and final set of audit documentation for retention within the 45 days after the report +release date, as required by AS 1215.15. As of early June 2021, Marcum had at least 687 SPAC +work paper binders that were past the 45 day documentation completion date, and yet not archived. +In total, between late 2020 and over 2021, at least 1,800 of Marcum’s SPAC work paper binders +were delinquently archived, representing as much as 50% of SPAC work paper binders within this +time period. +Audit Documentation Added Following the 45-Day Documentation Completion Date +50. Marcum lacked sufficient policies, procedures, and monitoring related to compliance +with AS 1215.16, as well as sufficient documentation and communication of such policies. AS +1215.16 requires that no audit documentation is deleted or discarded after the “documentation +completion date,” set at 45 day following the audit report release date. Yet, Marcum failed to +sufficiently document or communicate this requirement in a manner that would have provided +reasonable assurance that the policy would be understood and complied with. For example, the +relevant section of one policy manual failed to state this requirement at all. +51. AS 1215.16 also requires that the addition of any documentation subsequent to the +45-day documentation completion date is explicitly documented, including documenting “the date +the information was added, the name of the person who prepared the additional documentation, and +the reason for adding it.” Yet, Marcum did not sufficiently document or communicate this +requirement in a manner that would have provided reasonable assurance that the policy would be + +6 Approximately two months later, following the initiation of Staff’s investigation, this policy +was suspended. + + 12 +understood and complied with. For example, one policy manual limited this requirement to those +alterations that were “substantive,” which limitation is not contained in the audit standard, and not +defined within Marcum’s policies. Another policy manual did state a memorandum was required to +document any additions made to audit documentation, but the policy was unclear as to its +application. +52. Marcum’s internal email communications reflect that Marcum did require a +memorandum in connection with all delinquently archived binders, and that Marcum did require +that such memoranda were signed by both the engagement partner and the EQR. Yet, Marcum +failed to sufficiently document these requirements in a written policy statement—such as a +statement in an official policy manual—or otherwise communicate such requirements in a manner +that would have provided reasonable assurance that the policy would be understood and complied +with. +53. Marcum’s failure to sufficiently document and communicate its policy led to +practice inconsistency regarding the use of a memorandum in connection with delinquently archived +binders. The SEC Review also indicated that engagement partners did not sign off on such memos +approximately 20% of the time, and EQRs did not sign off over 40% of the time. +ENGAGEMENT QUALITY REVIEW +54. In connection with engagement quality reviews, Marcum lacked sufficient policies, +procedures, and monitoring related to the documentation of engagement quality reviews, as well as +related to the objectivity of such reviews, as required by QC 20.03, QC 20.17, and QC 20.20. This +resulted in numerous engagements in violation of the underlying audit standard, AS 1220, which, +among other things, requires that the EQR sufficiently document his or her review, including +documents reviewed and the date he or she provided concurring approval of the issuance (AS +1220.19), and requires that the EQR remain objective and not assume engagement team +responsibilities (AS 1220.07). +EQR Documentation +55. At Marcum, engagement quality review procedures were documented via sign offs +on routing slips, EQR memos, and sign offs on individual work papers in the engagement software. +56. Work Paper Sign Offs. The SEC Review revealed that approximately 33% of +Marcum’s EQR sign offs—as limited to those work papers that explicitly required sign offs, per +Marcum policy—were either signed post-issuance, or were missing. Similar figures were found in +Marcum’s Post-Issuance IPO Review. Separately, in connection with quarterly reviews, Marcum +EQRs often did not sign off on any work papers in the engagement software. A sampling review, +by SEC staff in the Division of Enforcement, of 15 quarterly review binders revealed that three of +the 15 review binders contained no EQR sign offs, at all, on individual work papers via the +engagement software. + + 13 +57. Routing Slips. At Marcum, routing slips purported to serve as documentation of the +EQR’s concurring approval, and the date of such approval. Yet, Marcum had a widespread practice +of post-issuance sign offs on routing slips, including by EQRs. In half of 28 audit binders sampled +in the SEC Review, the EQR signed the routing slip post-issuance. Such post-issuance sign offs +failed to serve as an effective control to ensure that review procedures were completed and +concurring approval obtained prior to issuance. Such post-issuance sign offs also failed to +document the completion of review procedures and concurring approval prior to issuance. +58. EQR Memos. At Marcum, EQR memos purported to serve as documentation of the +EQR’s review procedures. Similar to routing slips, Marcum also had a widespread practice of post- +issuance sign offs on EQR memos. Marcum’s Post-Issuance IPO Review revealed that, as of one to +three days following issuance, over half of work paper binders did not contain a signed EQR memo. +The SEC Review reflected similar findings. Moreover, delays in EQR memo sign offs typically ran +in parallel with delays in routing slip sign offs; frequently, the two documents were signed off by +the EQR in parallel—and both signed off post-issuance. Indeed, the SEC Review found that in 13 +of 28 sampled audit binders, the EQR signed off post-issuance on both the routing slip and the EQR +memo. In such instances, neither the routing slip nor the EQR memo served as an effective control +or sufficient documentation. EQR memos were also typically signed only manually, and there are +indications such sign offs were also signed with only manually-input dates that did not reflect the +actual date on which the Marcum EQR signed the EQR memo. +59. The above-noted deficiencies occurred against a backdrop in which Marcum was +already on notice, for several years running, that the engagement quality review process was under +stress. This included repeated Marcum 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. +EQR Objectivity +60. While Marcum EQRs often conducted required sign offs only post-issuance, at the +same time, in many instances, EQRs conducted their sign offs prior to relevant engagement partner +sign offs. The SEC Review revealed that at least 10% of EQR sign offs were conducted prior to the +engagement partner signing off on the same work paper. Additionally, with the institution, in early +2021, of Marcum’s Post-Issuance IPO Review, internal communications repeatedly reflected that +EQRs were asked to sign off on work papers, notwithstanding circumstances in which such work +papers included open review notes or lacked engagement team sign offs. In certain instances, +engagement partners appeared to encourage such practices, including in a training presentation in +which it was stated that due to SPAC’s tight timelines, Marcum could not “wait to put everything +through a serial process,” and should instead conduct contemporaneous reviews. +61. In other instances, the Marcum EQR refrained from signing off on work papers +before the engagement partner, but provided direct guidance and feedback to the engagement +manager—prior to engagement partner review. This included, for example, an instance in which +such guidance was provided prior to the engagement partner being assigned to the engagement. + + 14 +DOCUMENTATION OF WARRANT ACCOUNTING PROCEDURES +62. Among Marcum’s SPAC clients, virtually all issued warrants. In connection with +warrant accounting procedures, however, Marcum lacked sufficient policies, procedures, and +monitoring to provide reasonable assurance that the work performed by the firm’s personnel with +respect to the documentation of warrant accounting procedures would meet the requirements of the +underlying audit standard, AS 1215, as required by QC 20.03, QC 20.17, and QC 20.20. This +resulted in numerous engagements in violation of AS 1215. +63. Marcum’s memoranda documenting its warrant accounting procedures were +consistently insufficient. These internally prepared memos were not dated, did not reference the +memo’s author, and did not reference the client’s name. Such memos contained no citations or +cross-references to the individual client’s warrant agreement or features. Across clients, the +language utilized and 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. Notably, the template upon which such memos were based provided for only one +accounting conclusion (equity treatment), and provided no guidance regarding any potential +alternate conclusions, and no direction regarding potentially relevant client-specific information to +analyze and correspondingly reference and detail in adapting the template memo. +64. Marcum also received and purportedly reviewed client-prepared memoranda +analyzing the proper accounting treatment for the client’s warrants. Marcum’s documentation of its +warrant accounting procedures in connection with client warrant accounting memos, however, was +also consistently insufficient. In almost all instances reviewed, the only comment by Marcum on +the client memo was a summary comment at top, stating the date Marcum received the memo and +the fact of Marcum’s review. The lack of substantive auditor notations and comments make it +difficult to identify what procedures Marcum actually performed in connection with its evaluation +of the memo and the client’s accounting conclusion. +65. Warrant accounting related work papers were also not consistently signed off on by +either the engagement partner or EQR. The SEC Review found that, among 28 audit binders +sampled, over 60% had no EQR sign off on Marcum’s warrant accounting memo; engagement +partners failed to sign off pre-issuance nearly 30% of the time. Sign offs on the client-prepared +warrant accounting memos were similar. +66. Marcum’s annual internal inspection, conducted in the summer of 2021, revealed +similar findings regarding insufficient documentation of warrant accounting procedures. Among 38 +SPAC engagements inspected, 32 were required to be re-opened to add appropriate documentation, +including, primarily, documentation related to warrant analysis and/or warrant valuation. Inspector +comments in connection with the internal inspection also frequently reflected that no evidence of +warrant accounting procedures had been documented in relevant work papers. +COMMUNICATIONS WITH AUDIT COMMITTEES + + 15 +67. In connection with audit committee communications, Marcum lacked sufficient +policies, procedures, and monitoring related to compliance with the underlying audit standard, AS +1301, as required by QC 20.03, QC 20.17, and QC 20.20. This resulted in numerous engagements +in violation of this audit standard, including based upon insufficient communication of changes in +significant risks to the audit committee, and the failure to sufficiently and accurately document the +fact, timing, and method of audit committee communications. +Timing and Mode of Audit Committee Communications +68. Marcum’s work papers for many engagements reflected insufficient audit +documentation related to the timing and/or the mode of communications with audit committees. +This included instances in which the only documentation of relevant communications consisted of +unsigned letters, including instances in which such letters still contained “track changes.” +69. Marcum’s annual internal inspection, conducted in the summer of 2021, also +revealed repeated instances in which there was insufficient documentation of audit committee +communications. This included findings that 9 out of 38 SPAC engagements examined did not +contain the final audit committee letter in the relevant binder. +70. Within Marcum’s SPAC practice, there was a common practice of oral, rather than +written, audit committee communications. Marcum’s policies did not sufficiently address the need +to document the fact and timing of oral communications; Marcum also lacked sufficient procedures +and monitoring to ensure that such oral communications were sufficiently documented. +Substance of Audit Committee Communications +71. Marcum’s annual internal inspection also revealed repeated instances in which +Marcum’s communications to the audit committee failed to include newly identified significant +risks—5 out of 38 engagements examined—in violation of AS 1301.11. Marcum’s policies, +procedures, and monitoring were insufficient to provide reasonable assurance that all requisite +matters would be communicated to an issuer’s audit committee. Notably, Marcum had already been +made aware, in connection with the PCAOB’s 2019 inspection, that half of audits examined did not +comply with the relevant audit standard. +RISK ASSESSMENTS +72. In connection with its performance of risk assessment procedures, Marcum lacked +sufficient policies, procedures, and monitoring related to compliance with the underlying audit +standard, AS 2110, as required by QC 20.03, QC 20.17, and QC 20.20. This resulted in numerous +SPAC engagements in violation of this audit standard, including based upon the failure to conduct +risk assessments at the assertion level, and the failure to identify all relevant significant risks. + + 16 +Assertion Level Risk Assessments +73. Marcum’s SPAC practice failed to conduct risk assessments at the assertion level. A +review of nearly 80 SPAC audits conducted by SEC staff did not reveal a single instance, prior to +2022, in which a SPAC audit included an assertion level risk assessment. While Marcum did have +a template work paper, called a “Risk Assessment Summary Form,” which outlined procedures +including assertion level risk assessments, such work paper was never used in these SPAC +engagements—despite the work paper being listed as a required sign off, for engagement partners +and EQRs, in the relevant completion checklist. +Identification of All Significant Risks +74. Marcum’s SPAC practice also consistently failed to identify all relevant significant +risks. Prior to March 2020, Marcum’s planning meeting memos did not explicitly identify any +significant risks, and most memos contained no reference to the significant risk of management +override of controls. Among memos dated between March 2020 and April 2021, virtually all +memos identified only management override of controls as a significant risk, and up to 10% did not +identify any significant risks. 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. +75. Marcum appears to have identified potential SPAC risks such as complex financial +instruments, related party transactions, and contingent fees only rarely, and only starting in mid- +2021. The identification of significant risks also did not appear correlated to the SPAC’s lifecycle +stage. Instead, the SPAC practice’s identification of significant risks correlated directly to the time +period in which the memo was drafted, rather than the circumstances of individual clients. +76. Marcum’s failure to conduct adequate risk assessments and sufficiently identify all +significant risks is also illustrated by its planning meeting practices. Several of Marcum’s SPAC +engagement partners also followed a practice of conducting joint planning meetings, in which one +planning meeting was held to discuss up to 27 separate SPAC clients, documented in one joint +memo, whose discussion of significant risks was a single paragraph section designed to apply to all +clients. +TECHNICAL CONSULTATIONS +77. In connection with technical consultations, also internally referred to as “national +office” consultations, Marcum lacked sufficient policies, procedures, and monitoring to provide +reasonable assurance that personnel obtained requisite and appropriate technical consultations, as +required by QC 20.19, as well as QC 20.03, QC 20.17, and QC 20.20. + + 17 +Obtaining Consultations When Appropriate +78. Marcum lacked sufficient policies, procedures, and monitoring to provide reasonable +assurance that personnel obtained consultations when appropriate. +79. Marcum’s written policies on technical consultations provided insufficient and +inconsistent guidance regarding when a consultation should, or must, be obtained. In February +2021, Marcum released a written policy on technical consultations that listed certain “required +consultations.” Yet, Marcum’s policy manual’s statement on technical consultations continued to +contain no indication regarding when consultations were required. +80. Moreover, prior to February 2021, Marcum had no policy explicitly indicating the +circumstances under which technical consultations were required, noting only in its policy manual a +handful of high-level scenarios that “might require consultation.” +81. Outside of its written policies, Marcum lacked sufficient guidance regarding +consultations; the decision to obtain a consultation was therefore left almost entirely to the +engagement teams and their assigned engagement quality reviewers to determine. Marcum also +lacked any firm-wide procedures to track or monitor the request for, or occurrence of, technical +consultations. +82. Among the consultations explicitly required by Marcum’s policy were consultations +in the event of any restatement. 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. +Consultant Selection +83. Marcum lacked sufficient policies, procedures, and monitoring to provide reasonable +assurance that individuals consulted had appropriate levels of knowledge, competence, judgment, +and authority. Marcum had insufficient policies or procedures regarding consultant selection; while +a listing of “subject matter experts” was made available on the firm’s intranet, the firm was not +otherwise involved in an engagement team’s selection of any individual consultant. Nor was the +firm monitoring consultant selections, such that it could monitor whether individual consultants +were appropriately qualified to consult in connection with specific engagements. Consequently, +Marcum could also not effectively monitor whether it had a sufficient number of appropriately +qualified experts, including on a subject-matter specific basis. +Consultation Quality +84. Marcum lacked sufficient policies, procedures, and monitoring to provide reasonable +assurance regarding consultation quality, including consultation procedures and documentation. +Marcum had no firm-wide policies regarding how to request a consultation, or how to conduct +consultation procedures. There are indications this lack of formalities may have resulted in + + 18 +miscommunications regarding the performance of technical consultations; for example, in at least +one instance, an engagement partner believed she had obtained a consultation, while the +“consultant” did not understand himself to have provided one. +85. Marcum’s policy manual stated that “unusual, controversial,” “complex,” and +“material” consultations should be documented, but there was no further guidance, including what +form such documentation should take. To the extent consultations were documented, many appear +to have been documented in a cursory fashion. +86. Additionally, Marcum was not monitoring consultation quality, including the +sufficiency or appropriateness of consultation procedures and documentation. +ENGAGEMENT PARTNER SUPERVISION AND REVIEW +87. In connection with engagement partner supervision and review, Marcum lacked +sufficient policies and procedures related to compliance with the underlying audit standard, AS +1201, as required by QC 20.03 and QC 20.17. This resulted in numerous engagements in violation +of this audit standard. +88. Within Marcum’s SPAC practice, insufficient partner supervision and review +extended across many stages of engagement work. Engagement partners frequently failed to +sufficiently supervise and review engagement work in connection with each of the processes +discussed above, including: +89. Client acceptance, including adequate personnel capacity and client timing +expectations. +90. Client acceptance and management integrity, including timely receipt and review +of background reports from all relevant parties. +91. Audit documentation, including timely work paper sign offs and compliance with +AS 1215. +92. Engagement quality review (EQR), including documentation of review and +concurring approval and compliance with AS 1220. +93. Documentation of warrant accounting procedures and compliance with AS 1215. +94. Audit committee communications, including timely communications with all +requisite disclosures, and sufficient documentation of such communications in audit work papers, in +compliance with AS 1301. +95. Risk assessments, including conducting procedures at the assertion level and +identifying all significant risks, in compliance with AS 2110. + + 19 +96. In addition to the processes discussed above, Marcum partners also frequently failed +to sufficiently supervise engagement work in connection with client intake and planning, and +frequently failed to provide sufficient supervision and review of staff-level work. +97. Client intake and planning. Marcum’s engagement partners frequently failed to +sufficiently supervise client intake and initial planning. There was typically no initial conversation +walking the client through the information and documents Marcum needed, resulting in the frequent +receipt of late and incomplete information from clients. +98. Oversight of staff-level work. Marcum’s engagement partners frequently failed to +sufficiently supervise engagement work conducted by staff-level personnel. At the time staff-level +work was conducted, Marcum often had not yet assigned an engagement manager, and there was +often no contemporaneous supervision by the engagement partner. Over time, with increased +workload, Marcum increasingly assigned engagement managers later in the audit process. The +impact was that Marcum often had insufficient contemporaneous oversight of staff-level work. This +resulted in staff-level work quality that was repeatedly found substantially lacking, including work +papers reflecting no work done at all, or work papers referencing erroneous or outdated information. +99. Marcum’s system of quality control was not sufficient to provide reasonable +assurance that supervision and review of audit work performed by engagement partners would be +compliant with AS 1201. +DUE PROFESSIONAL CARE +100. As a result of the conduct described above, Marcum partners frequently failed to +exercise due professional care in carrying out SPAC engagement work, in violation of AS 1015. +101. Marcum’s system of quality control was not sufficient to provide reasonable +assurance that SPAC engagement work would meet the requirements of AS 1015, as required by +QC 20.03 and QC 20.17. +TRAINING, DOCUMENTATION, AND COMMUNICATION OF POLICIES AND +PROCEDURES, AND EVALUATION OF SUFFICIENCY OF TRAINING, PRACTICE +AIDS, AND GUIDANCE +102. Marcum’s evaluation and monitoring of its internal trainings related to SPAC +engagements, and personnel compliance with firm-mandated training requirements, was +insufficient, as required by QC 20.13 and QC 20.20. There was also insufficient documentation and +communication of SPAC policies and procedures, as required by QC 20.23 and QC 20.24. +Relatedly, Marcum’s evaluation of the appropriateness of its training, guidance materials, and +practice aids—which could serve to document and communicate such requirements—was also +insufficient, as required by QC 20.20. Marcum’s failure to adequately document and communicate +policies and procedures related not only to SPAC-specific requirements, but also policies and +procedures relevant to the firm’s public company practice generally. + + 20 +103. The composition and size of Marcum’s SPAC practice changed dramatically +between mid-2020 and mid-2021. As late as September 2020, two engagement partners conducted +virtually all SPAC IPO audit work. Working alongside them were only nine managers, with two +managers responsible for over half of such engagements. Beginning in late 2020, dozens of +Marcum partners, managers and staff who did not have previous SPAC experience were brought in +to assist on engagements. By mid-2021, at least 43 engagement partners and 75 managers were +staffed on SPAC engagements. Staff level personnel increased from 30 in mid-2020 to 80 by 2022. +104. The influx of new personnel into Marcum’s SPAC practice—including many +personnel who worked on only a handful of SPACs—elevated the importance of training activities, +elevated the importance of formalizing and memorializing relevant policies and practices, and +elevated the importance of evaluating and monitoring the sufficiency of relevance practice aids and +guidance. +105. Instead, the influx of new personnel exposed pre-existing deficiencies in Marcum’s +practices related to training, documentation, and communication of policies and procedures. While +some of these deficiencies might have been partially ameliorated by sufficient partner supervision +and review, based upon the conduct discussed above, Marcum lacked sufficient guidance, +supervision, and review at the engagement partner level as well. +Training +106. Marcum conducted a training related to SPAC engagements, and purported to make +the training mandatory for any manager or partner-level personnel, prior to conducting any SPAC +engagement work. Many SPAC planning memos also explicitly promised to assign to the +engagement staff with “adequate SPAC industry experience” as a necessary step to address +significant risks. Marcum deemed attendance at its SPAC training sufficient to meet the “adequate +SPAC industry experience” requirement. +107. Yet, Marcum did not sufficiently monitor and enforce training attendance, and +numerous personnel appear to have conducted SPAC engagement work prior to attending the +relevant training. +108. Marcum’s SPAC training also did not sufficiently address all relevant SPAC policies +and procedures. +Communication and Documentation of Policies and Procedures, and Evaluation of Practice Aids +and Guidance +109. Marcum did not memorialize its SPAC policies and procedures in any 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 + + 21 +typically relied upon email communications, which piecemeal guidance was not centralized and +evolved over time. +110. Marcum’s failure to memorialize relevant requirements in a consistent fashion and +centralized location contributed to many of the audit standard and quality control violations +described above and below. +111. For example, internal communications among Marcum’s SPAC practice personnel +repeatedly reflected questions and confusion regarding relevant policies and procedures, including +on the part of national office personnel and other partners. Some communications reflected that +Marcum personnel did not know whether certain documentation was required, or how to comply +with requirements. Other communications reflected that personnel were not aware of sign off +requirements. In certain instances, communications reflected that personnel were not aware of +which audit program or completion checklist to use, whether there even was an underlying audit +program or completion checklist, or where or how to find such guidance. Many questions raised +could not be answered without explicit discussion with national office partners, indicating that +Marcum’s pre-existing guidance did not appear to provide clear answers. +112. Such questions and confusion also reflected Marcum’s failure to sufficiently +evaluate, on an ongoing basis, the appropriateness and sufficiency of its training, guidance +materials, and practice aids. +113. For example, in light of certain concerns being raised, Marcum acknowledged that +the relevant completion checklist had not been appropriately maintained or updated since its +creation and needed significant work and updates, including SPAC customizations. +114. Many of the questions raised, and confusion illustrated, related to Marcum’s policies +and procedures relevant to public companies generally. As such, it was reflective of broad and +systemic deficiencies in Marcum’s documentation and communication of public company policies +and procedures generally. Notably, Marcum’s most recent annual internal inspection, conducted in +the summer of 2021, not only concluded that 32 SPAC audits contained documentation deficiencies +requiring the re-opening of the work paper binder—it also found that 37 non-SPAC audits also +contained documentation deficiencies requiring re-opening. +115. Marcum’s failure to sufficiently document and communicate relevant policies and +procedures continued even after the SPAC market’s initial “boom.” As late as August 2021, +Marcum’s SPAC partners continued to flag substantial and substantive concerns, including that +engagement managers failed to sufficiently understand relevant technical issues and certain audit +standard requirements, and were insufficiently diligent in documenting and reviewing work papers. +This included, for example, instances in which engagement partners stated managers and staff-level +personnel were “copying and pasting” documentation from prior audits (including audits performed +on different clients), without removing extraneous or inaccurate information, updating relevant +technical references, or appropriately cross-referencing related work papers. Partners also +expressed concerns that managers, as well as some partners, were creating documentation without + + 22 +sufficiently understanding the underlying accounting or valuation analysis, such as guidance +received from internal technical specialists. +116. Marcum relied upon an outside firm (“Firm A”) to conduct staff-level work on +SPAC engagements. Marcum’s communication of relevant policies and procedures to personnel at +Firm A was also insufficient. Marcum had no centralized or consistent source for guidance for Firm +A personnel. Firm A instead received ad hoc guidance from up to 20 different Marcum partners, a +practice risking confusion and inconsistency. Additionally, because Firm A was often conducting +its work prior to a manager or partner being assigned to the engagement, in such instances there +could be effectively no contemporaneous communication. Firm A personnel also did not have full +access to Marcum policies, procedures, and guidance documents. Firm A personnel, while provided +Marcum email addresses, were not on relevant SPAC email distribution lists, despite Marcum’s +SPAC practice relying upon email as a primary mode of communication. Firm A personnel did +have access to Marcum work paper templates, but lacked sufficient guidance regarding which +templates were appropriate and current. Firm A personnel also did not attend relevant SPAC +trainings until February 2021, and not all Firm A personnel attended. +117. The insufficiencies described above also relate back to Marcum’s failure to +sufficiently evaluate, prior to client acceptance, whether the firm had sufficient capacity to complete +the engagement work with professional competence, including the capacity of the firm’s overall +quality control system, including processes and systems to effectively train, educate, and +communication with personnel. +E. VIOLATIONS +RULE 102(e) AND SECTION 4C OF THE EXCHANGE ACT +118. 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. Rule 102(e)(1)(iv)(B). As a result of the conduct described above, +Marcum 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) +119. 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. + + 23 +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.” +120. As a result of Marcum’s conduct described above, Marcum violated this standard in +numerous engagements. +Supervision of the Audit Engagement (AS 1201) +121. 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.” +122. As a result of Marcum’s conduct described above, Marcum violated this standard in +numerous engagements. +Audit Documentation (AS 1215) +123. 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.” +124. 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.” +125. As a result of Marcum’s conduct described above, Marcum violated this standard in +numerous engagements. + + 24 +Engagement Quality Review (AS 1220) +126. AS 1220.07 requires that “[t]o maintain objectivity, the engagement quality +reviewer … should not make decisions on behalf of the engagement team or assume any of the +responsibilities of the engagement team.” +127. 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 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 the issuance.” +128. As a result of Marcum’s conduct described above, Marcum violated this standard in +numerous engagements. +Communications with Audit Committees (AS 1301) +129. AS 1301.11 requires that an auditor “communicate to the audit committee +significant changes to the planned audit strategy or the significant risks initially identified and the +reasons for such changes.” +130. AS 1301.25 requires that an auditor communicate to the audit committee the +matters required under the standard, AS 1301, either orally or in writing, and that the auditor “must +document the communications in the work papers, whether such communications took place orally +or in writing.” AS 1301.26 requires that “[a]ll audit committee communications required by this +standard should be made in a timely manner and prior to the issuance of the auditor’s report.” +131. As a result of Marcum’s conduct described above, Marcum violated this standard in +numerous engagements. +Identifying and Assessing Risks of Material Misstatement (AS 2110) +132. AS 2110.59 requires that an auditor “identify and assess the risks of material +misstatement at the financial statement level and the assertion level.” +133. 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 includes the risk of management override of controls. +134. As a result of Marcum’s conduct described above, Marcum violated this standard in +numerous engagements. +PCAOB Quality Control Standards (QC 20) + + 25 +135. 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.” +136. 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.” +137. QC 20.14 requires a firm to establish policies and procedures related to the +acceptance and continuance of clients and engagements, and that such policies and procedures are +sufficient to provide the firm “reasonable assurance that the likelihood of association with a client +whose management lacks integrity is minimized.” +138. 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.” +139. 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. +140. 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.” +141. 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. +142. 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 + + 26 +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.” +143. As a result of Marcum’s conduct described above, Marcum violated QC 20. +MARCUM VIOLATED RULE 2-02(b)(1) OF REGULATION S-X +144. 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. +145. Through the conduct described above, Marcum violated 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. +E. FINDINGS +146. Based on the foregoing, the Commission finds that Respondent violated Rule 2- +02(b)(1) of Regulation S-X. +147. 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). +F. REMEDIAL EFFORTS +148. In connection with the conduct described above, Marcum has undertaken certain +remedial steps, including revisions to certain quality control policies and procedures. Such efforts +have been considered by the Commission in determining to accept Marcum’s Offer, and will be +reviewed by the Independent Consultant, as described below. +G. UNDERTAKINGS +INDEPENDENT CONSULTANT +149. Respondent Marcum shall retain, within sixty (60) days after the entry of this +Order, an independent consultant (“Independent Consultant”), not unacceptable to the Commission +Staff in the Division of Enforcement (“Commission Staff”) and the PCAOB Staff. Marcum shall +provide the Commission Staff and the PCAOB Staff with notice of possible Independent +Consultant candidates no later than thirty (30) days following the entry of this Order. The +Commission Staff and the PCAOB Staff shall have ten (10) business days to communicate whether +the Independent Consultant candidates are not unacceptable to the Commission Staff and the +PCAOB Staff. Marcum shall, upon request by the Commission Staff or the PCAOB Staff, provide + + 27 +information about the Independent Consultant’s work plan to the Commission Staff and the +PCAOB Staff including the Independent Consultant’s experience, ability to staff the engagement, +and expertise in auditing and audit firm quality controls. Marcum shall provide to the Commission +Staff and the PCAOB Staff a copy of the engagement letter detailing the scope of the Independent +Consultant’s responsibilities within three (3) months after the entry of this Order. If requested by +Commission Staff or the PCAOB Staff, Marcum shall make the Independent Consultant available +to Commission Staff and the PCAOB Staff to make presentations, provide updates, and explain the +work, progress, and conclusions. The Independent Consultant’s compensation and reasonable +expenses shall be borne exclusively by Marcum. +(i). Independence +150. To ensure the independence of the Independent Consultant, Marcum: 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 the PCAOB Staff; and 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. +151. Marcum will require the Independent Consultant to enter into an agreement that +provides that, for the period of engagement and for a period of two (2) years after the issuance of +the Independent’s Consultant’s final report (as defined in Paragraph 159), the Independent +Consultant shall not enter into any employment, consultant, attorney-client, auditing or other +professional relationship with Marcum, or any of its present or former affiliates, directors, officers, +partners, 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 +Commission Staff and the PCAOB Staff, enter into any employment, consultant, attorney-client, +auditing or other professional relationship with Marcum, 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 (2) years after the issuance of the Independent Consultant’s +final report (as defined by Paragraph 159). +152. With respect to Commission Staff and the PCAOB Staff, Marcum will not assert +any legal privilege over communications with or work product prepared by the Independent +Consultant. +(ii). Scope of Independent Consultant’s Review +153. Within the time periods specified below, the Independent Consultant will review +and evaluate Marcum’s audit, review, and quality control policies and procedures as to, among +other aspects, their sufficiency, adequacy, design, implementation, operation, and effectiveness, + + 28 +applicable to Audit Clients7 regarding the subjects set forth below. The Independent Consultant’s +purpose for this review and evaluation will be to make recommendations for improvements to +policies and procedures that: +a. Provide reasonable assurance that personnel comply with applicable +professional standards and the firm’s standards of quality (see QC 20.03, +QC 20.17, and QC 20.20) including: +1. That due professional care is exercised in the planning and performance +of the audit and the preparation of the report. See AS 1015. +2. That engagement partners are properly supervising the work of +engagement team members and for compliance with PCAOB standards, +including reviewing the work of engagement team members to evaluate +whether the work was performed and documented, the objectives of the +procedures were achieved, and the results of the work support the +conclusions reached. See AS 1201. +3. That auditors are documenting the procedures performed, evidence +obtained, and conclusions reached with respect to relevant financial +statement assertions, and that audit documentation contains sufficient +information for an experienced auditor, having no previous connection +with the engagement to (a) 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. See AS 1215.06. +4. That audit documentation and other documents, including emails that +contain audit documentation, are being retained for the length of time +required by PCAOB standards and Commission rules or SEC +regulations, unless a longer period of time is otherwise required by law. +See AS 1215.14. +5. That prior to the audit report release date, the auditor completed all +necessary auditing procedures and obtained sufficient evidence to +support the representations in the auditor’s report. See AS 1215.15. +6. That a complete and final set of audit documentation is assembled for +retention as of a date not more than 45 days after the report release date + +7 An “Audit Client,” for purposes of these undertakings, means any SEC registrant or any client +for which the audit or review was required by the federal securities laws. + + 29 +(“documentation completion date”) and that documentation +requirements are also met for unfinished or incomplete engagements. +See AS 1215.15. +7. That audit documentation is not deleted or discarded after the +documentation completion date and that any information and +documentation added after the documentation completion date must +indicate the date the information was added, the name of the person who +prepared the additional documentation, and the reason for adding it. See +AS 1215.16. +8. That engagement quality reviewers and others who assist the reviewer +should not make decisions on behalf of the engagement team or assume +any of the responsibilities of the engagement team. See AS 1220.07. +9. That engagement quality review should contain sufficient information to +enable an experienced auditor, having no previous connection with the +engagement, to understand the procedures performed by the engagement +quality reviewer, and others who assisted the reviewer, to comply with +the provisions of this standard, including information that identifies: (a) +the documents reviewed by the engagement quality reviewer, and others +who assisted the reviewer, and (b) the date the engagement quality +reviewer provided concurring approval of issuance or, if no concurring +approval of issuance was provided, the reasons for not providing the +approval. See AS 1220.19. +10. That the auditor is communicating to the audit committee significant +risks identified and any changes throughout the course of the +engagement. See AS 1301.09 and .11. +11. That the auditor is communicating to the audit committee the matters +required to be communicated by AS 1301, either orally or in +writing, unless otherwise specified in AS 1301, and is documenting +those communications in the work papers, including whether such +communications took place orally or in writing. See AS 1301.25. +12. That all audit committee communications required by AS 1301 are +made in a timely manner and prior to the issuance of the auditor’s +report. See AS 1301.26. +13. That the auditor is identifying and assessing the risks of material +misstatement at the financial statement level and the assertion level. See +AS 2110.59. +14. That the auditor is identifying and assessing significant risks consistent with AS + + 30 +2110.69, 70, and .71. +b. Provide the firm with reasonable assurance that the policies and procedures +established by the firm for each of the elements of quality control described +in QC 20 are suitably designed and are being effectively applied, as +applicable to the audit standards cited in this Order. See QC 20.03, QC +20.17, and QC 20.20; AS 1015; AS 1201; AS 1215.06, .14, .15, and .16; AS +1220.07 and .19; AS 1301; and AS 2110.59, .69, .70, and .71. +c. Provide the firm with reasonable assurance that work is assigned to personnel +having the degree of technical training and proficiency required in the +circumstances and that personnel participate in general and industry-specific +continuing professional education and other professional development +activities that enable them to fulfill responsibilities assigned. See QC +20.13(b) and (c). +d. Provide the firm with reasonable assurance that the likelihood of association +with a client whose management lacks integrity is minimized. See QC 20.14. +e. Provide the firm with reasonable assurance that the firm undertakes only +those engagements that the firm can reasonably expect to be completed with +professional competence, including, but not limited to policies and +procedures related to the client acceptance process, the Client Acceptance +Committee, and staffing capacity as related to client acceptance. See QC +20.15(a). +f. Provide the firm with reasonable assurance that personnel refer to +authoritative literature or other sources and consult, on a timely basis, with +individuals within or outside the firm, when appropriate and that the +individuals consulted should have appropriate levels of knowledge, +competence, judgment, and authority. See QC 20.19. +g. Provide the firm with reasonable assurance that quality control policies and +procedures are being communicated to personnel and that they are understood +and complied with, and that the firm has established a means of +communicating its established quality control policies and procedures, and +the changes thereto, to appropriate personnel on a timely basis. See QC +20.23; QC 20.24. +154. Marcum shall cooperate fully with the Independent Consultant and shall provide +reasonable and timely access to any firm personnel, information, and records (including audit and +consultation documents) as the Independent Consultant may reasonably request for the +Independent Consultant’s review and evaluation described in Paragraph 153 above and the reports +specified in Paragraphs 155 through 162 below. + + 31 +(iii). Independent Consultant Reports and Certifications +155. Within eight (8) months after the entry of this Order, Marcum shall require the +Independent Consultant to issue a detailed written report (“Initial Report”) to Marcum: (i) +summarizing the Independent Consultant’s review and evaluation of the areas identified in +Paragraph 153 and its subsections above; and (ii) making recommendations, where appropriate, +reasonably designed to ensure that audits conducted by Marcum comply with PCAOB standards +and rules and any applicable federal securities laws. Marcum shall require the Independent +Consultant to provide a copy of the Initial Report to the Commission Staff and the PCAOB Staff +when the Initial Report is issued. Marcum shall also make the Independent Consultant available to +Commission Staff and the PCAOB Staff to discuss its work both periodically and after issuance of +the report. +156. Marcum will adopt and implement, as soon as practicably possible, but in any +event no later than two (2) years after the entry of this Order, and in compliance with the +requirements set forth in Paragraphs 157-163 below, all recommendations of the Independent +Consultant in the Initial Report. Provided, however, that within thirty (30) days of issuance of the +Initial Report, Marcum may advise the Independent Consultant in writing of any recommendation +that it considers to be unnecessary, unjust, outside the scope of this Order, unduly burdensome, or +impractical. Marcum need not adopt any such unnecessary, unjust, outside the scope of this Order, +unduly burdensome, or impractical recommendation at that time, but instead may propose in +writing to the Independent Consultant an alternative recommendation (an “Alternative +Recommendation”) designed to achieve the same objective or purpose. Marcum will provide any +such Alternative Recommendation(s) to the Commission Staff and the PCAOB Staff at the same +time that Marcum submits such Alternative Recommendation(s) to the Independent Consultant. +Marcum and the Independent Consultant shall engage in good faith negotiations in an effort to +reach agreement on any recommendations objected to by Marcum. +157. In the event that the Independent Consultant and Marcum are unable to agree on +any Alternative Recommendation(s) within sixty (60) days of the issuance of the Initial Report, +Marcum shall abide by the determinations of the Independent Consultant. +158. Within sixty (60) days of issuance of the Initial Report, Marcum will certify to the +Commission Staff and the PCAOB Staff in writing that (i) Marcum has adopted and has +implemented or will implement all recommendations of the Independent Consultant; and (ii) the +Independent Consultant agrees that Marcum has adopted, implemented, and/or has a plan for +implementation (the “Certification of Agreement to Adopt Recommendations”). Marcum will +provide a copy of the Certification of Agreement to Adopt Recommendations to the Commission +Staff and the PCAOB Staff. To the extent that Marcum has not implemented all recommendations +contained in the Initial Report by that time, Marcum will certify to the Commission Staff and the +PCAOB Staff in writing, no later than thirty (30) days after their implementation, that (i) Marcum +has adopted and has implemented all recommendations contained in the Initial Report; and (ii) the +Independent Consultant agrees that the recommendations have been adequately adopted and +implemented by Marcum (“Implementation Certification”). + + 32 +159. Within six (6) months of the issuance of the Initial Report or the Implementation +Certification, whichever is later, Marcum shall require the Independent Consultant to complete +testing to assess (i) whether Marcum has implemented the written policies and procedures +concerning the areas specified in Paragraph 153 and its subsections above and (ii) the effectiveness +of the design and implementation of those policies and procedures. At least thirty (30) days prior +to beginning the testing, Marcum shall provide to the Commission Staff and the PCAOB Staff a +copy of the scope and parameters for testing. The Commission Staff and the PCAOB Staff shall +have ten (10) days to provide comments. Within thirty (30) days of the completion of this testing, +Marcum shall require the Independent Consultant to issue a written report summarizing the results +of the Independent Consultant’s testing and assessment, and if applicable, any recommendations +(“Final Report”) and to provide a copy of the Final Report to the Commission Staff and the +PCAOB Staff. At this time, if the Independent Consultant determines that Marcum has adopted +and implemented all recommendations set forth in the Initial Report and that Marcum’s quality +control policies addressing those recommendations and the policies specified in Paragraph 153 and +its subsections are functioning effectively, Marcum shall require the Independent Consultant to +certify in writing that Marcum has satisfied such undertakings (“Independent Consultant +Certification”) and provide a copy of this certification to the Commission Staff and the PCAOB +Staff. In all events, Marcum must complete all undertakings concerning the implementation of the +recommendations set forth in the Independent Consultant’s Initial Report, and any amended +recommendations, and provide the Independent Consultant Certification to the Commission Staff +no later than two (2) years after the entry of this Order. +160. To the extent that the Final Report has additional recommendations that Marcum +has not implemented, within thirty (30) days of issuance of the Final Report, Marcum will certify +to the Commission Staff and the PCAOB Staff in writing that it has adopted and has implemented +or will implement all additional recommendations of the Independent Consultant (“Final +Certification of Agreement to Adopt Recommendations”). Marcum will provide a copy of the +Final Certification of Agreement to Adopt Recommendations to the Commission Staff and the +PCAOB Staff. To the extent that Marcum has not implemented all additional recommendations +contained in the Final Report by that time, Marcum will certify to the Commission Staff and the +PCAOB Staff in writing, by thirty (30) days after their implementation, that Marcum has adopted +and has implemented all recommendations contained in the Final Report (“Final Implementation +Certification”). In all events, Marcum must complete all undertakings concerning the +implementation of the recommendations set forth in the Independent Consultant’s Final Report no +later than four (4) months after the issuance of the Final Report. +161. The Initial Report, Final Report, Certification of Agreement to Adopt +Recommendations, Implementation Certification, Independent Consultant Certification, Final +Certification of Agreement to Adopt Recommendations, and Final Implementation Certification, +and any related correspondence or other documents shall be submitted to Laura B. Josephs, +Assistant 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, and to the PCAOB, Director of Enforcement and Investigations, 1666 K Street NW, +Washington DC, 20006. + + 33 +162. The Initial 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. +163. No later than sixty (60) days from the date that Marcum signs the Final +Implementation Certification, Marcum’s CEO and Marcum’s leader of quality control policies and +procedures shall both 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 Marcum agrees to +provide such evidence. This certification and supporting material shall be submitted to Laura B. +Josephs, Assistant 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, 100 F Street NE, Washington DC, 20549, and to the PCAOB, Director of Enforcement +and Investigations, 1666 K Street NW, Washington DC, 20006, no later than sixty (60) days from +the date of the completion of the undertakings. +164. For good cause shown, and solely at the discretion of the Commission Staff and +the PCAOB Staff, the Commission Staff and PCAOB 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. +165. If the Commission Staff believes that Marcum has not satisfied these +undertakings, the Commission Staff may petition the Commission to reopen the matter to +determine whether additional sanctions are appropriate. +MARCUM’S ACCEPTANCE OF NEW ISSUER AUDIT CLIENTS +166. Between the date of entry of this Order and the date on which Marcum provides a +copy of the Certification of Agreement to Adopt Recommendations to the Commission Staff, +and pursuant to the Independent Consultant’s review and approval as provided in Paragraph 168, +Marcum shall accept no more than three (3) new audit clients (“New Audit Clients”) per quarter.8 + +8 A New Audit Client is defined as an entity seeking audit services from Marcum that is (a) an +issuer, as that term is defined in Section 2(a)(7) of the Sarbanes-Oxley Act of 2002; or (b) is +seeking audit services for the purpose of registering securities with the Commission. + + 34 +Quarters shall be calculated starting with the date of entry of this Order, running in ninety (90) day +increments thereafter. In the event that Marcum has attrition of non-SPAC audit clients (“Non- +SPAC Audit Clients”9) that Marcum is serving as of the date of this Order, Marcum may accept +additional New Audit Clients equal to the number of departed Non-SPAC Audit Clients, but may +not in any event accept more than a total of two (2) additional New Audit Clients per quarter. +To the extent that Marcum accepts fewer New Audit Clients than the maximum allowable within a +quarter, the number of allowable New Audit Clients will “rollover” into subsequent quarters. The +Independent Consultant shall report to the Commission Staff on a quarterly basis the New Audit +Clients Marcum has accepted and will confirm that the Independent Consultant has approved +acceptance of such New Audit Clients pursuant to the New Audit Client Protocol described in +Paragraph 168. The Independent Consultant shall not approve any New Audit Client that meets +the criteria described in Paragraph 168. +167. Between the date of entry of this Order and the date on which Marcum provides a +copy of the Certification of Agreement to Adopt Recommendations to the Commission Staff, +Marcum shall not accept any New Audit Clients that meet any of the following criteria: +a. the new engagement would begin after September 30 of the year under audit for +December 31 year-end audits, or more than nine (9) months after the prior fiscal +year-end date for year-end audits of entities with fiscal year-ends other than +December 31; +b. 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 an “other auditor,” as defined by AS 2101, +as amended, paragraph .A5; or for New Audit Clients that do not have operations, +its principal executive offices are located outside the United States; +c. the New Audit Client has an un-remediated material weakness in its internal +controls over financial reporting (a “MWICFR”); or +d. 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. + +9 A Non-SPAC Audit Client is defined as an entity that (a) is not and was not a special purpose +acquisition company (“SPAC”) and (b) is (i) an issuer, as that term is defined in Section 2(a)(7) +of the Sarbanes-Oxley Act of 2002, or (iii) receiving audit services from Marcum for the purpose +of registering securities with the Commission. + + 35 +168. Between the date of entry of this Order and the date on which Marcum provides a +copy of the Implementation Certification to the Commission Staff, the Independent Consultant +shall review and approve any New Audit Clients, pursuant to the following: +a. Marcum shall provide the Independent Consultant a minimum of sixty (60) days to +prepare a written protocol for reviewing and approving the New Audit Clients +(“New Audit Client Protocol”). The sixty (60) day period shall commence on the +date upon which the Independent Consultant is formally retained by Marcum. +Marcum shall require the Independent Consultant to provide a copy of the New +Audit Client Protocol to the Commission Staff. The Commission Staff shall have +ten (10) business days to communicate whether the New Audit Client Protocol is +not unacceptable to the Commission Staff. The New Audit Client Protocol shall +outline, at a sufficient level of detail, procedures to be performed in connection with +the review of any prospective New Audit Client, including documents and +information to be requested and reviewed, factors to be analyzed, and discussions, +meetings, or interviews to be held, as needed. The New Audit Client Protocol shall +also outline documentation to be created, in connection with the review of any +prospective New Audit Client, which documentation shall memorialize, at a +sufficient level of detail, procedures performed and conclusions reached in +connection with the review of any prospective New Audit Client (the “New Audit +Client Acceptance Documentation”). The New Audit Client Protocol shall also +take into consideration the following factors: +i. whether as of the date the proposed new engagement is considered, +Marcum’s policies, procedures, and quality control system, as known or +observed by the Independent Consultant at the time of acceptance are +sufficient for Marcum to conduct the engagement in accordance with all +applicable professional standards; +ii. 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; +iii. whether the proposed engagement partner, EQR, and engagement team +members have sufficient capacity to complete their respective +responsibilities within the requisite time frame and with professional +competence and in accordance with all applicable professional standards; +iv. whether the staffing resources proposed to be dedicated to the engagement +are sufficient to conduct the engagement in accordance with applicable +professional standards; and + + 36 +v. 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. +b. Marcum shall require the Independent Consultant to apply the New Audit Client +Protocol to assess and approve any New Audit Clients. New Audit Client +Acceptance Documentation must be completed, in a sufficient level of detail, in +connection with the review of any prospective New Audit Client; such +documentation must also be sufficient to reflect the date upon which the New Audit +Client Protocol procedures were performed, and that such procedures were +performed prior to any formal acceptance of the New Audit Client by Marcum. +In the event the Independent Consultant does not approve the acceptance of a New +Audit Client, Marcum shall not accept the client. +c. Marcum shall maintain all New Audit Client Acceptance Documentation for a +period of seven (7) years, regardless of whether a New Audit Client was accepted, +and shall make such documentation available to Commission Staff upon request, +within five (5) business days of any such request. +MARCUM ASIA +169. Marcum shall ensure that all Independent Consultant recommendations adopted +and implemented by Marcum as described in Paragraphs 155 through 165 will also be adopted and +implemented by Marcum Asia. +170. Certifications by Marcum required by Paragraphs 158 and 160 (Certification of +Agreement to Adopt Recommendations; Implementation Certification; Final Certification of +Agreement to Adopt Recommendations; and Final Implementation Certification) shall include +parallel representations by Marcum regarding adoption and implementation for Marcum Asia. +171. From the date of entry of this Order until the date of the Implementation +Certification, all Marcum Asia New Audit Clients10 will be reviewed and approved by the +Independent Consultant pursuant to the requirements described in Paragraph 168. Except, +however, the Independent Consultant will not approve any Marcum Asia New Audit Client that +conducts the majority of its operations from within the United States or whose principal executive +offices are in the United States. + +10 A Marcum Asia New Audit Client is defined as an entity seeking audit services from Marcum +Asia that is (a) an issuer as that term is defined in Section 2(a)(7) of the Sarbanes-Oxley Act of +2002; (b) registered with the Commission; or (c) for the purpose of registering securities with the +Commission from the date of entry of this Order. + + 37 +TRAINING AND PROFESSIONAL DEVELOPMENT +172. Marcum shall require each audit professional to undergo training, as applicable, +related to changes to the firm’s policies and procedures that result from the Independent +Consultant’s Initial Report and Final Report. +COMMUNICATION TO AUDIT PROFESSIONALS +173. Marcum shall inform its audit professionals of the terms of the Order within ten +(10) days after entry of the Order. +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 its undertakings enumerated in Paragraphs 149-173 +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 $10 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 +(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 + + 38 +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Marcum 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 Carolyn Welshhans, Associate +Director, 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/2023/AAER-4424.txt b/raw/aaer/2023/AAER-4424.txt new file mode 100644 index 0000000000000000000000000000000000000000..7d19c7eb88069a2f368287e9851e6f95d0551603 --- /dev/null +++ b/raw/aaer/2023/AAER-4424.txt @@ -0,0 +1,96 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97795 / June 23, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4424 / June 23, 2023 + +Admin. Proc. File No. 3-21314 + + +In the Matter of + +ALAN J. MARKOWITZ, CPA + + +SCHEDULING ORDER + +On February 28, 2023, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Alan J. Markowitz, 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 Markowitz filed an answer to the allegations contained in the +OIP on April 27, 2023. The parties conducted a prehearing conference on May 10, 2023, +pursuant to Rule 221.2 On May 12, 2023, the parties filed a joint prehearing conference +statement stipulating to a proposed schedule. They request that the Commission enter an order +that reflects their proposed schedule.3 +Accordingly, it is ORDERED, based on the parties’ representations, that the parties +adhere to the following schedule: +October 20, 2023 Last date to serve expert reports + +1 Alan J. Markowitz, CPA, Exchange Act Release No. 96995, 2023 WL 2299560 (February +28, 2023). +2 See 17 C.F.R. § 201.221. +3 See Rule of Practice 221(e), 17 C.F.R. § 201.221(e) (providing for entry of order that +“recites the agreements reached” at the prehearing conference). +2 + +November 17, 2023 Last date to serve rebuttal expert reports +December 8, 2023 Close of discovery +December 15, 2023 Last date to file any motions for summary disposition, if +leave for any such motions is granted4 +January 12, 2024 Last date to file oppositions to any motions for summary +disposition +January 19, 2024 Last date to file replies to any motions for summary +disposition +January 22, 2024 Parties exchange witness and exhibit lists +January 29, 2024 Parties to file any prehearing motions or briefs, including +motions in limine + Parties to file objections to witness and exhibit lists +February 5, 2024 Parties to file any oppositions to prehearing motions or +briefs, including motions in limine +February 12, 2024 Parties to file any replies to prehearing motions or briefs, +including motions in limine + Last date to file any stipulation, admission of fact, and +stipulation concerning the contents, authenticity, or +admissibility into evidence of documents + Last date to move to have official notice taken of any +matter + Parties to exchange demonstrative exhibits +February 15, 2024 Final prehearing conference +February 19, 2024 Hearing commences + (Time and location TBD) + +4 See 17 C.F.R. § 201.250(c) (requiring leave to be sought to file motions for summary +disposition in 120-day proceedings and articulating that summary disposition may be granted as +to a claim or defense when there is “no genuine issue with regard to any material fact” and “the +movant is entitled to summary disposition as a matter of law”); see also Markowitz, 2023 WL +2299560, at *14 (designating this proceeding as one under the “120-day timeframe”). +3 + + +It is further ORDERED that, if either party seeks to file a motion for summary disposition +pursuant to Rule of Practice 250(c), such party shall file the necessary motion for leave to do so +by November 15, 2023, not exceeding 2,000 words, that sets the basis for the anticipated +summary disposition motion and addresses any other pertinent considerations, including whether +the parties consent to any modifications to the prehearing schedule as a result of such motion.5 +Any opposition, also not exceeding 2,000 words, shall be filed by November 22, 2023. +This order is without prejudice to further modification of the schedule by the +Commission or by a hearing officer, whether upon request by a party or sua sponte, including, +without limitation, changes necessary because of the pendency or disposition of any motions for +summary disposition. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + +5 See supra n. 4; see also Adopting Release, Amendments to the Commission’s Rules of +Practice, 81 Fed. Reg. 50,212, 50,224-25 (July 29, 2016) (describing the factors relevant to +“assessing whether a party has demonstrated good cause” in seeking leave to file a summary +disposition motion in a 120-day proceeding). \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4425.txt b/raw/aaer/2023/AAER-4425.txt new file mode 100644 index 0000000000000000000000000000000000000000..adf5a766edc009e71bda394922c7deb8756f1fc1 --- /dev/null +++ b/raw/aaer/2023/AAER-4425.txt @@ -0,0 +1,440 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11206 / July 3, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97829 / July 3, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4425 / July 3, 2023 + +ADMINISTRATIVE PROCEEDING + File No. 3-21511 + + +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 Future FinTech Group Inc. (“FTFT” or “Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent 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. +In the Matter of +Future FinTech Group Inc., +Respondent. +2 +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds1that: + +Summary + +These proceedings arise out of, and this Order covers, recurring material misstatements in the +financial statements of Future FinTech Group Inc. (“FTFT”) during a three year period. The +misstatements included material errors for the carrying amount of investments during the fiscal +years of 2016, 2017, and 2018 (the “relevant period”). Additionally, as disclosed in FTFT’s filings +with the Commission, FTFT has had recurring material weaknesses in its Internal Control over +Financial Reporting and repeatedly failed to remediate them. + + +Respondent + +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 is headquartered in Beijing, +China. In 2018 FTFT changed its business model to include block chain technology 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. + + +Facts + +1. During the relevant period, FTFT experienced a series of setbacks that resulted in +a continuous decline in the economic condition of 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 losses in the event an asset’s carrying value +exceeded its fair value. + +2. ASC Topic 360, Property, Plant, and Equipment, requires an issuer to recognize +an impairment loss if the carrying amount of a long-lived asset is not recoverable and exceeds its +fair value and provides examples of circumstances for when an asset or asset group must be +tested for recoverability as the result of events or changes in circumstances that indicate a +carrying amount may not be recoverable. Such circumstances include a significant adverse +change in the extent or manner in which a long-lived asset is used, a current-period operating or +cash flow loss combined with a history of operating or cash flow losses, or a projection or +forecast that demonstrates continuing losses associated with the use of a long-lived asset. + + +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 +3. Throughout the relevant period, FTFT experienced various events or changes in +circumstances that indicated the carrying amounts of certain assets may not have been +recoverable. As disclosed in its Form 10-K filings for fiscal years 2015 through 2018, FTFT +stated that some 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 assets. Moreover, over the course of the relevant period, despite +disclosing the adverse business conditions, FTFT did not recognize those losses in its financial +statements in accordance with ASC Topic 360 due to insufficient internal accounting controls, +including an insufficient understanding of GAAP. FTFT’s assertion that its assets were carrying +at the appropriate value was not substantiated with sufficient evidence or documentation. + +4. Examples of this are seen in the following operating subsidiaries of FTFT: + +a. Huludao Wonder + +i. In FTFT’s Management Discussion and Analysis (“MD&A”) of its Form +10-K for the 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 the +Forms 10-K for fiscal years 2017 and 2018, and the company recorded fixed asset impairment +losses of $2.4 million in 2016, and $11.3 million in 2017. However, FTFT’s process to test for +impairment and measure any related impairment loss was insufficient. As such, FTFT’s asserted +carrying amounts for assets related to Huludao were unsupported. + +ii. For example, FTFT’s board of director minutes for fiscal year 2016 +document a decision to recognize a full impairment for Huludao’s equipment assets. However, +FTFT did not record full impairment losses in the audited financial statements in its Form 10-K +filing for fiscal year 2016. More significantly, the land and equipment were used by Huludao as +collateral for a loan on which Huludao had defaulted. + + +b. Suizhong Project + +i. This project involved the construction of facilities to support FTFT’s fruit +juice business. FTFT reported related assets including an office building, dormitory, refrigeration +storage facility, and warehouse. The company disclosed in the MD&A of its Form 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 Form 10-K for fiscal year 2016, the company’s MD&A +disclosures indicated 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 sufficient recoverability analyses and had insufficient basis for the +4 +carrying amounts of these assets. + +ii. In the fiscal year 2017 Form 10-K, FTFT recorded impairment losses of +$25.06 million, equaling their construction costs and nearly their entire investment. + +c. Guo Wei Mei + +i. Shaanxi Guo Wei Mei Kiwi Deep Processing Co., Ltd. (“Guo Wei Mei”), +a subsidiary of a subsidiary 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 Forms 10-K that it projected completing +construction in the second quarter of 2017. However, the fiscal year 2017 Form 10-K disclosed +in its MD&A and footnote disclosure 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. In its Form 10-K for 2018, FTFT inconsistently disclosed that it recorded +an impairment loss of $25.19 million in the footnotes for its financial statements compared to a +$45 million impairment loss in the MD&A. In addition to the inconsistency of the disclosure, the +disclosures contained no additional relevant facts as to why the additional impairment was not +recorded earlier in fiscal 2017 nor justification for recording the impairment loss in fiscal 2018. + +d. Yingkou + +i. In the fiscal year 2015 Form 10-K that FTFT filed in November 2016, +FTFT disclosed in the MD&A 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 subsequent filings contained inconsistencies. In its Form 10-K for +fiscal year 2016, the company disclosed in the MD&A that it had recognized a $2.1 million +impairment loss in 2016 with respect to the concentrated fruit juice equipment. However, in its +Form 10-K for the fiscal year 2017, FTFT’s filing disclosed in the MD&A that it recognized an +impairment loss of $2.1 million in 2017 and $0 in 2016. And finally, in its Form 10-K for fiscal +year 2018, it disclosed in the MD&A 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 for Yinkou in 2016 and 2017 in its financial statements, but did recognize +impairment of the remaining value of the asset in 2018. + +5. FTFT recorded impairment losses of $4.5 million in fiscal year 2016, $89 million +in fiscal year 2017, and $178 million in fiscal year 2018. However, as a result of the above +5 +failure to perform appropriate recoverability testing during the relevant period, those numbers +were unsupported and materially misstated. The financial statements for fiscal years 2016 and +2017 should have included losses that were not taken until later years, and the financial +statements for fiscal years 2017 and 2018 included losses that should have been taken in earlier +years. + +6. In addition to the accounting errors identified above, FTFT’s Forms 10-K during +the relevant period contained numerous errors and inconsistencies. For instance, for the fiscal +year 2017 Form 10-K, FTFT described the impairment for Huludao as either $11.76 million +(p.40), $11.34 million (p.50) or $11.33 million (p.F-7). Similarly the fiscal year 2018 Form 10-K +described 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 Form 10-K also disclosed 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. + +7. While FTFT’s Forms 10-K for fiscal years 2016, 2017, 2018, and 2019 disclosed +that the company had effective Internal Control over Financial Reporting, the company’s Forms +10-Q reflected material weaknesses in multiple quarters of every year except for 2019. +Specifically, the company identified material weaknesses in all three quarters of fiscal years +2016 and 2017, and the second and third quarters of fiscal year 2018. The Forms 10-Q in 2019 +contained no language regarding the effectiveness of its internal control over financial reporting. + +8. Starting with the Form 10-Q for the first quarter of fiscal year 2020, FTFT’s +Forms 10-Q and 10-K have all disclosed the company’s Internal Control over Financial +Reporting were ineffective because of material weaknesses. + +9. As a result, for the fiscal year 2016 forward, seventeen out of twenty-one +quarterly filings disclosed material weakness in Internal Control over Financial Reporting. In +each instance, the material weakness was due to the fact that the company lacked “sufficient +accounting personnel with the appropriate level of knowledge, experience and training in U.S. +GAAP and SEC reporting requirements.” Although the filings repeatedly described efforts to +remediate this problem, the material weakness persisted, as exemplified by the company’s last +three Forms 10-K. The company’s most recent Form 10-K, filed on April 19, 2023, again notes +a material weakness “related to our lack of U.S. GAAP and SEC reporting experience,” with +plans to purportedly address that weakness. + +10. During and soon after the relevant period, FTFT offered and sold securities in a +number of transactions, including on a registered basis. + + +Violations + +11. As a result of the conduct described above, FTFT violated Section 17(a)(2) and (3) +of the Securities Act, which prohibit FTFT from 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 +6 +make the statements made, in light of the circumstances under which they were made, not +misleading and engaging in any transaction, practice, or course of business which operates or +would operate as a fraud or deceit upon the purchaser in connection with t he offer or sale of +securities. + +12. Section 13(a) of the Exchange Act requires issuers with a class of securities +registered pursuant to Section 12 of the Exchange Act 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 12b-20, 13a-1 and 13a-13 require the filing of annual and quarterly reports, +respectively. As a result of the conduct described above, FTFT violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder. + +13. As a result of the conduct described above, FTFT violated Section 13(b)(2)(A) of +the Exchange Act, which requires companies with a class 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 their transactions and dispositions of their assets. + +14. As a result of the conduct described above, FTFT violated Section 13(b)(2)(B) of +the Exchange Act, which requires companies with a class of securitie s registered pursuant to +Section 12 of the Exchange Act 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. FTFT also violated Exchange Act Rule +13a-15(a), which requires issuers to maintain internal control over financial reporting as defined +in Rule 13a-15(f). + + +Undertakings + +Respondent has undertaken to: + +15. Retain, within sixty (60) 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 test, assess, and review Respondent’s internal accounting controls and internal control over +financial reporting (collectively, “review). The Consultant’s review shall include the following +areas: + +a. The implementation, effectiveness and sufficiency of FTFT’s internal +accounting controls. The review shall include, but not be limited to, a +review of the manner and means the company accounts for asset +valuations and impairments, including but not limited to the Respondent’s +policies, practices, procedures, and controls, relating to (i) asset valuation, +and (ii) the assessment and testing of assets for impairment; + +b. FTFT’s compliance with Commission requirements related to internal +7 +control over financial reporting, including but not limited to the adequacy of +FTFT’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. FTFT’s 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. FTFT’s training of its employees on matters related to GAAP as well as +financial reporting requirements. + +16. Provide, within seventy-five (75) days of the issuance of this Order, a copy of the +engagement letter detailing the Consultant’s scope of work and responsibilities to Sheldon +Pollock, Esq. at the SEC’s New York Regional Office, 100 Pearl Street, Suite 20-100, New +York, NY 10004-2616. + +17. Require the Consultant, at the conclusion of the review, which in no event shall be +no more than 180 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. + +18. 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 an 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. + +19. 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. + +20. 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. +8 +21. For the period of engagement and for a period of two years from completion of +the engagement, Respondent shall not (i) retain the independent Consultant for any other +professional services outside of the services described in this Order; (ii) enter into any other +professional relationship with the independent Consultant, including any employment, +consultant, attorney-client, auditing or other professional relationship; or (iii) enter, without prior +written consent of the Commission staff, into any such professional relationship with any of the +independent Consultant’s present or former affiliates, employers, directors, officers, employees, +or agents acting in their capacity as such. + +22. 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. + +23. Require the Consultant to report to the Commission staff on its activities as the +staff may request. + +24. Respondent agrees that the Commission staff may extend any of the dates set forth +above at its discretion. + +25. 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 Sheldon Pollock, Esq. at the SEC’s New York Regional Office, 100 Pearl Street, +Suite 20-100, New York, NY 10004-2616, 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 FTFT’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 FTFT cease and desist from committing or causing any violations and any future +9 +violations of Sections 17(a)(2) and (3) of the Securities Act, 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(a) thereunder. + + +B. Respondent FTFT shall pay a civil money penalty in the amount of $1,650,000 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). Payment shall be made in the +following installments: The first installment of $150,000 shall be paid within ten (10) +days of the entry of this Order; the second installment of $375,000 shall be paid within 90 days +of the entry of this Order; the third installment of $375,000 shall be paid within 180 days of the +entry of this Order; the fourth installment of $375,000 shall be made within 270 days of the entry +of this Order; and the last installment of $375,000 shall be made within 360 days of the entry of +this Order. 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) 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 +FTFT 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 Sheldon Pollock, Esq. at the SEC’s +New York Regional Office, 100 Pearl Street, Suite 20-100, New York, NY 10004-2616. + +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. + +D. Respondent shall comply with the undertakings enumerated in paragraphs III.15 +through III.25 above. + + +By the Commission. + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4426.txt b/raw/aaer/2023/AAER-4426.txt new file mode 100644 index 0000000000000000000000000000000000000000..9d12f618ae5e6a55ba289f60b34fd395cfe7896c --- /dev/null +++ b/raw/aaer/2023/AAER-4426.txt @@ -0,0 +1,1390 @@ + + + + + + + + + + + + + + + + SEC.gov | Vidul Prakash + + + + + + + + !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\/915126","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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Vidul Prakash , 3:23-cv-03300 (N.D. Cal., Complaint filed July 3, 2023) + + + + SEC Charges Former CFO of "Smart" Window Manufacturer, View Inc., for Failure to Disclose Company's $28 Million Liability + + + + + The Securities and Exchange Commission today charged Vidul Prakash, the former Chief Financial Officer of California-based manufacturer of "smart" windows, View Inc. ("View"), for his negligent failure to ensure the company's disclosure of $28 million in projected warranty-related liabilities. + + The SEC's complaint alleges that, in a series of reports and statements filed with the SEC from December 2020 to May 2021, View disclosed warranty liabilities of $22 million to $25 million, consisting largely of projected costs to manufacture replacements for certain defective windows. According to the complaint, Prakash approved the amounts disclosed despite knowing that those amounts excluded additional costs which View had decided to incur to pay to ship and install the replacement windows. The complaint alleges that, including those additional costs, View should have disclosed total warranty liabilities of $48-$53 million and, as a result, View materially misstated its warranty liability for fiscal years 2019 and 2020 and the first quarter of 2021. + + The SEC's complaint, filed in the U.S. District Court for the Northern District of California, charges Prakash with violating Section 17(a)(3) of the Securities Act of 1933, Section 14(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 14a-9 and 13b2-1. The complaint seeks permanent injunctions, civil penalties, and an officer and director bar. + + The SEC's investigation was conducted by Theis Finlev and Michael Foley and was supervised by Jason H. Lee, all of the SEC's San Francisco Regional Office. The SEC's litigation against Prakash will be conducted by Suzy LaMarca and Mr. Finlev. + + + 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/2023/AAER-4427.txt b/raw/aaer/2023/AAER-4427.txt new file mode 100644 index 0000000000000000000000000000000000000000..ba5af75449355d41d236c948c770d1b9037c0caf --- /dev/null +++ b/raw/aaer/2023/AAER-4427.txt @@ -0,0 +1,215 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97835 / July 5, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4427 / July 5, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21513 + + +In the Matter of + +REED L. BENSON, CPA + +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 Reed L. Benson (“Benson” 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. + +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. These proceedings concern reporting and disclosure control failures by +Co-Diagnostics, Inc. (“Co-Diagnostics”). Co-Diagnostics failed to disclose related party +transactions involving the family members of the company’s Chief Executive Officer (“CEO”) and +Benson, Co-Diagnostics’s then-Chief Financial Officer (“CFO”), Secretary, and General Counsel, +in its annual reports for the fiscal years ended December 31, 2018, 2019, and 2020 and in its +definitive proxy statements filed in 2019, 2020, and 2021. Benson signed the company’s annual +reports for the fiscal years ended December 31, 2018, and December 31, 2019. +2. Co-Diagnostics also failed to keep accurate books and records and failed to have +disclosure controls and procedures designed to ensure the company disclosed related party +transactions as required. Benson, along with Co-Diagnostics’s CEO, was responsible for +establishing and maintaining Co-Diagnostics’s relevant disclosure controls and procedures. +3. Based on this conduct, and as described in further detail below, Benson violated +Rule 13a-14 of the Exchange Act and caused Co-Diagnostics’s violations of Sections 13(a) and +13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. +RESPONDENT +4. Benson, age 76, is a resident of Sandy, Utah. Benson was the CFO of +Co-Diagnostics from 2014 to February 2021, its Secretary from 2014 to August 2021, and its +General Counsel from April 2013 to September 2021. Benson was also a director of +Co-Diagnostics from 2014 to 2017. Benson is an Inactive Emeritus Attorney in Utah and has an +inactive CPA license. +OTHER RELEVANT ENTITY AND INDIVIDUAL +5. Co-Diagnostics, a Utah company with its principal executive offices in Salt Lake +City, Utah, develops, manufactures, and sells reagents used for diagnostic tests, as well as +polymerase chain reaction (“PCR”) test kits used for diagnostic and research purposes. +Co-Diagnostics’s common stock is registered under Section 12(b) of the Exchange Act and trades +on the Nasdaq under the ticker “CODX.” +6. Dwight H. Egan (“Egan”), age 69, is a resident of Sandy, Utah. Egan has been +the CEO of Co-Diagnostics, as well as the Chairman of its Board, since 2013. +FACTS +7. Item 404(a) of Regulation S-K requires an issuer to disclose “any transaction . . . in +which any related person had or will have a direct or indirect material interest.” The instructions to +Item 404(a) define related person to include any immediate family member of a director or +executive officer of the issuer, including children. Under Item 404(d), Co-Diagnostics, which +made filings as a “smaller reporting company” in fiscal years 2018 through 2020, was required to + +3 +disclose any transaction exceeding “the lesser of $120,000 or one percent of the average of the . . . +company’s total assets at year end for the last two completed fiscal years.” +8. The relevant related-person reporting thresholds for Co-Diagnostics were $29,791 +for fiscal year 2018, $31,077 for fiscal year 2019, and $18,842 for fiscal year 2020. +9. During this time, Co-Diagnostics employed Egan’s son as the Director of Sales and +Marketing. Egan’s son was paid compensation totaling $91,352 in fiscal year 2018, $224,900 in +fiscal year 2019, and $1,113,440 in fiscal year 2020. +10. Also during this time, Co-Diagnostics employed Benson’s son as the Head of +Corporate Communications and Investor Relations. Benson’s son was paid compensation totaling +$327,820 in fiscal year 2018, $218,959 in fiscal year 2019, and $1,109,303 in fiscal year 2020. In +addition, Co-Diagnostics retained the services of the consulting company that Benson’s son +co-owned and paid that company $60,000 in fiscal year 2018, $78,500 in fiscal year 2019, and +$20,000 in fiscal year 2020. Co-Diagnostics also issued 7,000 shares of Co-Diagnostics stock to +the consulting company in fiscal year 2020. +11. These payments to Egan’s son and to Benson’s son constituted reportable +transactions under Item 404 of Regulation S-K. They were not recorded in Co-Diagnostics’s +books and records as related party transactions, and Co-Diagnostics failed to disclose them in its +annual reports on Form 10-K for the fiscal years ended December 31, 2018, 2019, and 2020 or in +its definitive proxy statements filed in 2019, 2020, and 2021. +12. Benson signed the company’s annual reports on Form 10-K for fiscal years ended +December 31, 2018, and December 31, 2019. +13. Sarbanes-Oxley Section 302 provides that the Commission shall, by rule, require +the principal executive officer and the principal financial officer of companies filing periodic +reports under Section 13(a) of the Exchange Act to make certain certifications in each annual or +quarterly report. To implement Section 302, the Commission promulgated Exchange Act Rule +13a-14, which provides that an issuer’s annual and quarterly reports shall include certain +certifications signed by the principal executive and principal financial officer of the issuer. +14. Benson, as Co-Diagnostics’s principal financial officer, was required to certify, +among other things, that he was responsible for establishing and maintaining disclosure controls +and procedures, and that he had designed such disclosure controls and procedures to ensure that +material information relating to the registrant is made known to the certifying officers, particularly +during the period in which the periodic report is being prepared. Benson executed such +certifications for the quarters and years from the first quarter of 2018 through the second quarter of +2020. These certifications were inaccurate. +15. During this time, Co-Diagnostics did not have any policies or procedures +concerning related party transactions, including what constitutes a related party transaction or how +such transactions should be disclosed by the company. Co-Diagnostics did not identify related +party transactions in its books and records. Although he was responsible for establishing and + +4 +maintaining Co-Diagnostics’s disclosure controls and procedures, Benson did not adequately +familiarize himself with the disclosure rules regarding related party transactions sufficient to +ensure that Co-Diagnostics met its disclosure obligations regarding such transactions in its filings +with the Commission. +Violations +16. As a result of the conduct described above, Benson violated Rule 13a-14 of the +Exchange Act and caused Co-Diagnostics’s violations of Section 13(a) and 13(b)(2)(A) of the +Exchange Act and Rules 13a-1 and 12b-20 thereunder. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Benson’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Benson 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 13a-1, 12b-20, and 13a-14 thereunder. + +B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $40,000 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 + + +5 +Payments by check or money order must be accompanied by a cover letter identifying +Benson 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 Steven G. Rawlings, Assistant Regional +Director, Division of Enforcement, New York Regional Office, Securities and Exchange +Commission, 100 Pearl St., Suite 20-100, New York, NY 10004-2616. + + 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, 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/2023/AAER-4428.txt b/raw/aaer/2023/AAER-4428.txt new file mode 100644 index 0000000000000000000000000000000000000000..4af67c778c657ba3f94651c6bcc1473eb0e57242 --- /dev/null +++ b/raw/aaer/2023/AAER-4428.txt @@ -0,0 +1,355 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11209 / July 5, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97836 / July 5, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4428 / July 5, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21514 + + +In the Matter of + +CO-DIAGNOSTICS, 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 Co-Diagnostics, Inc. (“Co-Diagnostics” 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. These proceedings concern Co-Diagnostics’s issuance of misleading press releases +on February 6 and 10, 2020 concerning a screening test it had developed to detect the novel +coronavirus, later named COVID-19 by the World Health Organization. Specifically, the press +releases misleadingly suggested that the test could be used by consumers to detect COVID-19, +when in fact, at that time, the test was intended for Research Use Only (“RUO”), which meant it +could not be sold for clinical diagnostic purposes. +2. Co-Diagnostics offered and sold securities to investors after it issued the February 6 +and 10, 2020 press releases. +3. In addition, Co-Diagnostics failed to disclose related party transactions involving +the family members of the company’s Chief Executive Officer (“CEO”) and then-Chief Financial +Officer (“CFO”), Secretary, and General Counsel in its annual reports for the fiscal years ended +December 31, 2018, 2019, and 2020 and in its definitive proxy statements filed in 2019, 2020, and +2021. Co-Diagnostics also failed to keep accurate books and records and failed to have disclosure +controls and procedures designed to ensure the company disclosed related party transactions as +required. +4. Based on this conduct, and as described in further detail below, Co-Diagnostics +violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A), and +14(a) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-15(a) and 14a-3 thereunder. Negligence +is sufficient to establish a violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act. Aaron +v. SEC, 446 U.S. 680, 696-97 (1980). +RESPONDENT +5. Co-Diagnostics, a Utah company with its principal executive offices in Salt Lake +City, Utah, develops, manufactures, and sells reagents used for diagnostic tests, as well as +polymerase chain reaction (“PCR”) test kits used for diagnostic and research purposes. +Co-Diagnostics’s common stock is registered under Section 12(b) of the Exchange Act and trades +on the Nasdaq under the ticker “CODX.” +OTHER RELEVANT INDIVIDUALS +6. Dwight H. Egan (“Egan”), age 69, is a resident of Sandy, Utah. Egan has been +the CEO of Co-Diagnostics, as well as the Chairman of its Board, since 2013. + +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 +7. Reed L. Benson (“R. Benson”), age 76, is a resident of Sandy, Utah. R. Benson +was the CFO of Co-Diagnostics from 2014 to February 2021, its Secretary from 2014 to August +2021, and its General Counsel from April 2013 to September 2021. R. Benson was also a director +of Co-Diagnostics from 2014 to 2017. R. Benson is an Inactive Emeritus Attorney in Utah and has +an inactive CPA license. +8. Andrew B. Benson (“A. Benson”), age 44, is a resident of Salt Lake City, Utah. +A. Benson has been Co-Diagnostics’s Head of Corporate Communications and Investor Relations +since 2014. A. Benson is also a co-owner and Managing Partner of a consulting company that +provides services relating to public and investor relations. He is the son of R. Benson. +FACTS +Co-Diagnostics Issues Materially Misleading Press Releases on February 6 and 10, 2020 +Background +9. Co-Diagnostics’s business focuses on the development of molecular tools for the +detection of infectious diseases, liquid biopsy for cancer screening, and agricultural applications. +Prior to 2020, Co-Diagnostics designed and sold polymerase chain reaction (“PCR”) diagnostic +tests for diseases and pathogens such as tuberculosis, hepatitis B and C, Malaria, dengue, human +papilloma virus, chikungunya, and Zika virus. +10. On July 2, 2019, Co-Diagnostics received a letter from the staff of Nasdaq +informing the company that it was in danger of becoming de-listed because its stock had closed +below $1.00 for the prior 30 consecutive business days. Per Nasdaq rules, to remain listed, +Co-Diagnostics’s stock had to close at or above $1.00 for 10 consecutive business days within the +next 180 calendar days, and if it failed to regain compliance within that time Co-Diagnostics could +be eligible for an additional 180 calendar day period to regain compliance. +11. As a result of this notice, Co-Diagnostics increased its public relations efforts in +order to inform the public and its customers about the development of its testing products and to +maintain its Nasdaq listing. These efforts included issuing frequent press releases, as well as using +third-party consultants, including the firm co-owned by A. Benson, to disseminate those press +releases and other information about the company. +12. On January 23, 2020, Co-Diagnostics announced that it had completed the +principal design work for a PCR screening test for the novel coronavirus, which would later be +named COVID-19 (“the Logix Smart Test”). At this time, this version of the Logix Smart Test +was intended for research use only, which meant it could not be sold for clinical diagnostic +purposes (i.e., to actually diagnose a patient as having COVID-19) without receiving further +authorization. + +4 +The February 6 and 10, 2020 Press Releases +13. On February 6, 2020, Egan and A. Benson worked on drafting a press release +relating to the Logix Smart Test with the goal of issuing it sometime that day. Egan ultimately +approved the final version of the press release for publication (the “February 6 Release”). +14. As of February 6, 2020, Co-Diagnostics had not received authorization from the +Food and Drug Administration (“FDA”) or any other regulatory entity to sell or use its Logix +Smart Test for diagnostic purposes. Co-Diagnostics later received approval to sell the Logix Smart +Test for diagnostic purposes in the European Union and other places that accepted a CE marking +on February 24, 2020, and Emergency Use Authorization from the FDA to sell the test for +diagnostic purposes in the United States on April 3, 2020. +15. Yet, the February 6 Release announced that Co-Diagnostics’s “research use only +(RUO) CoPrimer Test for the 2019 n-Cov coronavirus [was] ready for sale to appropriate +laboratories, hospitals and institutions in need of a solution to the current coronavirus epidemic.” +The press release further stated that Co-Diagnostics “believe[d] that the test’s unique design +[would] provide enhanced accuracy when detecting the presence of the coronavirus, including +improved specificity over tests designed on a different platform.” +16. Egan was also quoted in the release as stating, “[i]ncreased specificity is one of the +hallmarks of tests built using [Co-Diagnostics’s] patented CoPrimer platform.” +17. The references to the “specificity” of the Logix Smart Test in the February 6 +Release spoke to whether the Company’s technology could differentiate COVID-19 from other +viruses with similar genetic sequences in a patient (i.e., to correctly identify as negative patients +who do not have COVID-19). +18. On February 6, 2020, Co-Diagnostic’s stock closed at $3.08, representing an +18.92% increase over the day prior on a volume of 10,909,200, a 48 % increase from the average +daily volume for the prior thirty calendar days. +19. Co-Diagnostics used similar language to describe the Logix Smart Test in a +February 10, 2020 press release (the “February 10 Release”). In the February 10 Release, +Co-Diagnostics announced “sales of its screening test designed to identify the presence of the +novel coronavirus” and quoted Egan as stating that the company was “pleased to be able to offer a +product to this market that excels in being both sensitive and specific, the two benchmarks for +accuracy in molecular diagnostics.” The February 10 Release further quoted Egan as stating that +the company believed it could be “most helpful in this ongoing situation . . . by providing +diagnostic solutions that are affordable and accessible in any market in the world” and that the +speed with which Co-Diagnostics had designed and commercialized its test was a “compelling +proof-of-concept that the Company’s unique process and patented technology could quickly and +efficiently be applied to address the diagnostic needs associated with other emergencies, including +potential mutations of the coronavirus.” + +5 +20. Egan and A. Benson worked on drafting the February 10 Release, which Egan +ultimately approved. +21. On February 10, 2020, Co-Diagnostics stock closed at $3.96, representing a 32% +increase over the day prior, on a volume of 28,920,600. +The FDA Has Concerns About the Statements Made By Co-Diagnostics in the February 6 and +10, 2020 Press Releases +22. On February 11, 2020, a representative from the FDA contacted Co-Diagnostics’s +Head of Regulatory Affairs to inform Co-Diagnostics that the FDA had concerns with, among +other things, the above-quoted language in the February 6 and 10 Releases. +23. With respect to the February 6 Release, the FDA said that the language in question +implied that the Logix Smart Test could be used for diagnostic purposes, when it could not, and +also impermissibly made claims about the test’s performance given it had not yet been approved +for diagnostic use. With respect to the February 10 Release, the FDA said that the language in +question implied that the Logix Smart Test could be used for screening and diagnostic purposes, +when it could not. The FDA requested that Co-Diagnostics take immediate action to resolve these +issues and provide to the FDA a list of proposed corrective actions by February 14, 2020. +24. Three days later, on February 14, 2020, Co-Diagnostics sent the FDA a corrective +and preventive action plan, signed by A. Benson and Co-Diagnostics’s then-Head of Regulatory +Affairs, which required the then-Head of Regulatory Affairs to review press releases relating to the +Logix Smart Test going forward to ensure better accuracy. +25. The FDA again contacted Co-Diagnostics on February 26, 2020 with remaining +concerns regarding the February 6 and 10 Releases, which were still accessible on Co- +Diagnostics’s website. In response, on or around February 28, 2020, Co-Diagnostics added a +legend to the releases stating that the test was (1) for research use only and not intended for use in +diagnostic procedures; and (2) not available for sale in the U.S. Thereafter, the February 6 and 10 +Releases remained on Co-Diagnostics’s website with the addition of this language. +26. Prior to the addition of the clarifying legend, the February 6 and 10 Releases were +materially misleading because they implied that the Logix Smart Test was able to be sold and used +to diagnose COVID-19 with accuracy when it had not yet received the appropriate regulatory +approval to be utilized in this manner either in the United States or abroad. +27. A reasonable investor would have found the statements in the February 6 and 10 +Releases about the purported ability of the Logix Smart Test to be shipped to “laboratories, +hospitals and institutions in need of a solution to the current coronavirus epidemic” to be material, +especially because these statements were made in the early stages of the pandemic when +COVID-19 testing was scarce. + +6 +Co-Diagnostics Offers and Sells Securities +28. On or around February 13, 2020, Co-Diagnostics offered and sold 3,324,676 shares +of the Company’s common stock at a purchase price of $3.08 per share in a registered direct public +offering, for gross proceeds of approximately $10.2 million. At the time of the offer and sale, +Co-Diagnostics had neither retracted nor modified the materially misleading statements contained +in the February 6 or 10 Releases. +Co-Diagnostics Fails to Report Transactions with the CEO’s and CFO’s Family Members +29. Item 404(a) of Regulation S-K requires an issuer to disclose “any transaction . . . in +which any related person had or will have a direct or indirect material interest.” The instructions to +Item 404(a) define related person to include any immediate family member of a director or +executive officer of the issuer, including children. Under Item 404(d), Co-Diagnostics, which +made filings as a “smaller reporting company” in fiscal years 2018 through 2020, was required to +disclose any transaction exceeding “the lesser of $120,000 or one percent of the average of the . . . +company’s total assets at year end for the last two completed fiscal years.” +30. The relevant related-person reporting thresholds for Co-Diagnostics were $29,791 +for fiscal year 2018, $31,077 for fiscal year 2019, and $18,842 for fiscal year 2020. +31. During this time, Co-Diagnostics employed Egan’s son as the Director of Sales and +Marketing. Egan’s son was paid compensation totaling $91,352 in fiscal year 2018, $224,900 in +fiscal year 2019, and $1,113,440 in fiscal year 2020. +32. Also during this time, Co-Diagnostics employed A. Benson, the son of then-CFO, +Secretary, and General Counsel, R. Benson, as the Head of Corporate Communications and +Investor Relations. A. Benson was paid compensation totaling $327,820 in fiscal year 2018, +$218,959 in fiscal year 2019, and $1,109,303 in fiscal year 2020. In addition, Co-Diagnostics +retained the services of the consulting company that A. Benson co-owned and paid that company +$60,000 in fiscal year 2018, $78,500 in fiscal year 2019, and $20,000 in fiscal year 2020. +Co-Diagnostics also issued 7,000 shares of Co-Diagnostics stock to the consulting company in +fiscal year 2020. +33. These payments to Egan’s son and to A. Benson constituted reportable transactions +under Item 404 of Regulation S-K. They were not recorded in Co-Diagnostics’s books and records +as related party transactions, and Co-Diagnostics failed to disclose them in its annual reports on +Form 10-K for the fiscal years ended December 31, 2018, 2019, and 2020 or in its definitive proxy +statements filed in 2019, 2020, and 2021. +34. Egan signed the company’s annual reports on Form 10-K for the fiscal years ended +2018, 2019, and 2020 and solicited proxies relating to the definitive proxy statements filed in 2019, +2020, and 2021. R. Benson signed the company’s annual reports on Form 10-K for fiscal years +ended December 31, 2018, and December 31, 2019. + +7 +35. During this time, Co-Diagnostics did not have any policies or procedures +concerning related party transactions, including what constitutes a related party transaction or how +such transactions should be disclosed by the company. Co-Diagnostics did not identify related +party transactions in its books and records. +Violations + +36. As a result of the conduct described above, Co-Diagnostics violated Sections +17(a)(2) and 17(a)(3) of the Securities Act, which prohibit any person in the offer or sale of +securities from obtaining money or property by means of any untrue statement of material fact or +any omission to state a material fact necessary in order to make statements made, in light of the +circumstances under which they were made, not misleading, and from engaging in any 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, respectively. +37. As a result of the conduct described above, Co-Diagnostics violated Section 13(a) +of the Exchange Act and Rule 13a-1 thereunder, which require issuers with a class of securities +registered pursuant to Exchange Act Section 12 to file such periodic and other reports as the +Commission may prescribe and in conformity with such rules as the Commission may promulgate. +The obligation to file such reports embodies the requirement that they be true and correct. 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. Co-Diagnostics violated Exchange Act Rule 12b-20. +38. As a result of the conduct described above, Co-Diagnostics violated Section 14(a) +of the Exchange Act and Rule 14a-3 thereunder. Section 14(a) of the Exchange Act prohibits any +person from acting in contravention of the Commission’s rules and regulations “to solicit or to +permit the use of his name to solicit any proxy . . . in respect of any security . . . registered pursuant +to Section 12” of the Exchange Acts. Rule 14a-3 prohibits issuers with securities registered +pursuant to Exchange Act Section 12 from soliciting proxies without furnishing proxy statements +containing the information specified in Schedule 14A, including related party disclosures pursuant +to Item 404. +39. As a result of the conduct described above, Co-Diagnostics violated Exchange Act +Rule 13a-15(a), which requires issuers with a class of securities registered pursuant to Exchange +Act Section 12 to maintain disclosure controls and procedures. +40. As a result of the conduct described above, Co-Diagnostics violated Section +13(b)(2)(A) of the Exchange Act, which requires issuers with a class of securities registered +pursuant to Exchange Act Section 12 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. + +8 +Co-Diagnostics’s Remedial Efforts + +41. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Co-Diagnostics’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 Co-Diagnostics 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), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-15(a), and 14a-3 +thereunder. + + +B. Co-Diagnostics shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $250,000 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 Co- +Diagnostics 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 Steven G. Rawlings, Assistant + +9 +Regional Director, Division of Enforcement, New York Regional Office, Securities and Exchange +Commission, 100 Pearl St., Suite 20-100, New York, NY 10004-2616. + + 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/2023/AAER-4429.txt b/raw/aaer/2023/AAER-4429.txt new file mode 100644 index 0000000000000000000000000000000000000000..c65f0d8ad1f59a9c3c1bfc3300602bbacdbb9a22 --- /dev/null +++ b/raw/aaer/2023/AAER-4429.txt @@ -0,0 +1,372 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11210 / July 5, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97837 / July 5, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4429 / July 5, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21515 + + +In the Matter of + +DWIGHT H. EGAN, + +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 Dwight H. Egan (“Egan” 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. These proceedings concern Egan’s failure to exercise reasonable care in approving +misleading press releases that Co-Diagnostics, Inc. (“Co-Diagnostics”) issued on February 6 and +10, 2020 concerning a screening test Co-Diagnostics had developed to detect the novel +coronavirus, later named COVID-19 by the World Health Organization. Specifically, the press +releases misleadingly suggested that the test could be used by consumers to detect COVID-19, +when in fact, at that time, the test was intended for Research Use Only (“RUO”), which meant it +could not be sold for clinical diagnostic purposes. +2. Co-Diagnostics offered and sold securities to investors after it issued the February 6 +and 10, 2020 press releases. +3. In addition, Co-Diagnostics failed to disclose related party transactions involving +the family members of the company’s Chief Executive Officer (“CEO”) and then-Chief Financial +Officer (“CFO”), Secretary, and General Counsel in its annual reports for the fiscal years ended +December 31, 2018, 2019, and 2020 and in its definitive proxy statements filed in 2019, 2020, and +2021. Egan signed each of these filings, including the definitive proxy statements listing Egan as a +Co-Diagnostics board member and director nominee. +4. Co-Diagnostics also failed to keep accurate books and records and failed to have +disclosure controls and procedures designed to ensure the company disclosed related party +transactions as required. Egan, along with Co-Diagnostics’s then-CFO, Secretary, and General +Counsel, was responsible for establishing and maintaining Co-Diagnostics’s relevant controls and +procedures. +5. Based on this conduct, and as described in further detail below, Egan violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 14(a) of the Exchange Act and +Rules 14a-3 and 13a-14 thereunder, and caused Co-Diagnostics’s violations of Sections 13(a) and +13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. Negligence is sufficient +to establish a violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act. Aaron v. SEC, 446 +U.S. 680, 696-97 (1980). +RESPONDENT +6. Egan, age 69, is a resident of Sandy, Utah. Egan has been the CEO of +Co-Diagnostics, as well as the Chairman of its Board, since 2013. + +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 +OTHER RELEVANT ENTITY AND INDIVIDUALS +7. Co-Diagnostics, a Utah company with its principal executive offices in Salt Lake +City, Utah, develops, manufactures, and sells reagents used for diagnostic tests, as well as +polymerase chain reaction (“PCR”) test kits used for diagnostic and research purposes. +Co-Diagnostics’s common stock is registered under Section 12(b) of the Exchange Act and trades +on the Nasdaq under the ticker “CODX.” +8. Andrew B. Benson (“A. Benson”), age 44, is a resident of Salt Lake City, Utah. +A. Benson has been Co-Diagnostics’s Head of Corporate Communications and Investor Relations +since 2014. A. Benson is also a co-owner and Managing Partner of a consulting company that +provides services relating to public and investor relations. He is the son of Reed L. Benson. +9. Reed L. Benson (“R. Benson”), age 76, is a resident of Sandy, Utah. R. Benson +was the CFO of Co-Diagnostics from 2014 to February 2021, its Secretary from 2014 to August +2021, and its General Counsel from April 2013 to September 2021. R. Benson was also a director +of Co-Diagnostics from 2014 to 2017. R. Benson is an Inactive Emeritus Attorney in Utah and has +an inactive CPA license. +FACTS +Co-Diagnostics Issues Materially Misleading Press Releases on February 6 and 10, 2020 +Background +10. Co-Diagnostics’s business focuses on the development of molecular tools for the +detection of infectious diseases, liquid biopsy for cancer screening, and agricultural applications. +Prior to 2020, Co-Diagnostics designed and sold polymerase chain reaction (“PCR”) diagnostic +tests for diseases and pathogens such as tuberculosis, hepatitis B and C, Malaria, dengue, human +papilloma virus, chikungunya, and Zika virus. +11. On July 2, 2019, Co-Diagnostics received a letter from the staff of Nasdaq +informing the company that it was in danger of becoming de-listed because its stock had closed +below $1.00 for the prior 30 consecutive business days. Per Nasdaq rules, to remain listed, +Co-Diagnostics’s stock had to close at or above $1.00 for 10 consecutive business days within the +next 180 calendar days, and if it failed to regain compliance within that time Co-Diagnostics could +be eligible for an additional 180 calendar day period to regain compliance. +12. As a result of this notice, Co-Diagnostics increased its public relations efforts in +order to inform the public and its customers about the development of its testing products and to +maintain its Nasdaq listing. These efforts included issuing frequent press releases, as well as using +third-party consultants, including the firm co-owned by A. Benson, to disseminate those press +releases and other information about the company. +13. On January 23, 2020, Co-Diagnostics announced that it had completed the +principal design work for a PCR screening test for the novel coronavirus, which would later be + +4 +named COVID-19 (“the Logix Smart Test”). At this time, this version of the Logix Smart Test +was intended for research use only, which meant it could not be sold for clinical diagnostic +purposes (i.e., to actually diagnose a patient as having COVID-19) without receiving further +authorization. +The February 6 and 10, 2020 Press Releases + +14. On February 6, 2020, Egan and A. Benson worked on drafting a press release +relating to the Logix Smart Test with the goal of issuing it sometime that day. Egan ultimately +approved the final version of the press release for publication (the “February 6 Release”). +15. As of February 6, 2020, Co-Diagnostics had not received authorization from the +Food and Drug Administration (“FDA”) or any other regulatory entity to sell or use its Logix +Smart Test for diagnostic purposes. Co-Diagnostics later received approval to sell the Logix Smart +Test for diagnostic purposes in the European Union and other places that accepted a CE marking +on February 24, 2020, and Emergency Use Authorization from the FDA to sell the test for +diagnostic purposes in the United States on April 3, 2020. +16. Yet, the February 6 Release announced that Co-Diagnostics’s “research use only +(RUO) CoPrimer Test for the 2019 n-Cov coronavirus [was] ready for sale to appropriate +laboratories, hospitals and institutions in need of a solution to the current coronavirus epidemic.” +The press release further stated that Co-Diagnostics “believe[d] that the test’s unique design +[would] provide enhanced accuracy when detecting the presence of the coronavirus, including +improved specificity over tests designed on a different platform.” +17. Egan was also quoted in the release as stating, “[i]ncreased specificity is one of the +hallmarks of tests built using [Co-Diagnostics’s] patented CoPrimer platform.” +18. The references to the “specificity” of the Logix Smart Test in the February 6 +Release spoke to whether the Company’s technology could differentiate COVID-19 from other +viruses with similar genetic sequences in a patient (i.e., to correctly identify as negative patients +who do not have COVID-19). +19. On February 6, 2020, Co-Diagnostic’s stock closed at $3.08, representing an +18.92% increase over the day prior on a volume of 10,909,200, a 48 % increase from the average +daily volume for the prior thirty calendar days. +20. Co-Diagnostics used similar language to describe the Logix Smart Test in a +February 10, 2020 press release (the “February 10 Release”). In the February 10 Release, +Co-Diagnostics announced “sales of its screening test designed to identify the presence of the +novel coronavirus” and quoted Egan as stating that the company was “pleased to be able to offer a +product to this market that excels in being both sensitive and specific, the two benchmarks for +accuracy in molecular diagnostics.” The February 10 Release further quoted Egan as stating that +the company believed it could be “most helpful in this ongoing situation . . . by providing +diagnostic solutions that are affordable and accessible in any market in the world” and that the + +5 +speed with which Co-Diagnostics had designed and commercialized its test was a “compelling +proof-of-concept that the Company’s unique process and patented technology could quickly and +efficiently be applied to address the diagnostic needs associated with other emergencies, including +potential mutations of the coronavirus.” +21. Egan and A. Benson worked on drafting the February 10 Release, which Egan +ultimately approved. +22. On February 10, 2020, Co-Diagnostics stock closed at $3.96, representing a 32% +increase over the day prior, on a volume of 28,920,600. +The FDA Has Concerns About the Statements Made By Co-Diagnostics in the February 6 and +10, 2020 Press Releases +23. On February 11, 2020, a representative from the FDA contacted Co-Diagnostics’s +Head of Regulatory Affairs to inform Co-Diagnostics that the FDA had concerns with, among +other things, the above-quoted language in the February 6 and 10 Releases. +24. With respect to the February 6 Release, the FDA said that the language in question +implied that the Logix Smart Test could be used for diagnostic purposes, when it could not, and +also impermissibly made claims about the test’s performance given it had not yet been approved +for diagnostic use. With respect to the February 10 Release, the FDA said that the language in +question implied that the Logix Smart Test could be used for screening and diagnostic purposes, +when it could not. The FDA requested that Co-Diagnostics take immediate action to resolve these +issues and provide to the FDA a list of proposed corrective actions by February 14, 2020. +25. Three days later, on February 14, 2020, Co-Diagnostics sent the FDA a corrective +and preventive action plan, signed by A. Benson and Co-Diagnostics’s then-Head of Regulatory +Affairs which required the then-Head of Regulatory Affairs to review press releases relating to the +Logix Smart Test going forward to ensure better accuracy. +26. The FDA again contacted Co-Diagnostics on February 26, 2020 with remaining +concerns regarding the February 6 and 10 Releases, which were still accessible on +Co-Diagnostics’s website. In response, on or around February 28, 2020, Co-Diagnostics added a +legend to the releases stating that the test was (1) for research use only and not intended for use in +diagnostic procedures; and (2) not available for sale in the U.S. Thereafter, the February 6 and 10 +Releases remained on Co-Diagnostics’s website with the addition of this language. +27. Prior to the addition of the clarifying legend, the February 6 and 10 Releases were +materially misleading because they implied that the Logix Smart Test was able to be sold and used +to diagnose COVID-19 with accuracy when it had not yet received the appropriate regulatory +approval to be utilized in this manner either in the United States or abroad. +28. A reasonable investor would have found the statements in the February 6 and 10 +Releases about the purported ability of the Logix Smart Test to be shipped to “laboratories, +hospitals and institutions in need of a solution to the current coronavirus epidemic” to be material, + +6 +especially because these statements were made in the early stages of the pandemic when +COVID-19 testing was scarce. +Co-Diagnostics Offers and Sells Securities +29. On or around February 13, 2020, Co-Diagnostics offered and sold 3,324,676 shares +of the Company’s common stock at a purchase price of $3.08 per share in a registered direct public +offering, for gross proceeds of approximately $10.2 million. At the time of the offer and sale, +Co-Diagnostics had neither retracted nor modified the materially misleading statements contained +in the February 6 or 10 Releases. + +Co-Diagnostics Fails to Report Transactions with the CEO’s and CFO’s Family Members +30. Item 404(a) of Regulation S-K requires an issuer to disclose “any transaction . . . in +which any related person had or will have a direct or indirect material interest.” The instructions to +Item 404(a) define related person to include any immediate family member of a director or +executive officer of the issuer, including children. Under Item 404(d), Co-Diagnostics, which +made filings as a “smaller reporting company” in fiscal years 2018 through 2020, was required to +disclose any transaction exceeding “the lesser of $120,000 or one percent of the average of the . . . +company’s total assets at year end for the last two completed fiscal years.” +31. The relevant related-person reporting thresholds for Co-Diagnostics were $29,791 +for fiscal year 2018, $31,077 for fiscal year 2019, and $18,842 for fiscal year 2020. +32. During this time, Co-Diagnostics employed Egan’s son as the Director of Sales and +Marketing. Egan’s son was paid compensation totaling $91,352 in fiscal year 2018, $224,900 in +fiscal year 2019, and $1,113,440 in fiscal year 2020. +33. Also during this time, Co-Diagnostics employed A. Benson, the son of then-CFO, +Secretary, and General Counsel, R. Benson, as the Head of Corporate Communications and +Investor Relations. A. Benson was paid compensation totaling $327,820 in fiscal year 2018, +$218,959 in fiscal year 2019, and $1,109,303 in fiscal year 2020. In addition, Co-Diagnostics +retained the services of the consulting company that A. Benson co-owned and paid that company +$60,000 in fiscal year 2018, $78,500 in fiscal year 2019, and $20,000 in fiscal year 2020. +Co-Diagnostics also issued 7,000 shares of Co-Diagnostics stock to the consulting company in +fiscal year 2020. +34. These payments to Egan’s son and to A. Benson constituted reportable transactions +under Item 404 of Regulation S-K. They were not recorded in Co-Diagnostics’s books and records +as related party transactions, and Co-Diagnostics failed to disclose them in its annual reports on +Form 10-K for the fiscal years ended December 31, 2018, 2019, and 2020 or in its definitive proxy +statements filed in 2019, 2020, and 2021. +35. Egan signed the company’s annual reports on Form 10-K for fiscal years ended +December 31, 2018, 2019, and 2020 and solicited proxies relating to the definitive proxy +statements filed in 2019, 2020, and 2021. The definitive proxy statements, which solicited proxies + +7 +for the selection of its board of directors, each listed Egan, among others, as a Co-Diagnostics +board member and a director nominee. +36. Sarbanes-Oxley Section 302 provides that the Commission shall, by rule, require +the principal executive officer and the principal financial officer of companies filing periodic +reports under Section 13(a) of the Exchange Act to make certain certifications in each annual or +quarterly report. To implement Section 302, the Commission promulgated Exchange Act Rule +13a-14, which provides that an issuer’s annual and quarterly reports shall include certain +certifications signed by the principal executive and principal financial officer of the issuer. +37. Egan, as Co-Diagnostics’s principal executive officer, was required to certify, +among other things, that he was responsible for establishing and maintaining disclosure controls +and procedures, and that he had designed such disclosure controls and procedures to ensure that +material information relating to the registrant is made known to the certifying officers, particularly +during the period in which the periodic report is being prepared. Egan executed such certifications +for the quarters and years from the first quarter of 2018 through the third quarter of 2021. These +certifications were inaccurate. +38. During this time, Co-Diagnostics did not have any policies or procedures +concerning related party transactions, including what constitutes a related party transaction or how +such transactions should be disclosed by the company. Co-Diagnostics did not identify related +party transactions in its books and records. Although he was responsible for establishing and +maintaining Co-Diagnostics’s disclosure controls and procedures, Egan did not adequately +familiarize himself with the disclosure rules regarding related party transactions sufficient to +ensure that Co-Diagnostics met its disclosure obligations regarding such transactions in its filings +with the Commission. +Violations +39. As a result of the conduct described above, Egan violated Sections 17(a)(2) and +17(a)(3) of the Securities Act, which prohibit any person in the offer or sale of securities from +obtaining money or property by means of any untrue statement of material fact or any omission to +state a material fact necessary in order to make statements made, in light of the circumstances +under which they were made, not misleading, and from engaging in any 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, respectively. +40. As a result of the conduct described above, Egan, as a Co-Diagnostics director and +director nominee who permitted his name to be used in connection with Co-Diagnostics’s proxy +solicitation, violated Section 14(a) of the Exchange Act and Rule 14a-3 thereunder. Section 14(a) +of the Exchange Act prohibits any person from acting in contravention of the Commission’s rules +and regulations “to solicit or to permit the use of his name to solicit any proxy . . . in respect of any +security . . . registered pursuant to Section 12” of the Exchange Acts. Rule 14a-3 prohibits issuers +with securities registered pursuant to Exchange Act Section 12 from soliciting proxies without + +8 +furnishing proxy statements containing the information specified in Schedule 14A, including +related party disclosures pursuant to Item 404. +41. As a result of the conduct described above, Egan violated Rule 13a-14 of the +Exchange Act. +42. As a result of the conduct described above, Egan caused Co-Diagnostics’s +violations of Section 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1 and 12b-20 +thereunder. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Egan’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 Egan 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 Rules 13(a), 13(b)(2)(A), and +14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-14 and 14a-3 thereunder. + +B. Respondent shall, within 30 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 +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 + + +9 +Payments by check or money order must be accompanied by a cover letter identifying Egan +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 Steven G. Rawlings, Assistant Regional +Director, Division of Enforcement, New York Regional Office, Securities and Exchange +Commission, 100 Pearl St., Suite 20-100, New York, NY 10004-2616. + + 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, 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/2023/AAER-4430.pdf b/raw/aaer/2023/AAER-4430.pdf new file mode 100644 index 0000000000000000000000000000000000000000..755715f8dbab71e28c8b4a38a655d89adcb32113 Binary files /dev/null and b/raw/aaer/2023/AAER-4430.pdf differ diff --git a/raw/aaer/2023/AAER-4430.txt b/raw/aaer/2023/AAER-4430.txt new file mode 100644 index 0000000000000000000000000000000000000000..37d0228c77069b48922f8e222d1ccafd7d383351 --- /dev/null +++ b/raw/aaer/2023/AAER-4430.txt @@ -0,0 +1,86 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97920 / July 17, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4430 / July 17, 2023 + +Admin. Proc. File No. 3-21298 + + +In the Matter of + +JIA ROGER QIAN WANG, CPA and WANG +CERTIFIED PUBLIC ACCOUNTANT, P.C. + + + +ORDER + +On February 8, 2023, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Jia Roger Qian Wang, CPA, and Wang +Certified Public Accountant, P.C., (together, “Respondents”), 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 May 11, 2023, the parties filed a joint statement that, after a prehearing conference, +they had reached agreement on a proposed schedule for the proceeding. On May 25, 2023, the +Commission issued a scheduling order based on the parties’ representations.2 On July 10, 2023, +the parties filed an amended joint prehearing statement with suggested changes to the schedule. +Based on the representations in the July 10 statement, it is ORDERED that the parties adhere to +the following amended schedule: +June 9, 2023 Last date to exchange name and contact information of +individuals likely to have discoverable information. +June 16, 2023 Last date for parties to meet and confer on discovery plan. + +1 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96852, 2023 WL 1819154 (Feb. +8, 2023). +2 Jia Roger Qian Wang, CPA, Exchange Act Release No. 97590, 2023 WL 3646085 (May +25, 2023). +2 + +June 23, 2023 Last date to exchange identity of any expert witness and +expected topics of testimony. +July 17, 2023 Last date to exchange identity of any rebuttal expert +witness and expected topics of testimony. +August 21, 2023 Close of fact discovery. +September 1, 2023 Last date to serve expert reports. +September 15, 2023 Last date to serve rebuttal expert reports. +September 29, 2023 Close of expert discovery. +October 13, 2023 Last date to file any motions for summary disposition, if +leave for any such motions is granted. +November 3, 2023 Last date to file oppositions to any motions for summary +disposition. +November 24, 2023 Last date to file replies to any motions for summary +disposition. +November 24, 2023 Parties exchange and file final witness lists. +December 1, 2023 Parties exchange and file final exhibit lists and pre-marked +exhibits. +December 8, 2023 Parties file any motions in limine, prehearing briefs, and +any proposed stipulations of fact. +December 11, 2023 Final prehearing conference. +December 19, 2023 Hearing commences. +It is further ORDERED that the parties shall seek leave to file any motions for summary +disposition pursuant to Rule of Practice 250(c) by August 25, 2023, by filing a concise statement, + +3 + +which also addresses whether the parties consent to any modifications of the prehearing schedule +as a result of such motion for summary disposition.3 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + + +3 See 17 C.F.R. § 201.250(c) (requiring leave to be sought to file motions for summary +disposition in 120-day proceedings and articulating that summary disposition may be granted as +to a claim or defense when there is “no genuine issue with regard to any material fact” and “the +movant is entitled to summary disposition as a matter of law”); see also Jia Roger Qian Wang, +CPA, 2023 WL 1819154, at *9 (designating this proceeding one under the “120-day +timeframe”). \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4431.txt b/raw/aaer/2023/AAER-4431.txt new file mode 100644 index 0000000000000000000000000000000000000000..a27a216e7eb8d3e59bd289eb76eb1b3c4848fd83 --- /dev/null +++ b/raw/aaer/2023/AAER-4431.txt @@ -0,0 +1,274 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11212 / July 18, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97940 / July 18, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4431 / July 18, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21532 + +In the Matter of + +KEVIN R. HARRIS, 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 Kevin +R. Harris (“Respondent” or “Harris”) 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, 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.3 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. Harris, age 54, is and has been a certified public accountant licensed to practice in +the State of California. He served as interim, contract CFO of MusclePharm Corp. from November +2017 through March 2020. + +2. MusclePharm was, at all relevant times, a Nevada corporation with its principal +place of business in Los Angeles, California or Las Vegas, Nevada. MusclePharm was engaged in +the business of developing, marketing, and distributing branded nutritional supplements. At all +relevant times, MusclePharm’s common stock was registered with the Commission pursuant to +Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”), and traded on the OTC +Link under the symbol “MSLP.” + +3. On June 27, 2023, the Commission filed a complaint against Harris in SEC v. +Casutto, et al. (Civil Action No. 2:23-cv-05104-MCS-RAO). On July 6, 2023, the court entered an +order permanently enjoining Harris, by consent, from future violations of Sections 17(a)(2) and +17(a)(3) of the Securities Act of 1933 (the “Securities Act”), Section 14(a) of the Exchange Act, +and Rules 13b2-1, 14a-3, and 14a-9 thereunder, and 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-1, 13a-11, 13a-13, +and 13a-15 thereunder. Harris was also ordered to pay a $50,000 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that, while Harris was +engaged at MusclePharm, it (i) filed materially false and misleading financial statements in the +company’s annual report on Form 10-K for the fiscal year ended December 31, 2017, and in the +company’s quarterly reports on Form 10-Q for the first three quarters of fiscal year 2018; and +(ii) recorded materially false information in its books and records in preparation for filing its +annual report on Form 10-K for the fiscal year ended December 31, 2018. Specifically, the +complaint alleged that Harris engaged in certain improper accounting practices that resulted in a +material overstatement of MusclePharm’s annual and quarterly revenue contrary to generally +accepted accounting principles. These practices included, among other things, (i) prematurely +recognizing revenue for orders before they were shipped to customers, (ii) prematurely + 3 +recognizing revenue for orders upon shipment instead of after delivery and acceptance as +required by certain customer contracts, and (iii) misclassifying customer credits as advertising +expenses instead of reduction to revenue. In addition, the complaint alleged that Harris failed to +ensure that MusclePharm devised and maintained a system of internal accounting controls and +accurately disclosed certain perquisites paid to its named executive officers. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Harris’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Harris is suspended from appearing or practicing before the Commission as an +accountant. + +B. 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. + +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 + +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, including any orders in SEC v. +Casutto, et al. proceeding 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; + 5 + +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. + +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/2023/AAER-4432.pdf b/raw/aaer/2023/AAER-4432.pdf new file mode 100644 index 0000000000000000000000000000000000000000..746d96ccda75335921a459b27f2a56615bf47aaa Binary files /dev/null and b/raw/aaer/2023/AAER-4432.pdf differ diff --git a/raw/aaer/2023/AAER-4432.txt b/raw/aaer/2023/AAER-4432.txt new file mode 100644 index 0000000000000000000000000000000000000000..850ab166a82a44e32b926da7aa7ef61c35ce84e5 --- /dev/null +++ b/raw/aaer/2023/AAER-4432.txt @@ -0,0 +1,37 @@ + UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97941 / July 18, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4432 / July 18, 2023 + +Admin. Proc. File No. 3-17228 + + +In the Matter of + +MICHELLE L. HELTERBRAN COCHRAN, +CPA + +ORDER REQUESTING RESPONSE TO MOTION FOR RECONSIDERATION +On April 26, 2016, the Commission instituted this administrative proceeding against +Michelle L. Helterbran Cochran, CPA.1 On June 2, 2023, the Commission determined to +dismiss, as a matter of discretion, the proceeding.2 On June 20, 2023, Cochran sought +reconsideration pursuant to Rule of Practice 470, which provides that “[n]o response to a motion +for reconsideration shall be filed unless requested by the Commission.”3 Accordingly, IT IS +ORDERED that the Division of Enforcement file a response to Cochran’s motion for +reconsideration by July 25, 2023.4 +By the Commission. + + Vanessa A. Countryman +Secretary + +1 David Hall, P.C., Exchange Act Release No. 77718, 2016 WL 1665164 (Apr. 26, 2016). +2 Pending Administrative Proceedings, Exchange Act Release No. 97640, 2023 WL +3790795 (June 2, 2023). +3 17 C.F.R. § 201.470(b). +4 See id. (providing that any response shall comply with Rule of Practice 154, 17 C.F.R. +§ 201.154). \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4433.txt b/raw/aaer/2023/AAER-4433.txt new file mode 100644 index 0000000000000000000000000000000000000000..2908e8e6000981bc8bef4254018e9e9ae0365923 --- /dev/null +++ b/raw/aaer/2023/AAER-4433.txt @@ -0,0 +1,776 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98030 / August 1, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4433 / August 1, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21539 + + +In the Matter of + +JOHN R. BROWNE, 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” or “SEC”) deems it appropriate +that public administrative and cease-and-desist proceedings be, and hereby are, instituted against +John R. Browne, CPA (“Respondent” or “Browne”) 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 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. +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 Adminstrative and Cease-and-Desist Proceedings Pursuant to Section 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. These proceedings arise out of improper professional conduct by John R. Browne, a +certified public accountant (“CPA”), in connection with the audit of MusclePharm Corporation’s +(“MusclePharm”) financial statements for its fiscal year (“FY”) ended December 31, 2017, and the +quarterly reviews for the first three quarters of 2018 (collectively, the “relevant reporting periods”). +Browne was the engagement partner for the two accounting firms performing the MusclePharm +audit and quarterly review work during the relevant reporting periods, “Audit Firm 1” and “Audit +Firm 2.” + +2. During the relevant reporting periods, MusclePharm (1) prematurely recognized +revenues on sales where delivery had not yet occurred and (2) improperly classified certain +marketing-related customer credits as operating expenses rather than reductions to revenue. On +August 24, 2020, MusclePharm restated its financial statements for the relevant reporting periods +to, among other things, adjust for material overstatements of net revenue and gross profit resulting +from these, and other, accounting errors. + +3. Browne failed to appropriately audit these accounting areas by, among other things, +failing to act upon red flags in the working papers he reviewed that showed that MusclePharm’s +practices for recording and valuing revenue were not in accordance with generally accepted +accounting principles (“GAAP”) or its own public disclosures. + +4. As a result, Browne’s conduct departed from multiple auditing standards, including +failing to: exercise due professional care; properly supervise the audit engagement; gain an +understanding of key aspects of MusclePharm’s business; plan the audit based on assessed risks; + +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 +obtain sufficient appropriate audit evidence; properly evaluate audit results; and adequately +document the audit work. Nor did Browne’s conduct adhere to the professional standards for the +review of interim financial information for the first three quarters of 2018. + +B. RESPONDENT + +5. John R. Browne, CPA, 57, resides in Lakewood, Colorado. Browne was a partner +at Audit Firm 2 until his retirement from the firm in June 2023, and, before that, he was a partner at +Audit Firm 1. Browne served as the engagement partner for the MusclePharm audit and quarterly +review work for each of the relevant reporting periods. Browne joined the MusclePharm +engagement team in 2016 as the engagement quality reviewer. Although he is not currently +employed, Browne is a CPA licensed in Colorado since 1995. + +C. OTHER RELEVANT ENTITIES + +6. MusclePharm Corporation is a Nevada corporation with its principal place of +business in Las Vegas, Nevada, that develops, markets, and distributes branded nutritional +supplements. MusclePharm’s securities are registered pursuant to Section 12(g) of the Exchange +Act and traded on OTC Link, operated by OTC Markets Group Inc., under the symbol “MSLPQ.” +In 2015, MusclePharm was charged by the Commission in a settled cease-and-desist order for +violations of the Securities Act of 1933 (“Securities Act”) and the Exchange Act. See In the Matter +of MusclePharm Corp., Securities Act Rel. No. 9903 (Sept. 8, 2015) (the “2015 SEC Order”). +MusclePharm filed for Chapter 11 bankruptcy protection on December 15, 2022. + +7. Audit Firm 1 was, prior to October 2018, a Public Company Accounting Oversight +Board (“PCAOB”)-registered accounting and auditing firm. Audit Firm 1 became MusclePharm’s +external auditor of record in 2013, and served in that capacity for FY 2017 and the first two +quarters of 2018 (“Q1 2018” and “Q2 2018”). + +8. Audit Firm 2 is a PCAOB-registered accounting and auditing firm. In October +2018, Audit Firm 2 acquired Audit Firm 1’s business. After the acquisition, Audit Firm 2 +continued to serve as MusclePharm’s external auditor for the third quarter of 2018 (“Q3 2018”). +Audit Firm 2 resigned as MusclePharm’s auditor in May 2019 without completing the FY 2018 +audit. + +D. FACTS + +Background + +9. During Audit Firm 2’s audit of MusclePharm’s FY 2018 financial statements, Audit +Firm 2 discovered accounting errors impacting the last two quarters of 2018. The errors were due +to MusclePharm recognizing revenue on inventory that was temporarily stored off-site in trailers +and not disclosed to Audit Firm 2 during the year-end inventory count. Browne informed +MusclePharm’s audit committee of these errors. As a result, MusclePharm’s audit committee +4 +commenced an internal investigation and, on March 14, 2019, MusclePharm filed a Form 8-K, +Item 4.02, notice of non-reliance on its previously issued financial statements for Q3 2018. + +10. In May 2019, Audit Firm 2 resigned and Browne advised MusclePharm’s audit +committee that (i) the internal controls necessary for MusclePharm to develop reliable financial +statements do not exist, and (ii) information has come to Audit Firm 2’s attention that (1) has made +it unwilling to be associated with the financial statements prepared by MusclePharm’s +management because of multiple material weaknesses in internal control over financial reporting, +extraordinary attempts to mislead the Audit Firm 2 engagement team and allegations of +noncompliance with laws and regulations, (2) if further investigated, may materially impact the +fairness or reliability of the financial statements for the year ended December 31, 2018, or cause +Audit Firm 2 to be unwilling to be associated with MusclePharm’s financial statements and (3) it +has concluded materially impacts the reliability of previously issued financial statements for 2018. + +11. Thereafter, MusclePharm retained another auditing firm (“Audit Firm 3”), which +performed extensive audit procedures that identified a number of additional accounting errors +impacting earlier reporting periods, including (1) improper sales cutoff and (2) the +misclassification of marketing-related customer credits. As a result of these and other accounting +errors, MusclePharm subsequently filed a Form 10-K for FY 2019 that included unaudited restated +financial statements not only for Q3 2018, but also FY 2017 and the first two quarters of FY 2018. + +MusclePharm’s Improper Sales Cutoff + +12. During the relevant reporting periods, MusclePharm improperly accelerated +revenue by, among other things, recognizing sales upon shipment for certain customers that had +free on board (“FOB”) destination terms, meaning that risk of loss had not transferred and delivery +had not occurred until the MusclePharm goods were received and accepted by the customer at the +customer’s location. This practice was inconsistent with GAAP and the company’s revenue +recognition policy, which stated that MusclePharm recognized revenue when title and risk of loss +had transferred. See Financial Accounting Standards Board Accounting Standards Codification +(“ASC”) 605-10-25-1 (for FY 2017); ASC 606-10-25-30 (for Q1-Q3 2018). As a result, +MusclePharm prematurely recognized revenue for each of the relevant reporting periods, totaling +approximately $3.3 million in FY 2017, $3.0 million in Q1 2018, $3.5 million in Q2 2018, and +$3.0 million in Q3 2018. + +MusclePharm’s Misclassification of Marketing-Related Customer Credits + +13. During the relevant reporting periods, MusclePharm also improperly accounted for +certain marketing-related customer credits as expenses instead of reductions to revenue, which led +to an overstatement of MusclePharm’s net revenue. Under GAAP, consideration given by a vendor +to a customer is accounted for as a reduction to revenue, absent evidence of (1) an identifiable +benefit in exchange for the consideration and (2) a reasonable estimate of fair value of the +identifiable benefit. See ASC 605-50-45-2 (for FY 2017); ASC 606-10-32-25 and 606-10-32-26 +5 +(for Q1-Q3 2018).4 To satisfy the first criterion for expense treatment, the identifiable benefit +received by the vendor must be sufficiently separable from the product sold to the customer (i.e., +the marketing-related services provided by the customer can be obtained from a third-party not +purchasing MusclePharm’s products). See ASC 605-50-45-2(a). For this reason, product placement +fees are generally reductions to revenue. See ASC 605-50-45-4. To satisfy the second criterion, the +vendor must be able to reasonably estimate the fair value of the benefit identified. See ASC 605- +50-45-2(b). + +14. MusclePharm’s marketing-related customer credits typically fell into two +categories: (1) credits for partnership advertising and (2) product placement fees. Regarding +partnership advertising, relevant characteristics of MusclePharm’s arrangements included: (1) +agreements whereby a MusclePharm customer provided marketing activities that were integrated +into the customer’s website (e.g., to enhance visibility of MusclePharm’s products) or targeted to +the users of the website (rather than traditional print or media advertising that could be obtained +from parties other than the customer), and (2) agreements whereby the type and amount of +advertising was not specified, and MusclePharm did not request or receive this type of information. +MusclePharm calculated the price of the partnership advertising (i.e., amount of customer credits) +based on a percentage of the purchases made by the customer. Regarding product placement fees, +these primarily consisted of agreements with MusclePharm’s largest customer (“Customer 1”) for +end-cap promotions (placement of products at the end of store aisles) and fence promotions +(placement of products in a display at the front of the store). + +15. Without conducting an analysis of the customer credits as contemplated by GAAP, +MusclePharm improperly recorded these transactions as operating expenses instead of netting them +against revenue. The misclassification of marketing-related customer credits resulted in an +overstatement of net revenue (and corresponding overstatement of operating expenses) of +approximately $6.2 million for FY 2017, $2.6 million for Q1 2018, $3.8 million for Q2 2018, and +$2.9 million for Q3 2018. + +16. The Commission’s prior enforcement action against MusclePharm involved, among +other issues, this identical accounting issue. The 2015 SEC Order contained a finding that +MusclePharm improperly accounted for advertising and promotion-related costs as advertising +expenses rather than reductions of revenue for fiscal years 2010 and 2011, thereby materially +overstating revenue for those periods. + +Browne’s FY 2017 Audit Failures +Failure to Exercise Due Professional Care When Supervising the Audit of MusclePharm +17. PCAOB Auditing Standard (“AS”) 1015 states that due professional care imposes a +responsibility upon each member of the engagement team to exercise reasonable care and diligence +in the performance of his or her work throughout the audit process. See AS 1015.01-.08. Due + +4 Although ASC 606 uses different terminology than ASC 605 (e.g., referring to “distinct good or +service” instead of “identifiable benefit”), its consideration-payable-to-a-customer framework closely +aligns with ASC 605. +6 +professional care requires the auditor to exercise professional skepticism, which is an attitude that +includes a questioning mind and a critical assessment of audit evidence. See AS 1015.07. + +18. PCAOB Auditing Standard 1201 states that the audit engagement partner is +responsible for proper supervision of the work of engagement team members and for compliance +with PCAOB standards. See AS 1201.03. This includes, when reviewing the work of engagement +team members, evaluating whether the work performed is adequately documented and supports the +conclusions reached. See AS 1201.05(c). + +19. Browne, as engagement partner, was responsible for the supervision of the FY 2017 +audit work performed by Audit Firm 1, which occurred primarily between December 2017 and +April 2018. As set forth below, Browne did not act with due professional care when performing his +duties to supervise the audit. In particular, Browne did not exercise professional skepticism when +he failed to act on red flags concerning the two accounting errors discussed above in the working +papers he reviewed. + +Improper Sales Cutoff +20. During the FY 2017 audit work, Browne reviewed three working papers that +included language stating that delivery occurred, and MusclePharm recognized revenue, upon +shipment of its products to domestic customers (i.e., revenue recognition based on FOB origin +shipping terms). However, Browne also reviewed the principal accounting policies disclosed in +MusclePharm’s FY 2017 Form 10-K, which stated that MusclePharm recognized revenue when +title and risk of loss had transferred, which was “typically” upon shipment. As such, the Form 10- +K indicated that certain MusclePharm customers had shipping terms other than FOB origin (e.g., +FOB destination). Consequently, Browne should have known that MusclePharm’s practice of +recognizing revenue upon shipment may not have been appropriate under GAAP, as title and risk +of loss for some of MusclePharm’s customers did not transfer upon shipment. + +21. Browne also reviewed the working papers that tested sales cutoff. In these working +papers, the audit team reporting to Browne failed to document whether they considered +MusclePharm’s customers’ different shipping terms during the course of the substantive testing. +Instead, the working papers reflect that the audit team assumed that risk of loss transferred and +delivery occurred at the time of shipment for all customers. For example, the inventory cutoff +testing working paper stated that the engagement team compared MusclePharm’s packing slip to +the invoice date to determine if sales were booked in the proper period. Browne should have +observed that the packing slip date was inappropriate to establish that delivery had occurred for +customers with FOB destination terms because it did not reflect the date that delivery had occurred +(i.e., the date of receipt and acceptance). + +22. In addition, one of the working papers Browne reviewed during the FY 2017 audit +work was an internal MusclePharm memorandum documenting its anticipated adoption of the +revenue recognition standard ASC 606, which would become effective in FY 2018 (the “ASC 606 +Memo”). The ASC 606 Memo raised additional red flags that MusclePharm was recognizing +revenue contrary to certain of its customers’ shipping terms. While the ASC 606 Memo stated that +“revenue would be recognized when the product is shipped,” it also provided detailed information +7 +about contracts with certain large domestic customers, including Customer 1, stating that risk of +loss transferred and delivery only occurred when the product was received and accepted by those +customers (i.e., FOB destination shipping terms). + +23. Although the sales cutoff test work was based on a MusclePharm accounting +practice – to recognize revenue upon shipment – that was contradicted by other audit evidence and +MusclePharm’s revenue recognition policy set forth in its Form 10-K, Browne failed to identify +that the shipping terms MusclePharm used to recognize revenue had not been adequately tested by +the audit team. + +24. Browne failed to exercise professional skepticism in the face of these red flags. He +failed to inquire or ask for further information to resolve the inconsistency between +MusclePharm’s revenue recognition practice (which assumed FOB origin terms for all customers) +and the actual customer shipping terms reflected in the audit evidence (some of which were FOB +destination). + +25. MusclePharm subsequently restated, among other customers, the Customer 1 +transactions that were shipped prior to the end of FY 2017, but delivered after the end of FY 2017. + +Misclassification of Marketing-Related Customer Credits +26. During the FY 2017 audit work, Browne reviewed the working paper that tested +MusclePharm’s allowance for sales discounts. This working paper specifically addressed an +accrual for partnership advertising costs, almost all connected with MusclePharm’s second largest +customer (“Customer 2”), which MusclePharm recorded as operating expenses rather than +reductions to revenue (contra revenue). The working paper referenced the partnership advertising +contract with Customer 2, and concluded that the Customer 2 arrangement was appropriately +recorded as an operating expense in accordance with ASC 605-50-45-2. + +27. This conclusion was erroneous as it was contradicted by the underlying source +document. The information detailed in the referenced Customer 2 contract, which Browne +reviewed, did not support recording the related costs as operating expenses under ASC 605-50-45- +2. Among other things, the Customer 2 contract did not contain any information concerning the +type and amount of advertising to be provided by Customer 2. Further, the price Customer 2 +charged MusclePharm for the partnership advertising was based on a percentage of Customer 2’s +purchases from MusclePharm, thus indicating it was a sales discount. + +28. Notwithstanding the lack of audit evidence supporting expense treatment for these +marketing-related customer credits, and the audit team’s ASC 605-50-45-2 conclusion regarding +the Customer 2 contract, Browne failed to inquire or ask for further information from the audit +team or MusclePharm’s management to resolve whether MusclePharm’s accounting for the +customer credits was proper under GAAP. + +29. In addition, Browne reviewed a working paper that evaluated general ledger +account balance variances between FY 2016 and FY 2017. For significant variances, the audit +team obtained explanations from MusclePharm’s management. As part of these analytical +8 +procedures, the audit team identified a significant variance for MusclePharm’s “Other Advertising” +account, which included marketing-related customer credits. The documented explanation +provided for this variance explained that it was due to “promotions with some of the Company’s +key customers,” and specifically referenced Customer 1 and Customer 2. The balance and variance +associated with the “Other Advertising” account exceeded the audit planning materiality threshold. + +30. Browne, however, failed to make any additional inquiries or request additional +information to understand the substance of these customer credits, or why MusclePharm had +classified them as operating expenses rather than contra revenue. + +31. Further, MusclePharm’s FY 2017 Form 10-K states in the notes to the financial +statements: “We record advertising related credits with customers as a reduction to revenue as no +identifiable benefit is received in exchange for credits claimed by the customer.” (Emphasis +added). However, the ASC 606 Memo states the opposite: + +“The company also noted that significant credits are processed with customers +during the year, however, these credits are related to one-off marketing and +advertising costs and are recognized as such within the general operating +expenses for the company. The most significant costs that the Company +experiences with their customers are for partnership advertising, store support and +international marketing.” (Emphasis added). + +32. Despite the contradiction between the working papers Browne reviewed reflecting +that MusclePharm was recording marketing-related customer credits as operating expenses (and +not contra revenue) and the Form 10-K disclosure reflecting that such credits were recorded as +reductions to revenue, Browne failed to inquire or request further information from the audit team +or MusclePharm’s management to resolve the inconsistency. Instead, Browne failed to exercise +professional skepticism when he failed to recognize the evidence in the working papers, and +instead relied solely on MusclePharm’s 2017 Form 10-K to conclude, erroneously, that +MusclePharm was recording marketing-related customer credits in accordance with GAAP. + +33. MusclePharm subsequently restated, among other customers, the Customer 2 +marketing-related customer credits that were improperly recorded as operating expenses. + +Failure to Understand Key Aspects of MusclePharm’s Business +34. PCAOB Auditing Standard 2110 states that an auditor should 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. See AS 2110.07. This includes, for example, understanding the audit +client’s key customer relationships, business processes, and application of accounting principles. +See AS 2110.10, .12, and .28. In addition, the auditor should presume that there is a fraud risk +involving improper revenue recognition and evaluate which types of revenue, revenue transactions, +or assertions may give rise to such risks. See AS 2110.68. +9 + +35. Browne failed to gain an understanding of how MusclePharm actually recognized +revenue or how it recorded marketing-related customer credits. Moreover, although he was aware +of MusclePharm’s previous settlement with the SEC, Browne did not obtain or review a copy of +the 2015 SEC Order. Had he done so, Browne would have known the SEC charged MusclePharm +with numerous violations, including incorrectly accounting for marketing-related customer credits +during 2011 and 2012, which is the same practice MusclePharm engaged in during 2017 and 2018. +Browne thus failed to consider this aspect of the 2015 SEC Order when developing an +understanding of MusclePharm’s business and accounting practices, and assessing audit risk. + +Failure to Plan the Audit Based on an Assessment of Risk When Conducting the Audit +36. PCAOB Auditing Standard 2101 states that the engagement partner is responsible +for planning the work of an audit. See AS 2101.03. When developing the audit plan, the auditor +should evaluate, among other things, legal or regulatory matters of which the company is aware, +and public information about the company relevant to the evaluation of the likelihood of material +financial statement misstatements. See AS 2101.07. The auditor should modify the overall audit +strategy and audit plan, as necessary, if circumstances change significantly during the audit, such +as obtaining audit evidence that contradicts the audit evidence upon which the risk assessment was +based. See AS 2101.15; AS 2110.74. + +37. PCAOB Auditing Standard 2301 states the auditor should design and perform audit +procedures in a manner that addresses the assessed risks of material misstatement for each relevant +assertion of each significant account and disclosure. See AS 2301.08. In addition, the auditor +should perform substantive procedures, including tests of details, that are specifically responsive to +the assessed significant risks, including fraud risks. See AS 2301.11. + +38. As part of the audit planning, Browne reviewed the working paper in which the +audit team assessed revenue recognition (existence of sales) and the valuation of sales as +“significant risks” for the MusclePharm FY 2017 audit. Both sales cutoff and the classification of +marketing-related customer credits affected revenue recognition and the calculation of net revenue. +Despite being significant risks, Browne failed to plan the audit to sufficiently test these areas. +Further, he did not adjust the audit plan when the audit team received evidence that MusclePharm +was recording revenue and classifying marketing-related customer credits in a manner that was +inconsistent with its Form 10-K disclosures and GAAP. + +Failure to Obtain Sufficient Appropriate Audit Evidence When Conducting the Audit +39. PCAOB Auditing Standard 1105 states the auditor must perform audit procedures +to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion. +See AS 1105.04. If audit evidence obtained from one source is inconsistent with that obtained from +another, 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. See AS 1105.29. +10 + +40. PCAOB Auditing Standard 2805 states that 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. See AS 2805.04. + +41. The working papers Browne reviewed reflected that MusclePharm was engaging in +improper revenue recognition and misclassifying marketing-related customer credits. In addition, +the audit evidence, such as the ASC 606 Memo, showed inconsistencies between MusclePharm’s +actual accounting practices and its Form 10-K disclosures. Browne, however, did not require the +audit team to gather the additional audit evidence needed to resolve these matters. + +Failure to Properly Evaluate Audit Results When Conducting the Audit +42. PCAOB Auditing Standard 2810 states that, in forming an opinion on the financial +statements, 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. See AS 2810.03. + +43. Browne did not take into account relevant information in the working papers he +reviewed indicating that MusclePharm’s financial statements were not, in material respects, +prepared in conformity with GAAP. + +Failure to Ensure Appropriate Documentation +of the Audit Work When Conducting the Audit + +44. PCAOB Auditing Standard 1215 states that audit documentation should be +prepared in sufficient detail to provide a clear understanding of its purpose, source, and +conclusions reached. See AS 1215.04. The audit documentation should, among other things, +support the basis for the auditor’s conclusions concerning every relevant financial statement +assertion. See AS 1215.05(b). + +45. Browne failed to ensure that the Audit Firm 1 audit team adequately documented +evidence supporting the audit team’s conclusions. Instead, the working papers prepared by the +audit team, and reviewed by Browne, do not provide support for the conclusions reached. For +example, the working papers do not support that the Customer 1 arrangement met the revenue +recognition criteria upon product shipment or that the Customer 2 arrangement met both criteria of +ASC 605-50-45-2 for recording the credits as operating expenses. + +Browne’s Q1-Q3 2018 Quarterly Review Failures +Failure to Adhere to PCAOB Standards for Review of Interim Financial Information When +Conducting Reviews of MusclePharm’s Quarterly Filings +46. PCAOB Auditing Standard 4105 states that if, in performing a review of interim +financial information, an accountant becomes aware of information that leads him or her to believe +that the interim financial information may not be in conformity with generally accepted accounting +principles in all material respects, the accountant should make additional inquiries or perform other +11 +procedures that the accountant considers appropriate to provide a basis for communicating whether +he or she is aware of any material modifications that should be made to the interim financial +information. See AS 4105.22. The accountant should also prepare documentation in connection +with a review of interim financial information that includes any significant findings or issues, such +as when results of review procedures indicate that the interim financial information could be +materially misstated, including actions taken to address such findings, and the basis for the final +conclusions reached. See AS 4105.52. + +Improper Sales Cutoff +47. During the Q1-Q3 2018 interim reviews, Browne reviewed information indicating +that MusclePharm was recognizing revenue based on the shipment of its products even though it +had FOB destination shipping terms with several large customers. In particular, for each of the first +three quarters of 2018, Browne reviewed a version of the ASC 606 Memo containing the same red +flags presented during the FY 2017 audit. Browne, however, did not inquire or request additional +information to resolve these contradictions, or request testing to determine the materiality of the +sales cutoff issue. + +Misclassification of Marketing-Related Customer Credits +48. During the Q1-Q3 2018 interim reviews, Browne reviewed the profit and loss +(“P&L”) analytical procedures working papers that indicated that MusclePharm continued to +record marketing-related customer credits as operating expenses (which was inconsistent with its +prior-year disclosures). These working papers also showed that the expenses associated with +customer payments were increasing over time, and exceeded the applicable quarterly review +materiality thresholds. + +49. For example, during the Q1 2018 quarterly review, Browne reviewed the Audit +Firm 1 engagement team’s P&L analytical procedures working paper showing that a portion of the +increased advertising and promotion expense (an amount substantially over the Q1 2018 +materiality threshold) was attributable to “the Company paying [Customer 1] to move product to a +better location.” This was an additional red flag that MusclePharm was improperly recording a +material amount of product placement fees as operating expenses. Browne, however, failed to +require additional quarterly review procedures to resolve whether MusclePharm was recording the +marketing-related customer credits in accordance with GAAP. + +50. In addition, during the Q1 2018 quarterly review, Browne was provided with the +Audit Firm 1 engagement team comments to the Form 10-Q questioning MusclePharm’s +classification of marketing-related customer credits as operating expenses instead of as contra +revenue. Browne, however, failed to ensure that the engagement team documented the response +from MusclePharm, if any, to the inquiry concerning the marketing-related customer credits even +though the issue was material to the financial statements for the quarter. + + + + +12 +E. VIOLATIONS + +51. 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. Exchange Act Section 4C(b) and +Rule 102(e)(1)(iv) of the Commission’s Rules of Practice define improper professional conduct +with respect to persons associated with public accounting firms and persons licensed to practice as +accountants to include repeated instances of unreasonable conduct that indicate a lack of +competence. As a result of the conduct described above, Browne 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. Browne’s conduct involved repeated instances of unreasonable +conduct, each resulting in violation of PCAOB standards. + +52. During the period at issue herein, Rule 2-02(b)(1) of Regulation S-X required 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.” SEC Release No. 34-49708 (May 14, 2004). As a result of the conduct described +above, Browne caused Audit Firm 1 to violate Regulation S-X Rule 2-02(b)(1) when he, as the +engagement partner on the FY 2017 audit, approved the issuance of Audit Firm 1’s audit report, +which stated that Audit Firm 1 had conducted the audit in accordance with PCAOB standards +when, in fact, it had not. + +F. FINDINGS + +53. Based on the foregoing, the Commission finds that Browne 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. + +54. Based on the foregoing, the Commission finds that Browne caused a violation of +Rule 2-02(b) of Regulation S-X by Audit Firm 1. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Browne’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Browne shall cease and desist from committing or causing any violations and any +future violations of Rule 2-02(b) of Regulation S-X. + +13 + B. Browne is denied the privilege of appearing or practicing before the Commission as +an accountant. + +C. After eighteen (18) months 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: + +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 PCAOB and Respondent shall submit +the following additional information: + +14 +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 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, 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; + +15 +(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. + +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 + +16 +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. Browne shall, within 14 days of the entry of this Order, pay a civil money penalty +in the amount of $11,162 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: + + +17 +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 John +R. Browne 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 Ian S. Karpel, Assistant Regional +Director, Division of Enforcement, Securities and Exchange Commission, 1961 Stout Street, Suite +1700, Denver, CO 80294-1961. + + O. 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/2023/AAER-4434.txt b/raw/aaer/2023/AAER-4434.txt new file mode 100644 index 0000000000000000000000000000000000000000..ad30a9859be21d65ad32bcab026093144d8bbc3c --- /dev/null +++ b/raw/aaer/2023/AAER-4434.txt @@ -0,0 +1,78 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98039 / August 2, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4434 / August 2, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21543 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +DAVID LETHEM, : 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 David Lethem (“Lethem” or “Respondent”) 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. From at least early 2016 to March 2019, Lethem was the Chief Financial Officer of +FTE Networks, Inc. (“FTE”), a Naples, Florida-based public company that provided networking +infrastructure to the technology and telecommunications industries. Lethem, 65 years old, is a +resident of Fort Myers, Florida. + +2. On May 11, 2023, Lethem pled guilty before the United States District Court for +the Southern District of New York (“District Court”) in United States v. Palleschi et al., No. +1:21-cr-00454-CM-2 (S.D.N.Y), to one count of conspiracy to commit securities fraud, in +violation of 18 U.S.C. § 371, one count of securities fraud, in violation of 15 U.S.C. §§ 78j(b) +and 78ff, 17 C.F.R. § 240.10b-5 and 240.10b5-2, and 18 U.S.C. § 2, and additional charges. On +May 22, 2023, the District Court adopted the recommendation of the Magistrate Judge to accept + +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 + +Lethem’s guilty plea, and adjudged Lethem guilty of the offenses to which the guilty plea was +offered. + +III. + +In view of the foregoing, the Commission finds that Lethem 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 David Lethem 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-4435.txt b/raw/aaer/2023/AAER-4435.txt new file mode 100644 index 0000000000000000000000000000000000000000..e573af80348ffd6ddf4b9931b4787c8b5bbceef1 --- /dev/null +++ b/raw/aaer/2023/AAER-4435.txt @@ -0,0 +1,431 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11219 / August 7, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98065 / August 7, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4435 / August 7, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21547 + + + +In the Matter of + +LAWRENCE K. WHITE, CPA, + +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS + PURSUANT TO SECTION 8A OF THE +SECURITIES ACT OF 1933, SECTION4C +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 Lawrence K. +White (“White” or “Respondent”) pursuant to Section 8A of the Securities Act of 1933 +2 +(“Securities Act”), Section 4C1 of the Securities Exchange Act of 1934 (“Exchange 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, 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 + +1. This matter involves violations of the federal securities laws by White, acting as the part- +time CFO of Outstanding Real Estate Solutions, Inc. (“ORES”). ORES is a Texas-based company +that claimed to specialize in fixing and flipping mobile homes on behalf of investors. Rather than +spend investor funds on purchasing, refurbishing, and reselling mobile homes, ORES paid investor +returns with other investors’ funds and misappropriated investor funds by paying undisclosed sales + +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: + + 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 +commissions and funding the personal expenses of ORES’s CEO. Between May and July 2021, +White prepared or signed false and misleading correspondence regarding ORES’s use of investor +funds and ability to repay investors that was distributed to investors in the offer or sale of ORES +securities. White was negligent in making representations in the correspondence because he had not +verified the information, and he knew or should have known the information contained within the +correspondence was false or misleading because he had personal knowledge of red flags regarding +ORES’s ability to repay investors. + +Respondent + +2. White, age 58, resides in Scottsdale, Arizona. White is and has been a Certified Public +Accountant licensed to practice in the State of Arizona and the State of Massachusetts. He is the +CEO and Managing Member of LKW Consulting, Inc., a company that provides financial support +services, accounting services, and part-time CFO services to private companies across various +industries. White served as ORES’s part-time CFO from March 2019 until November 2021. Early +in his career, White worked as an auditor for a public accounting firm, and he served as the Vice +President of Finance for one U.S. public company from 2000 to 2002. + + +Other Relevant Entity + +3. ORES is a Texas corporation, formed in 2015, with its principal place of business in New +Braunfels, Texas. ORES claimed to specialize in the purchase, refurbishment, and resale of mobile +homes. ORES ceased operations in February 2022. + +Facts + +4. ORES claimed to have expertise in fixing, flipping, and reselling mobile homes to generate +a guaranteed return for investors. ORES represented to prospective investors that it had successfully +fixed and flipped over 450 mobile homes generating thousands of dollars in monthly cash flow for +investors. However, from at least June 2018 to November 2021, ORES did not spend investor funds +on fixing and flipping mobile homes. ORES did not even own the vast majority of mobile homes +that it represented to investors that it would fix and flip. Instead, ORES paid investors from the +funds raised from other investors. From at least January 2020 through November 2021, ORES +began defaulting on or delaying its promised quarterly return payments to investors. To keep +investors appeased, ORES, its CEO, and associated salespersons told existing investors false +statements about the status of their payments and solicited new investors with misrepresentations or +omissions about ORES’s operations and payment status. Between at least May and July 2021, +White drafted and signed letters to investors as ORES’s part-time CFO or using his CPA +designation. These letters contained false and misleading information concerning ORES and its +investor payments for which White failed to confirm the accuracy. + + + + +4 +False and Misleading Correspondence to Investors + +5. In May 2021, White drafted an “Investor Comfort Letter” (at the request of ORES’s CEO +and an associated salesperson) that he knew or should have known would be disseminated to +existing and potential investors. White signed the letter using his CPA designation. This letter +stated that (1) ORES and its CEO had a “100% repayment history to its vendors and its investors”; +(2) ORES and its CEO were of the “highest integrity”; and (3) the investment funds ORES was +seeking would be used “for a legitimate business purpose.” White had no factual basis to make +these claims. White had no access to ORES’s bank accounts or books and records to determine +whether ORES had used or would actually use investor funds for “a legitimate business purpose.” +White did not verify whether ORES had a “100% repayment payment history.” In fact, during this +time, White was aware of red flags indicating ORES’s CEO had a delayed repayment history. + +6. Also in May 2021, White (at the request of ORES’s CEO) drafted a “Loan Confirmation +Letter” that he knew or should have known would be disseminated to existing and potential +investors. White signed the letter as ORES’s part-time CFO. The letter stated that ORES needed +“$900,000 in transactional funding” and that the funds would be used “for a legitimate purpose.” +White had no access to the ORES bank accounts or books and records, so he did not know, nor did +he verify, whether the information he conveyed to investors in the letter was truthful. + +7. From June 2021 to July 2021, ORES and its associates falsely told investors that the +company had been “locked out” of its bank account and could not timely pay any investor returns. +During this time, White (at the request of ORES’s CEO) drafted a “Bank Transitional Letter” that +he knew or should have known would be disseminated to investors in the offer or sale of ORES +securities. White signed the letter as both CPA and ORES’s part-time CFO. This letter, which +contained information provided by ORES’s CEO, falsely stated that (1) the ORES bank account +was locked; (2) ORES had recently “transitioned its operating banking relationship”; and (3) the +new bank was “performing a review of the prior account history” and had “put a temporary hold on +all transactional activity.” White knew or should have known this information was false and +misleading given his previous communications regarding ORES’s banking relationships. White had +no access to the ORES bank accounts or books and records, and thus did not verify the factual +accuracy of these claims. + +Violations + +8. Section 17(a)(3) of the Securities Act prohibits 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. As a result of the conduct described above, the Commission finds that +White willfully4 violated Section 17(a)(3) of the Securities Act. + + +4 “Willfully,” for purposes of imposing relief under Exchange Act Section 4C 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)). 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). +5 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent White’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. White shall cease and desist from committing or causing any violations and any +future violations of Section 17(a)(3) of the Securities Act. + + B. White is denied the privilege of appearing or practicing before the Commission as +an accountant. + +C. After three years from the date of the Order, White may request that the +Commission consider White’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: + +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 +6 + +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: + +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 Lawrence K. White, CPA, 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 +7 +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. + +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: +8 + +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, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $60,000 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. +9 + +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 +White 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, Division of Enforcement, +Securities and Exchange Commission, 801 Cherry Street, Suite 1900, Fort Worth, Texas 76102. + +O. 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 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 +10 +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-4436.pdf b/raw/aaer/2023/AAER-4436.pdf new file mode 100644 index 0000000000000000000000000000000000000000..535f162a4a05dbd99dc637fdc3f4ab098acdc7c7 Binary files /dev/null and b/raw/aaer/2023/AAER-4436.pdf differ diff --git a/raw/aaer/2023/AAER-4436.txt b/raw/aaer/2023/AAER-4436.txt new file mode 100644 index 0000000000000000000000000000000000000000..a70fdf355e15f87bc5a0b82459ad89868d876573 --- /dev/null +++ b/raw/aaer/2023/AAER-4436.txt @@ -0,0 +1,67 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98069 / August 7, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4436 / August 7, 2023 + +Admin. Proc. File No. 3- 21314 + + +In the Matter of + +ALAN J. MARKOWITZ, CPA + + +ORDER POSTPONING PROCEEDING + +On February 28, 2023, the Securities and Exchange Commission issued an order +instituting administrative proceedings (“OIP”) against Alan J. Markowitz, 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 July 11, 2023, the Division of Enforcement filed an +unopposed motion to stay the proceeding until thirty days after the Supreme Court of the United +States issues its mandate in SEC v. Jarkesy.2 The Division states that it is in the public interest to +stay this proceeding pending the Supreme Court’s resolution of Jarkesy because Markowitz has +filed a complaint for declaratory and injunctive relief against the Commission in the U.S. District +Court for the Southern District of New York that seeks relief from the OIP and raises the same +constitutional challenges that are now before the Supreme Court in Jarkesy. +We construe the Division’s motion as a request for postponement under Commission +Rule of Practice 161.3 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 + +1 Alan J. Markowitz, CPA, Exchange Act Release No. 96995, 2023 WL 2299560 (February +28, 2023). +2 No. 22-859, 2023 WL 4278448 (June 30, 2023) (cert. granted). +3 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). +2 + +other such matters as justice may require. Here, this proceeding was instituted fewer than six +months ago; we have not previously granted any postponements, adjournments, or extensions in +this proceeding; and, as yet, no evidentiary hearings have been held. 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.4 +Accordingly, it is ORDERED that the motion is GRANTED and that this proceeding and +any previously prescribed deadlines are postponed indefinitely. It is further ORDERED that no +later than thirty days after the Supreme Court issues its mandate in Jarkesy, the parties shall 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 + + + + +4 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-4437.txt b/raw/aaer/2023/AAER-4437.txt new file mode 100644 index 0000000000000000000000000000000000000000..8f976f758dbe1bbbd91f9b92ef0c98b133e408c5 --- /dev/null +++ b/raw/aaer/2023/AAER-4437.txt @@ -0,0 +1,332 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98103 / August 10, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4437 / August 10, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21559 + + +In the Matter of + +GRUPO AVAL ACCIONES +Y VALORES S.A. and +CORPORACIÓN +FINANCIERA +COLOMBIANA S.A., + +Respondents. + + +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 Grupo Aval Acciones y Valores S.A. (“Grupo +Aval”) and Corporación Financiera Colombiana S.A. (“Corficolombiana”) (referred to, collectively, +as “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, Respondents admit the Commission’s +jurisdiction over them and the subject matter of these proceedings, and consent to the entry of this +Order Instituting Cease-and-Desist Proceedings Pursuant to 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 Respondents’ Offer, the Commission finds1 that: + +Summary + +These proceedings arise out of Corficolombiana’s involvement, through its former +president as described below, in a bribery scheme related to the largest highway construction +project in the history of Colombia, known as Ruta del Sol II (“RDS 2”), and specifically the +construction of a road extension to the RDS 2 (the “Ocaña-Gamarra Extension”). The bribe +scheme took place against a backdrop of a failure to maintain sufficient internal accounting +controls and books and records that concealed the bribes as legitimate business expenses. As +Grupo Aval’s agent, Corficolombiana violated the anti-bribery provisions of the Foreign Corrupt +Practices Act (“FCPA”) and was a cause of Grupo Aval’s violations of the books and records and +internal accounting controls provisions of the FCPA. + +Respondents + +1. Grupo Aval, a Colombian financial holding company based in Bogota, is one of the +largest commercial banking groups in Colombia. Grupo Aval’s shares are listed on the NYSE, +and its securities have been registered with the Commission under Section 12 of the Exchange +Act since 2011 and has reporting obligations under Section 13 of the Exchange Act. + +2. Corficolombiana is Grupo Aval’s merchant bank subsidiary and the largest finance +corporation in Colombia. Grupo Aval consolidates Corficolombiana’s results of operations into +its financial statements. Corficolombiana’s board of directors included officers of Grupo Aval. + +Background + +3. Colombia’s Ruta del Sol highway project is a long-term project to rehabilitate and +construct highways connecting Bogota with large urban and rural areas throughout Colombia. +In 2009, the Colombian government started a bidding process for RDS 2, a 328-mile highway +infrastructure project. Corficolombiana sought partnerships with leading infrastructure +companies to bid on RDS 2 on behalf of Grupo Aval. At the time, the RDS 2 project was the +largest infrastructure project in Colombia’s history and was valued at approximately $1 billion. + +4. In 2009, Corficolombiana’s former president (“Corficolombiana Executive”) +negotiated a bidding proposal with a Brazilian construction company for the RDS 2 contract on +behalf of Corficolombiana. The Corficolombiana Executive reported to Corficolombiana’s +board of directors. + + +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 +5. Corficolombiana and the Brazilian construction company submitted a bid for the +RDS 2 project on October 27, 2009, and the Colombian government agency assigned to review +the RDS 2 bidding proposals awarded the project to them on December 15, 2009. + +6. Soon thereafter, Corficolombiana, the Brazilian construction company, and a third +company formed two legal entities based in Colombia: a company to manage the project and a +construction company to build the highway (referred to, collectively, as the “RDS 2 Joint +Venture”). The Brazilian construction company held an approximately 62% equity interest in +the two entities, and Corficolombiana, through a Corficolombiana subsidiary, maintained an +approximately 33% equity interest in the ventures. + +7. Corficolombiana’s participation in the RDS 2 bidding proposal was critical because +it had a well-known record in the financial sector, including financing infrastructure projects in +Colombia. Corficolombiana, through the Corficolombiana Executive and its subsidiary, +maintained influence over the financial and accounting operations of the RDS 2 Joint Venture, +including nominating and appointing employees responsible for monitoring and approving third +party obligations at the RDS 2 Joint Venture (such as the controller responsible for monitoring +the compliance framework and the contract administrator with joint approval authority over +third-party obligations). + +8. Beginning as early as 2012, the RDS 2 entity that was granted the rights to operate +the RDS 2 project (“concession company”) lobbied the Colombian government to add to the +RDS 2 concession contract a road extension project that would intersect the Ruta del Sol +highway. The Colombian government later added the Ocaña-Gamarra Extension to the original +RDS 2 contract. + +9. In 2013, a senior executive at the Brazilian construction company in Colombia +(“Brazilian Executive”) agreed to pay two individual intermediaries a success fee in exchange +for the approval and acceleration of the Ocaña-Gamarra Extension. The Brazilian Executive +knew that a portion of the success fee paid to the intermediaries would be paid to Colombian +government officials as bribes. + +10. Soon thereafter, the Brazilian Executive told the Corficolombiana Executive about +the bribe scheme to obtain the Ocaña-Gamarra Extension. The Corficolombiana Executive +agreed to the bribery scheme and authorized the bribe payments to intermediaries through the +RDS 2 Joint Venture using his influence over the financial and accounting operations of the +RDS 2 Joint Venture. + +11. On March 14, 2014, Colombian government officials signed the Ocaña-Gamarra +Extension as a contract addendum to the RDS 2 highway project contract. At the time, the +Ocaña-Gamarra Extension addendum was intended to create at least $350 million in additional +revenue and added new financing obligations for the RDS 2 highway project. As a result of the +bribery scheme, the Colombian government approved the Ocaña-Gamarra Extension without a +new public tendering process. + + 4 +12. After March 14, 2014, Colombian government officials reviewed the new financing +obligations for the Ocaña-Gamarra Extension addendum critical to the RDS 2 Joint Venture. In +May 2014, before Colombian government officials approved the new financing obligations for +the Ocaña-Gamarra Extension, the Brazilian Executive agreed to pay additional bribes to +Colombian government officials in the form of illicit campaign contributions. + +13. The Brazilian Executive informed the Corficolombiana Executive, and the +Corficolombiana Executive agreed to the bribery scheme and authorized the bribe payments to +intermediaries through the RDS 2 Joint Venture using his influence over the financial and +accounting operations of the RDS 2 Joint Venture. + +14. In October 2014, the Colombian government approved new financing obligations +for the Ocaña-Gamarra Extension addendum to the RDS 2 contract that were more favorable to +the RDS 2 concession company. The Brazilian Executive, together with the Corficolombiana +Executive, intended to influence, and did influence, the approval and acceleration of the Ocaña- +Gamarra Extension by, among other things, causing the payment of bribes paid so the +addendum would be included in the RDS 2 contract without a public tender or bidding process. + +15. The Corficolombiana Executive caused the RDS 2 Joint Venture to pay +approximately $28 million in bribes to Colombian government officials from 2014 through +2016 for the Ocaña-Gamarra Extension. Specifically, the Brazilian construction company paid +approximately $4 million in 2014; the RDS 2 concession company paid approximately $13.2 +million from 2014 through 2016 (approximately $2.7 million through a correspondent bank +located in the United States), and the RDS 2 construction company paid approximately $10.9 +million from 2014 through 2016. + +16. The Brazilian construction company, the Brazilian Executive, and the +Corficolombiana Executive used no-work contracts and sham invoices to pay bribes from the +RDS 2 Joint Venture to Colombian government officials by reimbursing or paying +intermediaries directly. These contracts and invoices involved work that the RDS 2 +construction company handled internally or were fictitious, but were recorded as legitimate +business expenses in the books and records of the RDS 2 Joint Venture. Grupo Aval reported +these expenses on financial statements it filed with the Commission. As a result, +Corficolombiana, through the Corficolombiana Executive, its subsidiary, and RDS 2 Joint +Venture, caused Grupo Aval to inaccurately record the payments in its books and records. + +17. Corficolombiana, through the Corficolombiana Executive and its subsidiary, +exercised influence over the financial and accounting operations of the RDS 2 Joint Venture. +For example, the Corficolombiana Executive caused the RDS 2 construction company to +approve payments to vendors for work that was already performed or lacked supporting +documentation. These payments resulted in the disposition of assets to pay for bribes. + +18. The bribery scheme provided Corficolombiana and other Grupo Aval subsidiaries +with an improper financial benefit in the form of fees, interest income, and investment + 5 +distributions totaling approximately $32 million. These illicit profits were consolidated to +Grupo Aval’s financial statements and accrued to Grupo Aval through 2020. + +LEGAL STANDARDS AND VIOLATIONS + +19. 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 the cause of the violation, due to an act or omission the person knew or +should have known would contribute to such violation. + + Corficolombiana Violated Exchange Act Section 30A + +20. As a result of the conduct described above, the Corficolombiana Executive caused +Corficolombiana to violate Section 30A of the Exchange Act, which prohibits any issuer with +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, 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 an effort to pay or offer to pay anything of value to +foreign officials for the purpose of influencing their official decision-making, in order to assist +in obtaining or retaining business. + +Grupo Aval Violated Exchange Act Section 13(b)(2)(A) and Corficolombiana Caused +Grupo Aval’s Violations + +21. As described above, the RDS 2 Joint Venture used no-work contracts and sham +invoices to pay bribes to Colombian government officials. These payments were recorded as +legitimate business expenses in the books and records of the RDS 2 Joint Venture and of +Corficolombiana, and were reported in Grupo Aval’s financial statements. In addition, the +Corficolombiana Executive signed various sub-certifications in connection with Grupo Aval’s +financial reporting that falsely stated he was unaware of illegal acts. As a result, +Corficolombiana caused violations of, and Grupo Aval 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. + +Grupo Aval Violated Exchange Act Section 13(b)(2)(B) and Corficolombiana Caused +Grupo Aval’s Violations + +22. As described above, bribe payments to intermediaries were approved by +Corficolombiana, through the Corficolombiana Executive and its subsidiary, relying on invoices +lacking supporting documentation or using contracts for vaguely described services typically +handled internally rather than by third parties. As a result, Corficolombiana caused violations +of, and Grupo Aval violated, Section 13(b)(2)(B) of the Exchange Act by failing to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances + 6 +that transactions are executed and access to assets is permitted only in accordance with +management’s general or specific authorization. + +Disgorgement and Non-Imposition of a Civil Penalty + +23. Respondents acknowledge that the Commission is not imposing a civil penalty +based upon the imposition of a $20,300,000 criminal fine as part of Corficolombiana’s +resolution with the U.S. Department of Justice. + +24. The disgorgement and prejudgment interest referenced in paragraph IV.C., below, +is consistent with equitable principles, does not exceed Grupo Aval’s net profits from its +violations, and returning the money to Grupo Aval 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 referenced 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. + +Grupo Aval’s Remedial Efforts + +25. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondents and cooperation afforded the Commission staff. +Respondents’ cooperation included voluntarily summarizing and providing facts developed +during their own internal investigation and producing and translating certain documents. +Respondents’ remediation included conducting a comprehensive risk assessment; re-evaluating +and re-designing their anti-corruption compliance program; improving policies and procedures; +and enhancing internal controls, including those related to joint venture entities and investments. + +Deferred-Prosecution Agreement + +26. Corficolombiana has entered into a deferred-prosecution agreement with the U.S. +Department of Justice that acknowledges responsibility for criminal conduct relating to the +findings in the Order. United States v. Corporación Financiera Colombiana S.A. (to be filed in +D. Md.) + 7 +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: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Grupo Aval 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. Pursuant to Section 21C of the Exchange Act, Respondent Corficolombiana cease +and desist from committing or causing any violations and any future violations of Sections +13(b)(2)(A), 13(b)(2)(B), and 30A of the Exchange Act. + + C. Grupo Aval shall, within 10 days of the entry of this Order, pay disgorgement of +$32,139,731 and prejudgment interest of $8,129,558 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. + +Payment must be made in one of the following ways: + +(1) Grupo Aval may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Grupo Aval 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) Grupo Aval 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 + + + + + + + 8 +Payments by check or money order must be accompanied by a cover letter identifying +Grupo Aval and Corficolombiana 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 Charles E. +Cain, Chief of the FCPA Unit, Division of Enforcement, Securities and Exchange Commission, +100 F St., NE, Washington, DC 20549-5631B. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4438.txt b/raw/aaer/2023/AAER-4438.txt new file mode 100644 index 0000000000000000000000000000000000000000..e0626579044da2611d3ec43ddd08ff2849029f87 --- /dev/null +++ b/raw/aaer/2023/AAER-4438.txt @@ -0,0 +1,1261 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98118 / August 14, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4438 / August 14, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21560 + + + + +In the Matter of + +CROWE U.K. LLP, +NIGEL D. BOSTOCK, FCA, +AND +MATTHEW C. +STALLABRASS, FCA + + +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, 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 Crowe U.K. +LLP ( “Crowe U.K.”), Nigel D. Bostock, FCA, and Matthew C. Stallabrass, FCA (each a +“Respondent” and collectively “Respondents”) pursuant to 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 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 + +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 (“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 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 Rule 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: + +SUMMARY +1. These proceedings arise out of Crowe U.K.’s deficient audit of Akazoo +Limited’s (“Old Akazoo”) 2018 financial statements (“2018 Audit”) in connection with Old +Akazoo’s business combination with a special purpose acquisition company (“the SPAC”). +Crowe U.K. audited Old Akazoo’s financial statements for the years ended 2016 through +2018 subject to PCAOB standards. The SPAC included Crowe U.K.’s audit report +containing an unqualified opinion dated June 7, 2019 (“Audit Report”) in its joint proxy and +registration statement filed for the initial business combination with Old Akazoo (known as +a “de-SPAC transaction”). This filing falsely stated Old Akazoo earned over $120 million +in revenue and had over four million paying subscribers in 2018. In reality, Old Akazoo +had only negligible amounts of revenue and subscribers. +2. In order to give the appearance of revenue, Old Akazoo fabricated +companies it called “aggregators.” Old Akazoo explained to Crowe U.K., but not to the + + +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 + +SPAC’s investors, that it never received cash payments from the purported aggregators in +2018 because Old Akazoo netted out the revenues and expenses attributable to the +aggregators. In support of its false explanation to Crowe U.K., Old Akazoo presented +Crowe U.K. with facially problematic agreements that lacked a commercial purpose and +dubious confirmation letters – both of which were fake. Crowe U.K., however, did not +design audit procedures to respond to these red flags or even attempt to contact the +aggregators directly. Less than a year after Crowe U.K. signed the Audit Report, Akazoo +S.A. (“Akazoo”), Old Akazoo’s public company successor after the de-SPAC transaction, +reported that Old Akazoo’s management had conducted a financial fraud that lasted several +years, including the years audited by Crowe U.K. +3. During the 2018 Audit, Crowe U.K. violated applicable PCAOB standards. +Crowe U.K. did not exercise an appropriate level of due professional care or professional +skepticism when it came to the aggregators, even though improper revenue recognition is a +significant risk and fraud risk per PCAOB guidance. Crowe U.K. also violated other +PCAOB standards, such as failing to control the confirmation process and failing to conduct +a meaningful engagement quality review (“EQR”). Further, Crowe U.K. had deficient +quality controls. As a result of these failures, Crowe U.K. engaged in improper professional +conduct during the 2018 Audit of Old Akazoo. +RESPONDENTS + +4. Crowe U.K. LLP was a PCAOB-registered public accounting firm +headquartered in London, U.K. Crowe U.K. submitted a request to withdraw its registration +from the PCAOB on June 2, 2023. It provides audit, tax, advisory, and risk services +through its offices in the United Kingdom, and is affiliated with Crowe Global, a +multinational professional services network consisting of more than 220 firms licensed to +use “Crowe” or “Horwath.” +5. Nigel D. Bostock, FCA, (the “Engagement Partner”) resides in the United +Kingdom, has served as the CEO of Crowe U.K. since September 2017, and is a member of +the board of Crowe Global. He was the engagement partner for each of Crowe U.K.’s +audits of Old Akazoo from 2015 through 2018 and supervised the audit team in London and +Athens, Greece. The Engagement Partner is a Fellow of the Institute of Chartered +Accountants in England and Wales (“ICAEW”). +6. Matthew C. Stallabrass, FCA, (the “Engagement Quality Reviewer”) +resides in the U.K., is a partner at Crowe U.K., and member of the firm’s Supervisory +Board. He was the engagement quality reviewer for Crowe U.K.’s 2018 Audit of Old +Akazoo as required by PCAOB standards. The Engagement Quality Reviewer is a Fellow + +4 + +of the ICAEW. +OTHER RELATED ENTITY + +7. Akazoo is organized under the laws of Luxembourg. From September 2019 +to May 2020, Akazoo’s principal place of business was Athens, Greece. Akazoo was +formed in September 2019 as a result of a merger between the SPAC and Old Akazoo, a +purported music streaming company that offered its services to emerging markets. +Akazoo’s ordinary shares were registered under the Exchange Act pursuant to Section 12(b) +and traded on the Nasdaq under the ticker “SONG,” before being delisted on June 2, 2020. +The shares were deregistered in January 2021. As of the date of this Order, Akazoo has no +operations and exists only to respond to legal disputes. +FACTS +Background +8. Crowe U.K. became Old Akazoo’s auditor in 2016 for the audit year ending +December 31, 2015 when Old Akazoo was a private company. Old Akazoo retained Crowe +U.K. to conduct its U.K. statutory audit and component reporting to the auditors of Old +Akazoo’s then-London Stock Exchange listed parent company (“Parent Company”). After +Parent Company went private, Crowe U.K. continued to conduct Old Akazoo’s statutory +audits and reporting to Parent Company’s auditors for the years ended 2016 and 2017 using +International Standards on Auditing applicable in the U.K. During this time, the members +of the engagement team visited Old Akazoo’s primary location in Athens at least twice. +9. In January 2019, the SPAC publicly disclosed Old Akazoo as its target for a +de-SPAC transaction. Because Old Akazoo needed three years of audited financial +statements for the de-SPAC transaction, Old Akazoo retained Crowe U.K., using the same +engagement team it had worked with since 2016. This new engagement required Crowe +U.K. to apply PCAOB auditing standards to re-audit Old Akazoo’s financial statements for +the years ended 2016 and 2017 and to conduct Old Akazoo’s 2018 Audit. +10. On August 14, 2019, the SPAC filed a joint proxy and registration +statement with the SEC on Form F-4 (“August 14, 2019 Filing”), in which the SPAC’s +board of directors recommended that shareholders vote for the proposed business +combination with Old Akazoo. The August 14, 2019 Filing falsely described Old Akazoo’s +music streaming business as of December 31, 2018, with the following highlights: + Over 4.6 million subscribers paid for Old Akazoo’s streaming content monthly; + Old Akazoo’s subscribers either paid Old Akazoo directly or through partners; + Old Akazoo also generated revenue through a free, ad-supported radio service with 2.6 +million users; + Old Akazoo operated in 25 separate markets; + +5 + + Old Akazoo was a profitable business with positive EBITDA since inception; + Old Akazoo had €104.8 million (or $120 million) in revenue in 2018; and + Old Akazoo had developed deep relationships with a large number of global, regional, +and local music content providers. + +11. The August 14, 2019 Filing included Crowe U.K.’s Audit Report. In the +Audit Report, Crowe U.K. claimed it had audited Old Akazoo’s financial statements for the +years ended 2018, 2017, and 2016 and that, in its opinion, Old Akazoo fairly presented its +financial statements in all material respects in accordance with International Financial +Reporting Standards. Crowe U.K. also stated it conducted its audits in accordance with +PCAOB standards. Crowe U.K. permitted the Audit Report’s inclusion in the August 14, +2019 Filing. +12. The merger between the SPAC and Old Akazoo became effective on +September 11, 2019, which created Akazoo. On September 17, 2019, Akazoo filed a Shell +Company Report on Form 20-F that incorporated the Audit Report by reference with Crowe +U.K.’s permission. +13. Approximately seven months later, on April 20, 2020, a short-selling hedge +fund published a report claiming that Akazoo had negligible operations, subscribers, and +revenue. Akazoo promptly formed a special committee of independent directors to +investigate the claims. On May 1, 2020, Akazoo disclosed that it had terminated its CEO – +who had been Old Akazoo’s CEO – and asked him to resign from the Board because of his +failure to cooperate with the investigation. In the same filing, Akazoo disclosed that Old +Akazoo’s 2018, 2017, and 2016 financial statements “should no longer be relied upon due +to the possibility that such financial statements contain material errors.” +14. Akazoo released the results of the internal investigation in a Form 6-K filing +with the SEC on May 21, 2020, admitting that “former members of Akazoo’s management +team and associates defrauded Akazoo’s investors . . . by materially misrepresenting +Akazoo’s business, operations, and financial results as part of a multi-year fraud.” Akazoo +admitted that its “historical financial statements were materially false and misleading, that +Akazoo has had only negligible actual revenue and subscribers for years and that former +members of Akazoo management and associates participated in a sophisticated scheme to +falsify Akazoo’s books and records…” +15. On September 30, 2020, the SEC filed SEC v. Akazoo S.A., 1:20-cv-08101- +AKH (S.D.N.Y.), an emergency action charging Akazoo with fraud and other violations. +That case concluded in October 2021, after the Commission received all requested relief. +The Crowe U.K. Engagement Team +16. Crowe U.K.’s engagement team for the 2018 Audit was led by the +Engagement Partner and included audit managers based in London and Athens that + +6 + +conducted the fieldwork under the Engagement Partner’s supervision. The engagement +team and the Engagement Quality Reviewer had almost no experience and limited training +conducting PCAOB audits. + +The Aggregators + +17. Crowe U.K. overlooked red flags pertaining to Old Akazoo’s music +streaming revenue and expenses that should have caused it to show greater skepticism and +expand its audit procedures before opining on Old Akazoo’s financial statements. The +notes to the financial statements contained in the August 14, 2019 Filing stated that Old +Akazoo’s revenue was generated though the sale of music-streaming subscriptions directly +to end-users or “through partners who are generally telecommunications, social messaging +or Original Equipment Manufacturers (OEM) companies.” The August 14, 2019 Filing +also stated that Old Akazoo’s major expense was the licensing fees it paid to music record +labels, publishers, and other rights holder for the rights to stream music. Nowhere in the +notes to the financial statements or elsewhere did the August 14, 2019 Filing disclose that +Old Akazoo claimed to pay the music licensing fees indirectly. + +18. Crowe U.K.’s audit work papers, however, described Old Akazoo’s revenue +and expense model differently from the SPAC’s August 14, 2019 Filing. According to +Crowe U.K.’s audit work papers, Old Akazoo’s business model depended on three so-called +“aggregators” – third-party businesses that supposedly maintained contracts with +telecommunication companies through which Old Akazoo’s streaming service was sold to +end-users. These aggregators purportedly generated and collected 90% of Old Akazoo’s +streaming revenue. +19. Despite the aggregators’ substantial and critical role in Old Akazoo’s +revenue generation, Crowe U.K.’s work papers reflected that Old Akazoo never received +any cash payments from them in 2018, a critical fact that was not included in the August 14, +2019 Filing. Old Akazoo’s explanation for this – which the engagement team accepted +without skepticism – was that the aggregators also managed Old Akazoo’s licensing +arrangements with content providers and paid licensing fees for content streamed through +Old Akazoo’s platform, which were Old Akazoo’s largest expense. Old Akazoo +documented this dual relationship with the aggregators through so-called “set-off” +agreements. +20. Crowe U.K.’s work papers also reflected that the aggregators paid other Old +Akazoo expenses in 2018 through arrangements the engagement team called “tripartite +agreements.” As Crowe U.K.’s work papers described, Old Akazoo contracted with +various vendors to provide services (such as software development). Instead of Old Akazoo +paying its vendors directly, the aggregators purportedly agreed to pay the vendors using the +streaming revenue the aggregators collected for Old Akazoo. In theory, the tripartite +agreements purportedly worked as follows: (1) the vendor agreed to release its claim against +Old Akazoo and look exclusively to the aggregator for payment; (2) the aggregator agreed + +7 + +to accept liability to the vendor; and (3) Old Akazoo released the aggregator for an amount +of receivables equal to the vendor’s invoice. +21. In reality, the aggregators were fictional. During its internal investigation of +the short seller’s allegations, Akazoo’s board of directors learned that the aggregators did +not exist and that the alleged transactions with them were simply an elaborate ruse papered +with false documents and non-existent transactions. The tripartite agreements likewise +were fabrications that did not reflect any actual transactions with real vendors. Old Akazoo +created these fictions to cover for its lack of cash flow despite claiming to have a large and +growing subscriber base. + Crowe U.K. Did Not Validate the Aggregators’ Existence +22. Per PCAOB guidance, Crowe U.K. identified improper revenue recognition +as a significant risk and as a fraud risk. Even so, it did not sufficiently design audit +procedures to respond to the identified risk appropriately. +23. The engagement team never validated the existence of the aggregators. In +particular, no one from the engagement team ever directly contacted the aggregators. +During the 2018 Audit, the engagement team did not perform additional audit procedures to +resolve inconsistencies. For example, the engagement team did not verify the physical +addresses of the aggregators – even when audit documentation showed that a certain +aggregator had the same address as another purported service provider. +Crowe U.K. Did Not Control the Confirmation Process with the +Aggregators and Failed to Follow-up on Red Flags +24. Crowe U.K. allowed Old Akazoo to control the process of confirming +revenues and expenses with the aggregators. An employee in Old Akazoo’s finance +department sent account receivable confirmation letters to email addresses purporting to +belong to aggregators and sometimes copied the Greek audit manager on the request. +Although Crowe U.K.’s confirmations explicitly directed the aggregators to return the +confirmation to a partner at Crowe Greece, some were returned to Old Akazoo, who then +forwarded the confirmations it received from the aggregator to the Greek audit manager, or +the aggregator copied the Greek audit manager on its response to Old Akazoo. + Red Flags in Aggregator A’s Confirmation Response +25. Other aspects of the aggregators’ confirmation process raised more red flags. +For instance, none of the aggregators’ representatives’ emails contained an email signature, +and one aggregator’s email address did not correlate to the aggregator’s corporate name. +But the engagement team did not question the discrepancy. +26. On February 15, 2019, Old Akazoo gave Crowe U.K. an account receivable +report purporting to reflect balances as of December 31, 2018 (“February AR Report”). + +8 + +Using the figure in the February AR Report, Crowe U.K. drafted a confirmation letter to the +aggregator that supposedly operated in Latin America (“Aggregator A”) asking Aggregator +A to confirm that it owed Old Akazoo €19,143,029.50 as of December 31, 2018. Crowe +U.K. allowed Old Akazoo to email the confirmation letter directly to Aggregator A. When +Crowe U.K. received the confirmation letter back through Old Akazoo months later in May +2019, “€19,143,029.50” was scratched out and “€3,702,750.14” was hand-written in the +margins. Aggregator A included no documentation or explanation for this in the response, +even though the confirmation letter requested such support for any discrepancies. +27. Crowe U.K. did not conduct audit procedures in response to the discrepancy. +Instead, Crowe U.K. accepted Old Akazoo’s explanation that it failed to incorporate +additional transactions between Old Akazoo and the aggregators that purportedly were +entered into before December 31, 2018, in the February AR Report. In support of this +claim, Old Akazoo then provided Crowe U.K. a second “updated” AR report dated May 15, +2019 (“May AR Report”) that reflected Aggregator A’s balance as of December 31, 2018, +as €3,702,750.14. The engagement team accepted this explanation even though it meant +that – at best – Old Akazoo’s 2018 year-end accounting records were grossly incomplete as +of February 15, 2019. + Additional Red Flags in the Confirmation Response +28. The audit documentation related to the confirmation of Old Akazoo’s two +other aggregators was even more suspicious because both aggregators confirmed the +balance reflected on Old Akazoo’s February AR Report — the same balance Old Akazoo +later told the engagement team was inaccurate in May 2019. For example, Crowe U.K. +dated the first confirmation letter for the aggregator that supposedly operated in Eastern +Europe (“Aggregator B”) for February 15, 2019, using the figure “€14,198,520.68,” which +was represented on the February AR Report. Again, Crowe U.K. allowed Old Akazoo to +email the confirmation letter to Aggregator B’s purported representative. On April 16, +2019, Aggregator B emailed Old Akazoo a signed confirmation letter agreeing to the +balance, which was copied to Crowe Greece. +29. Because the May AR report reflected that Aggregator B owed Old Akazoo +€10,881,822.55 as of December 31, 2018, not €14,198,520.68, the Engagement Partner +requested on June 6, 2019, that Old Akazoo provide a second set of confirmations from +Aggregator B. Rather than securing the confirmations directly from the aggregators, the +Engagement Partner relied on confirmations that Old Akazoo’s Financial Controller +forwarded to him. On June 6, 2019 – the same day of the Engagement Partner’s request – +Old Akazoo provided a new confirmation purportedly from Aggregator B that matched the + +9 + +same balance as listed on Old Akazoo’s May AR report. +30. Crowe U.K. accepted the June 6, 2019 confirmation letters from Old +Akazoo – one day before issuing the Audit Report – without conducting any other audit +procedures related to the authenticity of the confirmation letters. For instance, Crowe U.K. +did not contact Aggregator B to ask why it originally confirmed the balance of +€14,198,520.68 if that amount did not reflect all the transactions between Old Akazoo and +Aggregator B occurring in 2018. The below chronology illustrates the suspicious timeline +associated with the confirmation letters related to Aggregator B. +Crowe U.K. Did Not Exercise Appropriate Professional Skepticism Regarding the +Tripartite Agreements + +31. Crowe U.K. used deficient audit procedures to evaluate the tripartite +agreements. Crowe U.K. did nothing beyond reviewing the invoices and the tripartite +agreements, which both raised red flags that Crowe U.K. did not address. For example, Old +Akazoo supposedly entered into a tripartite agreement with a purported content provider +(“Vendor A”) and Aggregator A on December 31, 2018, to transfer approximately €11.6 +million. Crowe U.K.’s work papers included invoices from Vendor A. But those invoices +contained little detail, listed Vendor A’s name slightly differently than the tripartite +agreement, and reflected that Vendor A had the same mailing address in Belize as +Aggregator A. +32. Although the tripartite agreements represented significant unusual +transactions, no one from the engagement team verified the commercial purpose of the +transactions or directly contacted the parties to the agreements. The engagement team’s +blanket acceptance of the tripartite agreements was insufficient given that the agreements – +on their face – provided no details explaining the rationale for the transactions. +33. Rather than responding to the tripartite agreements with appropriate audit +procedures, Crowe U.K. relied on questionable representations by Old Akazoo’s +management. Old Akazoo’s management told the Engagement Partner that the purpose of +the tripartite agreements was to simplify Old Akazoo’s balance sheet. But Crowe U.K. + + +10 + +failed to document even this inadequate explanation in its work papers. Instead, the +Engagement Partner required that Old Akazoo’s management provide additional +representations that Old Akazoo’s creditors could not hold the company liable for the debts +transferred via the tripartite agreement. +Crowe U.K. Did Not Maintain Adequate Audit Documentation +34. Much of the audit evidence in the audit documentation was deficient for at +least two reasons. First, the work papers described testing that Crowe U.K. did not actually +perform. Work papers, including Crowe U.K.’s audit findings report, reflected that Crowe +U.K. reviewed payments received by the aggregators post year-end, but the aggregators +never made any payments to Old Akazoo at any time in 2018 or 2019 that Crowe U.K. +could review. Second, Crowe U.K.’s audit documentation did not include sufficient +appropriate audit evidence to support its audit conclusions. For example, Crowe U.K.’s +work papers claiming to support the accuracy of Old Akazoo’s account receivable balances, +merely attached excel spreadsheets containing a listing of Old Akazoo’s aged receivable +balances and purported revenue per segment. These spreadsheets did not – in any way – +support a conclusion that the information listed in the spreadsheets supported +management’s assertions. +Crowe U.K. Did Not Conduct a Sufficient EQR +35. Crowe U.K. did not conduct a sufficient EQR in accordance with PCAOB +standards, giving rise to a number of deficiencies during the audit. Rather than conducting +his review independently, the Engagement Quality Reviewer felt pressured by the +engagement team to complete his review quickly in order to meet a deadline set by Old +Akazoo related to the de-SPAC transaction. Consequently, the Engagement Quality +Reviewer deviated from his standard practice of independently accessing and reviewing +work papers in the audit file and instead relied on the engagement team’s answers to his +questions. He also relied on a handful of documents selected by the engagement team, +including a draft version of the audit findings report that contained false statements, such as +the engagement team’s representation that they reviewed cash payments from the +aggregators as part of their audit procedures. +36. The engagement team provided the Engagement Quality Reviewer with only +the select following documents for his review: (1) a draft of Old Akazoo’s financial +statements, (2) a draft of Crowe U.K.’s 2018 Audit Findings Report, (3) an IT audit report +addressing Old Akazoo’s general IT controls, and (4) a document from 2015 drafted by Old +Akazoo describing its business model. With respect to these documents, the Engagement +Quality Reviewer failed to note inconsistencies with Crowe U.K’s audit conclusions that +should have caused him to question the engagement team and independently access and +review the work papers. +37. Although the Engagement Quality Reviewer focused on Old Akazoo’s + +11 + +revenue recognition, which the engagement team had identified as the most significant risk +in the audit, he did not devote sufficient time to the EQR to understand the basis for the +engagement team’s conclusions. The Engagement Quality Reviewer understood the +significance of the aggregators to Old Akazoo’s revenue, asking [the engagement team]: +Can you clarify the work done on revenue recognition[?] In particular we seem to +be placing a lot of reliance on the aggregators, how have they ensured completeness +and how have we checked this? +38. In response, the engagement team emailed the Engagement Quality +Reviewer the IT audit report and a 2015 document describing Old Akazoo’s business +model. These documents, however, did not support the engagement team’s conclusions +about revenue recognition or the aggregators’ involvement. For example, the document +describing Old Akazoo’s business model was four years old, which focused on Old +Akazoo’s claim that it was growing rapidly. More concerning, the document contradicted +the engagement team’s conclusions about the aggregators’ role because it reflected that Old +Akazoo paid royalty costs to content providers directly, not indirectly through the +aggregators. Likewise, the IT audit document merely reflected testing of Old Akazoo’s +general IT controls, not the accuracy of its revenue or expense reconciliation. Despite the +shortcomings of this documentation, the Engagement Quality Reviewer did not request or +review additional documentation before providing his concurring approval of issuance. +39. In his haste to complete the EQR, the Engagement Quality Reviewer did not +follow his normal practice of accessing the audit file to confirm that the audit evidence +supported the engagement team’s conclusions. As a result, the Engagement Quality +Reviewer’s concurrence rested on the engagement team’s answers to his questions and the +four documents they provided, which undermined his judgement as the Engagement +Quality Reviewer and provided an insufficient basis for him to determine whether there +were any significant engagement deficiencies. +Crowe U.K.’s Inaccurate Statements in its Audit Report + +40. Crowe U.K.’s Audit Report falsely claimed that Old Akazoo fairly presented +its financial statements in all material respects for the years ended 2018, 2017, and 2016, +when Old Akazoo had a negligible amount of revenue, not the over $120 million in revenue +Old Akazoo’s 2018 financial statements represented. Crowe U.K.’s Audit Report also +falsely stated that Crowe U.K. conducted the 2018 Audit in accordance with PCAOB +standards. Further, Crowe U.K. failed to perform procedures that responded to the risk that +Old Akazoo was engaged in financial fraud. Crowe U.K. knew that its Audit Report would +be incorporated in the August 14, 2019 Filing and Akazoo’s post de-SPAC filing of its + +12 + +Form 20-F on September 17, 2019. + +The Engagement Team Did Not Sufficiently Follow the Firm’s Policies and +Procedures + +41. Although Crowe U.K. had engagement and review policies and procedures +related to the auditing deficiencies described above, the firm failed to establish monitoring +policies and procedures to provide the firm with reasonable assurance that those policies +and procedures were suitably designed and effectively applied by the engagement team. +For instance, Crowe U.K. had access to the Crowe Global Audit Manual, which contained +relevant policies and procedures, but the engagement team never consulted the manual. +Crowe U.K. also periodically emailed audit alerts to the entire firm, which covered subjects +such as fraud risks and proper confirmation procedures. Nevertheless, the Old Akazoo +engagement team did not follow the guidance in the relevant audit alerts. + +THE RESPONDENTS VIOLATED NUMEROUS PCAOB AUDITING STANDARDS + +Crowe U.K. Failed to Adhere to the Quality Control Standards + +42. PCAOB Quality Control Standards Section (“QC”) 20.13 requires an audit +firm to establish policies and procedures to provide reasonable assurance that, among other +things: (1) those hired possess the appropriate characteristics to enable them to perform +competently, and (2) work is assigned to personnel having the degree of technical training +and proficiency required in the circumstances. +43. QC 20.03 requires an audit firm to ensure that its personnel comply with the +professional standards applicable to its accounting and auditing practice, which includes +adopting policies and procedures to provide the firm with reasonable assurance that its +auditors are complying with professional standards and monitoring compliance with the +firm’s policies and procedures. +44. QC 30.03 requires an audit firm to have monitoring procedures that should +enable the firm to obtain reasonable assurance that its system of quality control is effective. +45. QC 40.08 requires the firm’s policies and procedures to address competency +requirements for the engagement partner, such as the ability to practice sound professional +judgment. The exercise of sound professional judgment includes the “ability to exercise +professional skepticism and identify areas requiring special consideration including, for +example, the evaluation of the reasonableness of estimates and representations made by +management[.]” +46. As detailed above, Crowe U.K. violated QC Sections 20, 30, and 40. In +particular, Crowe U.K. failed to appropriately establish and monitor its policies and +procedures with respect to: (1) demonstrating training and proficiency; (2) exercising due + +13 + +professional care in the performance of work; (3) obtaining sufficient appropriate audit +evidence; (4) maintaining sufficient audit documentation; (5) supervising the audit +engagement; (6) conducting proper engagement quality reviews; (7) appropriately +confirming Old Akazoo’s revenues; and (8) conducting appropriate procedures to obtain +reasonable assurances that the financial statements were free of material misstatements +caused by fraud. In addition, Crowe U.K.’s quality control policies and procedures failed to +address that the engagement partner had the ability to practice sound professional judgment +as evidenced by the engagement partner’s lack of professional skepticism in accepting +deficient audit evidence and management’s representations regarding the aggregators. +AS 1010: Training and Proficiency of the Independent Auditor +47. AS 1010.01 requires that the audit is performed by a person or persons +having adequate technical training and proficiency as an auditor. +48. Crowe U.K. violated AS 1010. As detailed above, the engagement team had +almost no experience and limited training conducting an audit pursuant to PCAOB auditing +standards. Further, the training provided did not sufficiently prepare the engagement team +to conduct the Old Akazoo engagement in conformity to PCAOB auditing standards. +AS 1015: Due Professional Care in the Performance of Work +49. AS 1015.01 requires an auditor to exercise due professional care in the +planning and performance of the audit and the preparation of the report. +50. AS 1015.09 requires that the auditor neither assumes that management is +dishonest nor assumes unquestioned honesty. The auditor should not be satisfied with less +than persuasive evidence because of a belief that management is honest. +51. Crowe U.K. and the Engagement Partner violated AS 1015. As detailed +above, the engagement team did not exercise professional skepticism about Old Akazoo’s +explanation for entering into the tripartite agreements. The engagement team did not +consider whether the tripartite agreements were evidence of fraud, despite the lack of audit +evidence showing a commercial reason for the unusual and significant agreements. +AS 1105: Audit Evidence +52. AS 1105.04 requires an auditor to plan and perform audit procedures to +obtain sufficient appropriate audit evidence to provide a reasonable basis for the audit +opinion. +53. AS 1105.06 requires that audit evidence be appropriate, meaning both +relevant and reliable in providing support for the conclusions on which the auditor’s opinion + +14 + +is based. +54. AS 1105.09 requires that, if conditions indicate that a document may not be +authentic or that the terms in a document have been modified but that the modifications +have not been disclosed to the auditor, the auditor should modify the planned audit +procedures or perform additional audit procedures to respond to those conditions and should +evaluate the effect, if any, on the other aspects of the audit. +55. AS 1105.29 requires that, 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. +56. Crowe U.K. and the Engagement Partner violated AS 1105. First, they did +not perform audit procedures to obtain sufficient appropriate audit evidence to provide a +reasonable basis that Old Akazoo had over $100 million in revenue. For example, some of +the engagement team’s work papers reflected that the engagement team reviewed payments +received by the aggregator post year-end, but the aggregators never made any payments to +Old Akazoo at any time in 2018 or 2019 that Crowe U.K. could review. +57. Second, Crowe U.K.’s audit evidence did not support the audit testing that +the engagement team claimed to perform or the conclusions they reached in the audit. +Certain work papers, which claimed to prove the accuracy of Old Akazoo’s account +receivable balances, attached spreadsheets containing a listing of Old Akazoo’s aged +receivable balances and purported revenue per segment. These spreadsheets did not – in +any way – prove that the information listed in the spreadsheets was accurate. +58. Third, the engagement team indirectly received all but one of the first round +of aggregator confirmations through Old Akazoo. None of the aggregator representatives’ +emails contained an email signature, and one aggregator’s email address did not correlate to +the aggregator’s corporate name. Crowe U.K. conducted no audit procedures in response. +Further, the amount of revenue Aggregator B confirmed in its first confirmation letter +conflicted with the February 2019 AR Report. Without additional corroborating evidence +or applying professional skepticism, Crowe U.K. relied on assurances from Old Akazoo’s +management that the discrepancy was caused by Old Akazoo failing to incorporate +additional transactions with the aggregators in Old Akazoo’s February 2019 AR report that +purportedly were entered into before December 31, 2018. +59. Fourth, Crowe U.K. and the Engagement Partner accepted without sufficient +explanation or challenge, the aggregators’ June 6, 2019 confirmations directly from +management, the same day the Engagement Partner requested the new confirmations. The +Engagement Partner received the confirmations without any direct contact with the +aggregators, and he conducted no alternative procedures to obtain sufficient evidence of the + +15 + +authenticity of the confirmations. +AS 1201: Supervision of the Audit Engagement +60. AS 1201.03 states that the engagement partner is responsible for proper +supervision of the work of engagement team members and for compliance with PCAOB +standards. +61. AS 1201.05 requires that the engagement partner review the work of +engagement team members to evaluate whether the work was performed and documented, +the objectives of the procedures were achieved, and the results of the work support the +conclusions reached. +62. AS 1201.06 requires that the engagement partner consider the nature of the +assigned work for each engagement team member, the risks of material misstatement, and +the knowledge, skill, and ability of each engagement team member. +63. Crowe U.K. and the Engagement Partner violated AS 1201. The +Engagement Partner did not appropriately supervise the audit. The Engagement Partner did +not staff auditors to the engagement team that had the requisite training to conduct a +PCAOB audit. Nor did he evaluate whether they complied with PCAOB auditing +standards. +AS 1215: Audit Documentation +64. AS 1215.04 requires an auditor to prepare audit documentation in sufficient +detail to provide a clear understanding of its purpose, source, and the conclusions reached. +65. AS 1215.05 requires that audit documentation support the representations in +the audit report. +66. AS 1215.06 requires that the auditor document the procedures performed, +evidence obtained, and conclusions reached with respect to relevant financial statement +assertions. +67. Crowe U.K. and the Engagement Partner violated AS 1215. First, Crowe +U.K.’s audit documentation did not show that the engagement sufficiently complied with +the applicable PCAOB standards. +68. Second, Crowe U.K.’s work papers did not provide a clear understanding of +its purpose, source, and the conclusions reached. The work papers were so disorganized +and confusing that, before the issuance of the Audit Report, the Engagement Partner added +another section into the work papers that reflected his independent analysis, where he tried +to make sense of the other audit documents. But the Engagement Partner’s work papers +only purported to tie together underlying audit documentation that did not actually support + +16 + +the conclusions of the audit. Consequently, the Engagement Partner was unsuccessful at +curing the deficiencies in the audit documentation. Considering that the Engagement +Partner had trouble reviewing the work papers, an experienced auditor with no connection +to the Old Akazoo engagement would not understand Crowe U.K.’s work papers. +69. Third, Crowe U.K.’s audit documentation did not clearly demonstrate that +significant work was actually performed. +AS 1220: EQR +70. AS 1220.05 requires an engagement quality reviewer to possess the level of +knowledge and competence related to accounting, auditing, and financial reporting required +to serve as the engagement partner on the engagement under review. +71. AS 1220.06 requires an EQR be independent of the company, perform the +engagement quality review with integrity, and maintain objectivity in performing the +review. +72. AS 1220.10 requires an engagement quality reviewer to evaluate the +engagement team’s assessment of, and responses to significant risks, such as fraud risks, +and other significant risks identified by the engagement quality reviewer. Also, the +engagement quality reviewer should evaluate the team’s determination, communication, +and documentation of critical audit matters. +73. AS 1220.11 requires that the engagement quality reviewer should evaluate +whether the engagement documentation he or she reviews supports the conclusions reached +by the engagement team. +74. Crowe U.K. and the Engagement Quality Reviewer violated PCAOB +auditing standards when conducting the EQR of Akazoo’s 2018 Audit. First, Engagement +Quality Reviewer had never conducted an audit or an EQR under PCAOB auditing +standards. Second, the Engagement Quality Reviewer did not comply with the requisite +standard because he deviated from his standard practice of independently accessing the +audit work file because of the pressure he felt from the engagement team to conduct the +EQR quickly. Third, the Engagement Quality Reviewer relied only on the handful of work +papers the engagement team emailed him and their answers to questions he posed in email +communications. Consequently, the Engagement Quality Reviewer was unable to evaluate +the engagement team’s determination, communication, and documentation of critical audit +matters because he did not have unfettered access to Old Akazoo’s audit file. Fourth, two +of the audit work papers that the Engagement Quality Reviewer reviewed contradicted +Crowe U.K.’s conclusions about Old Akazoo’s revenue. The Engagement Quality +Reviewer, thus did not sufficiently evaluate the engagement team’s assessment of and audit + +17 + +responses to the significant risk that Old Akazoo’s misstated its revenue. +AS 2301: The Auditor’s Responses to the Risks of Material Misstatement and AS +2401: Consideration of Fraud in a Financial Statement Audit +75. AS 2301.11A requires auditors to respond to risks associated with +significant unusual transactions and references to the requirements in AS 2401.66-67A to +perform procedures to respond to fraud risks posed by the significant unusual transactions +in the risk assessment process. +76. AS 2401.66 recognizes that evaluating whether the business purpose for +significant unusual transactions indicates that the transactions may have been entered into to +engage in fraud. +77. AS 2401.66A requires that the auditor design and perform procedures to +obtain an understanding of the business purpose (or lack thereof) of each significant unusual +transaction that the auditor has identified. +78. AS 2401.67 requires that the auditor evaluate whether the business purpose +(or the lack thereof) indicates that the significant unusual transaction may have been entered +into to engage in fraudulent financial reporting or conceal misappropriation of assets. In +making that evaluation, the auditor should, among others, evaluate whether: + The form of the transaction is overly complex (e.g., the transaction involves +multiple entities within a consolidated group or unrelated third parties); and + The transaction enables the company to achieve certain financial targets. +79. Crowe U.K. and the Engagement Partner violated AS 2301 and AS 2401. +As noted above, the engagement team did not perform procedures to respond to the fraud +risk caused by the tripartite agreements, which were significant and unusual transactions. +No one from the engagement team tried to verify the commercial purpose of the +transactions or directly contact the other parties to the agreements. Nor was there any +explanation for the tripartite agreements in the work papers. Last, the engagement team +never evaluated whether the tripartite agreements represented a fraud risk even though Old +Akazoo used the agreements to justify why the aggregators never made cash payments to +Old Akazoo in 2018. +AS 2310: The Confirmation Process +80. AS 2310.26 requires an auditor to direct the confirmation request to a third +party who the auditor believes is knowledgeable about the information to be confirmed. +81. AS 2310.27 requires an auditor to exercise a heightened degree of +professional skepticism, such as, for significant unusual year-end transactions that have a + +18 + +material effect on the financial statements. +82. AS 2310.28 requires an auditor maintain control over the confirmation +requests and responses. Maintaining control means establishing direct communication +between the intended recipient and the auditor to minimize the possibility that the results +will be biased because of interception and alteration of the confirmation requests or +responses. +83. AS 2310.29 recognizes that there may be situations in which a third-party +responds to a confirmation request other than in a written communication mailed to the +auditor. In those instances, additional evidence may be required to support the +confirmations validity. +84. AS 2310.33 requires the auditor, after performing any alternative +procedures, to evaluate the combined evidence provided by the confirmations and the +alternative procedures, to determine whether sufficient evidence has been obtained about all +the applicable financial statement assertions. In performing that evaluation, the auditor +should consider (a) the reliability of the confirmations and alternative procedures; (b) the +nature of any exceptions, including the implications, both quantitative and qualitative, of +those exceptions; (c) the evidence provided by other procedures; and (d) whether additional +evidence is needed. If the combined evidence provided by the confirmations, alternative +procedures, and other procedures is not sufficient, the auditor should request additional +confirmations or extend other tests, such as tests of details or analytical procedures. +85. Crowe U.K. and the Engagement Partner performed deficient audit +procedures related to confirmations. First, the engagement team did not direct the +confirmations to the aggregators. Rather, they allowed Old Akazoo to direct and control the +confirmation process, which included Old Akazoo selecting the person at the aggregator to +sign the confirmation letter. Second, the engagement team did not exercise a heightened +degree of professional skepticism when presented with the June 6, 2019, confirmation +letters that they received indirectly from Old Akazoo. Even though the aggregators +confirmed significant unusual transactions that Old Akazoo claimed to have entered into +with the aggregators by December 31, 2018, but failed to record in Old Akazoo’s records +until May 2019. Third, notwithstanding red flags, the engagement team did not undertake +appropriate and sufficient procedures regarding the validity of the confirmations process +with the aggregators. Fourth, the engagement team did not analyze whether sufficient +evidence was obtained about all the applicable financial statement assertions, namely, the +amount of Old Akazoo’s revenue. +VIOLATIONS + +86. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state +whether the audit was performed in accordance with applicable auditing standards. 17 CFR +210.2-02(b)(1). Crowe U.K. violated Rule 2-02(b)(1) of Regulation S-X and the + +19 + +Engagement Partner and the Engagement Quality Reviewer caused Crowe U.K.’s violation +of the same when Crowe U.K. issued the Audit Report attesting that it had conducted Old +Akazoo’s 2018 Audit in accordance with PCAOB standards when it had not. +87. Section 13(a) of the Exchange Act and Rule 13a-19 requires every foreign +private issuer that was a shell company to file a report on Form 20-F. Crowe U.K., the +Engagement Partner, and the Engagement Quality Reviewer caused Akazoo to violate +Section 13(a) of the Exchange Act and Rule l3a-9 thereunder by allowing the incorporation +of Crowe U.K.’s Audit Report in Akazoo’s Form 20-F. +88. Section 14(a) of the Exchange Act and Rule 14a-9 thereunder prohibit any +person from soliciting or permitting the use of their name to solicit any proxy or consent or +authorization in respect to any registered security at the time and in the light of the +circumstances under which it was made, was false or misleading with respect to a material +fact, or which omitted to state a material fact necessary in order to make the statements +therein not false or misleading or necessary to correct any statement in any earlier +communication with respect to the solicitation of a proxy for the same meeting or subject +matter which has become false or misleading while using the mail or any means or +instrumentality of interstate commerce. Crowe U.K. violated Section 14(a) of the Exchange +Act and Rule 14a-9 thereunder and the Engagement Partner and the Engagement Quality +Reviewer caused Crowe U.K.’s violations of the same by permitting the inclusion of Crowe +U.K.’s Audit Report in the August 14, 2019 Filing. +89. 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 either of the following two types of negligent +conduct: (i) 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 (ii) repeated 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)(1) and +(2). By violating PCAOB standards in connection with the 2018 Audit of Old Akazoo, as +described above, Crowe U.K., the Engagement Partner, and the Engagement Quality +Reviewer engaged in improper professional conduct as defined in Rule 102(e)(1)(iv). +FINDINGS +90. Based on the foregoing, the Commission finds that Crowe U.K. violated +Rule 2-02(b)(1) of Regulation S-X. +91. Based on the foregoing, the Commission finds that the Engagement Partner + +20 + +and the Engagement Quality Reviewer caused Crowe U.K. to violate Rule 2-02(b)(1) of +Regulation S-X. +92. Based on the foregoing, the Commission finds that Crowe U.K., the +Engagement Partner, and the Engagement Quality Reviewer caused Akazoo to violate +Section 13(a) of the Exchange Act and Rule 13a-19 promulgated thereunder. +93. Based on the foregoing, the Commission finds that Crowe U.K. violated +Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. +94. Based on the foregoing, the Commission finds that the Engagement Partner +and the Engagement Quality Reviewer caused Crowe U.K. to violate Section 14(a) of the +Exchange Act and Rule 14a-9 promulgated thereunder. +95. Based on the foregoing, the Commission finds that Crowe U.K., the +Engagement Partner, and, the Engagement Quality Reviewer 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. +DISGORGEMENT AND CIVIL PENALTIES +96. The disgorgement ordered in Section IV.D. is consistent with equitable +principles and does not exceed Crowe U.K.’s net profits from its violations. Crowe +U.K.’s $187,740 in disgorgement and $28,104 in prejudgment interest are deemed satisfied +by Crowe U.K.’s payment of $11,500,000 to Akazoo’s defrauded investors. +UNDERTAKINGS +97. Crowe U.K. has resigned from all audit engagements for issuer clients and +has withdrawn its PCAOB registration. +Acceptance of New Clients +98. Crowe U.K. undertakes not to accept an audit engagement from any new +client who is: (1) an issuer as that term is defined in Section 2(a)(7) of the Sarbanes-Oxley +Act of 2002; (2) registered with the Commission; (3) seeking an audit for the purpose of +registering securities with the Commission from the date of entry of this order; or (4) +permitting the inclusions of its audit report in any SEC filing. +99. If Crowe U.K. wishes to accept any audit engagement from any new client +described in paragraph 98, Crowe U.K. undertakes that, before it accepts such engagements, +it will: (1) certify that it is registered with the PCAOB in accordance with the Sarbanes- +Oxley Act of 2002, and such registration continues to be effective; (2) comply with the +undertakings discussed in paragraphs 100 through 113 below; and (3) provide the Division +of Enforcement with written certification of such compliance by an independent consultant, + +21 + +as set forth in paragraph 110 below. +Independent Consultant +100. If Crowe U.K. wishes to accept any audit engagement from any new client +described in paragraph 98, it shall retain the services of an independent consultant +(“Independent Consultant”) not unacceptable to the Division of Enforcement of the +Commission (“Division of Enforcement”), to review and evaluate Crowe U.K.’s policies +and procedures regarding: (1) demonstrating training and proficiency, (2) exercising due +professional care in the performance of work, (3) obtaining sufficient appropriate audit +evidence, (4) maintaining sufficient audit documentation, (5) supervising the audit +engagement, (6) conducting proper EQRs, (7) confirmation procedures, (8) conducting +appropriate procedures to obtain reasonable assurance that the financial statements are free +of material misstatements caused by fraud, and (9) adhering to the quality control standards. +The Independent Consultant will also review and evaluate whether Crowe U.K. has adopted +policies and procedures to provide the firm with reasonable assurance that its auditors are +complying with professional standards and monitoring compliance with the firm’s policies +and procedures. +101. Crowe U.K. shall provide to the Commission staff a copy of the engagement +letter detailing the scope of the Independent Consultant’s responsibilities. The Independent +Consultant’s compensation and expenses shall be borne exclusively by Crowe U.K. +102. Crowe U.K. shall cooperate fully with the Independent Consultant and shall +provide reasonable 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 paragraphs 106 and 109 below. +103. To ensure the independence of the Independent Consultant, Crowe U.K.: (1) +shall not have the authority to terminate the Independent Consultant or substitute another +independent compliance 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. +104. Crowe U.K. 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 +Crowe U.K. or Crowe Global or any of their 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 + +22 + +Division of Enforcement’s Fort Worth Regional Office, enter into any employment, +consultant, attorney-client, auditing, or other professional relationship with Crowe U.K. or +Crowe Global 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. +105. 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) is +otherwise required by law. +Independent Consultant Reports and Certifications +106. Within five months of the Independent Consultant being retained, Crowe +U.K. shall require the Independent Consultant to issue a detailed written report (“Report”) +to Crowe U.K.: (1) describing the Independent Consultant’s review and evaluation of the +areas identified in paragraph 100 above; and (2) making recommendations, where +appropriate, reasonably designed to ensure that audits conducted by Crowe U.K. comply +with Commission regulations and with PCAOB standards and rules. Crowe U.K. shall +require the Independent Consultant to provide a copy of the Report to the Commission staff +when the Report is issued. +107. Crowe U.K. shall adopt, implement, and thereafter maintain all +recommendations made by the Independent Consultant in the Report; provided, however, +that within thirty days of issuance of the Report, Crowe U.K. may advise the Independent +Consultant and the Division of Enforcement in writing of any recommendation that it +considers to be unnecessary, unduly burdensome, or impractical. With respect to any such +recommendation, Crowe U.K. need not adopt that recommendation at that time but shall +propose in writing to the Independent Consultant and the Division of Enforcement an +alternative policy, procedure, or system designed to achieve the same objective or purpose. +As to any of the Independent Consultant’s recommendations about which Crowe U.K. and +the Independent Consultant do not agree, Crowe U.K. shall attempt in good faith to reach +agreement with the Independent Consultant within sixty days of the date of the Report. In +the event that Crowe U.K. and the Independent Consultant are unable to agree on an +alternative proposal, Crowe U.K. shall abide by the determinations of the Independent +Consultant and adopt those recommendations deemed appropriate by the Independent +Consultant. +108. Within sixty days of issuance of the Report, but not sooner than thirty days + +23 + +after a copy of the Report is provided to the Commission staff, Crowe U.K. shall certify to +the Commission staff in writing that it has adopted and has implemented or will implement +all recommendations of the Independent Consultant (“Interim Certification of +Compliance”). Crowe U.K. shall provide a copy of the Interim Certification of Compliance +to the Commission staff. +109. Within six months of the issuance of the Report, Crowe U.K. shall require +the Independent Consultant to: (1) test whether Crowe U.K. has implemented and enforced +its policies and procedures concerning the areas specified in paragraph 100 above; (2) +assess the effectiveness of those policies and procedures; and (3) test whether Crowe U.K.’s +staff has completed the training specified in paragraph 111 below. Crowe U.K. shall +require the Independent Consultant to issue a written final report summarizing the results of +the Independent Consultant’s test and assessment (“Final Report”) and to provide a copy of +the Final Report to the Commission Staff. +110. Upon issuance of the Final Report, if the Independent Consultant determines +that the undertakings discussed herein have been completed to the satisfaction of the +Independent Consultant, Crowe U.K. shall require the Independent Consultant to certify in +writing that the undertakings have been completed (“Independent Consultant Certification”) +and provide a copy of this certification to the Commission staff. Crowe U.K.’s undertaking +to not accept any new clients described in paragraph 98 above shall continue until the +Independent Consultant has issued the Independent Consultant Certification. +Training +111. If Crowe U.K. wishes to accept any audit engagement from any new client +described in paragraph 98, Crowe U.K. shall require each audit and attest professional who +will participate in such engagement to complete successfully: (a) a minimum of 24 hours of +PCAOB audit-related training; and (b) a minimum of 8 hours of fraud-detection training. +The audit-related training requirement will cover the topics specified in paragraph 100 +above, with no less than four hours being devoted to confirmation procedures. The audit- +related training requirement may be fulfilled by completing course(s) conducted in +accordance with the applicable governing professional boards or agencies. The fraud- +detection training requirement will include training in techniques in detecting and +responding to possible fraud in the course of public company audits by audit clients or by +employees, officers, or directors of audit clients. +Crowe U.K. Certification +112. Within sixty days from the date of completion of the undertakings, Crowe +U.K. shall certify, in writing, compliance with the undertakings set forth above (“Final +Certification of Compliance”). The Final Certification of Compliance 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 + +24 + +make reasonable requests for further evidence of compliance, and Crowe U.K. agrees to +provide such evidence. +113. The engagement letter, Report, Interim Certification of Compliance, Final +Report, Independent Consultant Certification, Final Certification of Compliance, and any +related correspondence or other documents shall be submitted to Samantha Martin, Division +of Enforcement, Securities and Exchange Commission, 801 Cherry Street., Ste. 1900, Fort +Worth, TX 76102, with a copy to the Office of Chief Counsel of the Division of +Enforcement. +114. 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 the Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondents shall cease and desist from committing or causing any violations and +any future violations of Sections 13(a), and 14(a) of the Exchange Act and Rules 14a-9 and 13a-19, +promulgated thereunder, and Rule 2-02(b)(1) of Regulation S-X. + + B. Crowe U.K. is censured. + +C. Crowe U.K. shall comply with the undertakings enumerated in paragraphs 98 to +113 of Section III above. + +D. Crowe U.K. shall pay $187,740 in disgorgement plus prejudgment interest of +$28,104, and payment is deemed satisfied by Crowe U.K.’s payment of $11,500,000 to Akazoo’s +defrauded investors pursuant to settlements approved in private litigation. + +E. The Engagement Partner and the Engagement Quality Reviewer are hereby denied +the privilege of appearing or practicing before the Commission as an accountant. + + F. After five years from the date of the Order, the Engagement Partner may request +that the Commission consider his reinstatement by submitting an application to the attention of the +Office of the Chief Accountant. + + +25 + + G. After two years from the date of the Order, the Engagement Quality Reviewer may +request that the Commission consider his reinstatement by submitting an application to the +attention of the Office of the Chief Accountant. + + H. 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, the +Engagement Partner and/or the Engagement Quality Reviewer shall submit a written statement +attesting to an undertaking to have work by the Engagement Partner and/or the Engagement +Quality Reviewer reviewed by the independent audit committee of any public company for which +the Engagement Partner and/or the Engagement Quality Reviewer work or in some other manner +acceptable to the Commission, as long as the Engagement Partner and the Engagement Quality +Reviewer 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. + + I. 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, the Engagement +Partner and/or the Engagement Quality Reviewer shall submit a statement prepared by the audit +committee(s) with which the Engagement Partner and/or the Engagement Quality Reviewer will be +associated, including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which the Engagement Partner and/or the Engagement Quality Reviewer +will be associated; + +2. A description of the Engagement Partner’s and/or the Engagement Quality +Reviewer’s role on the specific audit committee(s) with which the Engagement +Partner and/or the Engagement Quality Reviewer 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 the Engagement Partner’s and/or the +Engagement Quality Reviewer’s service on the specific audit committee; and + +5. A statement noting whether the Engagement Partner and/or the Engagement +Quality Reviewer will be able to act unilaterally on behalf of the Audit +Committee as a whole. + + +26 + + J. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, the Engagement +Partner and/or the Engagement Quality Reviewer must be associated with a public accounting firm +registered with the PCAOB, and the Engagement Partner and/or the Engagement Quality Reviewer +shall submit the following additional information: + +1. A statement from the public accounting firm (the “Firm”) with which the +Engagement Partner and/or the Engagement Quality Reviewer 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 the Engagement Partner and/or the +Engagement Quality Reviewer 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 +the Engagement Partner and/or the Engagement Quality Reviewer will not +receive appropriate supervision; and + +3. A statement from the Engagement Partner and/or the Engagement Quality +Reviewer indicating that the PCAOB has taken no disciplinary actions against +the Engagement Partner and/or the Engagement Quality Reviewer since seven +(7) years prior to the date of the Order other than for the conduct that was the +basis for the Order. + + K. In support of any application for reinstatement, the Engagement Partner and/or the +Engagement Quality Reviewer shall provide documentation showing that the Engagement Partner +and/or the Engagement Quality Reviewer are currently licensed as certified public accountants +(“CPA”), or Associate Chartered Accountants (“ACA”), or Fellow Chartered Accountants +(“FCA”) and that the Engagement Partner and/or the Engagement Quality Reviewer have resolved +all other disciplinary issues with any applicable state boards of accountancy. If the Engagement +Partner and/or the Engagement Quality Reviewer are not currently licensed as CPAs, ACAs, or +FCAs, the Engagement Partner and/or the Engagement Quality Reviewer shall provide +documentation showing that their licensure is dependent upon reinstatement by the Commission. + + L. In support of any application for reinstatement, the Engagement Partner and/or the +Engagement Quality Reviewer shall also submit a signed affidavit truthfully stating, under penalty +of perjury: + +1. That the Engagement Partner and/or the Engagement Quality Reviewer 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; + + +27 + +2. That the Engagement Partner and/or the Engagement Quality Reviewer +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 the Engagement Partner and/or the Engagement Quality Reviewer, 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 the Engagement Partner and/or the Engagement Quality Reviewer, 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. + + +28 + +5. That the Engagement Partner’s and/or the Engagement Quality Reviewer’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; and + +6. That the Engagement Partner and/or the Engagement Quality Reviewer 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. + + M. The Engagement Partner and/or the Engagement Quality Reviewer shall also +provide a detailed description of: + +1. The Engagement Partner’s and/or the Engagement Quality Reviewer’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 the Engagement +Partner and/or the Engagement Quality Reviewer reported for such +work; and + +2. The Engagement Partner’s and/or the Engagement Quality Reviewer’s plans for +any future appearance or practice before the Commission. + + N. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + + O. If the Engagement Partner and/or the Engagement Quality Reviewer provide the +documentation and attestations required in this Order and the Commission (1) discovers no +contrary information therein, and (2) determines that the Engagement Partner and/or the +Engagement Quality Reviewer truthfully and accurately attested to each of the items required in +the Engagement Partner’s and/or the Engagement Quality Reviewer’s affidavit, and the +Commission discovers no information, including under Paragraph N, indicating that the +Engagement Partner and/or the Engagement Quality Reviewer have violated a federal securities +law, rule or regulation or rule of professional conduct applicable to the Engagement Partner and/or +the Engagement Quality Reviewer since entry of the Order (other than by conduct underlying the +Engagement Partner’s and/or the Engagement Quality Reviewer’s original Rule 102(e) +suspension), then, unless the Commission determines that reinstatement would not be in the public + +29 + +interest, the Commission shall reinstate the Engagement Partner and/or the Engagement Quality +Reviewer for cause shown. + + P. If the Engagement Partner and/or the Engagement Quality Reviewer 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 N, the burden shall +be on the Engagement Partner and/or the Engagement Quality Reviewer to provide an explanation +as to the facts and circumstances pertaining to the matter setting forth why the Engagement Partner +and/or the Engagement Quality Reviewer believe cause for reinstatement nonetheless exists and +reinstatement would not be contrary to the public interest. The Commission may then, in its +discretion, reinstate the Engagement Partner and/or the Engagement Quality Reviewer for cause +shown. + + Q. If the Commission declines to reinstate the Engagement Partner and/or the +Engagement Quality Reviewer pursuant to Paragraphs K and L, it may, at the Engagement +Partner’s and/or the Engagement Quality Reviewer’s request, hold a hearing to determine whether +cause has been shown to permit the Engagement Partner and/or the Engagement Quality Reviewer +to resume appearing and practicing before the Commission as an accountant. + + R. Crowe U.K. shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $750,000 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. + + S. The Engagement Partner shall, within 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 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. + + T. The Engagement Quality Reviewer shall, within 10 days of the entry of this Order, +pay a civil money penalty in the amount of $10,000 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) 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 + +30 + + +(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 +Crowe U.K. LLP, Nigel Bostock, or Matthew Stallabrass 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 Regional Director, Division of Enforcement, Securities and +Exchange Commission, 801 Cherry Street, Ste. 1900, Fort Worth, TX 76102. + +U. 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, 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. + + +31 + +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 +the Engagement Partner and the Engagement Quality Reviewer, and further, any debt for +disgorgement, prejudgment interest, civil penalty or other amounts due by the Engagement Partner +and the Engagement Quality Reviewer 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 Engagement Partner and the Engagement Quality Reviewer 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-4440.txt b/raw/aaer/2023/AAER-4440.txt new file mode 100644 index 0000000000000000000000000000000000000000..5ee0fbd7739e36427aa84bf5adabfaefce98c791 --- /dev/null +++ b/raw/aaer/2023/AAER-4440.txt @@ -0,0 +1,836 @@ + 1 + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11222 / August 15, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98131 / August 15, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4440 / August 15, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21561 + +In the Matter of + +Ault Alliance, Inc. (f/k/a BitNile +Holdings, Inc., Ault Global +Holdings, Inc., DPW Holdings, +Inc., and Digital Power +Corporation); Milton Charles +(“Todd”) Ault III; and William +B. Horne, CPA; + +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 Ault Alliance, Inc. (f/k/a BitNile Holdings, Inc., Ault Global Holdings, Inc., DPW +Holdings, Inc., and Digital Power Corporation) (“AAI”), Milton Charles (“Todd”) Ault III +(“Ault”), and William B. Horne (“Horne”) (collectively, “Respondents”). + +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 + 2 +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. + +III. + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: +SUMMARY +1. This matter involves material misstatements regarding certain businesses of AAI, +the failure to disclose interests in related person transactions, improper recording of purported +consulting services, erroneous accounting of investments, and the failure to maintain accounting +and disclosure controls. +2. In 2018 and 2019, AAI, a holding company based in Las Vegas, Nevada, and its +Executive Chairman and then-Chief Executive Officer (“CEO”), Ault, made materially false and +misleading statements and omissions concerning the performance of a $50 million purchase order +that AAI received from a related party, as well as the performance of AAI’s new crypto asset +mining business. AAI and Ault made these misstatements, which operated as a fraud on investors, +in registration statements, various periodic and other reports filed with the Commission, in investor +presentations, and in tweets by Ault. +3. In its Forms 10-K and proxy statements for fiscal years 2016 to 2021, AAI failed to +disclose material interests that Ault and then-Chief Financial Officer (“CFO”) Horne had in loans +that AAI made to a related person, as required by Item 404 of Regulation S-K. Separately, in +2019, through Ault and Horne, AAI improperly recorded $75,000 paid to an individual as being for +consulting services which, in fact, were not provided to AAI and benefitted Ault in extinguishing a +personal debt owed to the individual. +4. In addition, from 2017 through the present, AAI has had reporting, books and +records, and internal accounting control failures, and has failed to maintain Disclosure Controls +and Procedures (“DCP”) and Internal Control over Financial Reporting (“ICFR”) due to repeated +material weaknesses that AAI has repeatedly disclosed. AAI failed to maintain DCP and ICFR for +22 consecutive reporting periods from the period ended June 30, 2017, through the period ended +September 30, 2022. These deficiencies continue through today and have not been remedied. AAI +announced one restatement in 2017 resulting from its material weaknesses. And during its fiscal +years ended December 31, 2018 through 2021, AAI improperly accounted for its investments in +warrants of a related party. On April 14, 2023, AAI filed amended periodic reports to restate for +this improper warrant accounting. +5. Based on the foregoing and the conduct described below, Respondents committed +the following violations. AAI violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, +Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a), and Exchange Act Rules 12b-20, + +1 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 +13a-1, 13a-11, 13a-13, 13a-15(a), 14a-3, and 14a-9. Ault violated and caused AAI’s violations of +Securities Act Sections 17(a)(2) and 17(a)(3), and Exchange Act Section 14(a) and Exchange Act +Rules 14a-3 and 14a-9; violated Exchange Act Rule 13b2-1; and caused AAI’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, 13a-13. Horne violated Exchange Act Rule 13b2-1 and caused AAI’s violations of +Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). +RESPONDENTS AND RELEVANT ENTITY +6. Ault Alliance, Inc. is a Delaware corporation whose principal place of business is +in Las Vegas, Nevada. AAI is a diversified holding company which, since 2016, has engaged in +operating businesses that include, among others, power products and systems, digital asset mining +of Bitcoin, the manufacture and sale of textile technology machinery, and commercial lending. +During the relevant period, AAI has been known by several different names: AAI (since January +3, 2023); BitNile Holdings, Inc. (from December 13, 2021 to January 2, 2023); Ault Global +Holdings, Inc. (January 19, 2021 to December 12, 2021); DPW Holdings, Inc. (September 19, +2017 to January 18, 2021); and Digital Power Corporation (prior to September 19, 2017). AAI’s +stock is registered under Section 12(b) of the Exchange Act, and its common stock trades on +NYSE American. AAI has a December 31 fiscal year end. AAI offered and sold securities during +the relevant period. +7. Milton Charles (“Todd”) Ault III, age 52, resides in Las Vegas, Nevada. In late +2016, through an entity he controlled, Ault became AAI’s largest shareholder and obtained the +right to appoint a majority of directors to AAI’s Board of Directors. On March 16, 2017, Ault +became Executive Chairman of AAI’s Board of Directors, a position he currently holds. In +December 2017, Ault became AAI’s CEO, a position he held until January 2021. Ault was +suspended by the Financial Industry Regulatory Authority in May 2012 for two years for +unauthorized trading in customer accounts and failing to deliver securities. +8. William B. Horne, age 53, resides in Sammamish, Washington. Horne has served +as AAI's CEO since January 2021. He was AAI's CFO from January 2018 to August 2020 and +AAI's President from August 2020 to January 2021. Horne has served as a director of AAI’s +Board of Directors since October 2016. Horne was licensed as a CPA in the state of Washington in +1996. His license lapsed in 2017. +9. Avalanche International Corp. (“Avalanche” or “MTIX”), a holding company, +is a Nevada corporation with its principal place of business in Las Vegas, Nevada, which AAI has +repeatedly disclosed as a “related party” since 2017. In 2014, Ault acquired control over Avalanche +and has served as its Chairman since then. In June 2022, AAI acquired over 90% of Avalanche’s +stock and began consolidating its financial results. Horne has been a director and CFO of +Avalanche since June 2016. Avalanche’s common stock was publicly traded until September +2021. Avalanche has not filed any periodic reports with the Commission since its third fiscal +quarter ended August 31, 2016. At Ault’s urging, AAI invested over $17 million in Avalanche +from 2016 to 2021 for Avalanche to acquire textile treatment technology from MTIX Ltd. and to +contract with AAI to manufacture textile treatment machines. Avalanche does business under the +name MTIX International. + + 4 +FACTS +Misstatements Concerning New Business Operations2 +10. Under Ault’s leadership, starting in 2017, AAI expanded its core power supply +business to include the manufacture of textile treatment systems and “cryptocurrency mining.” As +these operations grew, AAI, through Ault, made materially false and misleading statements and +omissions about the businesses and their financial prospects. +Misstatements Concerning $50 million purchase order with MTIX +11. In late 2016, after Ault became controlling shareholder of AAI, Ault obtained +approval from AAI’s Board to loan Avalanche up to $1.5 million to acquire MTIX Ltd., an early- +stage, UK-based company that had a textile treatment technology system which had not been +commercially proven. Avalanche completed the acquisition of MTIX the following year. +12. On March 15, 2017, AAI issued a press release announcing that it had received a +$50 million purchase order from MTIX Ltd. to manufacture, install and service textile treatment +systems using MTIX’s technology. The purchase order called for the manufacture and installation +of 25 machines over approximately two and a half years: 2 machines by the end of 2017; 6 more +machines by August 2018; and the remaining 17 machines by August 2019. The purchase order +was material to AAI as it stood to double AAI’s annual revenue, which had averaged about $8 +million during the prior three fiscal years. AAI’s stock price increased by over 175% immediately +after the press release. +13. AAI and Ault made a series of misrepresentations about the MTIX purchase order +over the next two years. +14. In 2018, AAI and Ault misrepresented to investors that AAI had completed and +delivered the first machine under the MTIX contract. On May 21, 2018, Ault led an investor +presentation concerning AAI’s financial review for the quarter ended March 31, 2018. In the +materials used for the presentation, which were furnished as an exhibit to a Form 8-K signed by +Ault, Ault represented that AAI had delivered its first machine under the MTIX purchase order. +Ault repeated this assertion in a June 6, 2018 investor presentation, which was also furnished as an +exhibit to a Form 8-K signed by Ault, and added that the other machines were “on track to be +delivered timely.” In an earnings call on August 15, 2018, Ault represented that the first machine +had been “completed.” + +2 AAI offered and sold securities through registered offerings during the period of these +misstatements (2018-2019). These included, among others, raising over $29 million through At- +The-Market (ATM) offerings of its common stock under prospectus supplements to registration +statements offering up to $80 million: (1) raised $18 million under a 2/27/2018 424B5 +Prospectus Supplement offering up to $50 million, which was terminated 9/23/2018; (2) raised +$6 million under a 10/16/2018 424B5 Prospectus Supplement offering up to $25 million, which +was discontinued on 4/1/2019; and (3) raised $5.5 million through 12/31/2019 under a 8/6/2019 +424B5 Prospectus Supplement offering up to $5.5 million, which incorporated by reference +AAI’s fiscal 2018 Form 10-K. + 5 +15. These statements were not true, as Ault knew or should have known. By early +2018, the first machine was largely complete and had been delivered to an AAI subcontractor for +finalization. However, AAI was experiencing significant delays on the project primarily due to its +failure to pay subcontractors to manufacture the machines, including significant payments to +finalize completion of the first machine and to move forward manufacturing another machine. +Though certain records reflect that Ault believed that funding had been paid for completion of the +first machine, emails and texts prior to Ault’s August 15, 2018 earnings call above, which included +Ault, showed that AAI was experiencing delays completing the machines, including finalizing the +first machine, due to lack of funds to pay certain vendors and subcontractors. In addition, although +Ault claimed he received conflicting information from Avalanche and AAI executives whether +delivery to the last subcontractor for finalization constituted delivery under the contract, the +contract required delivery of the machines to MTIX or an MTIX customer, not an AAI +subcontractor. In the months after Ault’s August 15, 2018 earnings call, the delivery date of the +first machine continued to slip and funding delays continued. Texts between Ault and the CEO of +Avalanche in September 2018 estimated a revised delivery date for the first machine in April 2019 +and identified numerous items remaining before delivery could occur. Emails involving Ault from +October 2018 to April 2019 reflect that the finalization of the first machine was significantly +behind schedule and had not yet been completed. +16. Despite these delays and financial setbacks, in numerous AAI filings made with the +Commission from May 21, 2018 through May 20, 2019, most of which were signed by Ault, AAI +expressed the belief that the MTIX purchase order would be a source of revenue and “generate +significant cash flows.”3 AAI omitted any information regarding its inability to perform under the +purchase order, including that it was unable to pay AAI vendors to complete the manufacture of +machines. +17. It was not until December 27, 2019, in a Form S-3/A signed by Ault and filed just +weeks after AAI received an investigative subpoena from the Commission staff, that AAI +disclosed for the first time that it had “not yet delivered a MLSE plasma-laser system to MTIX.”. +According to an April 2022 MTIX press release, the first delivery of an MLSE machine by MTIX +to a customer occurred in November 2021 and was expected to be installed during 2022. +Misstatements Concerning AAI’s Crypto Mining Revenue and Operations +18. In January 2018, AAI announced the formation of a new subsidiary to operate a +“cryptocurrency” business that would engage in the mining of crypto assets. Over the course of +that year, AAI and Ault made misleading and false public statements that made the crypto business +appear more successful than it was. +19. In May and June 2018, AAI and Ault made material misstatements regarding the +company’s crypto mining revenues, which were principally generated from mining Bitcoin. On +May 9, 2018 and May 12, 2018, Ault stated on Twitter that AAI was mining over $400,000 a +month in Bitcoin. On May 21, 2018, AAI issued a press release representing that it was “currently + +3 See Form 10-Q (5/21/2018); Form S-3 (6/11/2018); Form 10-Q (8/20/2018); Prospectus +(9/14/2018); Form S-3/A (11/1/2018); Proxy Statement (11/19/2018); Form S-3 (12/7/2018); +Prospectuses (filed from 2/12/2019 through 4/2/2019); Form 10-K for fiscal year 2018 +(4/16/2019); Form 1-A (5/13/2019); Form 10-Q (5/20/2018). + 6 +mining $420,000 to $460,000 a month of cryptocurrencies or between $1,200,000 to $1,400,000 in +value per quarter.” A June 6, 2018 AAI investor presentation by Ault, which was also filed by +AAI as an attachment to a Form 8-K, represented that AAI was “currently mining between +$450,000 to $500,000 in [Bitcoin] monthly.” +20. Ault knew or should have known that these statements significantly overstated the +value of crypto assets that AAI was mining. For example, on May 12, 2018, the total value from +AAI's crypto mining had reached $367,509, which represented all the mining it had done since +January 2018—nowhere close to $400,000 per month stated in Ault’s tweet. Even after AAI +increased its number of active mining machines on May 16 to over 1700, AAI mined significantly +less Bitcoin than any of its disclosed monthly mining amounts. Though the current mining +amounts in the above misstatements were extrapolations from the information Ault was receiving +from individuals more closely involved in the crypto mining operation, crypto executives regularly +updated Ault orally with information about the number of active miners and the daily amount of +Bitcoin being mined. Ault at times received weekly trend reports or emails showing the actual +amount of daily crypto mined over the past month or longer, the market value of Bitcoin, and the +total value of Bitcoin in AAI's digital wallet. Ault also knew that the fundamentals for mining +digital assets were getting worse as the quarter progressed: the price of Bitcoin steadily decreased +after its peak in early May, while the difficulty to mine Bitcoin increased. Despite this, AAI’s +“current” mining revenues according to Ault and AAI continued to improve throughout the +quarter, even as its actual mining revenue declined, as ultimately disclosed in AAI’s second quarter +Form 10-Q, filed on August 20, 2018, which reported $719,000 in crypto mining revenues for the +three months ended June 30, 2018. +21. In addition, Ault and AAI misrepresented the launch of a digital asset miner that +AAI touted as a new ASIC Bitcoin miner designed to operate faster and more efficiently. In +investor presentations on September 5, 2018, and October 2, 2018, both of which were attached to +Forms 8-K furnished with the Commission, Ault represented that AAI had developed a +“proprietary” crypto miner “in collaboration with Samsung” that had been introduced for sale in +September 2018. However, Ault was aware that AAI had not collaborated with Samsung to +develop a miner. Instead, AAI had a memorandum of understanding to purchase miners from +another party and sell them as AAI miners under a white-label agreement. Further, at the time of +these statements, AAI did not have a white-labelled miner available for sale. +22. These misstatements were material because investing in the crypto space was +material to AAI’s business plan in 2018 and was part of the company’s publicly stated long-term +investment strategy. The mining amounts reflected in AAI’s and Ault’s statements also grossly +overstated “current” monthly and quarterly revenues. Even the lowest claimed current quarterly +mining revenue of $1.2 million reflected in those statements overstated actual revenue for the +quarter of $719,000 by 40%. +AAI’s Failure to Properly Disclose Related Persons Ault and Horne’s Interests +in AAI’s Investment in Avalanche + +23. At Ault’s urging and with the approval of AAI’s board of directors, including +Horne, from 2016 through 2021, AAI loaned approximately $17.8 million to Avalanche. During +this period, Avalanche had little to no revenues, insufficient funds to pay its expenses, and relied +on AAI’s loans for its operating cash flows. Ault, in addition to his controlling interests in + 7 +Avalanche, served as the Chairman of Avalanche’s board of directors, and Horne, starting in June +2016, served as the CFO of Avalanche and an uncompensated director. +24. Horne and Ault – related persons to AAI due to their senior positions at AAI – had +an interest in the loans from Avalanche. Specifically, as a result of these loans, Avalanche was able +to pay Horne’s salary as CFO, to pay fees to Ault for serving as Chairman, to reimburse certain +expenses to Horne and Ault, and to reimburse loans Ault had made to Avalanche through a +company he controlled. In total during this period, Avalanche paid over $1.5 million of the loan +proceeds from AAI to Ault and his company, and paid Horne over $300,000. +25. AAI failed to disclose Ault and Horne’s interest in these loans in its annual reports +on Forms 10-K or its proxy statements, as required. Form 10-K and Schedule 14A (to the extent the +proposed action to be taken is the election of directors) require registrants to disclose, pursuant to Item +404 of Regulation S-K, any current or proposed transaction “in which the registrant was or is to be a +participant and the amount involved exceeds $120,000, and in which any related person had or will +have a direct or indirect material interest.” A related person under Item 404 includes a director or +executive officer of the registrant, such as Ault and Horne. Item 404 requires disclosure of, among +other information, the name of the related person; the related person’s interest in the transaction; +the approximate dollar amount of the transaction; the approximate dollar value of the related +person’s interest in the transaction; and any other material information about the transaction. +26. AAI’s Forms 10-K for the years ended December 31, 2016 through 2021, and its +Schedules 14A soliciting elections of directors filed from 2017 through 2022, disclosed the +amounts AAI loaned to Avalanche, which well exceeded $120,000 in each year. AAI also +disclosed Ault and Horne’s senior positions with Avalanche, and Ault’s ownership interest in +Avalanche. However, AAI did not disclose in these filings the approximate value of Ault and +Horne’s interest in those loans, which enabled Avalanche to pay Horne’s salary and Ault’s Board +fees, and the loan and expense reimbursements noted above. Specifically, AAI failed to disclose +that Ault received the following total related person payments: $179,550 in 2016; $750,350 in +2017; $279,137 in 2018; $130,894 in 2019; $251,425 in 2020; and $58,333 in 2021. Similarly, +AAI failed to disclose that Horne received the following total related person payments: $10,671 in +2016; $100,404 in 2017; $57,911 in 2018; $46,166 in 2019; $44,647 in 2020; and $54,727 in 2021. +AAI, Through Ault and Horne, Inaccurately Recorded $75,000 as Consulting Fees in AAI’s +Books and Records, which Benefitted Ault in Extinguishing a Personal Debt4 + +27. In 2018, Ault wanted AAI to purchase shares that an individual (“Individual”) +owned in a private company (“M Corp”) in which AAI had acquired a controlling interest. The +Individual wanted to be paid his cost basis for his shares, $100,000, and Ault wanted to pay the +Individual that amount, in part because the Individual was an important client of a broker who +provided services to AAI and who had recommended the share purchase. Drafts of a share +purchase agreement were exchanged between the parties but never finalized. + + +4 AAI offered and sold securities through registered offerings during August 2019 and through +December 31, 2019. See footnote 2, above. See also 10/2/2020 424B5 Prospectus Supplement +and subsequent amendment offering up to $40 million, which incorporated AAI’s fiscal 2019 +Form 10-K and raised $39.9 million through 12/31/2020. + 8 +28. At the same time, Ault was in an ongoing dispute with the Individual over +outstanding amounts owed to the Individual in connection with a loan the Individual made in 2015 +to a political action committee (“PAC”) of which Ault was the Chairman and for which Ault had +pledged securities for repayment. + +29. On or around July 25, 2018, AAI made a payment of $25,000 to the Individual to +purchase his M Corp shares. The Individual thereafter signed a draft purchase agreement, which +stated that AAI would pay $100,000 for the Individual’s shares. AAI never signed the purchase +agreement. In emails or texts to Ault over the following year, the Individual complained that he +had not received the full $100,000 for his M Corp shares. + +30. Almost a year later, on or around May 7, 2019, AAI paid another $10,000 to the +Individual, which the Individual understood was a further payment towards the purchase of the +Individual’s shares. + +31. Two months later, in July 2019, AAI provided the Individual two agreements, +both signed by Ault. One agreement reflected that AAI paid $25,000 for the 16,677 shares of M +Corp the Individual owned, contrary to the amount the Individual expected to be paid. Another +agreement, for consulting services, which the parties had been discussing separately but never +finalized, reflected that the $10,000 AAI paid to the Individual on May 7, 2019, was an initial +payment for those services—again, contrary to the Individual’s understanding that he was being +paid for his M Corp shares. + +32. By August 2019, despite numerous requests from the Individual, AAI had not paid +$100,000 for his M Corp shares and Ault had not paid the amounts the Individual believed he +was owed from the PAC loan, which by then exceeded $100,000. On August 21, 2019, the +Individual sent a text message to Ault, stating: “One time offer. $65k wired to my account +tomorrow. [PAC] obligation with your personal guarantee will be considered settled.” Ault +responded, “I think I oh (sic) more,” to which the Individual replied, “65k by tomorrow end of +day, and we’re done. Needs to be considered [M Corp] purchase for enhanced tax treatment.” +Two days later, on August 23, 2019, AAI wired $65,000 to the Individual. As noted above, Ault +had pledged securities to guarantee repayment of the Individual’s loan to the PAC. + +33. AAI’s books and records falsely reflected that the $10,000 and $65,000 +payments to the Individual (for a total of $75,000) were paid for consulting services. In fact, the +Individual had provided minimal or no consulting services to AAI. +34. Horne, AAI's then-CFO, approved all three payments to the Individual and +recorded the descriptions of the payments in AAI's books and records. Horne was not involved in +the communications between Ault and the Individual. Horne was aware that AAI was acquiring +the Individual’s M Corp shares and that Ault wanted to pay the Individual $100,000 for those +shares. However, Horne valued the shares at $25,000 based on previous prices AAI had paid +other shareholders for M Corp stock, and he did not want to pay an inflated amount for the +shares so as not to disadvantage AAI in future negotiations with other M Corp shareholders. +Horne chose to record the two payments totaling $75,000 as consulting services. Horne +understood from Ault that Ault and the Individual had been discussing a consulting arrangement +and had exchanged draft consulting agreements. However, Horne did not know if the $75,000 + 9 +was for actual consulting services. And Horne knew that the Individual had not submitted +invoices to AAI for consulting services. + +35. Ault was aware of and approved of the payments to the Individual. Although +Horne was responsible for making the payments and recording them in AAI's books and records, +Ault knew or should have known that $75,000 was recorded for consulting services, which was +false and grossly overstated any consulting services the Individual arguably provided. As noted +above, Ault signed agreements stating that AAI had purchased the Individual’s M Corp shares +for $25,000 and that the $10,000 paid to the Individual was an initial payment for purported +consulting services. Ault should have known that Horne inaccurately recorded the remaining +$65,000 as consulting services in the company’s books. As a result of the two payments for +unsupported consulting work, AAI paid $75,000 for services it did not receive. Instead, the +payments benefitted Ault because the Individual received the cost basis for his M Corp shares +and no longer held Ault personally responsible for the disputed PAC debt. +AAI's Erroneous Accounting and Failure to Maintain +Disclosure Controls and Procedures and Internal Control over Financial Reporting + +AAI’s Improper Accounting of Avalanche Warrants +36. As part of AAI’s loans to Avalanche, starting in September 2017, Avalanche issued +warrants to purchase shares of Avalanche common stock. As of December 31, 2021, Avalanche +had issued AAI warrants to purchase 35.6 million shares of Avalanche stock. AAI improperly +accounted for these warrants during the fiscal years 2018 through 2021 by recording the changes in +fair value of the warrants in other comprehensive income instead of in net income. +37. AAI failed to apply the Financial Accounting Standards Board Accounting +Standards Codification (“ASC”) Topic 321, Investments – Equity Securities (“ASC 321”), which +was issued under Accounting Standards Update No. 2016-01, to the purchased warrants in +Avalanche. ASC 321 became effective for fiscal years beginning after December 15, 2017. ASC +321 eliminated the ability to record changes in the fair value of certain investments in equity +securities within other comprehensive income, and instead required such changes to be recorded +immediately in net income/loss. Though ASC 321 became effective for AAI's fiscal year 2018 and +AAI applied it to equity investments in a private company in its Form 10-K for the year ended +December 31, 2018, it did not apply this standard to its Avalanche warrants. +38. In addition, beginning with AAI's fiscal year 2020, AAI began improperly +classifying the Avalanche warrants as debt securities instead of equity securities. AAI applied +ASC Topic 320, Investments—Debt and Equity Securities, which permits changes in fair value of +debt securities to be recorded in other comprehensive income rather than net income. Even when +AAI wrote off the value of these warrants at the end of fiscal year 2021, AAI’s Form 10-K for +fiscal 2021, filed on April 15, 2022, improperly characterized the write-off as “impairment of debt +securities”. +39. Though AAI’s periodic reports disclosed the amounts of changes in fair value of the +Avalanche warrants, they improperly recorded and disclosed the accounting for these changes. +AAI’s failure to record the change in fair value as part of net income materially under- or + 10 +overstated its reported net income or loss in its Forms 10-K and 10-Q during fiscal years 2018 +through 2021. Examples of these impacts are in the following table (in US dollars): + + +FY 2018 FY 2019 FY 2020 Q1 2021 Q2 2021 Q3 2021 FY 2021 +Unrealized gain +(loss) on warrants + +(8,027,746) + + (1,950,168) + +3,312,094 + +2,969,170 + +(5,893,000) + +(4,849,000) + +(2,683,000) +Reported Net +Income (Loss) + +(32,982,201) + +(32,945,828) + +(32,728,629) + +3,077,967 + +41,133,000 + +(42,774,000) + +(23,971,000) +Net income (loss) if +included + +(41,009,947) + +(34,895,996) + +(29,416,535) + +6,047,137 + +35,240,000 + +(47,623,000) + +(26,654,000) +% Impact on Net +Income (Loss) + +24.34% + +5.92% + +-10.12% + +96.47% + +-14.33% + +11.34% + +11.19% + +In addition, AAI improperly recorded and disclosed changes in fair value in its accounting for the +Avalanche warrants in the balance sheets and the statements of changes in stockholders’ equity in +its Forms 10-K and 10-Q during fiscal years 2018 through 2021, as well as in related financial +statement footnotes. + +40. The impacts of this erroneous accounting continued to be reported in AAI’s Forms +10-Q for the periods ended March 31, 2022, June 30, 2022, and September 30, 2022. +41. On April 14, 2023, AAI restated its financial statements to correct for its erroneous +warrant accounting by filing an amended Form 10-K for the year ended December 31, 2021, and +amended Forms 10-Q for the periods ended March 31, 2022, June 30, 2022, and September 30, +2022. +AAI’s Material Weaknesses in DCP and ICFR +42. AAI has disclosed several material weaknesses in each of its Forms 10-K and 10-Q +for over six fiscal years, from 2017 to 2022, continuing through its most recent Form 10-Q for the +period ended March 31, 2023. Although AAI disclosed that it remediated two material weaknesses, +one of those recurred and it and the other material weaknesses have not been remediated. Over six +years, AAI has repeatedly concluded and disclosed that its DCP and ICFR were not effective due +to these material weaknesses. +43. In its Form 10-Q/A for the period ended June 30, 2017, AAI disclosed that it lacked +sufficient internal accounting resources regarding required disclosures and lacked “segregation of +duties to ensure adequate review of financial statement preparation.” AAI disclosed that it filed +this amended 10-Q to restate the misclassification of certain payments that was caused by these +material weaknesses in its ICFR and resulting ineffective DCP. In its Form 10-K for the period +ended December 31, 2017, with respect to the first material weakness, AAI stated, “We do not +have sufficient resources in our accounting function, which restricts our ability to gather, analyze +and properly review information related to financial reporting in a timely manner.” The Form 10- +K also disclosed the “failure to have segregation of duties” and identified another material +weakness, stating, “We have inadequate controls to ensure that information necessary to properly +record transactions is adequately communicated on a timely basis from non-financial personnel to +those responsible for financial reporting.” As a result of these material weaknesses, AAI concluded +that its DCP and ICFR were ineffective. + 11 +44. AAI repeated two of these material weaknesses—insufficient accounting resources +and lack of segregation of duties—in each of its subsequent Forms 10-K and 10-Q through the +present, as identified in its most recent Form 10-Q for the period ended March 31, 2023, for a total +of 24 reporting periods. AAI also repeated the other material weakness—non-timely +communication from non-financial personnel to financial reporting personnel—for over three +years. +45. In its Forms 10-K for the years ended December 31, 2018 and 2019, AAI added an +additional material weakness regarding its failure to “design or maintain effective general +information technology (‘IT’) controls over certain information systems that are relevant to the +mitigation of the risk pertaining to the misappropriation of assets.” These included “[p]rogram +change management controls” for certain “financial IT applications” and “digital currency” mining +equipment, hardware wallets, and underlying accounting records, as well as “physical security +controls” related to “digital currency” mining equipment and hardware wallets. +46. AAI took certain remedial steps concerning its material weaknesses starting +particularly in 2018. These steps included hiring Horne as CFO in January 2018; hiring a Chief +Accounting Officer (“CAO”) in September 2018; hiring a Senior VP of Finance in January 2019; +and hiring a General Counsel in May 2019, along with hiring three other accounting, finance, and +legal employees. In addition, in December 2020, the company hired a consultant to review +management’s assessment of compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and +to identify internal control process improvements. In January 2021, the company hired a Director +of Reporting. +47. In its fiscal year 2020 Form 10-K, AAI reported that it had remediated two of its +material weaknesses—the inadequate communication from non-financial personnel and the IT +controls, noted above. However, over the next two years, AAI reported a similar and expanded +financial IT-related material weakness, including controls related to revenue recognition and its +crypto assets. Specifically in its fiscal year 2021 Form 10-K, AAI stated, “Our primary user access +controls (i.e. provisioning, de-provisioning, privileged access and user access reviews) to ensure +appropriate authorization and segregation of duties that would adequately restrict user and +privileged access to the financially relevant systems and data to appropriate personnel were not +designed and/or implemented effectively. We did not design and/or implement sufficient controls +for program change management to certain financially relevant systems affecting our processes.” +In its fiscal year 2022 Form 10-K, AAI further expanded this material weakness to its crypto assets +and revenue recognition, stating: “The Company did not design and/or implement user access +controls to ensure appropriate segregation of duties or program change management controls for +certain financially relevant systems impacting the Company’s processes around revenue +recognition and digital assets to ensure that IT program and data changes affecting the Company’s +(i) financial IT applications, (ii) digital currency mining equipment, and (iii) underlying accounting +records, are identified, tested, authorized and implemented appropriately to validate that data +produced by its relevant IT system(s) were complete and accurate. Automated process-level +controls and manual controls that are dependent upon the information derived from such +financially relevant systems were also determined to be ineffective as a result of such deficiency. +In addition, the Company has not effectively designed a manual key control to detect material +misstatements in revenue.” + 12 +48. In addition, in its fiscal year 2020, 2021 and 2022 Forms 10-K, AAI expanded its +first material weakness to state that its insufficient accounting resources also restricted its ability to +apply “complex accounting principles relating to consolidation accounting, fair value estimates and +analysis of financial instruments for proper classification in the consolidated financial statements,” +in a timely manner for financial reporting. The company applies consolidation accounting and fair +value estimates to its investments in various related parties, including Avalanche. +49. Despite AAI's remedial actions and other planned remedial actions, the company +continues to report most of the same material weaknesses it originally identified six years ago, +some of which have expanded, and has repeatedly concluded since 2017 that its DCP and ICFR are +ineffective due to its disclosed material weaknesses. +VIOLATIONS5 +Violations by AAI +50. As a result of the conduct described above, AAI 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 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. +51. In addition, AAI violated Section 14(a) of the Exchange Act and Rule 14a-3 +thereunder, which, with respect to issuers with securities registered pursuant to Section 12 of the +Exchange Act, prohibit soliciting proxies without furnishing proxy statements containing the +information specified in Schedule 14A. AAI also violated Rule 14a-9 thereunder, which +prohibits the use of proxy statements containing materially false or misleading statements or +materially misleading omissions necessary to make statements made not misleading. + +52. In addition, AAI violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a- +11, 13a-13 and 12b-20 thereunder, which require every issuer with securities registered pursuant +to Section 12 of the Exchange Act, to file with the Commission annual, quarterly, and current +reports containing such information as the Commission’s rules may require and 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. +53. In addition, AAI violated Exchange Act Rule 13a-15(a), which requires issuers +required to file reports pursuant to Section 13(a) or 15(d) to maintain disclosure controls and +procedures as defined in Exchange Act Rule 13a-15(e) and to maintain internal control over +financial reporting as defined in Exchange Act Rule 13a-15(f). + +5 The violations herein do not require a showing of scienter. See, e.g., Aaron v. S.E.C., 446 U.S. +680, 701-02 (1980); S.E.C. v. Hurgin, 484 F. Supp. 3d 98, 109 (S.D.N.Y. 2020); S.E.C. v. Wills, +472 F. Supp. 1250, 1268 (D.D.C. 1978); Ponce v. S.E.C., 345 F.3d 722, 737 n.10 (9th Cir. 2003); +S.E.C. v. World-Wide Coin Investments, 567 F. Supp. 724, 749 (N.D. Ga. 1983). + 13 +54. In addition, AAI 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. +55. In addition, AAI 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, among other things, provide reasonable assurances that, among other things, transactions are +recorded as necessary to permit preparation of financial statements in accordance with generally +accepted accounting principles. +Violations by Ault +56. As a result of the conduct described above, Ault violated and was a cause of AAI’s +violations of Securities Act Sections 17(a)(2) and 17(a)(3). +57. In addition, Ault violated and was a cause of AAI’s violations of Exchange Act +Section 14(a) and Exchange Act Rules 14a-3 and 14a-9. +58. In addition, Ault was a cause of AAI’s violations of Exchange Act Section 13(a) +and Exchange Act Rules 13a-1, 13a-11, 13a-13, and 12b-20. +59. In addition, Ault was a cause of AAI’s violations of Exchange Act Section +13(b)(2)(A) and Section 13(b)(2)(B). +60. In addition, Ault violated Exchange Act Rule 13b2-1, which prohibits any person +from directly or indirectly falsifying any books and records subject to Section 13(b)(2)(A) of the +Exchange Act. +Violations by Horne +61. As a result of the conduct described above, Horne violated Exchange Act Rule +13b2-1 and was a cause of AAI’s violations of Exchange Act Sections 13(b)(2)(A) and +13(b)(2)(B). +DISGORGEMENT BY AULT +62. The disgorgement and prejudgment interest ordered in paragraph IV.F is consistent +with equitable principles and does not exceed Respondent’s net profits from its 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.F shall be +transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the Exchange +Act. +REMEDIAL EFFORTS BY AAI + +63. In determining to accept the Offer of AAI, the Commission considered AAI’s +remedial act of restating its financial statements to correct its erroneous accounting for the changes + 14 +in fair value of the warrants it held in related party Avalanche. + +UNDERTAKINGS BY AAI + +Respondent AAI undertakes to: + +Independent Consultant + +64. Retain, within 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 +conduct a comprehensive review and evaluation of the adequacy of Respondent’s ICFR and +DCP, and to provide recommendations for improvements as may be needed to ensure +Respondent’s compliance with ICFR and DCP requirements. This review and evaluation shall also +include an assessment of Respondent’s policies and procedures regarding public disclosures; +policies and procedures involving the approval and recording of current and historic transactions +with related parties insofar as they may affect ongoing financial reporting in Respondent’s +current periodic and other reports; and consolidation accounting and fair value estimates, +including concerning related party transactions. + +65. Respondent shall provide, within 45 days of the issuance of this Order, a copy of +the engagement letter detailing the Consultant’s responsibilities to the Commission staff. + +66. Respondent shall require the Consultant to complete its review and evaluation, +and to make its recommendations in a written report (“Report”), within six (6) months of entry of +this Order. + +67. Respondent shall require the Consultant to issue the Report simultaneously to +Respondent and the Commission staff. The Report shall include a description of the Consultant’s +review and evaluation, the conclusions reached, and the Consultant’s recommendations for +changes or improvements to Respondent’s ICFR and DCP. + +68. Respondent will adopt and implement all recommendations in the Consultant’s +Report within 180 days of the issuance of the Report. As to any recommendation that +Respondent considers to be unduly burdensome or impractical, Respondent may, within 30 days +of the issuance of the Report, submit in writing to the Consultant and the Commission staff a +proposed alternative reasonably designed to accomplish the same objectives. As to any +recommendation on which Respondent and the Consultant do not agree within 30 days +thereafter, after attempting in good faith to reach an agreement, Respondent will abide by the +determination of the Consultant. As to any such disputed recommendation, the Consultant shall +inform Respondent and the Commission staff of the Consultant’s final determination within 60 +days after issuance of the Report. + +69. Respondent shall certify, in writing, compliance with the undertakings 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. + 15 +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 Tim England, Assistant Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., NE, Washington, DC 20549-5561, with a copy to the Office of the Chief +Counsel of the Division of Enforcement. no later than 60 days from the date of completion of the +undertakings. + +70. All written material required herein to be provided to the Commission staff shall +be provided by the Respondent and the Consultant to Melissa Hodgman, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549-5553. + +71. Respondent agrees that, for good cause shown, the Commission staff may extend +any of the dates set forth above. In the event Respondent decides to request an extension of any +such dates, it shall provide the Commission staff a written extension request that explains the +circumstances and rationale for such request. The written extension request shall be submitted to +the Commission staff no later than 30 days before the applicable deadline. + +72. Respondent shall cooperate fully with the Consultant, including providing the +Consultant with access to its files, books, records, and personnel as reasonably requested for the +above-referenced review, and obtaining the cooperation of respective employees or other persons +under Respondent’s control. + +73. Respondent shall require the Consultant to report to the Commission staff on its +activities as the Commission staff may request. + +74. Respondent and the Consultant shall agree that the Consultant is an independent +third-party and not an employee or agent of the Respondent. In addition, Respondent and the +Consultant agree that no attorney-client relationship shall be formed between them. + +75. 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. + +76. Respondent agrees, for the period of engagement and for a period of two years +from completion of the engagement, not to (i) retain the Consultant for any other professional +services outside of the services described in this Order; (ii) enter into any other professional +relationship with the Consultant, including any employment, consultant, attorney-client, auditing +or other professional relationship; or (iii) enter, without prior written consent of the Commission +staff, into any such professional relationship with any of the Consultant’s present or former +affiliates, employers, directors, officers, employees, or agents acting in their capacity as such. + +77. The reports by the Consultant will likely include confidential financial, +proprietary, competitive business or commercial information. Public disclosure of the reports + 16 +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. + +78. Respondent agrees to require that these undertakings shall be binding upon any +acquirer or successor in interest to Respondent. + +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 that: +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +AAI 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 14(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, 13a-13, 13a-15(a), +14a-3, and 14a-9. + +B. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Ault 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 14(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, +14a-3, and 14a-9. + +C. Pursuant to Section 21C of the Exchange Act, Horne 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 and Exchange Act Rule 13b2-1. + +D. AAI shall comply with the undertakings enumerated in the Undertakings section +above, at paragraphs 64-78. + +E. AAI shall, within 14 days of the entry of this Order, pay a civil money penalty in +the amount of $700,000 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. + +F. Ault shall, within 14 days of the entry of this Order, pay disgorgement of $75,000 +and prejudgment interest of $10,504, and pay a civil money penalty in the amount of $150,000, for +a total payment of $235,504, 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 +of disgorgement and prejudgment interest is not made, additional interest shall accrue pursuant to +SEC Rule of Practice 600, and if timely payment of a civil money penalty is not made, additional +interest shall accrue pursuant to 31 U.S.C. §3717. + 17 + +G. Horne shall, within 14 days of the entry of this Order, pay a civil money penalty in +the amount of $20,720 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 AAI +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 20549-5561. + +H. 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. + +V. + 18 +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 Ault and Horne, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Ault and Horne 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 Ault and Horne 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-4441.txt b/raw/aaer/2023/AAER-4441.txt new file mode 100644 index 0000000000000000000000000000000000000000..d99be3279579eec80457ca665bacb17915f1f23c --- /dev/null +++ b/raw/aaer/2023/AAER-4441.txt @@ -0,0 +1,566 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11223 / August 15, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98132 / August 15, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4441 / August 15, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21562 + + + +In the Matter of + +MALVERN BANCORP, INC. +and +JOSEPH D. GANGEMI + +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 Malvern Bancorp, Inc. (“Malvern”) and Joseph D. Gangemi (“Gangemi”) +(collectively “Respondents”). + +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 in Section V, 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. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds that: + +SUMMARY + +1. Between December 2017 and February 2021 (“Relevant Period”), Malvern +repeatedly failed to timely recognize and appropriately account for issues related to several large +commercial real estate loans resulting in material misstatements of Malvern’s financial statements +for several quarters. Gangemi was Malvern’s Chief Financial Officer and principal accounting +officer and reviewed and approved Malvern’s accounting that was improper. During the Relevant +Period, Malvern failed to properly account for troubled debt restructurings, loan impairments and +charge-offs, and impairment of other real estate owned. This led to Malvern’s restatement of its +financial statements in its amended Form 10-Q for the quarter-ended December 31, 2019 and in its +amended Form 10-K for the fiscal year-ended September 30, 2020. Throughout the Relevant +Period, Malvern’s books and records with respect to these loans were inaccurate and its related +internal accounting controls were ineffective. +2. Gangemi knew or should have known information indicating that Malvern’s +accounting for the assets was incorrect. As Chief Financial Officer and principal accounting +officer, Gangemi also failed to maintain accurate books and records and implement effective +internal controls over financial reporting. +3. As a result of this conduct, Malvern violated Section 17(a)(2) and 17(a)(3) of the +Securities Act, Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 +thereunder, and Section 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Gangemi caused +Malvern’s violations. +RESPONDENTS +4. Malvern Bancorp, Inc. (“Malvern”) was a corporation with its headquarters in Paoli, +Pennsylvania. Malvern was a bank holding company. At all relevant times, Malvern’s common +stock was registered under Section 12(b) of the Exchange Act, and traded on the NASDAQ under +ticker symbol MVLF. Malvern had a fiscal year-end of September 30. During the Relevant Period, +Malvern primarily operated through its wholly-owned subsidiary, Malvern Bank, National +Association (“Bank”). The Bank had its principal place of business in Paoli, Pennsylvania, with +other locations in Pennsylvania, New Jersey, and Florida. The principal business of Malvern, +through its Bank subsidiary, was making commercial real estate loans, residential real estate loans, +construction and development loans, commercial business loans, home equity loans and lines of +credit, and other consumer loans. On July 17, 2023, pursuant to an Agreement and Plan of Merger +By and Among First Bank, Malvern Bancorp, Inc. and Malvern Bank, National Association, +dated December 13, 2022 ("Agreement"), Malvern Bancorp, Inc. merged with and into First +Bank. Pursuant to the Agreement, First Bank is the surviving corporation and the successor to +Malvern. + + +5. Joseph D. Gangemi, age 39, is a resident of Downingtown, Pennsylvania. Gangemi +became Malvern’s Chief Financial Officer in 2015 and continued to serve in that role throughout +the relevant time. Gangemi is not a Certified Public Accountant. +FACTS +A. Accounting for Company A Loan + +a. December 31, 2017 Troubled Debt Restructuring +6. Company A was a commercial real estate company incorporated to lease a large big +box retail property it owned. Company A refinanced the property through a $7.2 million loan from +the Bank in July 2016. The loan was secured by the retail property. Company A had a national +retailer as its sole tenant. The loan to Company A was not guaranteed by the company’s principals. +7. In March 2017, Company A’s sole tenant declared bankruptcy. Company A did not +have any other sources of operational cash flow. Company A attempted to re-tenant its property +throughout 2017 and 2018 but failed to do so. After the tenant’s bankruptcy, Company A’s +principals refused to continue paying on the loan until the Bank provided payment relief through a +loan modification. In September 2017, the Bank approved a fifteen-month interest-only +modification. In December 2017, the Bank approved a reduced interest rate. Company A then paid +the delinquent loan payments to bring the loan current. +8. Despite the interest rate and payment term concessions granted by the Bank and +Company A’s financial difficulties and unwillingness to continue paying absent a modification, the +Bank did not classify the restructuring of the loan as a Troubled Debt Restructuring (“TDR”) as of +December 31, 2017.1 Gangemi reviewed the Bank’s analysis and approved the decision not to +classify the loan as a TDR. Malvern’s conclusion that the loan restructuring was not a TDR as of +December 31, 2017 was not appropriate. Malvern’s TDR analysis did not address relevant +circumstances surrounding the restructuring, including the borrower’s poor financial condition +after the loss of the property’s lease (i.e., no cash flow), the borrower’s stated intention not to +continue paying on the loan under the original loan terms, the lack of guarantors, the loan’s +delinquency, and the concessions provided by Malvern to reduce the borrower’s loan payments +due to the borrower’s lack of cash flow. These facts demonstrate that the restructuring of the loan +was a TDR as of December 31, 2017. Gangemi knew the relevant facts indicating that the loan was +a TDR and that they were not incorporated into the TDR analysis. The Bank’s analysis relied on +irrelevant and unsupported assumptions, such as the potential of new leases materializing. +9. By failing to identify this significant loan as a TDR, Malvern materially +misrepresented the true status of the loan. Gangemi caused the misstatement. + +1 As defined within Accounting Standard Codification (“ASC”) 310-40-20, a TDR is a restructuring of a debt +whereby “the creditor for economic or legal reasons related to the debtor's financial difficulties grants a concession +to the debtor that it would not otherwise consider.” + + + +b. March 31, 2018 Loan Impairment +10. Malvern reported the loan as a TDR in its March 31, 2018 Form 10-Q, after a +review of the loan by the Bank’s primary federal banking regulator. Per ASC 310-40-35-10, “[a] +loan restructured in a troubled debt restructuring is an impaired loan.” Per ASC 310-10-35-22, +when a loan is impaired, “a creditor shall measure impairment based on the present value of +expected future cash flows discounted at the loan’s effective interest rate, except that as a practical +expedient, a creditor may measure impairment based on […] the fair value of the collateral if the +loan is a collateral-dependent loan. If that practical expedient is used, Topic 820 shall apply.” The +Bank’s March 31, 2018 impairment analysis treated the loan as collateral dependent and – relying +on an April 2016 appraisal – concluded no impairment was required as of March 31, 2018. As +defined within ASC 310-10-20, a collateral-dependent loan is a “loan for which the repayment is +expected to be provided solely by the underlying collateral.” Bank policy stated the Bank should +obtain an updated appraisal for a collateral dependent loan. However, contrary to this policy, the +Bank did not obtain an updated appraisal until July 2018 and thus delayed recognizing any +impairment until then. +11. The Bank concluded no impairment was required as of March 31, 2018 based on a +brief impairment analysis, which was reviewed by Gangemi. The impairment measurement was +unreasonable and failed to accurately determine fair value because it relied on an appraisal that was +21-months old. Per ASC 820-10-35-2, 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 +measurement date.” As the April 2016 appraisal did not consider the current condition of the +property as of the measurement date of March 31, 2018, it was an inappropriate representation of +the fair value of the property as of that date. Gangemi knew these relevant facts indicating the +appraisal did not reflect the current conditions of the property. When the Bank obtained an updated +appraisal in July 2018, it provided a valuation that indicated a material loan impairment. The +Bank’s failure to timely recognize and record a loan impairment caused a material misstatement of +its financial statements for the quarter ended March 31, 2018. Gangemi caused the misstatement. +c. June 30, 2018 Loan Impairment +12. The August 2018 appraisal reported an “as is” value of $6.2 million and a +“Prospective Market Value at Stabilization” value of $7.6 million. The calculated impairment +based on the as-is value was approximately $1.3 million, and the impairment based on the as- +stabilized value was $172,000. The Bank determined to use a weighted average of the two +appraisal values to determine impairment of the loan. The Bank assigned an 85% probability that a +new lease for the property would be signed and assigned an 85% weight to the lower impairment +calculation based on the as-stabilized value. It assigned a 15% weight to the higher impairment +calculation based on the as-is value. Gangemi approved the use of the weighted average method, +which resulted in an impairment of $356,000, reported in Malvern’s financial statements filed in its +June 30, 2018 Form 10-Q. The weighted average method reduced the loan impairment by +approximately $1 million when compared to the impairment it would have recognized using only +the as-is value. +13. The Bank’s use of an 85% probability of lease-up was primarily based on the fact +that Company A had been negotiating with a potential tenant in late 2017 and early 2018. + + +However, at the time of the impairment analysis in July 2018, the Bank and Gangemi were aware +that this potential tenant was no longer interested in leasing the property. +14. The Bank’s reliance on a draft lease that was no longer under consideration to value +the collateral was not appropriate. There were no prospective leases under consideration at the time +of impairment. Gangemi’s approval of the Bank’s selection of 85% was not supported. None of the +Bank’s internal documentation prepared under Gangemi’s supervision supported or explained the +appropriateness of an 85% probability of lease-up. Based on the facts and circumstances that +existed at the time of the measurement date, the Bank should have impaired the loan using the as-is +value of the property as of June 30, 2018. Per ASC 820-10-35-9, “[a] reporting entity shall +measure the fair value of an asset or a 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.” Gangemi knew or should have known the Bank’s reliance on the “Prospective +Market Value at Stabilization” when determining the fair value of the property as of June 30, 2018 +was unreasonable, as such a value would not be considered by a market participant, acting in their +economic best interest, under the circumstances that existed at that time. +15. As a result, Malvern materially misstated its financial statements in its June 30, +2018 Form 10-Q. Gangemi caused the misstatement. Had the Bank properly accounted for the +impairment on the Company A loan, the Bank’s income before taxes would have decreased from +approximately $2.3 million to $1.3 million. Thus, Malvern's income before taxes was overstated by +approximately 77%. +16. As Gangemi was aware, Malvern incorporated these materially misstated financial +statements in the June 30, 2018 Form 10-Q into a prospectus for an October 2018 $25 million +offering and sale of common stock. +d. September 30, 2018 Loan Charge-Off +17. During the quarter ended September 30, 2018, the Bank changed its impairment +calculation and recorded an impairment of approximately $1.4 million based on the as-is value. +The Bank’s documentation stated that it changed its impairment calculation because the new lease +did not materialize. As noted above, the Bank was aware in the prior quarter that the lease likely +would not materialize. +18. The property owned by Company A remained vacant and the loan became +delinquent again in 2018. In June 2018, the principals began discussing providing a deed-in-lieu +(“DIL”) of foreclosure to exit the loan. In December 2018, the Bank executed a DIL with +Company A and recorded the collateral as an other real estate owned (“OREO”) asset. The Bank +charged off the loan for the amount that exceeded the collateral value based on the July 2018 +appraisal. +19. The Bank’s decision to charge off the loan as of December 31, 2018 instead of +September 30, 2018 was not appropriate because the amount of the loan balance in excess of the +appraised value was uncollectable as of September 30, 2018. Gangemi reviewed and approved the +Bank’s decision to charge off the loan as of December 31, 2018 instead of September 30, 2018. +Per ASC 310-10-35-41, a “loan or trade receivable balance shall be charged off in the period in + + +which the loans or trade receivables are deemed uncollectible.” There were numerous indications +of uncollectability of the loan balance prior to September 30, 2018 (e.g., no tenant, no operational +cash flow, no guarantor, significant delinquencies in 2017 and 2018, loan concessions, and +discussions of a possible DIL as early as June 2018). Gangemi knew these relevant facts indicating +the loan was uncollectable. Gangemi also knew that the Bank decided to accept the DIL and +approved the charge-off prior to the filing of the financial statements for the quarter-end and fiscal +year end September 30, 2018 in the company’s Form 10-K, which further demonstrates the Bank +should have recorded the charge-off in that period. +20. As a result, Malvern materially misstated its financial statements in its September +30, 2018 Form 10-K. Gangemi caused the misstatement. The Bank should have recognized a loan +charge-off of $1.2 million and recognized a $1.2 million provision for loan losses in connection +with the charge-off, which would have reduced Malvern’s quarterly income before taxes from +approximately $3 million to $1.8 million. Thus, Malvern’s quarterly income before taxes was +overstated by approximately 67%. +e. December 31, 2020 Impairment of Company A OREO +21. The Bank did not obtain an updated appraisal for the OREO property until April +2021 (approximately two-and-a-half years after its prior appraisal). The Bank purportedly did not +obtain an updated appraisal sooner due to the COVID-19 pandemic. Management, including +Gangemi, later determined that it should have obtained appraisals sooner when it became apparent +that the COVID-19 pandemic would be a long term impact. Between January 2019 and September +2020, the Bank did not record a material impairment of the asset as it continued to rely on the July +2018 appraised value +22. In its impairment analysis for the period ending September 30, 2020, the Bank +continued to rely on the July 2018 appraisal to conclude no impairment was required. Because of +the age of the appraisal, the Bank’s policy stated the Bank should discount the appraisal by 20%. +The Bank failed to do so and provided no justification for the departure from Bank policy. +23. During the December 31, 2020 quarter, Gangemi negotiated and executed a letter of +intent (“LOI”) to sell the property on behalf of the Bank. The Bank’s policy stated that the Bank +should record a charge-off for an asset when a LOI is signed with a lower purchase price than the +Bank’s recorded investment in the asset unless the Bank could document why the Bank would not +take a loss. The policy also stated that the Bank must obtain approval from the relevant +management committee if it did not record a charge-off. The Bank failed to perform an updated +impairment analysis as of December 31, 2020 incorporating the information from the LOI. The +Bank did not record an impairment as of December 31, 2020 and did not obtain the required +approval under its policy. Gangemi knew these relevant facts. +24. In April 2021, the Bank obtained an updated appraisal of the OREO, which showed +an impairment to the asset. The Bank did not record an impairment in the March 31, 2021 quarter. +In the June 30, 2021 Form 10-Q, the Bank recorded an $850,000 impairment after obtaining an +updated appraisal in June 2021. + + +25. The Bank’s accounting for the Company A OREO asset as of December 31, 2020 +was not appropriate. Gangemi was ultimately responsible for the Bank’s OREO impairment +analysis. The purchase price within the LOI had been recently negotiated and represented what a +willing buyer was willing to pay to purchase the property in an arms-length transaction. The +Bank’s policy, which Gangemi did not follow, expressly recognized that an LOI was a reliable +indicator of fair value. The value in the LOI was a better indicator of fair value than the two-year +old appraisal relied upon by the Bank. The Bank’s internal documentation did not support the +Bank’s decision to rely on the outdated appraisal when there was a more recent and reliable +indicator of fair value available. Gangemi did not incorporate the information from the LOI into +Malvern’s analysis. +26. As a result, Malvern materially misstated its financial statements in its December +31, 2020 Form 10-Q. Gangemi caused the misstatement. Had the Bank properly accounted for the +OREO property, it would have been written down by approximately $980,000 in its financial +statements in the December 31, 2020 Form 10-Q. This would have reduced Malvern’s income +before taxes from approximately $3 million to $2.02 million. Thus, Malvern’s income before taxes +was overstated by approximately 49%. +B. Accounting for Loan to Company B + +a. December 31, 2017 Troubled Debt Restructuring +27. Company B was a commercial real estate company incorporated to lease a large big +box retail property that it owned. Company B refinanced the property through a $9.7 million loan +from the Bank in July 2016. Company B’s principals were the same as Company A. Company B +had a national retailer as its sole tenant. The tenant was the same national retailer as Company A. +The loan to Company B had limited guarantees at origination of approximately 6% of the loan +balance. The guarantees reduced each month by the amount of principal repaid. +28. Like Company A, Company B’s tenant declared bankruptcy in March 2017. +Company B did not have any other sources of operational cash flow. After the tenant’s bankruptcy, +Company B’s principals refused to continue paying on the loan until the Bank provided payment +relief through a loan modification. In September 2017, the Bank approved a one-year interest-only +modification. In December 2017, the Bank approved a reduced interest rate. Company B then paid +the delinquent loan payment to bring the loan current. +29. The Bank did not classify the loan as a TDR during its initial assessment of the loan +modification as of December 31, 2017. The Bank’s analysis and conclusion was similar to its +analysis and conclusion when it concluded the loan to Company A was not a TDR. +30. Malvern reported the loan as a TDR in its March 31, 2018 Form 10-Q after a +review of the loan by the Bank’s primary federal banking regulator. +31. Gangemi reviewed and approved the Bank’s analysis and conclusion that the loan +was not a TDR. Malvern’s conclusion that the loan to Company B was not a TDR as of December +31, 2017 did not address relevant circumstances surrounding the restructuring, including the +borrower’s poor financial condition after the loss of the properties’ lease (i.e., no cash flow), the + + +borrower’s stated intention not to continue paying on the loan under the original loan terms, the +loan’s delinquency, the absence of full guarantees, and the concessions provided by Malvern to +reduce the borrower’s loan payments due to the borrower’s lack of cash flow. Gangemi knew these +relevant facts indicating the loan was a TDR. These facts demonstrate that the loan was a TDR as +of December 31, 2017. The Bank’s analysis relied on unsupported assumptions, such as new leases +and the purported willingness of limited guarantors to pay the entire loan balance. +32. As a result, Malvern materially misstated its reported aggregate outstanding loan +balances for TDRs in its December 31, 2017 Form 10-Q. Gangemi caused the misstatement. Had +the Bank properly classified the loans to Company A and Company B as TDRs, Malvern’s +reported aggregate outstanding loan balances for TDRs would have increased from approximately +$2.2 million to $18.8 million, an approximate 750% increase. +b. December 31, 2019 Impairment / Charge-Off +33. The Company B loan was impaired and a TDR. Throughout 2018 and 2019, the +Bank did not consider the loan to be collateral dependent because of the limited guarantee. During +this time, the Bank only required small amounts of impairment based on a present value of future +cash flows impairment analysis. +34. By January 2020, the guarantee had reduced to zero and the loan was due to reset at +a higher interest rate. The Bank attempted to restructure the loan to obtain a new limited guarantee. +For impairment purposes at December 31, 2019, the Bank – at Gangemi’s direction – initially +calculated two different impairment amounts. The first assumed the loan was collateral dependent +and used the fair value of the collateral, which resulted in a $3.1 million impairment. The second +assumed the loan was not collateral dependent and used the present value of the loan’s future cash +flows, which resulted in a $36,000 impairment. The Bank assumed a 50% probability that +Company B would accept the loan restructuring and applied a 50% weight to the present value of +future cash flows approach. The Bank assumed a 50% probability that Company B would not +accept the restructuring and applied a 50% weight to the fair value of the collateral approach. +Using this weighted approach, Malvern recorded a $1.56 million impairment based on this +methodology in its financial statements in the originally filed December 31, 2019 Form 10-Q. This +impairment was approximately $1.5 million less than had the impairment been calculated using +only the collateral’s fair value. +35. The Bank attributed the change in impairment methodology for December 31, 2019 +to the death of one of the guarantors. The Bank’s internal documentation suggested that the +guarantor died in January 2020. However, the guarantor actually died in August 2018, a fact that +some Bank employees were aware of but was not clearly communicated to management, including +Gangemi. +36. In March 2020, the Bank obtained an updated appraisal showing a $2.3 million +collateral shortfall compared to the Bank’s recorded investment in the loan. +37. After an examination by the Bank’s primary federal banking regulator, the Bank +determined the loan to Company B was collateral dependent as of December 31, 2019 and that a +charge-off should have been recognized in its financial statements during that quarter. As a result, + + +the Bank determined there was an error in the originally filed Form 10-Q and restated its financial +statements because the loan was collateral dependent and the $2.3 million impairment should have +been charged off in the December 31, 2019 quarter based on the appraised value. The Bank never +filed a Form 8-K Item 4.02 to report non-reliance on the financial statements filed in the original +Form 10-Q. Despite the restatement to correct errors in the financial statements, management +concluded there was no material weakness in internal controls. +38. The Bank’s accounting for the loan to Company B in its originally filed December +31, 2019 Form 10-Q was not appropriate. Gangemi reviewed and approved the impairment +analysis. The loan was collateral dependent as of December 31, 2019 based on the borrower’s +limited cash flow (i.e., the new tenant’s lease was not sufficient to establish a realistic repayment +plan), the looming balloon payment at maturity, the elimination of the loan guarantee, and +discussions with the loan sponsor of additional loan modifications due to higher reset interest rate. +Because the loan was collateral dependent, the Bank’s policy stated it should have immediately +ordered an updated appraisal and charged down the amount of the loan balance in excess of the +appraised value. However, the Bank did not obtain an updated appraisal for December 31, 2019 +reporting purposes. Moreover, the use of a 50%-50% blended impairment methodology that relied +in part on the loan’s cash flows was not appropriate for a collateral dependent loan. Such a +methodology that relied in part on the loan’s cash flows is not consistent with the definition of a +collateral dependent loan, which states that payment is expected to come “solely” from the +collateral. Gangemi knew or should have known that the Bank’s methodology was not consistent +with the definition of a collateral dependent loan. +39. As a result, Malvern materially misstated its financial statements in its originally +filed December 31, 2019 Form 10-Q. Gangemi caused the misstatement. Had the Bank properly +accounted for the impairment of the Company B loan, its net income would have been reduced +from approximately $2.5 million to $785,000. Thus, Malvern’s net income was overstated by +approximately 218%. This adjustment was reported in the amended December 31, 2019 Form 10- +Q to restate the financial statements. +C. Accounting for Loan to Company C +40. Company C was a commercial real estate company incorporated to lease retail +space it owned in a mixed-use commercial and residential building in New York City. Company C +obtained a $20.5 million loan from the Bank in 2017 with $18.7 million advanced initially. The +loan eventually had cash flow issues due to difficulty finding tenants. Throughout 2019 and 2020, +the Bank did not classify the loan as collateral dependent citing the strength of the guarantor. +38. Beginning in March 2020, the Bank granted three consecutive 90-day deferrals to +the borrower due to COVID-19. During this time, the Bank requested – but never received – +updated financial information on the borrower and its guarantor. +41. On November 9, 2020, the Bank issued a preliminary earnings release for the +quarter-ended and fiscal year ended September 30, 2020 based on financial statements that +provided for no impairment of the Company C loan. The preliminary earnings release was +furnished on Form 8-K. At the time of this release, the Bank, including Gangemi, knew that the + + +borrower was having financial difficulties. Subsequent to the release, the Bank, including +Gangemi, learned the guarantor was having financial difficulties. +42. On December 29, 2020, Malvern filed a late filing notice of the Form 10-K +notifying investors it was evaluating the loan to Company C as collateral dependent. On January +20, 2021, Malvern filed a Form 8-K signed by Gangemi notifying investors not to rely on the +preliminary earnings release and that the Bank was recording a $2.9 million charge-down and +$581,000 impairment related to the Company C loan. On January 29, 2021, Malvern filed its Form +10-K with the information regarding Company C from the January 20, 2021 Form 8-K +incorporated. +43. On February 26, 2021, the Bank amended its Form 10-K after receiving an updated +appraisal to record an additional $3.1 million impairment. Management also disclosed a material +weakness in its Internal Control over Financial Reporting based on its failure to timely identify the +loan to Company C as collateral dependent, which resulted in the inaccurate November 9, 2020 +earnings release. Bank management later concluded the company’s decision not to order an +appraisal in 2020 due to COVID-19 was incorrect. +44. These errors caused Malvern’s net income reported in its November 9, 2020 +earnings release and January 29, 2021 Form 10-K to be materially misstated. Gangemi caused the +misstatements. Malvern reported net income for the quarter of $2.2 million in its earnings release, +compared to a net loss of $3.5 million reported in the amended Form 10-K filed on February 26, +2021, an overstatement in the earnings release of approximately $5.7 million or 164%. The +originally filed Form 10-K reported net loss for the quarter of $546,000, an overstatement of +approximately $3 million or 84%. +45. The Bank’s failure to recognize the loan to Company C as collateral dependent and +impaired as of September 30, 2020 prior to issuing an earnings release was inappropriate. Gangemi +was ultimately responsible for the Bank’s impairment analysis. The Bank should have determined +the loan was collateral dependent and impaired as of September 30, 2020. The Bank requested +updated financial information from the borrower and the guarantor but never received it throughout +2020. The Bank relied on outdated information when approving loan deferrals and measuring +impairment. The loan to Company C was collateral dependent at the time of the earnings release +based upon the cash flow concerns and the borrower’s inability or unwillingness to provide +updated financial information concerning the guarantor, which prevented the Bank from +reasonably concluding that the guarantor’s financial condition had sufficiently improved to +alleviate such concerns. Gangemi knew facts indicating the loan was impaired and collateral +dependent as of the date of the preliminary earnings release. Moreover, as the Bank later +concluded, it should have obtained an updated appraisal for purposes of September 30, 2020 +financial reporting and immediately charged the loan down to appraised value and recognized a +corresponding loan loss provision. As a result, on November 9, 2020, Malvern issued a materially +inaccurate September 30, 2020 preliminary earnings release signed by Gangemi. On February 26, +2021, Malvern restated its September 30, 2020 Form 10-K, and concluded there was a material +weakness in internal controls. + + + +VIOLATIONS +46. Section 17(a)(2) of the Securities Act proscribes, in the offer or sale of a security, +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.” As a result of the conduct described above, Malvern +violated Section 17(a)(2) of the Securities Act. Gangemi caused Malvern’s violation of Section +17(a)(2). +47. 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.” As a result of the conduct described above, Malvern violated +Section 17(a)(3) of the Securities Act. Gangemi caused Malvern’s violation of Section 17(a)(3). +48. Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, and 13a-13 thereunder +require issuers with a class of securities registered pursuant to Section 12 of the Exchange Act to +file such periodic reports and other reports as the Commission may prescribe and in conformity with +such rules as the Commission may promulgate. The obligation to file such reports embodies the +requirement that they be true and correct. 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 light of the +circumstances under which they are made, not misleading. As a result of the conduct described +above, Malvern violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and +13a-13 thereunder. Gangemi caused Malvern’s violations of Section 13(a) of the Exchange Act and +Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. +49. 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. As a result of the conduct described above, +Malvern violated Section 13(b)(2)(A) of the Exchange Act. Gangemi caused Malvern’s violations +of Section 13(b)(2)(A) of the Exchange Act. +50. Section 13(b)(2)(B) of the Exchange Act, which requires issuers of securities +registered pursuant to Section 12 of the Exchange Act to devise and maintain a system of internal +accounting controls sufficient, among other things, to provide reasonable assurances that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles or any other criteria applicable to such statements. As +a result of the conduct described above, Malvern violated Section 13(b)(2)(B) of the Exchange Act. +Gangemi caused Malvern’s violations of Section 13(b)(2)(B) of the Exchange Act. +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 that: + + + + A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent Malvern cease and desist from committing or causing any violations and any future +violations of Section 17(a)(2) and 17(a)(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-11, 13a-13 thereunder. + + B. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent Gangemi cease and desist from committing or causing any violations and any future +violations of Section 17(a)(2) and 17(a)(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-11, 13a-13 thereunder. + + C. Respondent Malvern shall, within ten (10) business days of the entry of this Order, +pay a civil money penalty in the amount of $350,000 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. + + D. Respondent Gangemi shall, within ten (10) business days of the entry of this Order, +pay a civil money penalty in the amount of $40,000 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) 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 +Malvern Bancorp, Inc., or Joseph D. Gangemi, 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 St., 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, Respondents agree 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 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 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 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. + +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 Gangemi, and further, any debt for disgorgement, prejudgment interest, +civil penalty or other amounts due by Respondent Gangemi 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 Gangemi 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-4442.txt b/raw/aaer/2023/AAER-4442.txt new file mode 100644 index 0000000000000000000000000000000000000000..176f76191b459af6e78075065a677cafcfc56245 --- /dev/null +++ b/raw/aaer/2023/AAER-4442.txt @@ -0,0 +1,271 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98186 / August 21, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4442 / August 21, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21570 + +In the Matter of + +MICHAEL J. SENKEN, +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 +J. Senken (“Respondent” or “Senken”) 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 + +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. +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 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. Senken, age 64, is an accountant by trade. Senken completed all required +training and passed the certified public accountant (“CPA”) examination, but he never obtained a +CPA license. Senken served as the Chief Financial Officer of MiMedx Group, Inc. (“MiMedx”) +from 2010 to June 2018. + + 2. MiMedx was, at all relevant times, a Florida corporation headquartered in +Marietta, Georgia. MiMedx was a biotechnology company that manufactured and sold a variety of +products. At all relevant times, MiMedx’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 NASDAQ Global Market. + + 3. On November 26, 2019, the Commission filed a complaint against Senken +in SEC v. MiMedx Group, Inc., et al., Civil Action No. 1:19-cv-10927, in the U.S. District Court +for the Southern District of New York. On August 10, 2023, the court entered an order +permanently enjoining Senken, by consent, from future violations of Sections 17(a)(2) and (3) of +the Securities Act of 1933 (the “Securities Act”) [15 U.S.C. § 77q(a)(2), (3)], and Rules 13b2-1 +and 13b2-2 2 the Exchange Act of 1934 (the “Exchange Act”) [17 C.F.R. § 240.13b2-2]. Senken +was also ordered to pay shall pay a civil penalty in the amount of $75,000 and to forfeit $236,300 +of bonuses/incentive-based compensation to MiMedx Group, Inc. (“MiMedx”) pursuant to Section +304(a) of the Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7243(a). + + 4. The Commission’s complaint alleged, among other things, that Senken acted +negligently with respect to a fraudulent revenue-recognition scheme orchestrated by Senken’s +co-Defendants, MiMedx’s Chief Executive Officer and Chief Operations Officer. (Both the CEO +and COO were criminally charged and convicted for their roles in a separate scheme; Senken +was not charged criminally.) The complaint alleged that, through the scheme allegedly involving +Senken, MiMedx artificially inflated the company’s reported revenue by recognizing revenue +from a distributor of MiMedx products earlier than is permissible under generally accepted +accounting principles (“GAAP”); this resulted in MiMedx filing materially false and misleading +financial statements in the company’s annual report on Form 10-K for the fiscal years ended +December 31, 2013, 2014, 2015, and 2016, and in the company’s quarterly reports on Form 10- +Q for the same period and through the first three quarters of fiscal year 2017. In addition, the +complaint alleged that Senken failed to disclose certain information surrounding MiMedx’s +recognition of revenue from one distributor to MiMedx’s Audit Committee, independent +auditors, and others. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Doe’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent is suspended from appearing or practicing before the Commission as an +accountant. + +B. After 1 year 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; + +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. If Respondent is licensed as a certified public accountant (“CPA”), then in support +of any application for reinstatement, Respondent shall provide documentation showing that +Respondent’s license is current and that Respondent has resolved all other disciplinary issues with +any applicable state boards of accountancy. If Respondent’s CPA licensure is dependent upon +reinstatement by the Commission, then Respondent shall provide documents reflecting this +requirement. If Respondent has never been licensed as a CPA, then Respondent shall submit a +signed affidavit truthfully stating under penalty of perjury that Respondent has never been licensed +as a CPA. + +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 SEC v. +MiMedx Group, Inc., et al., Civil Action No. 1:19-cv-10927 (S.D.N.Y.), 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. + +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. + + 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/2023/AAER-4443.txt b/raw/aaer/2023/AAER-4443.txt new file mode 100644 index 0000000000000000000000000000000000000000..f32d4f72850a9700db3eb470bd69b199c8bf025b --- /dev/null +++ b/raw/aaer/2023/AAER-4443.txt @@ -0,0 +1,218 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98188 / August 22, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4443 / August 22, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21572 + + +In the Matter of + +BLACK SPADE +ACQUISITION CO, + +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 Black Spade Acquisition Co (“Black Spade” 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. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers of a security registered pursuant to Section 12 of the Exchange Act that fail to +file timely a periodic report shall file a Form 12b-25 “Notification of Late Filing,” commonly +known as “Form NT,” which contains, among other things, reasonable detail as to why the issuer’s +periodic report could not be filed on time and an explanation of any anticipated, significant changes +in the issuer’s results of operations. + + 2. In August 2022, Black Spade violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which Black Spade failed to disclose why, in sufficient detail under the +circumstances presented, its second-quarter fiscal year (“FY”) 2022 Form 10-Q could not be timely +filed. Black Spade’s Form 12b-25 also failed to acknowledge anticipated, significant changes in +Black Spade’s results of operations for the second quarter of FY2022, compared with Black Spade’s +operating results in the second quarter of FY2021, and to provide an explanation of the changes. +Three days after filing its Form 12b-25, Black Spade filed a Form 8-K disclosing to investors and +the market that the company’s financial statements included in its Form 10-K for FY2021 and Form +10-Q for first-quarter of FY2022 could no longer be relied upon and would be restated. Black +Spade, however, had failed to include in its Form 12b-25 any disclosure that the discovery, and +ongoing correction, of errors in its prior filings were among the principal reasons that it was unable +to file timely the subject Form 10-Q for the second quarter of FY2022. + +Respondent + +3. Black Spade, a Cayman Islands corporation based in Hong Kong, China, is a +special purpose acquisition company that is currently in the process of combining with another +company. At all relevant times, Black Spade common stock has been registered under Section +12(b) of the Exchange Act and trades on the New York Stock Exchange under the symbol BSAQ. + +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + +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 + + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date. Form 12b-25 also requires the issuer to confirm whether or not it anticipates +that any significant change in results of operations from the corresponding period for the prior +fiscal year will be reflected by the earnings statements to be included in the subject periodic report. +If such change is anticipated, the issuer must attach a narrative and quantitative explanation of the +anticipated change and, if appropriate, state the reasons why a reasonable estimate of the results +cannot be made. + + 6. On August 15, 2022, Black Spade filed with the Commission a Form 12b-25 +disclosing that Black Spade could not file timely its Form 10-Q for its second fiscal quarter, ended +June 30, 2022, “within the prescribed time period because the Company requires additional time to +prepare and review its financial statements to ensure adequate disclosure of the financial +information required to be included in the Form 10-Q.” + + 7. Furthermore, in its Form 12b-25, Black Spade affirmed that it did not anticipate that +any significant change in results of operations from the corresponding period for the prior fiscal +year would be reflected in the subject Form 10-Q. + + 8. On August 18, 2022, Black Spade filed with the Commission a Form 8-K +disclosing that, “the Company’s management, after consultation with [Auditor], the Company’s +independent registered public accounting firm, re-evaluated the Company’s accounting of accounts +payable and accrued expenses and determined that the Company failed to recognize and accrue +certain expenses in connection with the proposed initial business combination resulting in an +understatement of the account payable and accrued expenses, which requires an adjustment to the +Company’s financial statements as of December 31, 2021 and for the period from March 3, 2021 +(inception) through December 31, 2021 and its financial statements as of and for the quarterly +period ended March 31, 2022.” + +9. Prior to August 15, 2022, Black Spade understood that its inability to meet the +filing deadline for its second-quarter FY2022 Form 10-Q was due, in large part, to the discovery, +and ongoing correction, of errors in its Forms 10-K and first quarter 10-Q. Moreover, the company +was aware that its second-quarter FY2022 financial results, when reported, would differ +significantly from its second-quarter FY2021 financial results, including a 2585% increase in total +expenses versus second quarter FY2021. In its Form 12b-25, however, Black Spade failed to +disclose any of this information, much less provide the detailed narratives and quantitative +explanation specifically called for by the form. + +2 Form 12b-25 specifies a “narrative” disclosure in “reasonable detail why” Form 10-Q or 10-K “could not +be filed within the prescribed time period.” (See Form 12b-25, Part III.) + 4 + + + +Violations + + 10. As a result of the conduct described above, Black Spade violated Section 13(a) of +the Exchange Act and Rule 12b-25 thereunder. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Black Spade’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Black Spade cease and +desist from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $35,000 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 +Black Spade 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 D. Mark Cave, Associate + 5 +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/2023/AAER-4444.txt b/raw/aaer/2023/AAER-4444.txt new file mode 100644 index 0000000000000000000000000000000000000000..a37285e947de588bbfbbe3bb536b0f19bfbd3622 --- /dev/null +++ b/raw/aaer/2023/AAER-4444.txt @@ -0,0 +1,225 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98190 / August 22, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4444 / August 22, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21573 + + +In the Matter of + +ALPINE 4 HOLDINGS, +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 Alpine 4 Holdings, Inc. (“Alpine” 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. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers of a security registered pursuant to Section 12 of the Exchange Act that fail to +file timely a periodic report shall file a Form 12b-25 “Notification of Late Filing,” commonly +known as “Form NT,” which contains, among other things, reasonable detail as to why the issuer’s +periodic report could not be filed on time and an explanation of any anticipated, significant changes +in the issuer’s results of operations. + + 2. In November 2022, Alpine violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which Alpine failed to disclose why, in sufficient detail under the circumstances +presented, its third-quarter fiscal year (“FY”) 2022 Form 10-Q could not be timely filed. Alpine’s +Form 12b-25 also failed to acknowledge anticipated, significant changes in Alpine’s results of +operations for the third quarter of FY2022, compared with Alpine’s operating results in the third +quarter of FY2021, and to provide an explanation of the changes. Four days after filing its Form +12b-25, Alpine filed an 8-K disclosing to investors and the market that its previously-filed +financial statements included in Forms 10-K for FY2020 and FY2021, and all Forms 10-Q filed in +FY2021 should no longer be relied upon. Alpine, however, had failed to include in its Form 12b- +25 any disclosure that the discovery, and ongoing correction, of errors in its prior Forms 10-K and +10-Q were among the principal reasons that it was unable to file timely the subject Form 10-Q for +the third quarter of FY2022. Ultimately, Alpine further failed to file the subject Form 10-Q even +within the extension period provided by Rule 12b-25. + +Respondent + +3. Alpine, a Delaware corporation based in Phoenix, Arizona, is engaged in the +business of acquiring aerospace, defense services and technology related businesses. At all +relevant times, Alpine common stock has been registered under Section 12(b) of the Exchange Act +and trades on the NASDAQ Capital Market under the symbol ALPP. + + + + + + +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 +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date. Form 12b-25 also requires the issuer to confirm whether or not it anticipates +that any significant change in results of operations from the corresponding period for the prior +fiscal year will be reflected by the earnings statements to be included in the subject periodic report. +If such change is anticipated, the issuer must attach a narrative and quantitative explanation of the +anticipated change and, if appropriate, state the reasons why a reasonable estimate of the results +cannot be made. + + 6. On November 14, 2022, Alpine filed with the Commission a Form 12b-25 +disclosing that Alpine’s Form 10-Q for its third fiscal quarter, ended September 30, 2022, “could +not be filed without unreasonable effort or expense within the prescribed time period because +management requires additional time to compile and verify the data required to be included in the +report.” + + 7. Furthermore, in its Form 12b-25, Alpine affirmed that it would file the subject +Form 10-Q within the five-calendar-day extension period and indicated that it did not anticipate +that any significant change in results of operations from the corresponding period for the prior +fiscal year would be reflected in the subject Form 10-Q. + + 8. On November 18, 2022, Alpine filed with the Commission a Form 8-K disclosing +that “the Company’s December 31, 2020 financial statements in the Company’s previously filed +Annual Report on Form 10-K for the year ended December 31, 2020 (the ‘2020 Relevant +Periods’), the financial statements in the Quarterly Reports on Form 10-Q as of and for the quarters +ended March 31, 2021, June 30, 2021 and September 30, 2021, and the December 31, 2021 +financial statements in the Annual Report on Form 10-K for the year ended December 31, 2021 +(collectively, the ‘2021 Relevant Periods’), as well as the financial statements in the Quarterly +Reports for the periods ended March 31, and June 30, 2022 (the ‘2022 Relevant Periods’) should +no longer be relied upon.” Alpine determined “there were issues in the Company’s accounting for +business combinations and for income taxes in the 2020, 2021, and 2022 Relevant Periods.” + + +2 Form 12b-25 specifies a “narrative” disclosure in “reasonable detail why” Form 10-Q or 10-K “could not +be filed within the prescribed time period.” (See Form 12b-25, Part III.) + 4 +9. Prior to November 14, 2022, Alpine understood that its inability to meet the filing +deadline for its third-quarter FY2022 Form 10-Q was due, in large part, to the discovery, and +ongoing correction, of errors in its FY2020 10-K and FY2021 Forms 10-Q and 10-K. In its Form +12b-25, however, Alpine failed to disclose any of this information much less provide the detailed +narratives specifically called for by the form. + + 10. Additionally, although Alpine affirmed in its November 14, 2022 Form 12b-25 that +it would file its third-quarter FY2022 Form 10-Q within five calendar days, it ultimately failed to +do so. Ultimately, Alpine filed the Form 10-Q on April 25, 2023. + +Violations + + 11. As a result of the conduct described above, Alpine violated Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Alpine’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Alpine cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $60,000 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 + 5 +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 +Alpine 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 D. Mark Cave, Associate 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/2023/AAER-4445.txt b/raw/aaer/2023/AAER-4445.txt new file mode 100644 index 0000000000000000000000000000000000000000..6e1fe64db7fa58fe21a7bac83a1306688c8b4c7c --- /dev/null +++ b/raw/aaer/2023/AAER-4445.txt @@ -0,0 +1,521 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98191 / August 22, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4445 / August 22, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21575 + +In the Matter of + + DAVID D. BROOKS, 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, +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 David D. +Brooks (“Respondent” or “Brooks”) 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 +II. + In anticipation of the institution of these proceedings, Brooks has submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose + +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. + 2 +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, Brooks consents to the entry of this 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 (“Order”), as +set forth below. +III. + On the basis of this Order and Brooks’s Offer, the Commission finds3 that: +A. SUMMARY +1. This matter involves repeated instances of improper professional conduct by +David D. Brooks, a certified public accountant and audit partner of D. Brooks and Associates +CPA’s P.A. (“DBA”) based on his multiple failures to conduct six annual audits of the financial +statements of five public issuers in accordance with Public Company Accounting Oversight +Board (“PCAOB”) standards. Those issuers are referred to herein as Issuer A through Issuer E +(collectively, “Audit Clients”). + +2. From at least February 2018 through March 2019 (“Relevant Period”), Brooks +failed to comply with the professional standards of the PCAOB in conducting audits of the Audit +Clients because he did not, for one or more of the Audit Clients: (i) obtain sufficient appropriate +audit evidence; (ii) assemble a complete and final set of audit documentation (work papers); (iii) +appropriately document audit work; and (iv) exercise due professional care. Brooks also caused +DBA to issue five audit reports (one of which covered two annual audits for the Audit Client) that +inaccurately stated that the audits were performed in accordance with PCAOB standards. Each of +these audit reports was filed with the Commission along with the Audit Clients’ respective Forms +10-K. As a result, Brooks violated 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 Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice. + +B. RESPONDENT +3. Brooks, age 52, resides in Palm Beach Gardens, Florida, and is a certified public +accountant licensed in Florida and Massachusetts. Brooks founded DBA, a PCAOB-registered +firm, in 2009. He is DBA’s sole equity partner and has been its managing shareholder since the +firm’s inception. Brooks was the engagement partner for all of the audits at issue. + + +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 +C. OTHER RELEVANT ENTITIES +4. DBA is a Florida corporation headquartered in Palm Beach Gardens, Florida. It +was formed by Brooks in 2009, and has been registered with the PCAOB since December 2009. +During the Relevant Period, DBA had six employees, three of whom were partners. It provides +audit and valuation services, financial statement preparation, and consulting services. + +5. Issuer A is a Nevada corporation with its principal place of business in Wichita, +Kansas. Throughout the Relevant Period, its common stock was registered with the Commission +pursuant to Section 12(b) of the Exchange Act and quoted on the NYSE American – NASDAQ. +DBA audited Issuer A’s financial statements for the year ended December 31, 2018, which were +included in Issuer A’s Form 10-K filed with the Commission. Brooks was the engagement partner +on the FY 2018 audit and signed and authorized the issuance of an audit report that stated that +DBA had conducted its audit in accordance with PCAOB standards. + +6. Issuer B is a Nevada corporation with its principal place of business in Carson +City, Nevada. Throughout the Relevant Period, its common stock was registered with the +Commission pursuant to Section 12(b) of the Exchange Act and was quoted on the NASDAQ +Stock Market. DBA audited Issuer B’s financial statements for the years ended June 30, 2017 and +2018, which were included in Issuer B’s Form 10-K filed with the Commission. Brooks was the +engagement partner on both audits and signed and authorized the issuance of an audit report that +stated that DBA had conducted its audits in accordance with PCAOB standards. + +7. Issuer C is a Nevada corporation with its principal place of business in Lake Park, +Florida. Throughout the Relevant Period, its common stock was registered with the Commission +pursuant to Section 12(g) of the Exchange Act and was quoted on OTC Markets. DBA audited +Issuer C’s financial statements for the year ended December 31, 2017, which were included in +Issuer C’s Form 10-K filed with the Commission. Brooks was the engagement partner on the FY +2017 audit and signed and authorized the issuance of an audit report that stated that DBA had +conducted its audit in accordance with PCAOB standards. +8. Issuer D is a Nevada corporation with its principal place of business in Roseville, +California. Throughout the Relevant Period, its common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and was quoted on OTCQB operated +by the OTC Markets Group. DBA audited Issuer D’s financial statements for the year ended +December 31, 2017, which were included in Issuer D’s Form 10-K filed with the Commission. +Brooks was the engagement partner on the FY 2017 audit and signed and authorized the issuance +of an audit report that stated that DBA had conducted the audit in accordance with PCAOB +standards. +9. Issuer E is a Nevada corporation with its principal place of business in Niagara +Falls, New York. Throughout the Relevant Period, its common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and was quoted on OTCQB operated +by the OTC Markets Group. DBA audited Issuer E’s financial statements for the year ended +December 31, 2017, which were included in Issuer E’s Form 10-K filed with the Commission. +Brooks was the engagement partner on the FY 2017 audit and signed and authorized the issuance + 4 +of an audit report that stated that DBA had conducted the audit in accordance with PCAOB +standards. +D. FACTS + +10. During the Relevant Period, Brooks violated various PCAOB auditing standards, in +connection with the FY 2018 audit of Issuer A, the FY 2017 and 2018 audits of Issuer B, the FY +2017 audit of Issuer C, the FY 2017 audit of Issuer D, and the FY 2017 audit of Issuer E +(“Audits”), as summarized in the table below. Brooks was the engagement partner for each of +these Audits. + + +Issuer A Issuer B Issuer C Issuer D Issuer E +Filing and Fiscal Year Form 10-K +Year Ended +December +31, 2018 +Form 10-K +Years Ended +June 30, 2017 +and 2018 +Form 10-K +Year Ended +December +31, 2017 +Form 10-K +Year Ended +December 31, +2017 +Form 10-K +Year Ended +December 31, +2017 +Date of DBA’s audit report March 28, +2019 +October 4, +2018 +April 16, +2018 +April 17, +2018 +April 2, +2018 +AS 1015 Due Professional Care in the +Performance of Work +x x x x x +AS 1105 Audit Evidence x x x + +x x +AS 1210 Using the Work of a +Specialist +x x + + +AS 1215 Audit Documentation x x x + +x x +AS 2415 Consideration of an Entity’s +Ability to Continue as a +Going Concern + x x +AS 2810 Evaluating Audit Results x x x x x +Auditing Standard 1215, Audit Documentation +11. During the performance of the Audits, Brooks violated PCAOB auditing standard +(“AS”) 1215, Audit Documentation, by: (i) repeatedly failing to assemble for retention a complete +and final set of audit documentation (work papers); (ii) permitting additions and modifications to +the work papers after the documentation completion date without the required information (such as +the reasons for the additions and modifications); (iii) repeatedly failing to document audit work, +including his review; and (iv) failing to prepare an engagement completion document. For five of +the six Audits, Brooks never assembled complete and final sets of audit documentation. For one of +the Audits, Brooks assembled the complete and final set of audit documentation for retention days +after the documentation completion date. For each of the Audits, Brooks performed certain audit +work that he failed to document. During one of the Audits, Brooks never prepared an engagement +completion document. For these Audits, Brooks was the person at DBA responsible for ensuring +that the audit documentation complied with the requirements of AS 1215. + + 5 +Auditing Standard 1105, Audit Evidence +12. Brooks failed to obtain sufficient appropriate audit evidence in accordance with AS +1105.04, which requires an auditor to “plan and perform audit procedures to obtain sufficient +appropriate audit evidence to provide a reasonable basis for his or her opinion.” During one of the +Audits, Brooks violated AS 1105.04 because the engagement team’s testing of a sample of +operating expenses did not provide sufficient appropriate audit evidence. Also, during that Audit, +despite assessing income taxes as a significant audit area, Brooks did not perform audit procedures +for the income tax liability or income tax expense. In another Audit, after Brooks assessed +property, plant, and equipment as a significant audit area with a high risk of material misstatement +of impairment, Brooks did not document any audit procedures to evaluate impairment. + +Auditing Standard 1210, Using the Work of a Specialist + +13. Brooks also failed to obtain sufficient appropriate audit evidence in accordance +with AS 1210 which requires, among other things, an auditor to evaluate the professional +qualifications of a specialist and to make appropriate tests of data provided to a specialist. During +the Audits of two Audit Clients, each engaged specialists in connection with intangible assets and +goodwill. There is no audit documentation or any other contemporaneous evidence that any +procedures concerning the evaluation of the professional qualifications of the specialists and +testing of the data provided to the specialists were performed. + +Auditing Standard 2415, Consideration of an Entity’s Ability to Continue as a +Going Concern + + 14. Brooks further failed to obtain sufficient appropriate audit evidence in accordance +with AS 2415 which requires that when an auditor believes there is substantial doubt about the +ability of the entity to continue as a going concern for a reasonable period of time, the auditor +should document various items, including the auditing procedures performed and evidence +obtained to evaluate the significant elements of management’s plans and the auditor’s conclusions. +During two of the Audits, Brooks concluded that there was substantial doubt about the ability of +the Audit Clients to continue as a going concern and he included such in the respective audit +reports. Brooks did not prepare the required documentation prescribed by AS 2415 such as +documentation of the auditing procedures performed and evidence obtained to evaluate the +significant elements of management’s plans and the auditor’s conclusions. There is no audit +documentation or other contemporaneous evidence of any procedures performed. + +Auditing Standard 2810, Evaluating Audit Results + +15. Brooks failed to obtain sufficient audit evidence in accordance with AS 2810 which +states that as part of evaluating audit results, the auditor determines whether sufficient appropriate +audit evidence has been obtained to support his or her opinion on the financial statements. Brooks +violated AS 2810 during the Audits because he concluded that sufficient appropriate audit +evidence was obtained to support his opinion on the financial statements, when, in fact, he failed to +gather such evidence. For two of the Audits, there is no evidence that Brooks performed audit +procedures required by AS 1210 to, among other things, evaluate the professional qualifications of +the specialists and to make appropriate tests of data provided to specialists for intangible assets and + 6 +goodwill, both of which were significant accounts. During a third Audit, Brooks failed to audit +certain categories of operating expenses that were material to the income statement. For a fourth +Audit, Brooks failed to audit the income tax liability and related expense. During a fifth Audit, +Brooks failed to perform audit procedures to evaluate impairment of property, plant and equipment +which he had identified as a high risk of material misstatement. During a sixth Audit, there is no +evidence that Brooks performed audit procedures to evaluate the impairment of intangible assets. + +Auditing Standard 1015, Due Professional Care in the Performance of Work + +16. In connection with the Audits described herein, Brooks failed to exercise due +professional care. AS 1015 states that auditors are required to exercise due professional care in the +planning and performance of the audit and the preparation of the report. Brooks failed to exercise +due professional care as required by AS 1015 while performing the Audits. + +VIOLATIONS +17. As a result of the conduct described above, Brooks 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 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 discussed above, +Brooks engaged in repeated instances of unreasonable conduct, each resulting in a violation of +applicable professional standards. + +18. For the audits of Issuers B, C, D, and E discussed above, Rule 2-02(b)(1) mandated +that an accountant’s report “state whether the audit was made in accordance with generally +accepted auditing standards….” Rule 2-01(b)(1) was amended and beginning on November 5, +2018, it 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). The audit report for Issuer A was issued +after Rule 2-02(b)(1) was revised. 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, DBA violated and Brooks caused DBA’s violations of Rule 2- +02(b)(1) of Regulation S-X. + +FINDINGS +19. Based on the foregoing, the Commission finds that Brooks caused DBA’s +violations of Rule 2-02(b)(1) of Regulation S-X. + + 7 +20. Based on the foregoing, the Commission finds that Brooks engaged in improper +professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii). +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Brooks’s Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Brooks 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. Brooks is denied the privilege of appearing or practicing before the Commission as +an accountant. +C. After five years from the date of the Order, Brooks may request that the +Commission consider Brooks’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, Brooks +shall submit a written statement attesting to an undertaking to have Brooks’s work reviewed by the +independent audit committee of any public company for which Brooks works or in some other +manner acceptable to the Commission, as long as Brooks 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, Brooks shall +submit a statement prepared by the audit committee(s) with which Brooks will be associated, +including the following information: +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Brooks will be associated; +2. A description of Brooks’s role on the specific audit committee(s) with which +Brooks will be associated; +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + 8 +4. A description relating to the necessity of Brooks’s service on the specific audit +committee; and +5. A statement noting whether Brooks 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, Brooks must be +associated with a public accounting firm registered with the PCAOB and Brooks shall submit the +following additional information: + +1. A statement from the public accounting firm (the “Firm”) with which Brooks 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 Brooks 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 Brooks will not receive appropriate supervision; and + +3. A statement from Brooks indicating that the PCAOB has taken no disciplinary +actions against Brooks 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, Brooks shall provide documentation +showing that Brooks is currently licensed as a certified public accountant (“CPA”) and that Brooks +has resolved all other disciplinary issues with any applicable state boards of accountancy. If +Brooks is not currently licensed as a CPA, Brooks shall provide documentation showing that +Brooks’s licensure is dependent upon reinstatement by the Commission. + +H. In support of any application for reinstatement, Brooks shall also submit a signed +affidavit truthfully stating, under penalty of perjury: + +1. That Brooks has complied with the Commission suspension Order, and with +any related orders and undertakings, including any orders in the Matter of +David D. Brooks, CPA, or any related Commission proceedings, including any +orders requiring payment of disgorgement or penalties; + +2. That Brooks 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 Brooks, 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); + 9 + +4. That Brooks, 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 Brooks’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 Brooks 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. Brooks shall also provide a detailed description of: + +1. Brooks’s professional history since the imposition of the Order, including +(a) all job titles, responsibilities and role at any employer; + + 10 +(b) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Brooks reported for such work; and + +2. Brooks’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 Brooks provides the documentation and attestations required in this Order and +the Commission (1) discovers no contrary information therein, and (2) determines that Brooks +truthfully and accurately attested to each of the items required in Brooks’s affidavit, and the +Commission discovers no information, including under Paragraph J, indicating that Brooks has +violated a federal securities law, rule or regulation or rule of professional conduct applicable to +Brooks since entry of the Order (other than by conduct underlying Brooks’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 Brooks for cause shown. +L. If Brooks 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 Brooks to provide an explanation as to the +facts and circumstances pertaining to the matter setting forth why Brooks 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 Brooks for cause shown. +M. If the Commission declines to reinstate Brooks pursuant to Paragraphs K and L, it +may, at Brooks’s request, hold a hearing to determine whether cause has been shown to permit +Brooks to resume appearing and practicing before the Commission as an accountant. + +N. Brooks shall, within 10 days of the entry of this Order, pay a civil money penalty in +the amount of $50,000 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) Brooks may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Brooks 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) Brooks 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: + + + + 11 +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 David D. +Brooks 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 Glenn S. Gordon, Division of +Enforcement, Securities and Exchange Commission, 801 Brickell Avenue, Suite 1950, Miami, FL +33131. + +O. 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, Brooks 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 Brooks’s payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +Brooks 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 Brooks 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 +Brooks, and further, any debt for civil penalty or other amounts due by Brooks 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 Brooks 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-4446.txt b/raw/aaer/2023/AAER-4446.txt new file mode 100644 index 0000000000000000000000000000000000000000..947a2dc101a6472eff83611b5f0fff35e248620f --- /dev/null +++ b/raw/aaer/2023/AAER-4446.txt @@ -0,0 +1,232 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98192 / August 22, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4446 / August 22, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21574 + + +In the Matter of + +OMNIA WELLNESS 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 Omnia Wellness Inc. (“Omnia” 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. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers of a security registered pursuant to Section 12 of the Exchange Act that fail to +file timely a periodic report shall file a Form 12b-25 “Notification of Late Filing,” commonly +known as “Form NT,” which contains, among other things, reasonable detail as to why the issuer’s +periodic report could not be filed on time and an explanation of any anticipated, significant changes +in the issuer’s results of operations. + + 2. In November 2021, Omnia violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which Omnia failed to disclose why, in sufficient detail under the circumstances +presented, its period ended September 30, 2021 Form 10-Q could not be timely filed. Omnia’s +Form 12b-25 also failed to acknowledge anticipated, significant changes in Omnia’s results of +operations for the quarter, compared with Omnia’s operating results in the period ended September +30, 2020, and to provide an explanation of the changes. Fourteen days after filing its Form 12b-25, +Omnia filed a Form 8-K disclosing to investors and the market that the company’s financial +statements for the period ended June 30, 2021 could no longer be relied upon and would be +restated. Omnia, however, had failed to include in its Form 12b-25 any disclosure that the +discovery, and ongoing correction, of errors in its prior Forms 10-Q were among the principal +reasons that it was unable to file timely the subject Form 10-Q for the period ended September 30, +2021. Ultimately, Omnia also failed to file the aforementioned Form 8-K within the required +period under Exchange Act Rule 13a-11. + +Respondent + +3. Omnia, a Nevada corporation based in Buffalo, New York, is engaged in the +business of “on demand” massage memberships featuring its patented technology. At all relevant +times, Omnia common stock has been registered under Section 12(g) of the Exchange Act and is +quoted on the OTC Pink Market under the symbol OMWS. + +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + +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 + + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date. Form 12b-25 also requires the issuer to confirm whether or not it anticipates +that any significant change in results of operations from the corresponding period for the prior +fiscal year will be reflected by the earnings statements to be included in the subject periodic report. +If such change is anticipated, the issuer must attach a narrative and quantitative explanation of the +anticipated change and, if appropriate, state the reasons why a reasonable estimate of the results +cannot be made. + + 6. Section 13(a) and Rule 13a-11 of the Exchange Act require issuers with a security +registered pursuant to Section 12 of the Exchange Act to file or furnish, as applicable, current +reports with the Commission on Form 8-K. Issuers are required to file a Form 8-K within four +business days after the occurrence of certain events specified in the Form 8-K. Item 4.02 of Form +8-K specifies that if an issuer concludes, or is advised by its auditor, that any previously issued +financial statements required to have been provided should no longer be relied upon, the issuer +shall disclose the event and certain enumerated information on a Form 8-K. + + 7. On November 15, 2021, Omnia filed with the Commission a Form 12b-25 +disclosing that Omnia could not file timely its Form 10-Q for the period ended September 30, +2021, because management was “unable, without unreasonable effort or expense, to timely +compile all information for the disclosures required to be included in its Quarterly Report on Form +10-Q for the fiscal Quarter ended September 30, 2021.” + + 8. Furthermore, in its Form 12b-25, Omnia affirmed that it did not anticipate that any +significant change in results of operations from the corresponding period for the prior fiscal year +would be reflected in the subject Form 10-Q. + + 9. On November 29, 2021, Omnia filed with the Commission a Form 8-K disclosing +that, “[d]uring the preparation of its financial statements for the fiscal quarter ended September 30, +2021, the Company determined on November 17, 2021 that the Company’s previously issued +financial statements for the fiscal quarter ended June 30, 2021 included in its Quarterly Report for +the Fiscal Quarter ended June 30, 2021 (the ‘“Form 10-Q’”) should no longer be relied upon” +because Omnia had incorrectly accounted for, in those financial statements, research and +development expenses. Omnia failed to file its Form 8-K within the required four business day +period. + + +2 Form 12b-25 specifies a “narrative” disclosure in “reasonable detail why” Form 10-Q or 10-K “could not +be filed within the prescribed time period.” (See Form 12b-25, Part III.) + 4 +10. Prior to November 15, 2021, Omnia understood that its inability to meet the filing +deadline for the period ended September 30, 2021 Form 10-Q was due, in large part, to the +discovery, and ongoing correction, of errors in its period ended June 30, 2021 Form 10-Q. +Moreover, the company was aware that its period ended September 30, 2021 financial results, +when reported, would differ significantly from its period ended September 30, 2020 financial +results, including a 22% decrease in quarterly revenue. In its Form 12b-25, however, Omnia failed +to disclose any of this information, much less provide the detailed narratives and quantitative +explanation specifically called for by the form. + +Violations + + 11. As a result of the conduct described above, Omnia violated Section 13(a) of the +Exchange Act and Rules 12b-25 and 13a-11 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Omnia’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Omnia cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rules 12b-25 and 13a-11 thereunder. + +B. Respondent shall pay a civil money penalty in the amount of $60,000 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). Payment shall be made in the following five +installments: (1) $15,000 within 14 days of entry of this order; (2) $11,250 within 90 days of entry +of this order; (3) $11,250 within 180 days of this order; (4) $11,250 within 270 days of entry of +this order; and (5) $11,250 within 360 days of this order. 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 + 5 + +(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 +Omnia 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 D. Mark Cave, Associate 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/2023/AAER-4447.txt b/raw/aaer/2023/AAER-4447.txt new file mode 100644 index 0000000000000000000000000000000000000000..ad39467f7782e93b358edfdd29ec1a8ca510cb9e --- /dev/null +++ b/raw/aaer/2023/AAER-4447.txt @@ -0,0 +1,217 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98193 / August 22, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4447 / August 22, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21576 + + +In the Matter of + +RESHAPE LIFESCIENCES +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 ReShape Lifesciences Inc. (“ReShape” 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. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers of a security registered pursuant to Section 12 of the Exchange Act that fail to +file timely a periodic report shall file a Form 12b-25 “Notification of Late Filing,” commonly +known as “Form NT,” which contains, among other things, reasonable detail as to why the issuer’s +periodic report could not be filed on time and an explanation of any anticipated, significant changes +in the issuer’s results of operations. + + 2. In August 2022, ReShape violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which ReShape failed to disclose why, in sufficient detail under the circumstances +presented, its second-quarter fiscal year (“FY”) 2022 Form 10-Q could not be timely filed. +ReShape’s Form 12b-25 also failed to acknowledge anticipated, significant changes in ReShape’s +results of operations for the second-quarter of FY2022, compared with ReShape’s operating results +in the second-quarter of FY2021, and to provide an explanation of the changes. Three days after +filing its Form 12b-25, ReShape filed its second-quarter FY2022 Form 10-Q disclosing to investors +and the market a revision of its financial statements for the Forms 10-K for FY2020 and FY2021, +and Forms 10-Q for all quarters of 2021 and the first quarter of 2022. ReShape, however, had +failed to include in its Form 12b-25 any disclosure that the discovery, and ongoing correction, of +errors in its prior Forms 10-Q and 10-K were among the principal reasons that it was unable to file +timely the subject Form 10-Q for the second quarter of FY2022. + +Respondent + +3. ReShape, a Delaware corporation based in San Clemente, California, provides +weight-loss solutions to treat obesity and metabolic disease. At all relevant times, ReShape +common stock has been registered under Section 12(b) of the Exchange Act and trades on the +NASDAQ Capital Market under the symbol RSLS. + +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + +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 + + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date. Form 12b-25 also requires the issuer to confirm whether or not it anticipates +that any significant change in results of operations from the corresponding period for the prior +fiscal year will be reflected by the earnings statements to be included in the subject periodic report. +If such change is anticipated, the issuer must attach a narrative and quantitative explanation of the +anticipated change and, if appropriate, state the reasons why a reasonable estimate of the results +cannot be made. + + 6. On August 16, 2022, ReShape filed with the Commission a Form 12b-25 disclosing +that ReShape could not file timely its Form 10-Q for its second fiscal quarter, ended June 30, 2022, +because management “is unable, without unreasonable effort or expense, to file its Form 10-Q for +the quarter ended June 30, 2022 (the ‘Form 10-Q’) within the prescribed time period as it requires +additional time to complete the compilation of information for its financial statements and related +disclosures.” + + 7. Furthermore, in its Form 12b-25, ReShape affirmed that it did not anticipate that +any significant change in results of operations from the corresponding period for the prior fiscal +year would be reflected in the subject Form 10-Q. + + 8. On August 19, 2022, ReShape filed with the Commission a Form 10-Q disclosing +that “[t]he Company revised the statement of operations for the periods ended December 31, 2020, +March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021, and March 31, 2022, to +reflect the correction of an immaterial error in the computation of the weighted average shares used +to compute basic and diluted net loss per share. This revision has no impact on the Company’s net +loss or accumulated deficit.” + +9. Prior to August 16, 2022, ReShape understood that its inability to meet the filing +deadline for its second-quarter FY2022 Form 10-Q was due, in large part, to the discovery, and +ongoing correction, of errors in its computation of the weighted average shares in its FY2021 +Forms 10-Q and first-quarter 2022 Form 10-Q. Moreover, the company was aware that its second- +quarter FY2022 financial results, when reported, would differ significantly from its second-quarter +FY2021 financial results, including a 153% increase in quarterly operating loss versus second- +quarter FY2021. In its Form 12b-25, however, ReShape failed to disclose any of this information, +much less provide the detailed narratives and quantitative explanation specifically called for by the +form. + + +2 Form 12b-25 specifies a “narrative” disclosure in “reasonable detail why” Form 10-Q or 10-K “could not +be filed within the prescribed time period.” (See Form 12b-25, Part III.) + 4 + +Violations + + 10. As a result of the conduct described above, ReShape violated Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent ReShape’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent ReShape cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $35,000 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 +ReShape 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 D. Mark Cave, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + 5 + + 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/2023/AAER-4448.txt b/raw/aaer/2023/AAER-4448.txt new file mode 100644 index 0000000000000000000000000000000000000000..966e01478ce57bf045ef0cd23162d6d3060626ab --- /dev/null +++ b/raw/aaer/2023/AAER-4448.txt @@ -0,0 +1,235 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98194 / August 22, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4448 / August 22, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21577 + + +In the Matter of + +VIVIC CORP., + +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 Vivic Corp. (“Vivic” 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. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers of a security registered pursuant to Section 12 of the Exchange Act that fail to +file timely a periodic report shall file a Form 12b-25 “Notification of Late Filing,” commonly +known as “Form NT,” which contains, among other things, reasonable detail as to why the issuer’s +periodic report could not be filed on time and an explanation of any anticipated, significant changes +in the issuer’s results of operations. + + 2. In May 2022, Vivic violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which Vivic failed to disclose why, in sufficient detail under the circumstances +presented, its first-quarter fiscal year (“FY”) 2022 Form 10-Q could not be timely filed. Vivic’s +Form 12b-25 also failed to acknowledge anticipated, significant changes in Vivic’s results of +operations for the first quarter of FY2022, compared with Vivic’s operating results in the first +quarter of FY2021, and to provide an explanation of the changes. Three weeks after filing its Form +12b-25, Vivic filed a Form 8-K disclosing to investors and the market that financial statements +included in its Forms 10-Q for the first three quarters of FY2021 should not be relied upon. Vivic, +however, had failed to include in its Form 12b-25 any disclosure that the discovery, and ongoing +correction, of errors in its prior Forms 10-Q were among the principal reasons that it was unable to +file timely the subject Form 10-Q for the first quarter of FY2022. Ultimately, Vivic also failed to +file the aforementioned Form 8-K within the required period for filing this form under Exchange +Act Rule 13a-11. + +Respondent + +3. Vivic, a Nevada corporation based in Las Vegas, Nevada, is a travel agency that is +engaged in the manufacture, rental and sales of yachts. At all relevant times, Vivic common stock +has been registered under Section 12(g) of the Exchange Act and is quoted on the OTCQB Venture +Market under the symbol VIVC. + +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + + +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 + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date. Form 12b-25 also requires the issuer to confirm whether or not it anticipates +that any significant change in results of operations from the corresponding period for the prior +fiscal year will be reflected by the earnings statements to be included in the subject periodic report. +If such change is anticipated, the issuer must attach a narrative and quantitative explanation of the +anticipated change and, if appropriate, state the reasons why a reasonable estimate of the results +cannot be made. + + 6. Section 13(a) and Rule 13a-11 of the Exchange Act require issuers with a security +registered pursuant to Section 12 of the Exchange Act to file or furnish, as applicable, current +reports with the Commission on Form 8-K. Issuers are required to file a Form 8-K within four +business days after the occurrence of certain events specified in the Form 8-K. Section 4, Item +4.02 of Form 8-K specifies that if an issuer concludes, or is advised by its auditor, that any +previously issued financial statements required to have been provided should no longer be relied +upon, the issuer shall disclose the event and certain enumerated information on a Form 8-K. + + 7. On May 11, 2022, Vivic filed with the Commission a Form 12b-25 disclosing that +Vivic could not file timely its Form 10-Q for its first fiscal quarter, ended March 31, 2022, because +“[i]nformation necessary for the filing of a complete and accurate Form 10-Q could not be +gathered and reviewed within the prescribed time period without unreasonable effort and expense +to the Company.” + + 8. Furthermore, in its Form 12b-25, Vivic affirmed that it did not anticipate that any +significant change in results of operations from the corresponding period for the prior fiscal year +would be reflected in the subject Form 10-Q. + + 9. On June 1, 2022, Vivic filed with the Commission a Form 8-K disclosing that, “On +May 28, 2022, the board of directors (the ‘Board’) of Vivic Corp. (the ‘Company’) concluded that +due to de-consolidation of the Company’s subsidiary, the Company’s previously issued unaudited +interim financial statements included in the quarterly report on Form 10-Q for the fiscal quarter +ended September 30, 2021, filed on November 15, 2021, unaudited interim financial statements +included in the quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2021, filed on +August 12, 2021, and unaudited interim financial statements included in the quarterly report on +Form 10-Q for the fiscal quarter ended March 31, 2021, filed on May 14, 2021 (each a ‘Previous +Filing’ and collectively ‘Previous Filings’), should no longer be relied upon” because Vivic had +incorrectly accounted, in those financial statements, for a subsidiary’s investment. However, +Vivic’s auditor had informed Vivic’s board on May 12, 2022 that Vivic needed to restate certain + +2 Form 12b-25 specifies a “narrative” disclosure in “reasonable detail why” Form 10-Q or 10-K “could not +be filed within the prescribed time period.” (See Form 12b-25, Part III.) + 4 +previously filed financial statements. As such, Vivic failed to file its Form 8-K within the required +four business day period. + +10. Prior to May 11, 2022, Vivic understood that its inability to meet the filing deadline +for its first-quarter FY2022 Form 10-Q was due, in large part, to the discovery, and ongoing +correction, of errors in its Forms 10-Q for the first three quarters of FY2021. Moreover, the +company was aware that its first-quarter FY2022 financial results, when reported, would differ +significantly from its first-quarter FY2021 financial results, including a 96% decrease in quarterly +gross profit versus first quarter FY2021. In its Form 12b-25, however, Vivic failed to disclose any +of this information, much less provide the detailed narratives and quantitative explanation +specifically called for by the form. +Violations + + 11. As a result of the conduct described above, Vivic violated Section 13(a) of the +Exchange Act and Rules 12b-25 and 13a-11 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Vivic’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Vivic cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rules 12b-25 and 13a-11 thereunder. + +B. Respondent shall pay a civil money penalty in the amount of $60,000 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). Payment shall be made in the following five +installments: (1) $15,000 within 14 days of entry of this order; (2) $11,250 within 90 days of entry +of this order; (3) $11,250 within 180 days of this order; (4) $11,250 within 270 days of entry of +this order; and (5) $11,250 within 360 days of this order. 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; + + 5 +(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 +Vivic 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 D. Mark Cave, Associate 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/2023/AAER-4449.txt b/raw/aaer/2023/AAER-4449.txt new file mode 100644 index 0000000000000000000000000000000000000000..67241bb0ae7a59cfd46352aec1a86fff5bb25281 --- /dev/null +++ b/raw/aaer/2023/AAER-4449.txt @@ -0,0 +1,81 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98218 / August 24, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4449 / August 24, 2023 +ADMINISTRATIVE PROCEEDING +File No. 3-21579 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +MAC WAYNE BILLINGS, CPA, : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate to issue +an order of forthwith suspension of Mac Wayne Billings (“Billings”) 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. Billings was a licensed certified public accountant in the state of North Carolina. +2. On June 21, 2022, an indictment was filed against Billings in a criminal action +titled United States v. Mac Wayne Billings, No. 5:22-cr-000035 (W.D.N.C.). + + + +1 Rule 102(e)(2) provides in pertinent part: “[A]ny person whose license to practice as an accountant . . . has +been revoked or suspended in any State; or 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.” See +17 C.F.R. 201.102(e)(2). + + + + +2 + +3. On September 15, 2022, the court accepted Billings guilty plea to one count of +securities fraud and aiding and abetting the same in violation of 15 U.S.C. Sections 78j(b) and +78ff(a). He was subsequently sentenced to 41 months in prison, three years of supervised release, +restitution of $3,556,986.00 and a $100.00 assessment. +4. On December 19, 2022, the North Carolina State Board of Certified Public +Accountant Examiners (the “North Carolina CPA Board”) entered a consent order that +permanently revoked Billings’ certified public accountant certificate based on his criminal +conviction. +III. + +In view of the foregoing, the Commission finds that Billings has been (1) convicted of a +felony and (2) had his license to practice as a certified public accountant revoked by the North +Carolina CPA Board, both within the meaning of Rule 102(e)(2) of the Commission’s Rules of +Practice. + +Accordingly, it is ORDERED, that Mac Wayne Billings 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-4450.txt b/raw/aaer/2023/AAER-4450.txt new file mode 100644 index 0000000000000000000000000000000000000000..cf082c79365c98b5e4194e5b45187022a1ab2a30 --- /dev/null +++ b/raw/aaer/2023/AAER-4450.txt @@ -0,0 +1,321 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98222 / August 25, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4450 / August 25, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21581 + + +In the Matter of + +3M COMPANY, + +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 3M Company (“3M” 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. This matter concerns violations of the books and records and internal accounting +control provisions of the Foreign Corrupt Practices Act (“FCPA”) by 3M resulting from conduct +by one of its China-based subsidiaries, 3M-China Ltd. (“3M-China”) from at least 2014 to 2018 +(the “Relevant Period”). During that time, employees of 3M-China arranged for Chinese health +care officials (“Chinese Government Officials” or “Officials”) employed by its state-owned entity +customers (“SOE Customers”) to attend overseas conferences, educational events, and health care +facility visits (collectively, the “Educational Events”) ostensibly as part of 3M-China’s marketing +and outreach efforts, but that in fact were often a pretext to provide overseas travel, sightseeing and +entertainment (“Tourism Activities”) to the Officials to obtain and retain business from the SOE +Customers. As part of the scheme, funds were transferred to a complicit China-based travel +agency and were improperly used by 3M-China and the China-based travel agency to help pay for +the Tourism Activities. + +2. In violation of the books and records provisions of the Exchange Act, the overseas +travel and Tourism Activities were improperly recorded by 3M-China as legitimate business +expenses and then consolidated into 3M’s books and records, rendering them inaccurate. Also, in +violation of the internal accounting controls provisions of the Exchange Act, 3M failed to devise +and maintain an adequate system of internal accounting controls over the cross-border transfer of +funds to vendors, which helped facilitate the scheme. + +RESPONDENT + +3. 3M Company is a global manufacturer of products and services headquartered in +St. Paul, Minnesota. 3M’s common stock is registered with the Commission pursuant to Section +12(b) of the Exchange Act and trades on the New York Stock Exchange under the Ticker “MMM.” +3M 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. + +FACTS + +3M-China Improperly Funded Tourism Activities for Chinese Government Officials + +4. During the Relevant Period, a former 3M-China marketing manager (the +“Marketing Manager”) colluded with two China-based travel agencies (the “China Travel + +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 +Agencies”) to secretly provide Tourism Activities for Chinese Government Officials during +Educational Events. The Marketing Manager was aided in the scheme by several employees in +3M-China’s sales, marketing and professional services departments. + +5. The Marketing Manager and 3M-China employees (collectively, the “3M-China +Employees”) targeted influential Officials of SOE Customers for attendance at overseas +Educational Events and, in collusion with the China Travel Agencies, they would create a travel +itinerary that included various legitimate business, training and marketing activities for submission +to 3M-China’s compliance personnel for approval. The alternate itineraries (the “Alternate +Itineraries”) planned by 3M-China Employees and the China Travel Agencies consisted of various +Tourism Activities at or near the location of the Educational Events and were provided to the +relevant Chinese Government Officials. Provision of the activities in the Alternate Itinerary were +designed to improperly induce the Officials to purchase 3M products, and violated company +policy. + +6. The 3M-China Employees circulated the Alternate Itineraries through hand delivery +or personal WeChat accounts and asked the participants to keep the agenda hidden, and falsified +internal compliance documents that affirmatively denied and/or omitted mention of the Tourism +Activities that were planned as part of the overseas trip. + +7. In a number of instances the Tourism Activities were the primary reason for the +overseas trip. For example: (a) Tourism Activities were scheduled at the same time as the +Educational Event activities; (b) the ostensibly Educational Events were in English, and the trips +included Chinese Government Officials who neither understood English nor had adequate +translation services; and (c) at times Chinese Government Officials missed whole days of the +Educational Event or simply never attended at all. Certain Chinese Government Officials also +requested Tourism Activities as part of the overseas trip. + +8. During the Relevant Period, 3M-China sent Chinese Government Officials on at +least 24 overseas Educational Events that included Tourism Activities. 3M-China Employees also +accompanied the Chinese Government Officials on the Tourism Activities. The Educational +Events were held at tourist destinations and the Tourism Activities included guided tours, shopping +visits, day trips to nearby sites and other leisure activities, all of which were detailed in the +Alternate Itineraries. Examples of these trips include: + +• 2017, St. Paul, MN, Nashville, TN, and Los Angeles, CA. This nine-day trip included +eleven Chinese Government Officials. While the official agenda had Educational +Event activities for each day of the trip, the Alternate Itinerary had only one day of +Educational Event activities, with most of the remaining days scheduled with Tourism +Activities. 3M-China employees accompanied the Officials on the Tourism Activities +and at least some of the Officials did not understand English and were not provided +interpreters. + +• 2017, Boston, MA and St. Paul, MN: This seven-day trip included twelve Chinese +Government Officials. While the official 3M-China agenda had Educational Event + 4 +activities for each day, the Alternate Itinerary had primarily Tourism Activities. At +least some of the Chinese Government Officials did not understand English, +interpreters were not provided, and the Chinese Government Officials mostly +participated in Tourism Activities rather than attend the Educational Events. + +• 2016, Chicago, IL. This eight-day trip included five Chinese Government Officials, +two of whom were accompanied by their spouses. One Official and his spouse left +Chicago in the evening after the Educational Event started and returned after the Event +had ended in order to participate in Tourism Activities. Another Official attended one +day of the Educational Event, then left Chicago and never returned. Three other +Chinese Government Officials participated in full days of Tourism Activities nearly +every day of the scheduled Educational Event activities. The Officials were not seen at +the Educational Event activities and did not attend a dinner that 3M had organized for +them. + +• 2016, Brisbane & Sydney, Australia. This eight-day trip included four Chinese +Government Officials. While the official 3M-China agenda had Educational Event +activities scheduled for each non-travel day of the trip, the Alternate Itinerary only +scheduled two half-days for Educational Event activities, with the bulk of the time +scheduled for Tourism Activities. At least some of the Chinese Government Officials +did not understand English, were not provided interpreters, and joined the Tourism +Activities for entire days rather than attending the conference. + +9. In order to cover certain of their own non-reimbursable expenses related to Tourism +Activites, 3M-China Employees would at times work with the collusive China Travel Agencies to +inflate their billing invoices for ostensibly legitimate, line item expenses (e.g. travel costs). In +other instances, the 3M-China Employees submitted unpermitted invoices directly to the China +Travel Agencies for reimbursement. In addition, the China Travel Agencies, with the support of +the 3M-China Employees, at times directed that 3M-China’s distributors pay for portions of the +non-reimburseable expenses. + +10. 3M-China Employees measured the impact that the provision of overseas +Educational Activities had on sales. Certain 3M-China Employees tracked the effect of providing +overseas Educational Events to Chinese Government Officials on 3M-China’s sales to SOE +Customers. One 3M-China Employee tracked post-trip sales to the SOE Customer to ensure they +were consistent with 3M-China’s sales goals. 3M-China management asked for the “return on +investment” from an Educational Event (i.e. the effect of providing health care officials with +overseas travel on sales to the SOE Customer) by comparing sales figures before and after an +Educational Event. + +11. From at least 2014 through 2017, 3M-China paid nearly $1 million to fund at least +24 trips for Chinese Government Officials that included Tourism Activities. The costs of these +trips were improperly recorded in 3M’s books and records as legitimate business expenses, without +any indication that they included Tourism Activities. As a result of the above conduct, 3M +improperly benefited by at least $3.5 million from increased sales. + 5 +3M Provided Funds to a China Travel Agency that was Used to Pay for +Improper Tourism Activities + +12. As part of their scheme, 3M-China Employees arranged for 3M to directly provide +funds to one of the China Travel Agencies, which it then improperly used to offset some of the +costs of the Tourism Activities. 3M-China lacked oversight over the use of these funds: the funds +were not allocated for particular projects, but would be distributed at the discretion of the China +Travel Agency and the 3M-China Employees. + +13. 3M’s records indicate that between February 2016 and September 2018, 3M made +15 transfers totaling $254,000 to the China Travel Agency for vaguely described “marketing” +efforts. 3M had insufficient controls over the fund transfers, which did not adequately describe the +purpose or uses of the funds. + +LEGAL STANDARDS AND FCPA VIOLATIONS +14. 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 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. + +3M Violated Exchange Act Section 13(b)(2)(A) + +15. 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 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 a result of the conduct described above, 3M violated Exchange Act Section +13(b)(2)(A). + +3M Violated Exchange Act Section 13(b)(2)(B) + +16. Section 13(b)(2)(B) of the Exchange Act requires companies with a class of +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 (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). As a result of the conduct described above, +3M violated Exchange Act Section 13(b)(2)(B). + + 6 +DISGORGEMENT AND CIVIL PENALTIES + +17. The disgorgement and prejudgment interest ordered in section IV. is consistent +with equitable principles, does not exceed Respondent’s net profits from its 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 Section IV. shall be +transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the Exchange +Act. + +3M’S SELF-REPORTING, COOPERATION AND REMEDIAL EFFORTS + +18. In determining to accept the Offer, the Commission considered 3M’s self-reporting, +cooperation and remedial efforts. 3M promptly self-reported the misconduct after first learning of +it. The company’s cooperation included making witnesses available for interviews, voluntarily +producing translations of relevant documents, sharing facts uncovered during its internal +investigation – including notes of witness interviews – and providing comprehensive, periodic +updates on its investigation. 3M also undertook significant remedial measures, including +disciplining and/or terminating involved employees, terminating its relationship with the China +Travel Agencies, and further enhancements to its internal controls environment and compliance +program including additional controls over is cross-border fund transfers. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent 3M’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 and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. + +B. Respondent shall, within 14 days of the entry of this Order, pay disgorgement of +$3,538,897 and prejudgment interest of $1,042,721 and a civil money penalty in the amount of +$2,000,000 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 SEC Rule of Practice 600 and 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 + 7 + +(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 3M +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, Chief, FCPA Unit, Division of +Enforcement, 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, 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/2023/AAER-4452.txt b/raw/aaer/2023/AAER-4452.txt new file mode 100644 index 0000000000000000000000000000000000000000..8815eaf70d08169b9469f54226563f33a97ad59f --- /dev/null +++ b/raw/aaer/2023/AAER-4452.txt @@ -0,0 +1,458 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98243 / August 30, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4452 / August 30, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21588 + + +In the Matter of + +Plug Power 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 Plug Power Inc. (“Plug Power,” +or 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 Insituting 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. This matter involves financial reporting, accounting, and controls failures by Plug +Power, a provider of green hydrogen and hydrogen-fuel-cell systems. These failures led to a multi- +year restatement of Plug Power’s financial statements concerning, among other things, reported +assets and liabilities for leases, classification of certain operating costs, and loss accruals for +service contracts. + +2. From 2018 through the third quarter of 2020, Plug Power failed to properly account +for its right-of-use (“ROU”) assets and lease liabilities for certain sale-leaseback transactions, +failed to properly classify and present certain costs related to research and development (“R&D”) +activities as cost of revenue, and failed to properly estimate loss accruals for extended-maintenance +contracts. Plug Power also failed to properly account for other items, including bonus expense in +the third quarter of 2020, and certain conversions of the Company’s convertible preferred stock. +On March 16, 2021, Plug Power announced that its prior annual reports on Form 10-K for 2018 +and 2019, and prior quarterly reports on Form 10-Q for 2019 and 2020, should no longer be relied +upon due to the Company’s accounting errors. Plug Power subsequently restated these financial +statements in the Company’s 2020 Form 10-K filing on May 14, 2021. In the restatement, +management identified a material weakness in internal control over financial reporting (“ICFR”), +and ineffective disclosure controls and procedures (“DCP”), due to Plug Power’s failure to +maintain a sufficient complement of trained, knowledgeable personnel to execute their +responsibilities for certain financial statement accounts and disclosures. Despite these control +deficiencies, the Company raised over $5 billion from investors during the relevant Filing Period. +1 +Plug Power’s remediation efforts are ongoing but the Company’s material weakness in ICFR and +ineffective DCP have not been fully remediated. + +3. As a result of this conduct, Plug Power violated Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act, and Rules 13a-1, 13a-13, and 13a-15(a) – (c) thereunder. + +Respondent + +4. Plug Power is a Delaware corporation headquartered in Latham, New York. Plug +Power provides green hydrogen and hydrogen-fuel-cell solutions for electric motors in supply +chain and logistics applications, electric vehicles, stationary power, and other markets. The +Company’s common stock is registered under Section 12(b) of the Exchange Act, and trades +on the Nasdaq Stock Market under the symbol “PLUG.” + +Plug Power Releases 2020 Earnings + +5. On February 24, 2021, Plug Power’s management and its independent accounting +firm at the time, KPMG LLP (“KPMG”), met with the Company’s Audit Committee. During the +meeting, management informed the Audit Committee that Plug Power’s 2020 Form 10-K was + +1 The “Filing Period” begins on March 13, 2019, which is the date when Plug Power filed its first +financial statements that required restatement, and ends on May 14, 2021, which is the date when Plug +Power filed the restated financial statements in the Company’s 2020 Form 10-K. + 3 +substantially complete. Management and KPMG also reported that there were no significant audit +issues, and any pending items were considered immaterial. The following day, February 25, 2021, +Plug Power released its financial results for the fourth quarter and year-ended December 31, 2020. + +6. As audit work continued over the next few days, KPMG’s audit team examined +Plug Power’s impairment analysis for certain lease assets and questioned whether the Company +had failed to identify a triggering event and potential impairment. KPMG’s audit team also tried +to address open questions concerning Plug Power’s reclassification of certain hydrogen-fuel costs +as R&D expenses. Plug Power and KPMG tried to resolve these issues before the prescribed filing +date for the Company’s Form 10-K, but Plug Power ultimately missed the March 1, 2021 date. + +Plug Power Discloses Delayed Filing and Possible Restatement + +7. On March 2, 2021, Plug Power filed a Notification of Late Filing on Form 12b-25 +and disclosed that the Company needed “additional time to complete the procedures relating to its +year-end reporting process,” including “procedures relating to management’s assessment of the +effectiveness of internal controls.” Plug Power stated that it was “working diligently to complete +the necessary work, including review and assessment of the treatment of certain costs with regards +to classification between [R&D] versus Costs of Goods Sold, the recoverability of [ROU] assets +associated with certain leases, and certain internal controls over these and other areas.” The +Company also disclosed that “one or more of these items may result in charges or adjustments +to current and/or prior period financial statements.” + +8. Over the next two weeks, KPMG’s audit team continued to perform audit +procedures on Plug Power’s impairment analysis for certain lease assets and the reclassified costs. +The audit team eventually concluded that Plug Power’s ROU assets and lease liabilities for certain +sale-leaseback transactions had been calculated incorrectly and materially overstated. They also +concluded that certain hydrogen-fuel costs should not be reclassified and reported as R&D +expenses. KPMG notified Plug Power about the accounting errors. Management consulted +KPMG and Plug Power’s Audit Committee about these issues, and on March 12, 2021, the +Audit Committee concluded that the Company should restate its prior financial statements. + +Plug Power Announces Restatement + +9. On March 16, 2021, Plug Power filed a Form 8-K and announced that its prior +annual reports on Form 10-K for 2018 and 2019, and quarterly reports on Form 10-Q for 2019 +and 2020, should no longer be relied upon. Plug Power disclosed that it would restate the prior- +period financial statements to correct numerous accounting errors, including: (i) the reported book +value of ROU assets and related finance obligations; (ii) loss accruals for certain service contracts; +(iii) impairment of certain long-lived assets; and (iv) classification of certain costs relating to R&D +expense and cost of revenue. Plug Power stated that it expected to restate the impacted financial +statements in the Company’s 2020 Form 10-K. + + 4 +Plug Power Files Restatement + +10. On May 14, 2021, Plug Power filed a Form 10-K for 2020 that included restated +annual financial statements for 2018 and 2019, and interim quarterly reports for 2019 and 2020. +The restatement corrected numerous accounting errors, including the following: + +a. $112.7 million overstatement of ROU assets and lease liabilities as of +December 31, 2019 due to the failure to correctly calculate lease liabilities +for certain sale-leaseback transactions (“Sale-Leaseback Errors”); + +b. $19.5 million overstatement of gross profit for 2019, and $21.2 million +overstatement of gross profit for 2018, due to the failure to properly classify +and present certain costs related to R&D activities as cost of revenue (“Cost- +Classification Errors”); and + +c. $1.6 million understatement of the benefit for loss accruals in 2019, and +$5.3 million understatement of the provision for loss accruals in 2018, due +to the failure to properly estimate loss accruals for extended-maintenance +contracts (“Loss-Accrual Errors”). + +The restatement also corrected other accounting errors, including the Company’s reported bonus +expense in the third quarter of 2020, an error in prior lease accounting, an error from certain +conversions of the Company’s convertible preferred stock, and other items. Management +concluded that the aggregate impact of these accounting errors was material to the Company’s +prior-period financial statements. Additionally, while not part of the restatement, Plug Power +initially failed to identify triggering events in the fourth quarter of 2020 that caused a $5.7 million +impairment of certain ROU assets. + +11. In the 2020 Form 10-K, Plug Power’s management also identified the following +deficiency in the Company’s ICFR: + +the Company did not maintain a sufficient complement of trained, +knowledgeable resources to execute their responsibilities with +respect to [ICFR] for certain financial statement accounts and +disclosures. As a consequence, the Company did not conduct an +effective risk assessment process that was responsive to changes in +the Company’s operating environment and did not design and +implement effective process-level controls activities in the following +areas: presentation of operating expenses; accounting for lease - +related transactions; identification and evaluation of impairment, +loss-contract accr ual, certain expense accruals, and deemed +dividends; and timely identification of adjustments to physical +inventory in interim periods. + + 5 +Management concluded that this deficiency constituted a material weakness in ICFR, and the +Company’s DCP were not effective, as of December 31, 2020. Plug Power later filed an amended +Form 10-K on March 14, 2022 that provided management’s discussion and analysis for the +quarterly periods, and disclosed that the material weakness in ICFR and ineffective DCP also +existed in 2018 and 2019. Despite these control deficiencies, Plug Power raised over $5 billion +from investors during the relevant Filing Period, including approximately $4.8 billion from the sale +of common stock, and approximately $244 million from the sale of convertible senior notes. + +Plug Power’s Sale-Leaseback Errors + +12. In some sales transactions, Plug Power sells its hydrogen-power equipment to +financial institutions and then leases the equipment back to provide power to customers under +Power Purchase Agreements (“PPAs”). Sometimes Plug Power also sells its contractual future +revenue streams from customers under the PPAs to financial institutions in exchange for cash. +Plug Power repays that separate obligation to the financial institutions as the Company receives +payments from customers under the PPAs. + +13. There are two elements to these transactions with financial institutions: (i) a sale +and leaseback of equipment; and (ii) a debt component for the proceeds that Plug Power received +from financial institutions related to the sale of future revenues. Plug Power’s lease liabilities and +corresponding ROU assets for the sale and leaseback of equipment should be based on the present +value of the portion of the Company’s future payments to financial institutions that represent the +lease component (i.e., excluding the portion representing the Company’s debt-service repayments). +Historically, Plug Power incorrectly included the entire repayment amount when determining lease +liabilities and corresponding ROU assets even though the Company had separately recorded a debt +obligation related to the cash received from the sale of future revenues. + +14. To correct these errors, Plug Power reduced the lease liabilities and corresponding +ROU assets to exclude the double-counting of the debt obligation at the inception of the leases. +The restatement reduced Plug Power’s ROU assets and lease liabilities on December 31, 2019 by +$112.7 million. Relative to the Company’s previously reported ROU assets of $245 million, and +total assets of $771 million, the correction reduced Plug Power’s ROU assets by approximately +46%, and total assets by nearly 15%. + +Plug Power’s Cost-Classification Errors + +15. When Plug Power started deploying its GenKey hydrogen-power systems in +2014, the Company had to learn how to install and maintain these systems at different sites. Plug +Power encountered numerous problems during this process, including the loss of hydrogen fuel +that occurs during transportation, delivery, installation, and maintenance of equipment. Over time, +however, Plug Power developed better methods and generally reduced the amount of lost fuel. + +16. To account for these efforts, the Company reclassified a portion of such fuel-loss +costs to R&D expenses rather than cost-of-sales expenses. During the 2020 audit, KPMG +identified the reclassified costs as a potential adjustment because the audit team believed the + 6 +reclassification was a departure from generally accepted accounting principles (“GAAP”). +KPMG continued to perform audit procedures on these accounts in early March 2021, and the +audit team eventually concluded that the costs should be reported as cost of revenue (i.e., cost-of- +sales expenses). Management decided to restate the previously reported amounts. + +17. In the restatement, management concluded that Plug Power should have properly +classified these fuel costs as cost of revenue rather than R&D expenses. The restated expenses +negatively impacted the Company’s previously reported gross profit. For example, Plug Power’s +gross profit for 2019 decreased by $19.5 million — a 68% decrease in the previously reported +gross profit of $28 million — and its gross profit for 2018 decreased by $21.2 million — which +turned a $2.6 million gross profit into a gross loss of $18.6 million. + +Plug Power’s Loss-Accrual Errors + +18. Plug Power sells extended-maintenance contracts to customers that generally +provide five-to-ten-year coverage in exchange for up-front payments. The Company’s future +service obligations are recorded as deferred revenue, which is recognized over the life of the +contract, generally on a straight-line basis. When expected future service costs are projected to +exceed revenues over the remaining term of a contract, the Company records an accrual for loss. + +19. Plug Power failed to properly estimate loss accruals for extended-maintenance +contracts for two reasons. First, due to the Company’s prior reclassification of certain fuel costs +as R&D expenses, the Company failed to consider these historical costs when estimating future +services and potential loss accruals. Second, Plug Power also failed to properly consider certain +service costs for hydrogen infrastructure, and costs from stock warrants issued to large customers, +when estimating potential loss accruals. Initially, these costs were considered immaterial, but +over time the costs became material and the Company failed to include them in the loss-accrual +estimates. + +20. The restatement increased Plug Power’s 2018 loss accrual by $5.3 million — which +turned a $2.6 million gross profit into a gross loss of $2.7 million — and reduced the 2019 loss +accrual by $394,000 due to a partial release of the 2018 loss accrual. + +Plug Power’s Internal Control Deficiencies + +21. During the restatement process, Plug Power identified numerous control failures, +design deficiencies, and absent controls related to the Company’s accounting errors. In particular, +management determined that Plug Power did not have the appropriate level of accounting +personnel and technical expertise to properly assess the accounting implications of many complex +business transactions. Management concluded that this design deficiency was primarily caused +by a lack of sufficient qualified technical accounting and financial reporting personnel to perform +control activities for complex and non-routine transactions. + +22. Due to this deficiency, management determined that certain process-level controls +did not operate effectively to mitigate identified risks in the following areas: (i) accounting for + 7 +certain sale-leaseback transactions; (ii) classification of certain operating expenses; and +(iii) identification and evaluation of certain management estimates concerning loss accruals, +quarterly bonus expenses, and impairment. Management also determined that: (i) the Company’s +process when applying GAAP to complex accounting matters was insufficient; (ii) its estimation +policies and procedures were not consistent with overall market dynamics; and (iii) it did not +have sufficient tools and tracking mechanisms to maintain appropriate documentation for the +classification of certain operating expenses. Plug Power also failed to design sufficient controls +for: (i) lease accounting; (ii) presentation of operating expenses; (iii) identification and evaluation +of impairment; (iv) accrual for loss contracts; (v) accruals for certain expenses; and (vi) physical +inventory controls at interim periods. + +Plug Power’s Material Weakness Has Not Been Fully Remediated + +23. Management concluded that the failure of Plug Power’s process-level controls +resulted in material misstatements of the Company’s financial statements, and when considered +in aggregate, the deficiencies constituted a material weakness in ICFR in 2018, 2019, and 2020. +Management also concluded that Plug Power’s DCP were not effective during these periods +because of this material weakness in ICFR. + +24. Plug Power prepared a remediation plan during the restatement process, and began +implementing the plan in 2021, which includes numerous measures to remediate the material +weakness in ICFR and ineffective DCP. In Plug Power’s 2022 Form 10-K, filed on March 1, +2023, the Company disclosed management’s determination that certain enhancements to +Plug Power’s risk-management process, and enhancements to certain process-level controls and +information-technology controls, are operating effectively. The Company also disclosed that +management considers the risk-management process, process-level and general information- +technology material weaknesses that were identified in 2021 to be remediated as of December 31, +2022. Despite Plug Power’s ongoing remediation efforts, however, the Company’s material +weakness has not been fully remediated. + +Violations + +25. As a result of the conduct described above, Plug Power violated Section 13(a) of +the Exchange Act and Rules 13a-1 and 13a-13 thereunder, which require every issuer of a security +registered under Section 12 of the Exchange Act to file with the Commission complete and +accurate annual and quarterly reports. + +26. In addition, as a result of the conduct described above, Plug Power violated +Section 13(b)(2)(A) of the Exchange Act, which requires issuers such as Plug Power to make and +keep books, records and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of assets. + +27. In addition, as a result of the conduct described above, Plug Power violated +Section 13(b)(2)(B) of the Exchange Act, which, among other things, requires issuers such as +Plug Power to devise and maintain a system of internal accounting controls sufficient to provide + 8 +reasonable assurances that transactions are recorded as necessary to permit preparation of +financial statements in conformity with GAAP or any other criteria applicable to such +statements. + +28. In addition, as a result of the conduct described above, Plug Power violated +Exchange Act Rules 13a-15(a) – (c), which require issuers such as Plug Power to maintain and +evaluate the effectiveness of: (i) disclosure controls and procedures that are designed to ensure +that information required to be disclosed by the issuer in the reports that it files or submits under +the Exchange Act is recorded, processed, summarized and reported, within the time periods +specified in the Commission’s rules and forms, and that such information is accumulated and +communicated to the issuer’s management to allow timely decisions regarding required +disclosure; and (ii) internal control over financial reporting to provide reasonable assurance +regarding the reliability of financial reporting and the preparation of financial statements for +external purposes in accordance with GAAP. Under Item 308 of Regulation S-K, management +must provide an annual report that discloses management’s assessment of the effectiveness of +ICFR and any material weakness in ICFR, and management is not permitted to conclude that +the registrant’s ICFR is effective if there are one or more material weaknesses in the +registrant’s ICFR. + +Plug Power’s Remedial Efforts + +29. In determining to accept Plug Power’s Offer, the Commission considered remedial +acts promptly undertaken by the Company and cooperation afforded the Commission staff. +Specifically, Plug Power prepared and began implementing a remediation plan in 2021, which +includes the following remedial measures: (i) hiring additional resources, including approximately +60 new employees in its accounting and finance department and internal audit; (ii) utilizing third- +party resources with appropriate technical accounting expertise, and strengthening internal training, +to help the Company’s employees identify and address complex technical accounting issues that +affect the financial statements; (iii) designing and implementing a continuous risk-assessment +process to identify and assess risks of material misstatements, and to help ensure that financial- +reporting processes and related internal controls are properly designed, maintained, and +documented to respond to such risks in financial reporting; (iv) implementing more analysis and +review procedures and documentation for the application of GAAP, complex accounting matters, +and key accounting policies; (v) augmenting estimation policies and procedures to be more robust +and consistent with overall market dynamics, including evaluating the Company’s operating +environment to ensure operating effectiveness of certain process-level controls; (vi) deploying new +tools and tracking mechanisms to enhance and maintain appropriate documentation concerning the +classification of certain operating expenses; and (vii) reporting regularly to Plug Power’s Audit +Committee concerning progress and results, including the identification, status, and resolution of +control deficiencies. + +Undertakings + +30. Plug Power has undertaken to: + + 9 +a. Fully remediate its material weakness in ICFR, and ineffective DCP, within +one year from the date of this Order. + +b. Publicly disclose, within one year from the date of this Order, whether in +management’s opinion, Plug Power has fully remediated its material weakness +in ICFR and ineffective DCP. + +c. Certify, in writing, compliance with the undertakings set forth above. The +Commission staff may make reasonable requests for evidence of compliance, +including a narrative and supporting exhibits, and Plug Power agrees to +provide such evidence. The certification and any requested supporting +materials shall be submitted to James E. Etri, Assistant Director, 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 agreed +sanctions in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Plug Power 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 13a-1, 13a-13, and 13a-15(a) – (c) +thereunder. + + B. Respondent shall comply with the undertakings enumerated in Paragraph 30 above. + + C. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $1,250,000 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. + + D. If Respondent fails to comply with the undertakings enumerated in Paragraph +30 above, Respondent shall, within ninety (90) days after one year from the date of this Order, pay +an additional civil money penalty in the amount of $5,000,000 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. + +E. Payment(s) 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; + 10 + +(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 + +Payment(s) by check or money order must be accompanied by a cover letter identifying Plug +Power 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, Division of Enforcement, +Securities and Exchange Commission, 801 Cherry Street, Suite 1900, Fort Worth, Texas 76102. + + 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 any 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/2023/AAER-4453.txt b/raw/aaer/2023/AAER-4453.txt new file mode 100644 index 0000000000000000000000000000000000000000..46f8012be2ee6de4939cfe026ddfb507ab5d6b60 --- /dev/null +++ b/raw/aaer/2023/AAER-4453.txt @@ -0,0 +1,438 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98272 / September 1, 2023 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 6393 / September 1, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4453 / September 1, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21600 + + +In the Matter of + +SQN CAPITAL MANAGEMENT, +LLC and +JEREMIAH SILKOWSKI, + + +Respondents. +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND +SECTIONS 203(e), 203(f) AND 203(k) OF +THE INVESTMENT ADVISERS ACT OF +1940, 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 pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and +Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) +against SQN Capital Management, LLC (“SQN Capital”) and Jeremiah Silkowski (“Silkowski”) +(collectively, “Respondents”). + +II. + + In anticipation of the institution of these proceedings, the Respondents have submitted +Offers of Settlement (“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, the Respondents + +2 +consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings +Pursuant to Section 21C of the Securities Exchange Act of 1934 and Sections 203(e), 203(f) and +203(k) of the Investment Advisers Act of 1940, 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 the Respondents’ Offers, the Commission finds1 that: + +Summary + +1. SQN Capital is a registered investment adviser, and Silkowski is its President, +Chief Executive Officer (“CEO”) and Chief Compliance Officer (“CCO”). SQN Capital failed +to timely distribute annual audited financial statements prepared in accordance with Generally +Accepted Accounting Principles (“GAAP”) to the investors in two private funds that it advised +for each fiscal year from 2020 through 2022 and in two public funds that it advised for each +fiscal year from 2019 through 2022, resulting in violations of Section 206(4) of the Advisers Act +and Rule 206(4)-2 thereunder, commonly referred to as the “custody rule.” SQN Capital also +failed to adopt and implement written policies and procedures reasonably designed to prevent +violations of the Advisers Act and the rules thereunder, a violation of Section 206(4) of the +Advisers Act and Rule 206(4)-7 thereunder, commonly referred to as the “compliance rule.” +Silkowski willfully aided and abetted and caused SQN Capital’s custody rule and compliance +rule violations. In September 2020, the Commission charged SQN Capital for violating the +custody rule and compliance rule with respect to the same two private funds from 2012 through +2019. + + 2. In addition, the two public funds at issue here had reporting obligations pursuant +to Sections 15(d) and 13(a) of the Exchange Act and failed to file with the Commission annual +and quarterly periodic reports during the period from 2019 through the present. SQN Capital and +Silkowski willfully aided and abetted and caused the public funds’ violations of Section 13(a) of +the Exchange Act and Rules 13a-1 and 13a-13 thereunder. + +Respondents + +3. SQN Capital is a Delaware limited liability company with its principal office and +place of business in New York, New York. SQN Capital has been registered with the Commission +as an investment adviser since February 2012. According to SQN Capital’s Form ADV filed in +March 2023, it has a total of $414.7 million in regulatory assets under management (“RAUM”) +and manages a total of eight pooled investment vehicles with RAUM of $288.6 million; the four +funds at issue here have a total RAUM of $93.6 million. On September 4, 2020, the Commission +instituted settled public administrative and cease-and-desist proceedings against SQN Capital. In +the Matter of SQN Capital Management LLC, Advisers Act Rel. No. 5573 (Sept. 4, 2020) + +1 The findings herein are made pursuant to the Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. + +3 +(“September 2020 Order”). The Commission found that SQN Capital willfully violated Section +206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder. Without admitting or +denying the Commission’s findings, SQN Capital consented to the issuance of a cease-and-desist +order and censure, and paid a civil monetary penalty of $75,000. +4. Silkowski has been SQN Capital’s President, CEO, CCO and majority owner +since 2012. Silkowski is 48 years old and resides in Dobbs Ferry, New York. He does not hold +any securities licenses and has no known disciplinary history. +Facts + +5. During the relevant period, SQN Capital was the managing member of and served +as investment adviser to the two private funds at issue, SQN Special Opportunity Fund, LLC (“SO +Fund”) and SQN Portfolio Acquisition Company, LLC (“PA Fund”). SQN Capital also served as +investment manager to the two public funds at issue, SQN Alternative Investment Fund III L.P. +(“AIF III Fund”) and SQN AIF IV, L.P. (“AIF IV Fund”). The general partners of the AIF III +Fund and the AIF IV Fund are both wholly owned subsidiaries of SQN Capital. The securities +issued by the AIF III Fund and the AIF IV Fund are limited partnership units as to which the +funds filed registration statements on Form S-1 under the Securities Act of 1933. The AIF III +Fund and AIF IV Fund therefore have reporting obligations pursuant to Sections 15(d) and 13(a) of +the Exchange Act. The stated investment strategy for all four funds at issue focuses on +investments in industrial equipment leases, including through participation agreements, and other +asset finance investment opportunities. +6. The custody rule is designed to protect investment advisory clients from the misuse +or misappropriation of their funds and securities. It requires that registered advisers who have +custody of client funds or securities implement an enumerated set of requirements to prevent loss, +misuse, or misappropriation of those assets. + + 7. An investment adviser has custody of client assets if it holds, directly or indirectly, +client funds or securities, or if it has any authority to obtain possession of those assets, including, +among other things, by acting as a managing member of a limited liability company or a general +partner of a limited partnership. See Rule 206(4)-2(d)(2) of the Advisers Act. SQN Capital was +the managing member of the SO Fund and PA Fund, and a related person of SQN Capital served +as the general partner of the AIF III Fund and AIF IV Fund. SQN Capital therefore had custody +of the assets of the four funds at issue as defined in Rule 206(4)-2. + + 8. An investment adviser who has custody of client assets must, among other things: +(i) ensure that a qualified custodian maintains the client assets; (ii) notify the client in writing of +accounts opened by the adviser at a qualified custodian on the client’s behalf; (iii) have a +reasonable basis for believing that the qualified custodian sends account statements at least +quarterly to clients, except if the client is a limited liability company or a limited partnership for +which the adviser or a related person is a managing member or general partner, the account +statements must be sent to each member or limited partner; and (iv) ensure that client funds and +securities are verified by actual examination each year by an independent public accountant at a + +4 +time chosen by the accountant without prior notice or announcement to the adviser. See Rules +206(4)-2(a)(1) - (5). + + 9. The custody rule provides an alternative to complying with the requirements of +Rules 206(4)-2(a)(2), (3) and (4) for investment advisers to limited partnerships or limited liability +companies, such as the four SQN funds at issue. The custody rule provides that an investment +adviser “shall be deemed to have complied with” the independent verification requirement and is +not required to satisfy the notification and accounts statements delivery requirements with respect +to a fund if the fund is subject to audit at least annually and “distributes [the fund’s] audited +financial statements prepared in accordance with generally accepted accounting principles to all +limited partners (or members . . .) within 120 days of the end of [the fund’s] fiscal year” (“Audited +Financials Alternative”). See Rule 206(4)-2(b)(4). The accountant performing the audit must be +an independent public accountant that is registered with, and subject to regular inspection by, the +Public Company Accounting Oversight Board. See Rule 206(4)-2(b)(4)(ii). An investment +adviser to a pooled investment vehicle that fails to meet the requirements of the Audited Financials +Alternative to timely distribute audited financial statements prepared in accordance with GAAP +would need to satisfy all of the requirements of Rule 206(4)-2(a)(2)-(4) in order to avoid violating +the custody rule. + +10. While SQN Capital stated in its relevant Forms ADV that it was relying on the +Audited Financials Alternative to comply with the custody rule, SQN Capital did not satisfy the +requirements of the Audited Financials Alternative with respect to any of the four funds. SQN +Capital failed to engage an accounting firm to conduct an annual audit of the financial statements +of the SO Fund and the PA Fund for each year from 2020 through 2022. SQN Capital also failed +to engage an accounting firm to conduct an annual audit of the financial statements of the AIF III +Fund and the AIF IV Fund for each year from 2019 through 2022. As a result, annual audits were +never conducted, and audited financial statements were never distributed to investors in the four +funds, for any of the foregoing fiscal years. SQN Capital was therefore obligated to comply with +Rules 206(4)-2(a)(2), (3) and (4), which it also failed to do. + + 11. In addition, SQN Capital failed to comply with the requirement that every +investment adviser registered with the Commission adopt and implement written policies and +procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder. +See Rule 206(4)-7(a). While SQN Capital’s written policies and procedures referenced the custody +rule, they were not reasonably designed and implemented to prevent violations of the rule. + + 12. Silkowski was aware of the foregoing circumstances and did not take corrective +action to ensure that SQN Capital complied with the custody rule and compliance rule. As SQN +Capital’s CEO, Silkowski exercised control and authority over all the firm’s advisory functions and +decision-making and was responsible for ensuring the firm’s compliance with the custody and +compliance rules. He failed to take necessary steps to do so despite being on notice of the rule’s +requirements and was aware of the ongoing failures in obtaining audited financial statements for +the relevant funds or otherwise complying with the custody rule. Similarly, Silkowski was +responsible for ensuring that SQN Capital adopted and implemented policies and procedures + +5 +reasonably designed to prevent violations of the Advisers Act, including the custody rule. +Silkowski was aware that the firm’s policies and procedures were deficient with respect to the +custody rule and failed to take corrective action even after the entry of the September 2020 Order. + +13. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers of securities registered pursuant to Section 12 of the Exchange Act, such as the AIF III +Fund and the AIF IV Fund, to file with the Commission periodic reports, including annual reports +on Form 10-K and quarterly reports on Form 10-Q. + +14. The AIF III Fund has not filed an annual report on Form 10-K since April 15, +2019, and has not filed a quarterly report on Form 10-Q since November 14, 2019. The AIF IV +Fund has not filed an annual report on Form 10-K since April 1, 2019, and has not filed a +quarterly report on Form 10-Q since November 14, 2019. + +15. As the sole owner of the funds’ respective general partners, SQN Capital was +responsible for ensuring that the AIF III Fund and AIF IV Fund filed periodic reports in +compliance with the foregoing provisions, and SQN Capital failed to do so. In turn, Silkowski, as +SQN Capital’s CEO, was responsible for ensuring that SQN Capital properly discharged its +responsibilities with respect to those two funds’ periodic reporting obligations, and he failed to take +necessary steps to ensure that the funds complied with those obligations. + +Violations + + 16. Section 206(4) of the Advisers Act prohibits an investment adviser from engaging +in acts, practices or courses of business that are fraudulent, deceptive, or manipulative, as defined +by the Commission in rules and regulations promulgated under the statute. Proof of scienter is not +required to establish a violation of Section 206(4) of the Advisers Act and the rules thereunder. +See SEC v. Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992). Rule 206(4)-2 provides that it is a +fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of +Section 206(4) for a registered investment adviser to have custody of client assets unless the +adviser complies with the custody rule. Among other things, Rule 206(4)-2 requires registered +investment advisers with custody of client funds or securities to have independent public +accountants conduct surprise examinations of those client funds or securities, or to have private fund +clients timely distribute to their investors annual audited financial statements prepared in accordance +with GAAP. Rule 206(4)-7 requires, among other things, that an investment adviser registered +with the Commission adopt and implement written policies and procedures reasonably designed to +prevent violation of the Advisers Act and rules thereunder. + + 17. As a result of the conduct described above, SQN Capital willfully2 violated Section +206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder, and Silkowski willfully +aided and abetted and caused those violations. + +2 “Willfully,” for purposes of imposing relief under Sections 203(e) and 203(f) of the Advisers Act, “‘means no +more than that the person charged with the duty knows what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 + + +6 +18. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers of securities registered under Section 12 of the Exchange Act to file annual and quarterly +reports with the Commission. No showing of scienter is necessary to establish a violation of +Section 13(a) or the rules thereunder. SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1998); +Gateway Int’l Holdings, Inc., Exch. Act Rel. No. 53907, at 10 n.28 (May 31, 2006). As a result +of the conduct described above, SQN Capital and Silkowski willfully aided and abetted and +caused the AIF III Fund and the AIF IV Fund’s violations of Section 13(a) of the Exchange Act +and Rules 13a-1 and 13a-13 thereunder. + +Undertakings + +19. Respondents have undertaken to: + +a. Retain, within thirty (30) days of the issuance of this Order, the services of an +Independent Compliance Consultant (“Independent Consultant”) not unacceptable to the +staff of the Commission and provide a copy of this Order to the Independent Consultant. +No later than ten (10) days following the date of the Independent Consultant’s engagement, +Respondents shall provide the Commission staff with a copy of the engagement letter +detailing the Independent Consultant’s responsibilities, which shall include the review and +report 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 Respondents. + +b. Require the Independent Consultant to conduct a review, to be completed within six +(6) months of the Independent Consultant being retained, of SQN Capital’s adoption and +implementation of compliance policies and procedures that the Independent Consultant +deems relevant with respect to adherence to the Advisers Act’s custody rule and the +compliance rule. + +c. Require the Independent Consultant to produce a written report within thirty (30) +days of the conclusion of the review, which report shall: describe the review; set forth the +conclusions reached and the recommendations made by the Independent Consultant, as +well as any proposals made by Respondents; and describe how Respondents will +implement the Independent Consultant’s recommendations. + +d. Within sixty (60) days of receipt of the Independent Consultant’s report, take all +necessary and appropriate steps to adopt and implement all recommendations contained in +the Independent Consultant’s report. + + +(D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). The decision in The Robare Group, +Ltd. v. SEC, which construed the term “willfully” for purposes of a differently structured statutory provision, does +not alter that standard. 922 F.3d 468, 478-79 (D.C. Cir. 2019) (setting forth the showing required to establish that a +person has “willfully omit[ted]” material information from a required disclosure in violation of Section 207 of the +Advisers Act). + +7 +e. Within thirty (30) days of the adoption and implementation of all recommendations +in the Independent Consultant’s report, certify in writing to the Independent Consultant and +the Commission staff that Respondents have adopted and implemented all +recommendations in the report. The Commission staff may make reasonable requests for +further evidence of compliance, and Respondents agree to provide such evidence. + +f. Cooperate fully with the Independent Consultant and provide the Independent +Consultant with access to such files, books, records, and personnel as reasonably requested +for the Independent Consultant’s review, including access by on-site inspection. + +g. Agree that for the period of engagement and for a period of two years from +completion of the engagement, Respondents shall not (i) retain the Independent +Consultant for any other professional services outside of the services described in this +Order; (ii) enter into any other professional relationship with the independent consultant, +including any employment, consultant, attorney-client, auditing or other professional +relationship; or (iii) enter, without prior written consent of the Commission staff, into any +such professional relationship with any of the independent consultant’s present or former +affiliates, employers, directors, officers, employees, or agents acting in their capacity as +such. + +h. Agree that Respondents 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 other doctrine of privilege to prevent the Independent Consultant +from transmitting any information, reports, or documents to the Commission staff. + +i. Agree that 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) as is +otherwise required by law. + +j. 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 Respondents agree to provide such evidence. The certification and supporting material +shall be submitted to: George Stepaniuk, Assistant Regional Director, Securities and +Exchange Commission, New York Regional Office, 100 Pearl Street, Suite 20-100, New +York, NY 10004, 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. For good + +8 +cause shown, the Commission staff may extend any of the deadlines set forth with respect +to these undertakings. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in the Offers. + + Accordingly, pursuant to Sections 203(e), 203(f) and 203(k) of the Advisers Act and +Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. Respondents shall cease and desist from committing or causing any violations and +any future violations of (i) Section 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 +thereunder; and (ii) Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. + +B. Respondents are censured. + + C. Respondent SQN Capital shall pay a civil monetary penalty in the amount of +$200,000 to the 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: $60,000 +to be paid within 21 days of the entry of the Order; $70,000 to be paid within 90 days of the entry +of the Order; and $70,000 to be paid within 180 days of the entry of the Order. 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 above, SQN Capital shall contact the staff of the Commission for the +amount due. If SQN Capital 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. + + D. Respondent Silkowski shall pay a civil monetary penalty in the amount of $100,000 +to the 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: $30,000 to +be paid within 21 days of the entry of the Order; $35,000 to be paid within 90 days of the entry of +the Order; and $35,000 to be paid within 180 days of the entry of the Order. 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 above, Silkowski shall contact the staff of the Commission for the amount +due. If Silkowski 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. + +E. Payment must be made in one of the following ways: + + +9 +(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 and the file number of these proceedings; a copy of the cover letter and check or +money order must be sent to George Stepaniuk, Assistant Regional Director, Securities and +Exchange Commission, New York Regional Office, 100 Pearl Street, Suite 20-100, New York, +NY 10004. + + 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, Respondents agree that in any Related Investor +Action, Respondents 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. + + G. Respondents shall comply with the undertakings enumerated in Section III, +paragraphs 19.a-19.j, above. + + + + + +10 +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 Silkowski, and further, any debt for disgorgement, prejudgment interest, civil penalty +or other amounts due by Respondent Silkowski 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 Silkowski 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-4454.pdf b/raw/aaer/2023/AAER-4454.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e021b06db85ac2760f68365475a5133f0f1e8722 Binary files /dev/null and b/raw/aaer/2023/AAER-4454.pdf differ diff --git a/raw/aaer/2023/AAER-4454.txt b/raw/aaer/2023/AAER-4454.txt new file mode 100644 index 0000000000000000000000000000000000000000..7899c2537731f4cf8862ba1fc214285632c7f104 --- /dev/null +++ b/raw/aaer/2023/AAER-4454.txt @@ -0,0 +1,82 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98275 / September 1, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4454 / September 1, 2023 + +Admin. Proc. File No. 3-21298 + + +In the Matter of + +JIA ROGER QIAN WANG, CPA and WANG +CERTIFIED PUBLIC ACCOUNTANT, P.C. + + + +AMENDED SCHEDULING ORDER + +On February 8, 2023, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Jia Roger Qian Wang, CPA, and Wang +Certified Public Accountant, P.C., (together, “Respondents”), 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 +Following joint prehearing statements from the parties, the Commission has issued two +prior scheduling orders, on May 25 and July 17, 2023.2 On August 24, 2023,3 the parties filed a +second amended joint prehearing statement, which suggested further changes to the schedule for +the proceeding. The Division of Enforcement also filed that day a statement seeking leave to file +a motion for summary disposition. The parties then filed a document stating that they “consent +to any further modification of the prehearing schedule as a result of any motions for summary +disposition.” Based on the representations in the second amended joint prehearing statement, it is +ORDERED that the parties adhere to the following amended schedule: + +1 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96852, 2023 WL 1819154 (Feb. +8, 2023). +2 Jia Roger Qian Wang, CPA, Exchange Act Release No. 97590, 2023 WL 3646085 (May +25, 2023); Jia Roger Qian Wang, CPA, Exchange Act Release No. 97920, 2023 WL 4561058 +(July 17, 2023). +3 Although the document on its face is dated August 18, 2023, it was not filed with the +Commission’s electronic filing system until August 24. +2 + +September 18, 2023 Respondents provide responses to Division’s requests in +lieu of deposition. +October 9, 2023 Close of fact discovery. +November 15, 2023 Last date to serve expert reports. +December 8, 2023 Last date to serve rebuttal expert reports. +December 15, 2023 Close of expert discovery. +December 29, 2023 Last date to file motions for summary disposition. +January 12, 2024 Last date to file oppositions to motions for summary +disposition. +January 19, 2024 Last date to file replies to motions for summary disposition. +January 19, 2024 Parties exchange and file final witness lists. +February 2, 2024 Parties exchange and file final exhibit lists and pre-marked +exhibits. +February 19, 2024 Parties file any motions in limine, prehearing briefs, and +any proposed stipulations of fact. +February 26, 2024 Final prehearing conference. +March 5, 2024 Hearing commences. +It is further ORDERED that the Division’s request for leave to file a motion for summary +disposition pursuant to Rule of Practice 250(c) is GRANTED. +Given the parties’ consent to any further modifications of the prehearing schedule +because of the filing of motions for summary disposition, if a motion for summary disposition is +filed, the Commission may suspend or amend the above schedule on its own motion to allow +time for the motion to be resolved. + + +3 + +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-4455.txt b/raw/aaer/2023/AAER-4455.txt new file mode 100644 index 0000000000000000000000000000000000000000..c2ff05601665ca301bc632180125547d28d47e51 --- /dev/null +++ b/raw/aaer/2023/AAER-4455.txt @@ -0,0 +1,271 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98306 / September 7, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4455 / September 7, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21621 + +In the Matter of +BRET NAGGS, +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 Bret +Naggs (“Respondent” or “Naggs”) 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 +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule + +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 +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. Naggs, age 57, has been a certified public accountant licensed to practice in the State +of Wisconsin. The license is currently expired. From July 2014 through October 2015, Naggs +served as a Controller for the Truckload Logistics segment 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 (“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 s Form 15 terminating its common stock from registration under Section +12(g) of the Exchange Act. +3. On August 31, 2023, a final judgment was entered against Naggs by consent, +permanently enjoining him from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A), +of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13 thereunder, and from future +violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, in the civil action +entitled United States Securities and Exchange Commission v. Peter Armbruster et al., Civil +Action Number 19-cv-481, in the United States District Court for the Eastern District of +Wisconsin. Naggs also was ordered to pay a $17,500 civil money penalty. Naggs consented to the +entry of a final judgment in the matter without admitting or denying the allegations of the +complaint. +4. The Commission’s complaint alleged, among other things, that during Naggs’ tenure +as a Controller of Roadrunner from July 2014 to October 2015, Roadrunner submitted financial +statements that were materially false and did not fairly or accurately reflect the company’s financial +situation. The complaint also alleged that Naggs and others knowingly or recklessly provided +substantial assistance to Roadrunner in the filing of its financial statements. In addition, the +complaint alleged that Naggs and others knowingly or recklessly provided substantial assistance to +Roadrunner in its failure to make and keep books, records and accounts that accurately and fairly +reflected its transactions and disposition of assets, knowingly circumvented Roadrunner’s system of +internal accounting controls, and knowingly falsified or caused to be falsified Roadrunner’s books, +records and accounts. + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Naggs’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Bret Naggs is suspended from appearing or practicing before the Commission as an +accountant. + +B. After one (1) year 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 + + + 4 +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, including any orders in SEC v. +Armbruster, et al., 19-cv-481 (E.D. Wisc.), 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; + + + 5 +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. + +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/2023/AAER-4456.txt b/raw/aaer/2023/AAER-4456.txt new file mode 100644 index 0000000000000000000000000000000000000000..cff1a8d140b56ee4c3a49ead5dff0d539aa040b2 --- /dev/null +++ b/raw/aaer/2023/AAER-4456.txt @@ -0,0 +1,267 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98307 / September 7, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4456 / September 7, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21622 + +In the Matter of +MARK WOGSLAND, +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 Mark +Wogsland (“Respondent” or “Wogsland”) 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 +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule + +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 +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. Wogsland, age 58, was once a certified public accountant licensed to practice in the +State of Wisconsin. The license lapsed in or about 1992. From 2010 to July 2014, Wogsland +served as a Controller for the Truckload Logistics segment (“Truckload”) of Roadrunner +Transportation Systems, Inc. (“Roadrunner”). From July 2014 to December 2017, Wogsland served +as Director of Accounting for Truckload. +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 (“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 s Form 15 terminating its common stock from registration under Section +12(g) of the Exchange Act. +3. On August 31, 2023, a final judgment was entered against Wogsland by consent, +permanently enjoining him from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A), +of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13 thereunder, and from future +violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, in the civil action +entitled United States Securities and Exchange Commission v. Peter Armbruster et al., Civil +Action Number 19-cv-481, in the United States District Court for the Eastern District of +Wisconsin. Wogsland also was ordered to pay a $17,500 civil money penalty. Wogsland +consented to the entry of a final judgment in the matter without admitting or denying the allegations +of the complaint. +4. The Commission’s complaint alleged, among other things, that from around July +2013 to January 2017, during Wogsland’s tenure as a Controller for Truckload and Director of +Accounting of Roadrunner, Roadrunner submitted financial statements that were materially false +and did not fairly or accurately reflect the company’s financial situation. The complaint also alleged +that Wogsland and others knowingly or recklessly provided substantial assistance to Roadrunner in +the filing of its financial statements. In addition, the complaint alleged that Wogsland and others +knowingly or recklessly provided substantial assistance to Roadrunner in its failure to make and +keep books, records and accounts that accurately and fairly reflected its transactions and disposition +of assets, knowingly circumvented Roadrunner’s system of internal accounting controls, and +knowingly falsified or caused to be falsified Roadrunner’s books, records and accounts. + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Wogsland’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Mark Wogsland is suspended from appearing or practicing before the Commission +as an accountant. + +B. After one (1) year 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. + 4 + +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, including any orders in SEC v. +Armbruster, et al., 19-cv-481 (E.D. Wisc.), 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); + 5 + +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. +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; + 6 + +(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/2023/AAER-4457.pdf b/raw/aaer/2023/AAER-4457.pdf new file mode 100644 index 0000000000000000000000000000000000000000..86ef3778a265f15409724ba38a79c35ce89a8986 Binary files /dev/null and b/raw/aaer/2023/AAER-4457.pdf differ diff --git a/raw/aaer/2023/AAER-4457.txt b/raw/aaer/2023/AAER-4457.txt new file mode 100644 index 0000000000000000000000000000000000000000..5cf883437984f3ebdaecaf25fd214862c6db670a --- /dev/null +++ b/raw/aaer/2023/AAER-4457.txt @@ -0,0 +1,48 @@ + UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98329 / September 8, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4457 / September 8, 2023 + +Admin. Proc. File No. 3-17228 + + +In the Matter of + +MICHELLE L. HELTERBRAN COCHRAN, +CPA + +ORDER DENYING MOTION FOR RECONSIDERATION +On April 26, 2016, the Commission instituted this administrative proceeding against +Michelle L. Helterbran Cochran, CPA.1 On June 2, 2023, the Commission determined to +dismiss, as a matter of discretion, the proceeding.2 On June 20, 2023, Cochran timely sought +reconsideration pursuant to Rule of Practice 470.3 She asks that we amend the dismissal order to +clarify whether the proceeding was dismissed with prejudice. We have previously explained that +the Commission’s Rules of Practice do not distinguish between dismissing proceedings with or +without prejudice and therefore deny Cochran’s motion on that basis.4 Nevertheless, as a matter + + +1 David Hall, P.C., Exchange Act Release No. 77718, 2016 WL 1665164 (Apr. 26, 2016). +2 Pending Administrative Proceedings, Exchange Act Release No. 97640, 2023 WL +3790795 (June 2, 2023). +3 17 C.F.R. § 201.470. +4 See, e.g., John Christopher Polit, Exchange Act Release No. 92829, 2021 WL 3895196, +at *1 (Aug. 31, 2021) (declining to label a dismissal as either with or without prejudice). +2 + +of discretion here, we will not bring a future administrative proceeding against Cochran arising +from the conduct alleged in the April 26, 2016 order instituting proceedings.5 + +By the Commission. + + + Vanessa A. Countryman +Secretary + + +5 See id. (stating that the proceeding would not be reinstituted where the conviction +underlying the proceeding was reversed). \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4459.txt b/raw/aaer/2023/AAER-4459.txt new file mode 100644 index 0000000000000000000000000000000000000000..be0cc8aecc3a89fb3469fe06a63cf9bb359e5cd4 --- /dev/null +++ b/raw/aaer/2023/AAER-4459.txt @@ -0,0 +1,467 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 11241 / September 25, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98491 / September 25, 2023 + +AAER Release No. 4459 / September 25, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21708 + +In the Matter of + +GTT Communications, 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 GTT Communications, Inc. (“GTT” 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. GTT made materially misleading statements and omissions relating to Cost-of- +Revenue (“COR”) in certain 2019 and 2020 Exchange Act annual, quarterly, and current reports. +COR, referred to by GTT in public filings as Cost of Telecommunications Services, represents +direct costs incurred by GTT in providing telecommunications services to its customers and is +GTT’s largest operating expense. +2. GTT grew rapidly through a series of acquisitions in 2017 and 2018, but struggled +to integrate the newly-acquired companies into GTT’s systems. As a result, two key operational +systems – GTT’s Client Management Database (“CMD”) and its third-party bill processing system +(the “BPS”) – started to show a persistent and growing discrepancy between actual invoices +received through the BPS that related to COR and GTT’s expectation of what COR should be +based on underlying supplier contracts in CMD. This discrepancy, which was widely known +within GTT, was a clear sign that GTT’s COR accounting methodology was not working properly +and that GTT had data integrity issues. +3. GTT’s accountants and operations staff investigated the cause of the discrepancy, +but there was no effective way to compare the data in the two systems. Further, given the volume +of transactions following the acquisitions, GTT did not have the resources to review its COR +invoices manually for proper classification and validity. By at least mid-2018, GTT knew that it +did not have sufficient information systems or resources to record and report COR accurately and +fairly following the 2017 and 2018 acquisitions. Despite that knowledge, GTT failed to implement +and maintain policies and procedures designed to provide reasonable assurance that the COR +reflected in GTT’s financial statements was based on reasonable support. There also was a +knowledge disconnect between GTT’s operations employees, who managed the company’s COR- +related data, and the accounting employees, who used that data to record and report COR. Both +groups were confused as to the other’s role: operations did not fully appreciate how accounting +used the data they provided, and accounting did not fully understand what the data reflected and its +limitations. Consequently, GTT’s conduct fell below the standard of care of a reasonable, +similarly situated company. +4. As a result, GTT failed to disclose material facts concerning certain unsupported +adjustments to COR, which caused the statements that GTT made concerning COR to be +misleading in light of the circumstances. These adjustments concerned COR-In-Advance (i.e., pre- +paid expense) and COR vendor disputes and were reported in GTT’s Forms 10-Q for the quarters +ended September 30, 2019, and March 31, 2020, and in GTT’s Form 10-K for the fiscal year ended +December 31, 2019, and in related earnings releases on Forms 8-K. GTT also made material + +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 +omissions in its 2019 Form 10-K concerning uncertainties involving certain receivables from +vendors subject to disputes that were recorded in its financial statements that rendered statements it +made misleading. Consequently, and as described in more detail below, GTT violated Sections +17(a)(2) and (3) of the Securities Act. GTT also violated Sections 13(a), 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a) +thereunder. +Respondent +5. GTT Communications, Inc., a Delaware corporation headquartered in Virginia, was +a publicly traded multinational telecommunications and internet service provider at all relevant +times. GTT’s stock was registered under Section 12(b) of the Exchange Act and was listed on the +New York Stock Exchange (“NYSE”) until July 21, 2021, when it was delisted. On November 9, +2021, GTT filed a Form 15 terminating its registration under Section 12(g) of the Exchange Act +and notifying the Commission that its duty to file reports under Section 15(d)(1) of the Exchange +Act had been suspended for that fiscal year because it had fewer than 300 holders of record of each +class of securities registered under the Exchange Act. GTT and certain of its affiliates filed +prepackaged Chapter 11 bankruptcy cases on October 31, 2021, and GTT emerged as a private +company on December 30, 2022. +Facts +Following Several Acquisitions, Two GTT Operating Systems Used to Account +for COR Showed a Persistent Discrepancy Between Expected and Actual Expense +6. GTT grew rapidly between 2017 and 2018, completing eight acquisitions that more +than doubled GTT’s revenue and expense. Many of the acquired companies were private, +distressed companies located outside the United States that used different operating and accounting +systems than GTT and that lacked robust internal controls. GTT’s employees were overwhelmed +by the increased volume of data and transactions following the acquisitions and they struggled to +successfully integrate certain of these newly acquired companies into GTT’s systems, including +CMD and its BPS. +7. CMD was an internally developed platform that GTT used to manage its contracts +with networks, clients, and suppliers. GTT used CMD to bill customers for services provided, to +manage the inventory necessary to provide the contracted-for services, and to estimate the +expenses associated with providing the services. CMD contained estimates of GTT’s anticipated +COR derived from information about third-party vendor inventory used to fulfill services to its +customers. +8. GTT used its BPS, which was specifically designed for the telecommunications +industry, to process vendor invoices that underlay COR. The BPS received the majority of invoices +electronically directly from the telecommunications vendors. The BPS processed the vendor +invoices and pulled information, such as the service period and underlying charge type, into a +useable format for GTT operations employees to review and approve or reject in summary form. + 4 +For purposes of recording and reporting COR, the BPS contained GTT’s expenses as reflected in +the invoices received from the vendors. +9. By the close of the second quarter 2018, a persistent and growing discrepancy +existed between the amounts GTT was routinely paying in invoices as reflected in the BPS and the +expected costs that were reflected in CMD. This discrepancy between CMD and the BPS +indicated that GTT’s accounting methodology was not working correctly and that its systems had +data integrity issues. +10. At various points in time, GTT’s accountants and operations employees +investigated the cause of the discrepancy, but there was no effective way to compare the data in the +two systems, which by 2019 were processing more than 600,000 COR transactions on a monthly +basis. Additionally, given the volume of data, GTT did not have the resources to review the +invoices manually. +GTT Failed to Implement and Maintain Policies and Procedures Designed to Provide +Reasonable Assurance that COR Expense Adjustments Were Based on Reasonable Support +11. After the discovery of the discrepancy between CMD and the BPS, GTT never +resolved which data source should be used to record and report COR or which was more accurate. +Certain members of GTT’s management favored CMD because it was GTT’s database of record +and they believed it to be more accurate than the BPS. Certain members of GTT’s accounting staff +did not fully trust the accuracy of either CMD or the BPS. +12. Additionally, there was an information disconnect between the operations and +accounting staff. There was a lack of understanding as to the other’s role, and the two groups did +not effectively communicate concerning COR and the issues they were seeing. Operations was +responsible for maintaining the data in CMD and the BPS, while accounting was responsible for +recording and reporting COR based on the data maintained by operations. Accounting could not +resolve the data discrepancy problem without the help of operations. Further, operations did not +fully appreciate how accounting used the data they provided, and accounting did not fully +understand what the data reflected and its limitations. +13. By mid-2019, GTT accountants and operations employees, as well as some +members of senior management, knew that the only way to determine GTT’s actual COR was to +link the data between CMD and the BPS at a granular level. Until that exercise was completed and +the systems were updated, they knew that GTT did not have a reliable data source on which to base +the COR being recorded in the financial statements. +14. Thus, it was widely understood within GTT that it did not have sufficient systems +and resources to accurately record and report COR following its acquisitions. Yet, despite +knowing that it lacked both a reliable data source and the resources to manually review COR, GTT +failed to implement and maintain policies and procedures designed to provide reasonable assurance +that COR adjustments were based on reasonable support. Rather, GTT’s operations and +accounting employees continued to communicate ineffectively concerning COR, and GTT + 5 +continued to record adjustments to COR that lacked reasonable support, which fell below the +standard of care of a reasonable, similarly situated company. +GTT Made Unsupported Accounting Adjustments to COR in 2019 and 2020, Resulting in +Materially Misleading Statements and Omissions in Its Public Filings +15. As a result of GTT’s lack of policies and procedures to provide reasonable +assurance that COR adjustments were based on reasonable support as well as the information +disconnect between GTT’s operations and accounting employees regarding COR, GTT failed to +disclose material facts concerning certain unsupported and highly uncertain adjustments to COR +during the third quarter of 2019, fourth quarter of 2019 and the first quarter of 2020. This rendered +the disclosures made concerning COR and vendor disputes materially misleading in light of the +circumstances. +Third Quarter 2019 COR-In-Advance Adjustment +16. First, in the third quarter of 2019, GTT accountants moved $5.6 million of expense +from the income statement to COR-In-Advance (i.e., prepaid expense) on the balance sheet +without reasonable support. The adjustment increased prepaid expense and decreased COR on the +financial statements reported in GTT’s Form 10-Q for the third quarter of 2019. It was also +included in the financial information reported in an earnings release furnished with GTT’s +November 11, 2019, Form 8-K. By that time, GTT accounting and operations employees were +investigating, but had not determined the cause of, the discrepancy in COR reflected between +CMD and the BPS. Although they suspected the BPS was not properly processing certain invoices +that covered future service periods and was thus potentially overstating COR, they had no +reasonable basis to quantify the impact of this suspected shortcoming prior to the closing of the +books for the third quarter of 2019. GTT’s decision to record the $5.6 million adjustment was +motivated by a desire to keep expenses consistent with CMD while it continued to investigate. +Given the circumstances, GTT’s failure to disclose material facts concerning this unsupported +adjustment, including that GTT could not confirm the validity or quantification of this adjustment +prior to the close of the quarter, caused GTT’s disclosures concerning COR to be materially +misleading. The COR-In-Advance adjustment amount had a material impact on GTT’s third +quarter financial statements by increasing GTT’s operating income by approximately 23% and +decreasing its third quarter net loss before income taxes by approximately 17%. +Fourth Quarter 2019 Bulk Disputes Adjustment +17. Second, in the fourth quarter of 2019, GTT failed to disclose material facts +concerning an unsupported $16 million vendor dispute adjustment, which rendered GTT’s +disclosures concerning COR and vendor disputes materially misleading in light of the +circumstances. The adjustment reduced COR and was reflected in GTT’s 2019 Form 10-K, and in +the related earnings release furnished with the March 2, 2020, Form 8-K. +18. The adjustment lacked reasonable support because, as discussed below, it was +based on unverified data. During the fourth quarter of 2019, GTT undertook a massive project to +link as many of the invoices in the BPS as possible to CMD and to dispute any invoices that could + 6 +not be linked with the vendors. These disputes came to be known internally as “Bulk Disputes,” +and they differed from GTT’s normal course disputes (e.g., disputes based on specific vendor +billing errors identified during GTT’s bill verification procedures), in volume, timing and rationale. +19. GTT accountants calculated the $16 million adjustment based on preliminary +invoice data and estimated “win rates” (i.e., the percentage of disputes that GTT expected to win) +provided by operations. Because GTT had no history with Bulk Disputes prior to the fourth +quarter of 2019, GTT operations employees developed different estimated win rates for several +sub-categories of the Bulk Disputes (e.g., services marked “disconnected” were assigned an +estimated win rate of 68%, whereas services that could not be linked and required more research +were assigned a win rate of 15%). By contrast, GTT generally applied a single win rate based on +historical results to all normal course disputes. The adjustment was made before the actual filing +of the Bulk Disputes. +20. Following the booking of the $16 million adjustment, but prior to the filing of the +2019 Form 10-K, the operations team provided the accounting team with updated data that +reflected the actual disputes filed with the vendors, which was a smaller pool of invoices than the +set of invoices upon which the adjustment was based. When the GTT accountants applied the +same estimated win rates to the updated data, the calculation yielded an adjustment amount of +approximately $9.1 million as compared to the $16 million adjustment recorded in mid-January +using the preliminary invoice data. Although GTT had no prior experience with vendor disputes of +this volume or nature, the employees believed that the win rate would rise as GTT exhausted +efforts to link the invoices in the BPS to CMD. The theory was that any remaining unlinked +invoices were more likely to be erroneous given that GTT appeared to have no record of them. +GTT employees did not think they had time to update the win rates to apply to the updated data +prior to the filing of the Form 10-K. Thus, although the accounting function knew or should have +known that the $16 million entry was based on unverified data, that more accurate data was +available, and that the fourth quarter financials had not yet been finalized, the $16 million +adjustment was not updated to reflect the more accurate and up-to-date data reflected in the later +calculation. +21. Additionally, the 2019 Form 10-K included no meaningful disclosure regarding the +Bulk Disputes adjustment. Rather, GTT included its standard “Disputed Supplier Expenses” +disclosure for normal course vendor disputes, which did not describe the $16 million adjustment +amount or contain any disclosure concerning the Bulk Disputes. The Bulk Disputes process +differed from the normal course vendor disputes process in material ways and involved several +subjective assumptions that were highly uncertain: (1) most of the invoices making up the Bulk +Disputes had already been paid, requiring reimbursement or credit in the event of a win, whereas +those in the normal course disputes process had not yet been paid; (2) many of the Bulk Disputes +were being disputed simply because the underlying invoices in the BPS could not be linked to +CMD, whereas the normal course disputes were based on some specifically identified flaw in the +invoice; (3) these disputes were submitted using a “bulk” back-end process rather than through +individual submissions entered by GTT personnel; and (4) GTT had no history on which to base +the Bulk Disputes win rates whereas the normal course disputes were based on historical average +win rates for that type of dispute. Part of the Bulk Disputes adjustment was included as a $10.7 +million receivable from suppliers (under Prepaid Expenses and Other Current Assets), which + 7 +reflected GTT’s assumption at that time that two-thirds of the total Bulk Disputes were paid +disputes, without identifying that amount as part of its “Disputed Supplier Expenses” disclosure. +22. GTT’s failure to disclose material facts concerning the Bulk Disputes adjustment, +including that the adjustment did not reflect the actual disputes filed or the most accurate and up- +to-date data available prior to the filing of the Form 10-K and that the Bulk Disputes process +differed in several material ways from the normal course disputes as described above, rendered +GTT’s disclosures concerning vendor disputes and COR materially misleading in light of the +circumstances. The Bulk Disputes adjustment amount had a material impact on GTT’s financial +statements by increasing GTT’s 2019 operating income by approximately 15% and decreasing +GTT’s net loss before income taxes by approximately 13%. +23. Further, GTT failed to include any disclosure in its 2019 Form 10-K concerning the +material implications of the uncertainties associated with the methods, assumptions, and estimates +underlying the Bulk Disputes adjustment, as required by Item 303 of Regulation S-K. Among +other things, Item 303(a)(3)(ii) required disclosure of “any known … uncertainties that have had or +that the registrant reasonably expects will have a material favorable or unfavorable impact on net +sales, revenues or income from continuing operations….” GTT was required to objectively +evaluate whether it reasonably expected uncertainties in the Bulk Disputes adjustment to have a +material impact on the company’s liquidity, capital resources or results of operations and provide +disclosure about that uncertainty if the impact is material.2 GTT failed to disclose that the +assumptions it used to determine the Bulk Disputes adjustment, such as the win rates and the pool +of invoices disputed (e.g., a large number of invoices were disputed simply because GTT could not +find a record of them in CMD), were highly uncertain and it was reasonably likely the estimate +could change because they had no historical experience upon which to rely to evaluate whether +they would be successful in winning this type of dispute. +First Quarter 2020 Bulk Disputes +24. Finally, in the first quarter of 2020, GTT failed to disclose material facts concerning +two unsupported adjustments totaling $19 million relating to a reassessment of the Bulk Disputes +recorded in the fourth quarter of 2019 and additional disputes that had not been entered for the first + +2 The Commission has articulated a two-part test for determining whether a known trend or +uncertainty requires disclosure. “Where a trend, demand, commitment, event or uncertainty is +known, management must make two assessments: (1) Is the known trend, demand, commitment, +event or uncertainty likely to come to fruition? If management determines that it is not +reasonably likely to occur, no disclosure is required. (2) If management cannot make that +determination, it must evaluate objectively the consequences of the known trend, demand, +commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is +then required unless management determines that a material effect on the registrant's financial +condition or results of operations is not reasonably likely to occur.” Management’s Discussion +and Analysis of Financial Condition and Results of Operations, Securities Act Release No. 6835, +43 S.E.C. Docket 1330, 1989 WL 1092885, at *6 (May 18, 1989). This test was reiterated in the +2003 MD&A release (Release No. 33-8350) and in the 2020 MD&A release (Release No. 33- +10890). + 8 +quarter of 2020, which rendered GTT’s first quarter 2020 disclosures concerning COR and vendor +disputes materially misleading in light of the circumstances. The $19 million in adjustments +reduced COR and were reflected in GTT’s Form 10-Q for the first quarter of 2020, and in the +related earnings release furnished with the May 8, 2020, Form 8-K. +25. By the end of the first quarter of 2020, very few of the Bulk Disputes had been +resolved. Therefore, GTT reassessed the amount still outstanding for the Bulk Disputes recorded +in the fourth quarter. Continuing to believe, despite having no reasonable basis, that the win rate +would rise as the pool of unlinked invoices shrunk, GTT accounting employees increased the Bulk +Disputes win rate several times over a short period in connection with updating the calculation for +the first quarter of 2020. Ultimately, the accounting team booked a reaccrual for the fourth quarter +2019 Bulk Disputes of approximately $17 million, which was a $1 million increase over the +original fourth quarter 2019 adjustment. +26. In connection with calculating the reaccrual of the fourth quarter 2019 Bulk +Disputes adjustment in the first quarter of 2020, GTT initially raised the win rates for certain sub- +categories of Bulk Disputes based on GTT’s exhaustive linking efforts. However, the next day +accounting decided GTT should apply the higher normal course disputes win rate of 62% to all the +Bulk Disputes, regardless of sub-category, given that GTT had been pursuing the Bulk Disputes +for a few months by that point, which again increased the adjustment amount. Then, one day later, +after consulting with an operations employee, accounting raised the win rate to 75% based on +GTT’s linking efforts. +27. A few days later, the same operations employee informed accounting that he +thought they had agreed to use a 25% win rate for the Bulk Disputes, not 75%. After further +consideration, accounting changed the Bulk Disputes win rate back to the normal course disputes +win rate of 62%, which resulted in an updated Bulk Disputes adjustment amount of approximately +$17 million, or $1 million more than the fourth quarter 2019 estimate. Despite continuing to +believe that the best operational estimate for the Bulk Disputes win rate was 25%, the operations +employee did not protest the use of the normal course disputes win rate because he believed it to be +an accounting judgment and outside of his area of expertise. +28. Separately, GTT also recorded a Bulk Disputes adjustment for the first quarter of +2020. GTT believed that many of the billing issues identified in the fourth quarter of 2019 +continued in the first quarter of 2020. GTT attempted to identify the same charges during the first +quarter of 2020 that had not otherwise been disputed through the BPS for that period. GTT’s +accounting staff recorded an incremental adjustment to account for their estimate of those disputes +using a 75% win rate. This resulted in a reduction of COR of approximately $18 million in the +first quarter of 2020. +29. There was no reasonable basis to apply the normal course disputes win rate or +higher to the Bulk Disputes: (1) there were numerous differences between the Bulk Disputes and +the normal course disputes; and (2) GTT had not received enough results to provide any guidance +that the win rate for the Bulk Disputes, many of which concerned invoices that had already been +paid, would be similar to the normal course disputes, most of which had not yet been paid. GTT’s +failure to disclose material facts concerning these adjustments, including that GTT applied the + 9 +normal disputes win rate or higher despite having no results history to support such a win rate and +despite the material differences between these disputes and the normal course disputes, rendered +the disclosures made concerning COR and vendor disputes in the first quarter of 2020 materially +misleading. +30. The $19 million in Bulk Disputes reassessment and additional amount for disputes +not yet entered in the first quarter of 2020 had a material impact on GTT’s first quarter 2020 +financial statements by increasing GTT’s operating income by almost 200% and decreasing GTT’s +net loss before income taxes by 18%. +December 2020 Restatement Announcement +31. On December 22, 2020, GTT disclosed in a Form 8-K that its previously issued +consolidated financial statements for the years ended December 31, 2019, 2018 and 2017, and the +quarter ended March 31, 2020, should no longer be relied upon and that it intended to file restated +consolidated financial statements. In connection with closing its books for the second quarter of +2020, GTT identified several issues related to the recording and reporting of COR and commenced +an internal investigation. GTT also disclosed that it was evaluating the impact of the identified +errors on GTT’s internal control over financial reporting and disclosure controls and procedures +and that the company expected to report a material weakness in internal control over financial +reporting and report that its disclosure controls and procedures were ineffective. +32. GTT subsequently spent more than a year and tens of millions of dollars in an +attempt to correct its filings, but ultimately suspended its efforts to restate due in part to the +complexity of reconciling the two operational systems that were producing inconsistent +information relevant to the calculation of COR. When GTT emerged from bankruptcy on +December 30, 2022 as a private company owned by certain of its former creditors, GTT used +“Fresh-Start Reporting,” which allows companies to present their assets, liabilities, and equity as a +new entity on the day the company emerges from bankruptcy under Chapter 11 of the United +States Bankruptcy Code. +Materiality +33. Reasonable investors would have considered the misleading statements and +omissions described above to be important in making investment decisions concerning GTT’s +securities during the relevant period. +GTT Offered and Sold Securities During the Relevant Period +34. GTT offered and sold securities through its employee stock purchase plan, which +transactions were registered on Form S-8, during the relevant period, and received proceeds from +such sales. + 10 +GTT’s Disclosure Controls and Procedures and Internal Control +Over Financial Reporting Failures +35. Rule 13a-15(a) under the Exchange Act requires issuers such as GTT to maintain +disclosure controls and procedures, as defined in Rule 13a-15(e), and internal control over +financial reporting, as defined in Rule 13a-15(f). Rule 13a-15(e) defines “disclosure controls and +procedures” to include “controls and other procedures of an issuer that are designed to ensure that +information required to be disclosed … is recorded, processed, summarized and reported” within +the time periods specified in the Commission’s rules and forms. Rule 13a-15(f) defines “internal +control over financial reporting” as a process to “provide reasonable assurance regarding the +reliability of financial reporting and the preparation of financial statements” in accordance with +GAAP, and includes policies and procedures that provide reasonable assurance that transactions +are recorded as necessary to permit the preparation of the financial statements in accordance with +GAAP. +36. As described above, GTT lacked controls and procedures designed to ensure that +GTT’s COR adjustments – especially the Bulk Disputes adjustments, which involved a new and +highly uncertain process – were based on reasonable support and that material information +concerning those adjustments was reported in GTT’s Exchange Act reports. GTT also lacked +controls or procedures designed to provide reasonable assurance that COR was recorded and +reported in the proper periods. Further, GTT failed to maintain internal control over financial +reporting because, with respect to its COR adjustments, GTT lacked a process to provide +reasonable assurance regarding the reliability of financial reporting and the preparation of financial +statements, as well as lacked policies and procedures that provided reasonable assurance that its +COR adjustments were recorded as necessary to permit the preparation of financial statements in +accordance with GAAP. +Violations + +37. As a result of the conduct described above, GTT violated Sections 17(a)(2) and +17(a)(3) of the Securities Act. Section 17(a)(2) prohibits any person from obtaining money or +property in the offer or sale of securities 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 in which they were made, not misleading. Section 17(a)(3) of the Securities Act +prohibits any person from engaging in any transaction, practice, or course of business which +operates or would operate as a fraud or deceit upon the purchaser. Negligence is sufficient to +establish violations of Sections 17(a)(2) and 17(a)(3). Aaron v. SEC, 446 U.S. 680, 697 (1980). +38. As a result of the conduct described above, GTT 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 +annual, current, and quarterly reports as the Commission may require, and mandate that Exchange +Act reports contain such further material information as may be necessary to make the required +statements not misleading. + 11 +39. As a result of the conduct described above, GTT violated Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. Section 13(b)(2)(A) of the Exchange Act requires issuers with a +security 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 transactions and +dispositions of the assets of the issuer, and Section 13(b)(2)(B) of the Exchange Act requires such +issuers to, among other things, 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. +40. As a result of the conduct described above, GTT violated Rule 13a-15(a) under the +Exchange Act, which requires that every issuer of a security registered pursuant to Section 12 of +the Exchange Act maintain disclosure controls and procedures as defined in Rule 13a-15(e) under +the Exchange Act and that such issuers maintain internal control over financial reporting as defined +in Rule 13a-15(f) under the Exchange Act. +GTT’s Cooperation and Remedial Efforts +41. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. +42. GTT promptly self-reported to the Commission and provided substantial +cooperation, including by, among other things, providing multiple presentations concerning the +findings from its internal investigation, including presentations made before it had reached final +conclusions about the nature and scope of the relevant issues; identifying key documents and +witnesses; promptly making documents and witnesses available; and facilitating testimony from +former employees. +43. Further, GTT voluntarily undertook affirmative remedial measures in response to +the issues discovered, which included attempting to rebuild its COR accounts, replacing certain +members of management, its board of directors, and its auditor, and overhauling its accounting +function, including its policies and procedures relating to COR. +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 GTT cease and desist from committing or causing any violations and any future +violations of Sections 17(a)(2) and (3) of the Securities Act and of Sections 13(a), 13(b)(2)(A), +13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a) +thereunder. + + 12 + B. Respondent acknowledges that the Commission is not imposing a civil penalty in +part based upon its cooperation in a Commission investigation and/or related enforcement +action. 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/2023/AAER-4460.txt b/raw/aaer/2023/AAER-4460.txt new file mode 100644 index 0000000000000000000000000000000000000000..72f4c8e7d2209e8b87b827061e9a861e75e17b7a --- /dev/null +++ b/raw/aaer/2023/AAER-4460.txt @@ -0,0 +1,181 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98492 / September 25, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4460 / September 25, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21710 + + + +In the Matter of + +DAVID C. POWELL + +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 David C. Powell (“Respondent” +or “Powell”) pursuant to Section 4C +1 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: + +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. + + +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, 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 finds that: +3 + +A. RESPONDENT + +1. David C. Powell, age 50, is a resident of Atlanta, Georgia. Powell +previously was licensed in Ohio as a certified public accountant (“CPA”) between June 15, +2001, and December 31, 2008, and has never been licensed in any other jurisdiction. + +B. FACTS + +2. From 2005 to July 2020, Powell was employed in the Atlanta office of a +public accounting firm (the “Accounting Firm”), within its audit and assurance services +division. In 2013, Powell was promoted to Director, and was authorized by the Accounting +Firm to sign audit reports for private company audit engagements in the name of the +Accounting Firm. In 2019, Powell’s signing authority was taken away for performance- +related reasons. + +3. As an accountant within the audit and assurance services division, the +Accounting Firm required Powell to hold a CPA license in the state of Georgia. Powell +represented to the Accounting Firm that he did hold a CPA license in Georgia, as required +during the Accounting Firm’s annual certification process. Contrary to these annual +certifications, including, on at least one occasion, the provision of a falsified license, +Powell had never held a license in the state of Georgia and was not actively licensed in any +jurisdiction after 2008. + +4. During his time as a Director, Powell represented that he performed +numerous audits and signed audit reports for five non-public clients, purportedly on behalf + +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. + + +of the Accounting Firm. Powell also represented to these clients that the audits were “conducted in +accordance with auditing standards generally accepted in the United States of America +(“GAAS”).” The Accounting Firm was unaware that Powell was conducting these audits and +issuing these audit reports (the “unauthorized audits”). Moreover, for these unauthorized audits, +Powell did not comply with GAAS. For example, Powell failed to obtain annual engagement +letters, prepare audit documentation, and ensure proper review sign-off on workpapers and other +final reports. + +5. Powell took affirmative steps to conceal the unauthorized audits from the +Accounting Firm, including making misrepresentations about the status of these clients on reports +circulated to his supervisors and falsifying invoices related to the work performed for these clients. +Powell also hid the unauthorized status of these audits from each of the clients. + +6. Powell performed unauthorized audits from 2013 until 2019. Neither the +Accounting Firm nor any of the clients who received unauthorized audit reports discovered the +nature of Powell’s activity until after the Accounting Firm terminated him in July 2020 for +unrelated performance-based reasons. + +7. Powell also directly engaged in the due diligence process for a private, unregistered +securities offering by a client, purportedly on behalf of the Accounting Firm. Specifically, Powell +made representations regarding an unauthorized audit Powell had performed, including that the +unauthorized audit was performed by the Accounting Firm in accordance with GAAS. + +Violations + +8. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice state that the Commission may deny to any person the privilege of appearing or +practicing before it if such person is found “to be lacking in character or integrity or to have +engaged in unethical or improper professional conduct.” Section 4C(b)(1) and Rule +102(e)(1)(iv)(A) define improper professional conduct to include “[i]ntentional or knowing +conduct, including reckless conduct, that results in a violation of applicable professional +standards.” +4 + +9. Powell’s falsification of his CPA license to the Accounting Firm, his deficient +performance of unauthorized audits, the misrepresentations he made to conceal the unauthorized +audits from the Accounting Firm, and his participation in a due diligence process involving the +unauthorized audits demonstrate that Powell is lacking in character and integrity and that he +engaged in unethical and improper professional conduct. + + +4 Such standards include, among others, GAAS and the AICPA Code of Professional +Conduct and Commission Regulations. Amendment to Rule 102(e) of the Commission’s Rules of +Practice, 63 Fed. Reg. 57163, 57167 (Oct. 26, 1998). + + +10. Specifically, with respect to the unauthorized audits, Powell represented to his +clients that the audits were conducted in accordance with “auditing standards generally accepted in +the United States of America.” Yet, the unauthorized audits failed to comply with GAAS. Further, +Powell failed to comply with Section 0.300.040 of the AICPA Code of Professional Conduct, +which provides, among other things, that “[t]o maintain and broaden public confidence, members +should perform all professional responsibilities with the highest sense of integrity.” + +Findings + +11. Based on the foregoing, the Commission finds that Powell lacks character +and integrity and engaged in unethical and 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. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Powell’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +Respondent Powell is denied the privilege of 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-4461.txt b/raw/aaer/2023/AAER-4461.txt new file mode 100644 index 0000000000000000000000000000000000000000..cce7973a2f5df4b61e4827170ce56f44b2b0f876 --- /dev/null +++ b/raw/aaer/2023/AAER-4461.txt @@ -0,0 +1,692 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98499 / September 25, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4461 / September 25, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21712 + + +In the Matter of + +Michael D. Messina, 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 Michael D. +Messina, CPA (“Respondent” or “Messina”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) 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)(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 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: + +SUMMARY + +1. This matter involves violations of the federal securities laws and improper +professional conduct by Respondent Messina in conducting multi-year audits of Ault Alliance, Inc. +(“AAI”). AAI retained Marcum LLP (“Marcum”) to audit its financial statements for the fiscal +years ended December 31, 2016 through 2020. Messina was the engagement quality review +(”EQR”) partner for the aforementioned audits. +2. Messina did not perform an adequate engagement quality review in compliance with +the standards of the Public Company Accounting Oversight Board (“PCAOB”) when conducting +audits of AAI because he did not: (1) evaluate the significant judgments related to engagement +planning and to the engagement team’s assessment of, and audit responses to, significant risks +identified by the engagement team; (2) evaluate whether the engagement documentation indicated + + 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. + + 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 +that the engagement team responded appropriately to significant risks and supported the conclusions +reached by the engagement team; (3) perform his review with due professional care; and (4) +document his review appropriately. These failings led to substantive audit issues going unaddressed +in the AAI audits for fiscal years 2017-2020 and inadequate documentation of audit work in every +year for which he was AAI’s EQR partner, 2016-2020. + +3. Messina signed work papers authorizing, or otherwise authorized, the release of +audit reports for the fiscal year 2017-2020 AAI audits. Those audit reports stated that the audits had +been conducted in accordance with PCAOB standards, when they had not. As a result, Messina +caused and, within the meaning of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice, willfully aided and abetted Marcum’s violations of Rule 2- +02(b)(1) of Regulation S-X. Messina also 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. +RESPONDENT + +4. Michael D. Messina, age 64, resides in Dix Hills, New York. From 2007 to April +2023, he worked at Marcum LLP where he served as an EQR partner from 2012 to 2023, and +before that as a Director. He served as the EQR partner for the AAI audits of fiscal years 2016 +through 2020. He is currently licensed as a CPA in the state of New York. Messina has no +disciplinary history with the New York CPA licensing authority. +OTHER RELEVANT ENTITIES + +5. Marcum LLP, 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 over 30 cities. Marcum has been registered +with the PCAOB since October 2003. Marcum has served as AAI’s independent registered public +accounting firm since and including AAI’s fiscal year 2016. In June 2023, the Commission charged +Marcum with systemic quality control failures and violations of audit standards in connection with +audit work for hundreds of special purpose acquisition company (SPAC) clients. See In the Matter +of Marcum LLP, Exch. Act Rel. No. 97773 (June 21, 2023). + +6. Ault Alliance, Inc. is a Delaware corporation whose principal place of business is +in Las Vegas, Nevada. AAI is a diversified holding company that, since 2016, has engaged in +operating businesses that include, among others, power products and systems, digital asset mining +of Bitcoin, the manufacture and sale of textile technology machinery, and commercial lending. +During the relevant period, AAI has been known by several different names: AAI (since January +3, 2023); BitNile Holdings, Inc. (from December 13, 2021 to January 2, 2023); Ault Global +Holdings, Inc. (January 19, 2021 to December 12, 2021); DPW Holdings, Inc. (September 19, +2017 to January 18, 2021); and Digital Power Corporation (prior to September 19, 2017). AAI’s +stock is registered under Section 12(b) of the Exchange Act, and its common stock trades on +NYSE American. AAI has a December 31 fiscal year end. In August 2023, the Commission +charged AAI with false and misleading disclosures, incorrect accounting, and other violations + 4 +during 2017 to 2023. See In the Matter of Ault Alliance, Inc., et al., Exch. Act Rel. No. 98131 (Aug. +15, 2023). + +7. Avalanche International Corp. (“Avalanche”), a holding company, is a Nevada +corporation with its principal place of business in Las Vegas, Nevada, which AAI has disclosed as +a “related party” in its audited financial statements since 2017. AAI invested over $17 million in +Avalanche from 2016 to 2021. In June 2022, AAI acquired over 90% of Avalanche’s stock and +began consolidating its financial results. Avalanche’s common stock was publicly traded until +September 2021. +FACTS +Background +8. Marcum was first engaged to perform an audit for AAI for the fiscal year ending in +December 2016. Marcum is still engaged as AAI’s auditor. Messina was the EQR partner for the +AAI audits for fiscal years 2016-2020. The audit reports each stated that Marcum had conducted +its audits in accordance with PCAOB standards. + +9. Messina allowed significant issues in the AAI audits to go unaddressed. Messina +knew that significant and/or fraud risks had been identified in the areas of goodwill and intangible +assets in the fiscal years 2017-2018, crypto mining equipment in fiscal 2018, and related party +transactions and investments in fiscal years 2017-2020, Messina did not evaluate whether the +engagement team responded adequately to the identified risks and documented support for the +conclusions reached as required by PCAOB Auditing Standard 1220, Engagement Quality Review +(“AS 1220”). + +10. In the audits of AAI’s fiscal years 2017-2020, Marcum’s AAI work papers lack +documentary evidence that Messina evaluated all of the engagement team’s significant judgments +or reviewed the team’s related documentation, or that Messina held discussions with the +engagement partner or other engagement team members to evaluate their judgments or conclusions +in the significant areas of the audit. + + +Goodwill and Intangibles +11. During audit planning for the 2017 AAI audit, the engagement team identified +goodwill and other intangibles as accounts susceptible to material misstatement due to fraud, +specifically related to valuation and impairment. Goodwill and intangible assets comprised 21% of +AAI’s total assets in 2017. Messina did not sign off on any of the audit work papers for this area. + +12. For the AAI audit in 2018 when goodwill valuation was identified as a significant +risk area by the engagement team, Messina did not sign off on any work papers in the relevant +intangibles section. In 2018, goodwill and intangible assets accounted for 26% of AAI’s total +assets. + + 5 +13. For 2018, the engagement team described the risks of material misstatement +associated with goodwill and intangibles as “significant estimates and inputs associated with the +valuation.” The engagement team wrote that it “obtained third party valuation reports and utilized +Marcum Valuation team to perform analysis on the company’s conclusions” to address this +valuation risk. There is, however, no evidence of this in the audit work papers. AAI’s 2018 Form +10-K listed four subsidiaries with a total goodwill value of approximately $8.7 million. The only +goodwill valuation provided in the 2018 AAI work papers was for a company whose goodwill was +valued at $265,000 (3% of the total reported goodwill number). Moreover, three of the work +papers from the intangibles section had no reviewer sign-off (at any level of the audit team) until +after the audit report was issued to AAI. + +14. Because Messina did not review the goodwill and intangible assets work papers, he +was unable to identify whether the engagement team obtained sufficient appropriate audit evidence +to conclude that the valuations presented by AAI were reasonable. Messina did not review this +area, because he thought goodwill and intangibles did not have complex accounting and the +engagement team only identified it as significant because the total amount was a large portion of +AAI’s assets. +Crypto Miner Property, Plant & Equipment +15. In 2018, the existence and valuation of crypto miner property and equipment were +identified as a significant risk area for AAI. In 2018, AAI purchased approximately $9 million of +crypto mining equipment. The engagement team identified this as a significant audit area as the +value of the miners was material to the balance sheet (15% of total assets), and identified risks that +the equipment (1) did not exist due to accounting error or misappropriation, (2) did not belong to +the company, (3) was recorded at “incorrect values,” and (4) was impaired and not adjusted to net +realizable value. Again, Messina did not sign off on any of the audit work papers for this area. In +testimony, Messina said he did not review this area because it was “very easy” and there was “not +a lot of judgment involved.” + +16. If Messina had reviewed this section of the work papers, he would have learned that +the audit work performed by the engagement team was insufficient and did not support the +conclusions reached. The only supporting documents reviewed by the engagement team relating to +the existence of the miners were certain “invoices,” which were in fact prepayments made for +miners that were often not yet sourced. The engagement team never confirmed that the number of +miners listed on the invoices were actually delivered to or paid for by AAI. Further, AAI produced +to the engagement team a spreadsheet containing a list of all miners in service during 2018. The +engagement team did not request any supporting documentation to verify that AAI received the +miners listed on the spreadsheet or the date the miners were placed into service. The only work +performed by the engagement team on this work paper was to perform a physical observation +equivalent to 2% of the total value of the mining equipment. The spreadsheet contained many +errors, and many of the dates listed on the spreadsheet regarding when the miners had been placed +into service were incorrect and corresponded to a time when AAI did not have a physical space to +place that many miners. During his review, Messina also would have discovered that despite the +engagement team identifying a risk that the crypto miners could be impaired, there was no + 6 +evidence that the audit team performed any procedures as part of the 2018 audit to assess valuation +and impairment. + +17. In Q3 2019, AAI recorded an impairment for virtually the entire net book value of +the mining equipment: a $4.3 million impairment against a $4.9 million net book value. The +reasons given for impairment in Q3 2019 were even more apparent in December 2018. The +impairment in Q3 2019 was attributed to a decline in the price of Bitcoin which would lead to a +decline in projected cash flows for the life of the miners. During 2018, when no impairment was +recognized, the price of Bitcoin fluctuated but ultimately declined from $13,657 to $3,743 by year- +end. During the third quarter of 2019, however, the price of Bitcoin ranged from $8,104 to +$12,572. Overall, the price of Bitcoin was slowly improving in 2019 and Q3 was the best quarter +for Bitcoin in all of 2019. + +Related Party Transactions +18. For the AAI audits for 2017-2020, the engagement team identified related party +transactions as significant and fraud risks, and investments as a significant risk, susceptible to +material misstatement. In 2017, 33% of AAI’s total assets was comprised of investments in +Avalanche’s debt, warrants and common stock. In 2018-2020 the investments in Avalanche ranged +from 18-22% of AAI’s total assets. In 2019, Messina did not sign off on a single work paper +related to the Avalanche investments, despite the above-identified risks. For the audits of 2017, +2018 and 2020, Messina did not sign off on significant work papers related to the Avalanche +investments before the audit report release date, and in some cases, he did not sign off on those +significant work papers at all. + +19. In 2018, AAI’s investments in the warrants of Avalanche were identified as a high +risk, significant audit area. Beginning in September 2017, Avalanche issued warrants to purchase +shares of Avalanche common stock, which were equity securities. As of December 31, 2021, +Avalanche had issued AAI warrants to purchase 35.6 million shares of Avalanche stock. Financial +Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 321, Investments +– Equity Securities (“ASC 321”), which includes the guidance from Accounting Standards Update +No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, that +became effective for fiscal years beginning after December 15, 2017. ASC 321 requires that +changes in fair value of investments in equity securities be presented immediately in net +income/loss, which AAI failed to do for its investments in warrants and common stock of +Avalanche. Instead, AAI evaluated the warrants as debt securities under ASC 320, Investments— +Debt and Equity Securities, and recorded changes in fair value in other comprehensive +income/loss. This resulted in understatements in net loss of 24.34% in 2018 and 6% in 2019, and +an overstatement of 10% in 2020. + +20. If Messina appropriately reviewed and evaluated the work papers, he might have +noted that the company’s accounting for its investment in Avalanche warrants was not in +accordance with ASC 321 during the fiscal years 2018 through 2020, and that the engagement +partner had concurred with this wrong accounting treatment. + + 7 +21. On April 14, 2023, AAI restated its financial statements to correct for its incorrect +warrant accounting by filing an amended Form 10-K for the year ended December 31, 2021, and +amended Forms 10-Q for the periods ended March 31, 2022, June 30, 2022, and September 30, +2022. +Messina’s Late or Missing Sign-Offs on Work Papers + +22. Messina performed sign-offs in the AAI audit work papers after the audit report +release date in every year that he was EQR partner. +AAI Audit Year Total Messina Sign-offs % Late Sign-offs +2016 32 41% +2017 17 24% +2018 35 37% +2019 31 26% +2020 55 9% + +23. The “routing slip” and “EQR memo” work papers were the only two documents for +which Marcum policy required a sign-off prior to the issuance of an audit report. For the 2016 AAI +audit, Messina manually signed off on the routing slip and dated it on the report release date, but +the metadata on the routing slip indicates that the document was not created until two weeks later. +In the same year, Messina used an electronic, time-stamped signature to sign off after the report +release date on the EQR memo, and manually entered a date two weeks before the report release +date next to the electronic sign-off. For the 2017-2019 AAI audits, Messina used an electronic, +time-stamped signature to sign off after the report release date on the EQR memo and the routing +slip. Next to the electronic, time-stamped signature, he manually entered an earlier date that was on +or before the report release date. For FY 2020, Messina failed to sign off on the EQR memo +entirely. At Marcum, routing slips serve as documentation of the EQR’s concurring approval for +issuance of the audit report, and the date of such approval. EQR memos serve as confirmation that +the EQR appropriately performed his or her review in accordance with AS 1220.4 + +24. Messina also failed to sign off on work papers that were in significant risk areas of +the AAI audits. He did not document his work in a way that would enable someone to determine +whether he evaluated significant judgments and appropriate documentation. (AS 1220.10, +1220.11.) He also failed to notice or address the AAI engagement partner’s lack of pre-issuance +sign-offs and the audit team’s substantive audit issues described above. + +25. Messina deliberately chose not to review certain areas of the audits that were +deemed significant risks of material misstatement. Based on his judgment and discussions with the +engagement partner, he would elect not to look at significant areas in the audit using a “risk-based + +4 During the relevant period, Marcum had a widespread practice of EQR partners not signing off +on routing slips and EQR memos until after report release date. This practice failed to ensure +that review procedures were completed and concurring approval obtained prior to issuance of the +audit reports. See In the Matter of Marcum LLP, Exch. Act Rel. No. 97773 at ¶¶ 57 and 58. + 8 +approach.” He did not document why he chose not to review certain areas deemed significant by +the engagement team in the work papers. This is a violation of AS 1220, which requires an EQR +partner to review the engagement team’s assessment and audit responses to the significant risks +identified by the engagement team, including fraud risks, as well as other significant risks +identified by the EQR partner. + +26. Messina failed to sign off on key documents for which Marcum policy required +EQR partner sign off in every audit. In 2017 through 2020, he failed to sign off entirely on key +documents including the Summary Memo (FY 2017 and 2018), the Risk Assessment Summary +Form (FY 2019), and the auditor’s reports (FY 2017, 2019, and 2020). In 2016 through 2019, +Messina signed off on certain key documents in the AAI audits after the report release date, +including the Summary of Unadjusted Misstatements (FY 2016-2018), the Summary Memo (FY +2019), and the auditor’s report (FY 2018). + +27. These sign-off failures caused Messina to miss inconsistencies in the engagement +team’s assessment of, and audit responses to, significant risks identified by the engagement team. +For example, in 2019, Messina reviewed neither the Summary Memo nor the Risk Assessment +Form prior to report release date. Therefore, he did not notice that the engagement team identified +Goodwill and Intangible Asset Impairment as a significant area of the audit in the Summary Memo +but not in the Risk Assessment Form. Further, because he did not review the Risk Assessment +Form at all, he did not notice that the engagement team changed some assessed risk levels for +Goodwill and Intangibles from High to Moderate, and Moderate to Low, without adequately +addressing reasons for these changes. Goodwill and Intangibles comprised approximately 26% of +total company assets in both 2018 and 2019. +Relevant EQR Auditing Standards +28. All audit engagements conducted pursuant to PCAOB standards require an +engagement quality review and concurring approval of issuance by the EQR partner. (AS +1220.01.) “The objective of the engagement quality reviewer is to perform an evaluation of the +significant judgments made by the engagement team and the related conclusions reached in +forming the overall conclusion on the engagement and in preparing the engagement report.” (AS +1220.02.) + +29. Under PCAOB audit standards, the responsibilities of an EQR partner include +evaluating the significant judgments that relate to engagement planning, evaluating the team’s +assessment of and audit responses to significant risks, including fraud risks, and evaluating the +related documentation to confirm that it indicates that the team appropriately responded to the +significant risks and that it supports the conclusions reached. (AS 1220.09-.11.) + +30. An EQR partner can only provide concurring approval of issuance if after +performing his review with due professional care, he is not aware of a significant engagement +deficiency. The firm cannot grant permission for use of the report until the EQR provides +concurring approval for issuance. (AS 1220.12-.13.) + + 9 +31. PCAOB audit standards compel an EQR partner to document his review and +concurring approval of audit work and conclusions before issuance of the audit report. In practice, +the universally accepted method for documenting review and approval is signing and dating work +papers when the work or review is performed. Messina’s failure to perform a proper engagement +quality review is also corroborated by his lack of sign-offs. + +32. The audit documentation standard, PCAOB Auditing Standard 1215, Audit +Documentation (“AS 1215”), requires that prior to report release date, all audit procedures have to +be completed and sufficient evidence must be obtained. (AS 1215.15.) Through documentation, the +engagement team demonstrates that the audit procedures were completed and the evidence was +obtained before the auditor’s representations were made in its audit report. “Audit documentation +must clearly demonstrate that the work was in fact performed.” (AS 1215.06.) Audit +documentation includes “records of the planning and performance of the work, the procedures +performed, evidence obtained, and conclusions reached by the auditor.” (AS 1215.02.) + +33. Audit documentation must contain sufficient information to enable an experienced +auditor, with no previous connection to the audit engagement, “[t]o 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(b); see also AS 1220.19.) + +34. Sign-offs on work papers are necessary to demonstrate that the work was performed +before the report release date. If the EQR partner does not perform sign-offs until after the report +release date or does not perform sign-offs at all, and the work papers do not include persuasive +other evidence of review, then there is no proof in the work papers that the work was reviewed and +approved before the audit report issued. See PCAOB Release No. 2004-006, Audit Documentation +and Amendment to Interim Auditing Standards, at 3 (“[I]f audit documentation does not exist for a +particular procedure or conclusion related to a significant matter, its absence casts doubt as to +whether the necessary work was done.”). + +VIOLATIONS +35. Section 4C(a)(2) 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. Exchange Act +Section 4C(b)(2) and Rule 102(e)(1)(iv)(B) of the Commission’s Rules of Practice define improper +professional conduct with respect to persons associated with public accounting firms and persons +licensed to practice as accountants, respectively, as (1) a single instance of highly unreasonable +conduct, that results in a violation of applicable professional standards in circumstances in which +the associated person or 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. By +failing to comply with PCAOB standards in the audits of AAI, as described above, Messina +engaged in improper professional conduct as defined in Exchange Act Section 4C(b)(2) and Rule +102(e)(1)(iv)(B) of the Commission’s Rules of Practice. + + 10 +36. 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”).5 +“[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). An auditor violates Rule 2-02(b)(1) of Regulation S-X if it issues a report +stating that it has conducted its audit in accordance with PCAOB standards when it has not. No +showing of scienter is necessary to establish a violation of Rule 2-02(b)(1) of Regulation S-X. +Marcum stated in the audit reports for AAI’s fiscal years 2017 to 2020 that it had conducted the +audits in accordance with PCAOB standards when it had not. As a result of the conduct described +above, Messina willfully aided and abetted and caused Marcum’s violation of Rule 2-02(b)(1) of +Regulation S-X. + +37. Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) 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 willfully violated, or willfully aided and abetted the violation +of, any provision of the Federal securities laws or the rules and regulations thereunder. As +described above, Messina willfully aided and abetted Marcum’s violations of the federal securities +laws and rules and regulations thereunder within the meaning of Section 4C(a)(3) of the Exchange +Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +FINDINGS + +38. Based on the foregoing, Messina 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. + +39. Based on the foregoing, Messina willfully aided and abetted and caused Marcum +LLP’s violations of Rule 2-02(b)(1) of Regulations S-X. + +40. Based on the foregoing, Messina willfully aided and abetted violations of the +federal securities laws pursuant to Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) 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’s Offer. + + +5 In November 2018, Rule 2-02(b)(1) was amended to require that the accountant’s report +state “the applicable professional standards under which the audit was conducted,” instead of +GAAS. + 11 + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondent Messina 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 Messina is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. After two 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: + +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. + + 12 +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 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 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, 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: + + 13 +(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. + +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; + + 14 +(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 Messina shall pay a civil money penalty in the amount of $30,000 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). Payment shall be made in the following +installments: (1) $10,000 shall be due and payable within 14 days of the entry of this Order; (2) +$10,000 shall be due and payable within 180 days of the entry of this order; and (3) the remainder +within 365 days after the entry of this order. 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: + + 15 +(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 +Messina 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. + + O. 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). + + 16 + + By the Commission. + + + +Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4462.txt b/raw/aaer/2023/AAER-4462.txt new file mode 100644 index 0000000000000000000000000000000000000000..9ea8928565ca5ec359f0ae7c9291d2e76cb891fc --- /dev/null +++ b/raw/aaer/2023/AAER-4462.txt @@ -0,0 +1,452 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11245 / September 28, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98577 / September 28, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4462 / September 28, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21745 + + +In the Matter of + +Stanley Stefanski, 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 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 Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 4C +1 and + +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 +21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice2 against Stanley Stefanski (“Stefanski” 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, Respondent admits the Commission’s jurisdiction over him and +the subject matter of these proceedings, and 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 and Notice of Hearing (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds +3 that: + +Summary + +1. This case concerns accounting and disclosure fraud by Pareteum Corporation, a +telecommunications company, spanning from 2018 through mid-2019 (the “relevant time period”). +During this time, Pareteum’s public filings materially overstated revenue by approximately $12 +million for fiscal year 2018 (60% of the ultimately restated revenue), and by approximately $30 +million for the first and second quarters of 2019 (91% of the ultimately restated revenue). + +2. These misstatements resulted from improper accounting practices, whereby +Pareteum executives, including Stefanski, allowed revenue to be recognized based on non-binding +purchase orders and prior to product shipment, which was not in accordance with generally +accepted accounting principles (“GAAP”). Further, Stefanski and others took steps to conceal these +practices from Pareteum’s auditor. + + + +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 + +3. As a result of the conduct described herein, Stefanski willfully violated Section 17(a) +of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) and 13b2-2 +thereunder, and willfully aided and abetted and caused Pareteum’s and Pareteum’s CFO’s +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, 13a-1, 13a-11, and 13a-13 thereunder. + +Respondent + +4. Stanley Stefanski, age 48, is a resident of New York, New York. Stefanski served +as Business Controller of Pareteum during his employment with the company from November +2017 until he resigned in September 2020. He obtained a New York CPA license in 2001, but it is +currently lapsed. + +Other Relevant Entity + +5. Pareteum Corporation was incorporated in Delaware with a principal place of +business in New York, New York. At all relevant times, Pareteum was a telecommunications and +cloud software company. On May 15, 2022, Pareteum filed a Chapter 11 bankruptcy petition and +is currently in liquidation. Until November 2020, its common stock was registered with the +Commission pursuant to Section 12(b) of the Exchange Act, and prior to November 12, 2020 +traded on the NASDAQ exchange under the symbol “TEUM.” It then traded under the same +symbol on the OTC Markets Group Inc.’s Pink Open Market until filing for bankruptcy. On +September 2, 2021, the Commission instituted a settled cease-and-desist proceeding finding that +Pareteum violated Section 17(a) of the Securities Act, and Sections 10(b), 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, +and imposing a $500,000 civil penalty. + +Background + +6. During the relevant time period, Pareteum was a telecommunications “Software as +a Service” or “SaaS” company that offered various services such as SIM card services, WiFi +service, and a Cloud platform. Pareteum’s customers were telecommunications businesses that +contracted with Pareteum for these service offerings and related materials (such as SIM cards), and +then marketed and sold the services directly to downstream consumers. One portion of Pareteum’s +business was its mobile bundled services line, which provided SIM cards with customizable +service plan options. Pareteum’s customers then resold the SIM cards and service plans to +consumers. + +7. At all relevant times, in its Forms 10-K and 10-Q filed with the Commission, +Pareteum represented that the financial statements included in those forms were prepared in +accordance with GAAP. FASB Accounting Standards Codification Topic 606, Revenue From +Contracts With Customers (“ASC 606”), provides guidance for recognizing revenue for the type of +sales agreements described above. ASC 606 requires entities to recognize revenue to depict the + 4 +transfer of promised goods or services to customers in an amount that reflects the consideration to +which the entity expects to be entitled in exchange for those goods or services. + +8. ASC 606 requires entities to apply the following steps to assess whether and what +revenue should be recognized: (1) identify the contract with a customer; (2) identify the +performance obligations in the contract; (3) determine the transaction price; (4) allocate the +transaction price to the corresponding performance obligation(s); and (5) recognize revenue when +or as the entity satisfies a performance obligation by transferring control of a promised good or +service to a customer. + +9. Consistent with this, Pareteum disclosed in its 2018 Form 10-K that starting on +January 1, 2018, Pareteum was reporting revenue in accordance with ASC 606 which, Pareteum +stated, “requires entities to recognize revenue when control of the promised goods or services is +transferred to customers at an amount that reflects the consideration to which the entity expects to +be entitled in exchange for those goods or services.” + +Pareteum’s Improper Revenue Recognition Practices Based on +Non-Binding Purchase Orders + +10. Despite disclosing that it would adhere to ASC 606, in practice, the company did +not have internal accounting controls in place to provide reasonable assurance that it would follow +that guidance. While serving as Pareteum’s Business Controller, Stefanski implemented the +revenue recognition process under the direction of Pareteum’s CFO. In practice, Pareteum +recognized revenue based on non-binding purchase orders and without any regard to whether +Pareteum satisfied any performance obligations. For a number of customers, Pareteum recognized +revenue prior to any “contract with the customer” to satisfy the first step of ASC 606. Moreover, +there were no revenue recognition policies and procedures in place to require sufficient review of +the purchase orders’ payment terms or collectability, and there was no formal process in place to +provide reasonable assurance that Pareteum’s performance obligations under a purchase order had +been satisfied, as ASC 606 requires. + +11. Instead of properly following ASC 606, Pareteum’s revenue recognition procedure +for mobile bundled services customers during the relevant time period was as follows: (1) a new +customer signed a contract and master services agreement; (2) Pareteum drafted a purchase order +providing the number of SIM cards the customer intended to purchase, as well as an estimated cost +for the associated average monthly service plan they were expecting to sell to downstream +consumers; (3) the customer signed this purchase order, which in most cases indicated that the full +cost listed was just an estimated forecasted amount that would not be due unless the customer sold +the product to downstream consumers; and (4) Pareteum’s Finance department recognized revenue +for the entire amount listed in the purchase order provided by the Pareteum Sales department, +without regard to whether the order was even a contract under step 1 of ASC 606, and without +checking whether any of Pareteum’s performance obligations under the purchase order had been +met. Pareteum recognized the total revenue of each purchase order regardless of whether the SIM +cards had been shipped or whether a platform had been set up by Pareteum sufficient to even allow +the SIM card service plans to work. + 5 + +12. To comply with Step 5 of ASC 606, Pareteum had to satisfy its performance +obligations under the purchase order prior to recognizing revenue. Specifically, Stefanski and +other Pareteum executives should have ensured that the SIM cards had been shipped, and that the +platform had been created and was operational. In multiple instances, Pareteum failed to meet all +of these requirements prior to recognizing revenue. + +13. Pareteum’s CFO had not put in place sufficient internal accounting controls to +assess whether the required performance obligations had been met prior to Pareteum recognizing +revenue, and in practice, such checks often were not properly done. As a result, Stefanski, +alongside and under the direction of Pareteum’s CFO, recognized the amounts listed in the +purchase orders based solely on the purchase order being signed by the customer without +confirming whether these amounts were recognizable under ASC 606, resulting in Pareteum +improperly recognizing millions of dollars of revenue in contravention of ASC 606. + +14. Recognizing the full amount of each purchase order once signed, rather than in +accordance with GAAP, became standard practice for Pareteum’s mobile bundled services line of +business. Stefanski and other former Pareteum executives knew or were reckless in not knowing +that the requirements for proper revenue recognition had not been met and yet continued to +authorize or accept decisions to recognize millions of dollars of revenue improperly. These +improper revenue recognition decisions accounted for millions of Pareteum’s revenue each quarter, +starting in 2018 and continuing through the first half of 2019, even though it was not yet owed by +the customers. By August 2019, Pareteum had only collected a fraction of the tens of millions in +revenue it had recognized for mobile bundled services customers. + +Misstatements Made to Pareteum’s Auditor + +15. Due to the improper revenue recognition practices described above, Pareteum’s +accounts receivable (“AR”) balance ballooned by the end of 2018. Realizing that a large AR +balance without supporting invoices would raise red flags with Pareteum’s auditors, Pareteum’s +then-CFO began a push to get all AR amounts invoiced by the end of November 2018, and +Stefanski assisted. + +16. When Pareteum’s independent auditor performed its 2018 end-of-year audit +testing in February 2019, it included Pareteum’s accounts receivable as a main risk area. To test +the validity of the AR amounts, the auditor sent out audit confirmations to many of Pareteum’s +customers asking the customers to sign that they agreed with Pareteum’s record of how much +was owed to Pareteum as of year-end 2018. These audit confirmations went out to the vast +majority of the customers that accounted for the $12 million in revenue that Pareteum improperly +recognized in 2018. None of these customers should have been able to sign these confirmations, +as they knew they did not owe the amount stated on the confirmations at that time. Some of +these customers did not initially return the confirmation to the auditor, so Pareteum’s CFO and +Stefanski directed Pareteum sales employees to reach out to the customers and encourage them +to sign the confirmations. + + 6 +17. Stefanski knew the audit confirmations should not have been provided to the +auditor because he understood that the customers were confirming amounts that they did not +actually owe at the time. + +Pareteum’s Improper Recognition of Revenue From an Unsigned Purchase Order, and +Related Cover-up Steps + +18. In addition to the improper revenue recognition practices discussed above, +Pareteum also improperly recognized millions in revenue based on an unsigned, mid-negotiation +purchase order for International Mobile Subscriber Identity numbers, or IMSIs, to which the +customer never ultimately agreed. + +19. Unlike SIM cards, IMSIs are “virtual” and do not require the shipment of a +physical SIM card – instead, Pareteum would deliver IMSIs by assigning and emailing the +relevant IMSI numbers to the customer once the necessary platform had been developed and +created by Pareteum. + +20. In late January 2019, Pareteum and a customer were negotiating an IMSI +purchase order. A former Pareteum sales employee drafted a purchase order for 6.3 million +euros and circulated an unsigned version internally to others at Pareteum for approval. + +21. Despite the fact that the customer had not signed or agreed to the 6.3 million euro +purchase order, a senior executive at Pareteum told Stefanski that Pareteum should recognize +20% of the purchase order in January 2019. Stefanski was provided no reasoning for why 20% +of the purchase order was an appropriate amount, which he knew was necessary before +recognizing revenue. Regardless, the day after receiving this instruction, Stefanski forwarded +the unsigned draft order to his accounting staff and asked them to recognize 20% of it for +January 2019. This amount, approximately $1.4 million, was included in Pareteum’s revenue for +the first quarter of 2019. + +22. The sales order did not meet the criteria for revenue recognition: Most +significantly, the customer had not actually agreed to the purchase order, and so there was no +contract under Step 1 of ASC 606. In addition, Pareteum had not yet begun to perform any of its +obligations, as required by Step 5 of ASC 606 prior to recognizing revenue. Finally, Stefanski +understood that there was no basis or reason for specifically recognizing 20% of the draft +purchase order amount – other than the fact that he had been told to do so. + +23. Meanwhile, the former Pareteum sales employee ultimately finalized the purchase +order with the customer in February 2019 – but for 630,000 euros, not 6.3 million. +Notwithstanding this change in the purchase order, Stefanski continued to recognize revenue off +of the unsigned draft purchase order for 6.3 million euros. Pareteum recognized another 20% of +revenue from the draft purchase order in February 2019, and another 20% in April 2019. +Ultimately, Pareteum recognized a total of approximately $4.4 million in revenue for this +customer in the first and second quarter of 2019, before the service platform was even functional + 7 +and despite the fact that the signed agreement was only for 630,000 euros, or approximately +$750,000 – an amount that was still just a consignment agreement and not recognizable revenue. + +Pareteum’s Misleading Filings + +24. Pareteum’s 2018 Form 10-K, filed on March 18, 2019, was materially misleading +as it overstated 2018 revenue by 60% ($12 million). Pareteum’s 10-Qs were also misleading +from at least November 14, 2018 through August 9, 2019, as these filings also overstated +revenue by up to 102% (Q2 2019 10-Q, dated August 9, 2019). + +25. In addition, with respect to each quarterly or annual filing, from at least March 12, +2019 through August 13, 2019, Pareteum filed current reports on Form 8-K, pursuant to +Exchange Act Rule 13a-11, attaching materially misleading press releases concerning financial +results for the completed reporting period. These press releases were misleading because they +included, and often highlighted, the revenue amounts that were materially overstated. + +Pareteum’s Restatement and Offer of Settlement + +26. On October 21, 2019, Pareteum publicly announced that it would be issuing +financial restatements for all of 2018 and the first two quarters of 2019, and that it expected the +restatements to reduce the reported revenue by $9 million for all of 2018 and $24 million for the +first half of 2019. After this announcement, Pareteum’s Audit Committee began an independent +investigation. + +27. On December 14, 2020, Pareteum filed a restated Form 10-K for 2018, reducing the +full year revenue from $32.4 million to $20.3 million. On March 12, 2021, Pareteum restated is +financial results for 2019, reporting a full year revenue of $62.05 million – reducing its stated +revenue for the first quarter of 2019 from $23.04 million to $13.07 million, and for the second +quarter of 2019 from $34.2 to $16.9 million. + +28. On September 2, 2021, Pareteum agreed to an Offer of Settlement and the +Commission commenced a settled cease-and-desist proceeding, finding that Pareteum violated +Section 17(a) of the Securities Act, and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the +Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and imposing a +$500,000 civil penalty. + +Violations + +29. As a result of the conduct described above, Stefanski willfully violated Section +17(a) of the Securities Act, which prohibits fraudulent conduct in the offer or sale of a security. + +30. As a result of the conduct described above, Stefanski willfully violated Section +10(b) of the Exchange Act and Rules 10b-5(a) and (c) promulgated thereunder, which prohibit +fraudulent conduct in connection with the purchase or sale of securities. + + 8 +31. As a result of the conduct described above, Stefanski willfully aided and abetted +and caused Pareteum’s CFO’s and Pareteum’s violations of Section 10(b) of the Exchange Act and +Rule 10b-5 promulgated thereunder, which prohibit fraudulent conduct in connection with the +purchase or sale of securities. + +32. As a result of the conduct described above, Stefanski willfully violated Rule 13b2-2 +under the Exchange Act, which prohibits any officer or director of an issuer from directly or +indirectly making or causing to be made a materially false or misleading statement to an +accountant in connection with any audit, review, or examination of the financial statements of the +issuer. + +33. As a result of the conduct described above, Stefanski willfully aided and abetted +and caused Pareteum’s violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, +13a-11 and 13a-13 promulgated thereunder, which require issuers of securities registered pursuant +to Section 12 of the Exchange Act to file periodic and other reports with the Commission, +including annual, quarterly and current reports that must contain any material information +necessary to make the required statements made in the report not misleading. + +34. As a result of the conduct described above, Stefanski willfully aided and abetted and +caused Pareteum’s violations of Exchange Act Section 13(b)(2)(A), which 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 their transactions and dispositions of +assets. + +35. As a result of the conduct described above, Stefanski willfully aided and abetted +and caused Pareteum’s violations of Exchange Act Section 13(b)(2)(B), which 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, among other things, +transactions are recorded as necessary to permit preparation of financial statements in accordance +with GAAP. + +Stefanski’s Cooperation + +36. In determining to accept the Offer, the Commission considered Stefanski’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, disgorgement, prejudgment interest and civil penalties are +appropriate and in the public interest under Section 8A of the Securities Act, and appropriate under +Sections 21B and 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 + 9 +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 Stefanski’s Offer. + + Accordingly, pursuant to Section 8A of the Securities Act, Sections 4C and 21C of the +Exchange Act, and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, it is hereby +ORDERED that: + + A. Respondent Stefanski shall 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, 12b-20, 13a-1, 13a-11, 13a- +13, and 13b2-2 thereunder. + +B. Respondent Stefanski be, and hereby is prohibited 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. Respondent Stefanski is denied the privilege of appearing or 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, following the entry of a final judgment +against the last remaining defendant(s) in Securities and Exchange Commission v. Victor Bozzo, et +al. (S.D.N.Y.) (the “Related Actions”). + +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 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. § + 10 +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-4463.txt b/raw/aaer/2023/AAER-4463.txt new file mode 100644 index 0000000000000000000000000000000000000000..24cddf29f833b3f46cb7fe2acc3df8f470cef192 --- /dev/null +++ b/raw/aaer/2023/AAER-4463.txt @@ -0,0 +1,117 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98595 / September 28, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4463 / September 28, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21746 + +In the Matter of +ROBERT DEL PRETE, +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 Robert +Del Prete (“Respondent” or “Del Prete”) 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, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings, and the findings contained in + +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 +Section III, paragraph 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. Del Prete, age 38, is a resident of Brick, New Jersey. From September 2020 +until May 2022, Del Prete was a consultant who provided accounting services to HighCape Capital +Acquisition Corp. (“HighCape”). Del Prete is not licensed as a certified public accountant. + + 2. HighCape was, at all relevant times, a Delaware corporation with its +principal place of business in New York, New York. HighCape was a Special Purpose Acquisition +Company or a blank check company. At all relevant times, HighCape’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 NASDAQ National Market. + + 3. On September 25, 2023, a judgment was entered against Del Prete, +permanently enjoining him from future violations of Section 10(b) of the Exchange Act and Rule +10b-5 thereunder, in the civil action entitled Securities and Exchange Commission v. Robert Del +Prete, Civil Action Number 23-20452, in the United States District Court for the District of New +Jersey. Pursuant to the judgment, Del Prete was also prohibited 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 [15 U.S.C. § 78l] or that is required to file reports pursuant to Section 15(d) of the +Exchange Act [15 U.S.C. § 78o(d)]. + + 4. The Commission’s complaint alleged that Del Prete, an accounting +consultant at HighCape subject to a confidentiality provision, had advance knowledge of a +business combination between HighCape and a target company due to his inside position and +involvement in events relating to the deal. Among other things, Del Prete was present at board +meetings on January 27 and February 17, 2021 during which the planned business combination +was discussed. The complaint alleged that Del Prete bought 5,789.65 shares of HighCape, less +than an hour after attending the February 17 board meeting. In addition, the complaint alleged that +Del Prete sold all 5,789.65 shares on February 18, 2021, after the press release announcing the deal +was issued, realizing a profit of $60,170. + + + + + + + + + + 3 + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Del Prete’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + Del Prete 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-4464.txt b/raw/aaer/2023/AAER-4464.txt new file mode 100644 index 0000000000000000000000000000000000000000..08cd39bfde4eb1553902e0e86659e006c1f64362 --- /dev/null +++ b/raw/aaer/2023/AAER-4464.txt @@ -0,0 +1,353 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 6438 / September 28, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4464 / September 28, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21750 + + +In the Matter of + +FOREPONT CAPITAL LLC, + + +Respondent. +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 203(e) AND 203(k) OF THE +INVESTMENT ADVISERS ACT OF 1940, +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 pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 +(“Advisers Act”) against Forepont Capital LLC (“Forepont,” or the “Respondent”). + +II. + + In anticipation of the institution of these proceedings, the 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 it and the subject matter of these +proceedings, which are admitted, the Respondent consents to the entry of this Order Instituting +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the +Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a +Cease-and-Desist Order (“Order”), as set forth below. + +2 + +III. + + On the basis of this Order and the Respondent’s Offer, the Commission finds that: + +Summary + +1. Forepont is a registered investment adviser and committed multiple violations of +the Advisers Act with respect to the two private funds that it advised. First, Forepont failed to +timely distribute annual audited financial statements prepared in accordance with generally +accepted accounting principles (“GAAP”) to the investors in the two private funds for fiscal +years 2020 and 2021, resulting in violations of Section 206(4) of the Advisers Act and Rule +206(4)-2 thereunder, commonly referred to as the “custody rule.” + +2. Second, Forepont engaged in principal transactions with one of the two private +funds without disclosing to its client, the fund, in writing prior to completion of the transactions +that Forepont was acting as principal and without obtaining the client’s consent to the transactions. +In March 2021, Forepont arranged for transfers to the fund, retroactive to the fund’s inception on +September 30, 2020, of multiple securities held by two Forepont officers and co-owners and a third +senior associated person: (1) its chief executive officer (“CEO”), who was also its chief investment +officer (“CIO”) and a co-owner; (2) its chief financial officer (“CFO”), who was also its chief +compliance officer (“CCO”) and a co-owner; and (3) one of Forepont’s venture partners. In +exchange, the three individuals received equity interests in the fund. Because these three +individuals were officers, owners and/or senior associated persons of Forepont, these transfers +constituted principal transactions between Forepont and the fund and therefore required Forepont +to provide the requisite written disclosure to, and obtain prior consent from, the fund. Forepont +failed to do so, resulting in violations of Section 206(3) of the Advisers Act. +3. Third, the transferred assets included securities of a company whose CEO and co- +founder is the brother of Forepont’s CEO and securities of a company whose founder, chairman of +the board, and chief innovation officer is the Forepont venture partner whose securities were also +transferred to the fund. In addition, all the securities transferred to the fund for purposes of these +in-kind exchanges had been acquired by the individuals prior to September 30, 2020 but were +transferred to the fund at the individuals’ purported cost basis in those securities. Because +Forepont did not provide advance disclosure to the fund of these material facts concerning the +transfers and the associated conflicts of interest or the relationships between Forepont and the +individuals whose securities were transferred to the fund, Forepont also violated its fiduciary duty +to its client and thereby violated Section 206(2) of the Advisers Act in connection with these +retroactive transfers. +4. Finally, Forepont also failed to adopt and implement written policies and +procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder, +resulting in a violation of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, +commonly referred to as the “compliance rule.” + +3 +Respondent + +5. Forepont is a Delaware limited liability company with its principal office and place +of business in White Plains, New York. Forepont has been registered with the Commission as an +investment adviser since May 2020. According to Forepont’s Form ADV filed in March 2023, it +has approximately $82 million in regulatory assets under management in two pooled investment +vehicles. +Facts + +Background +6. During the relevant period, a Forepont affiliate was the general partner of, and +Forepont served as investment adviser for, Forepont Capital Partners Fund 2, L.P (“Cayman +Fund”). Forepont also served as investment adviser and investment manager for Forepont Capital +Partners Fund II FPCI (“French Fund”), a private equity fund organized under the laws of France. +As investment manager of the French Fund, Forepont had the authority to obtain possession of, or +had access to, the French Fund’s funds and securities. The stated investment strategy for both +funds focused on equity investments in pharmaceutical, biotech, life-sciences, and technology +startups. +Custody Rule Failures + 7. The custody rule is designed to protect investment advisory clients from the misuse +or misappropriation of their funds and securities. It requires that registered advisers who have +custody of client funds or securities implement an enumerated set of requirements to prevent loss, +misuse, or misappropriation of those assets. + + 8. An investment adviser has custody of client assets if it or a related person holds, +directly or indirectly, client funds or securities, or if it has the ability to obtain possession of, or has +access to, those assets, including, among other things, by acting as a managing member of a limited +liability company, a general partner of a limited partnership or a comparable position for another +type of pooled investment vehicle. See Rule 206(4)-2(d)(2). Because an affiliate of Forepont was +the general partner of the Cayman Fund and Forepont was the investment manager of the French +Fund, Forepont had custody of the assets of the two funds as defined in Rule 206(4)-2. + + 9. A registered investment adviser who has custody of client assets must, among other +things: (1) ensure that a qualified custodian maintains the client assets; (2) notify the client in +writing of accounts opened by the adviser at a qualified custodian on the client’s behalf; (3) have a +reasonable basis for believing that the qualified custodian sends account statements at least +quarterly to clients, except if the client is a limited liability company or a limited partnership for +which the adviser or a related person is a managing member, general partner, or comparable +position for another type of pooled investment vehicle, the account statements must be sent to each +member or limited partner; and (4) ensure that client funds and securities are verified by actual + +4 +examination each year by an independent public accountant at a time chosen by the accountant +without prior notice or announcement to the adviser. See Rule 206(4)-2(a)(1)-(4). + 10. The custody rule provides an alternative to complying with the requirements of +Rule 206(4)-2(a)(2), (3), and (4) for investment advisers to limited liability companies, limited +partnerships or other types of pooled investment vehicles, such as the two Forepont funds at issue. +The custody rule provides that an investment adviser “shall be deemed to have complied with” the +independent verification requirement and is not required to satisfy the notification and accounts +statements delivery requirements with respect to a fund if the fund is subject to audit at least +annually and “distributes [the fund’s] audited financial statements prepared in accordance with +generally accepted accounting principles to all limited partners (or members . . .) within 120 days +of the end of [the fund’s] fiscal year” (“Audited Financials Alternative”). See Rule 206(4)-2(b)(4). +The accountant performing the audit must be an independent public accountant that is registered +with, and subject to regular inspection by, the Public Company Accounting Oversight Board +(“PCAOB”). See Rule 206(4)-2(b)(4)(ii). An investment adviser to a limited liability company or +limited partnership that fails to meet the requirements of the Audited Financials Alternative to +timely distribute audited financial statements prepared in accordance with GAAP would need to +satisfy all of the requirements of Rules 206(4)-2(a)(2), (3), and (4) in order to avoid violating the +custody rule. + 11. While Forepont stated in its relevant Forms ADV that it was relying on the Audited +Financials Alternative to comply with the custody rule, Forepont did not satisfy the requirements +of the Audited Financials Alternative with respect to either of the two funds. Forepont engaged an +independent, PCAOB-registered accounting firm to conduct an annual audit of the financial +statements of the French Fund and Cayman Fund for fiscal years 2020 and 2021, but the audit firm +did not complete the audits and issue audit reports until well after 120 days following the end of +both years. Accordingly, audited financial statements were not distributed by Forepont to the +investors in the two funds until long after 120 days of the end of the respective fiscal years, as set +forth in the table below: + +Fund End of Fiscal +Year +Date Distribution +Required +Date Distributed Days +Late +French Fund December 31, +2020 +April 30, 2021 December 14, +2022 +593 days +Cayman +Fund +December 31, +2020 +April 30, 2021 December 14, +2022 +593 days +French Fund December 31, +2021 +April 30, 2022 December 14, +2022 +229 days +Cayman +Fund +December 31, +2021 +April 30, 2022 December 15, +2022 +230 days + +5 + 12. Because Forepont did not satisfy the requirements of the Audited Financials +Alternative, Forepont was required to comply with each of the provisions of Rules 206(4)- +2(a)(2), (3), and (4), which it failed to do. For example, Forepont did not ensure that client funds +and securities were verified by actual examination each year by an independent public accountant +at a time chosen by the accountant without prior notice or announcement to the adviser, in +accordance with Rule 206(4)-2(a)(4). +Prohibited Principal Transactions and Undisclosed Conflicts of Interest + +13. On March 1, 2021, the Cayman Fund, acting through Forepont, acquired equity +interests in four companies from two individuals who were officers and co-owners of Forepont and +a third individual who was also a senior associated person of Forepont: (1) Forepont’s CEO, CIO +and co-owner; (2) its CFO, CCO and co-owner; and (3) a Forepont venture partner. In exchange, +these three individuals received limited partnership interests in the Cayman Fund. Although these +in-kind transfers occurred on March 1, 2021, they were deemed to be effective as of September 30, +2020, the date of the Cayman Fund’s initial close. The individuals purchased the transferred +securities at various times prior to September 30, 2020. +14. Because the three individuals were officers, owners and/or senior associated +persons of Forepont, these transfers constituted principal transactions between Forepont, as +investment adviser, and its advisory client, the Cayman Fund. Accordingly, Section 206(3) of +the Advisers Act required Forepont to disclose to the Cayman Fund in writing, prior to +completion of the transfers, that Forepont was acting as principal in these transactions and to +obtain the Cayman Fund’s consent to each transaction. Forepont and its affiliates could not +consent to the transactions on behalf of the Cayman Fund because of the conflicts of interest the +transactions presented, and the Cayman Fund did not have a limited partners’ committee with the +requisite authority to act on behalf of the limited partners in the event of a conflict. Accordingly, +Forepont was required to provide the requisite written disclosure to the Cayman Fund’s limited +partners before completion of the transactions and to obtain their consent to each transaction. +Forepont failed to do so. +15. Forepont also failed to disclose to the limited partners of the Cayman Fund all the +material facts concerning additional conflicts of interest arising from the transfers. The transfers +included securities of a company whose CEO and co-founder is the brother of Forepont’s CEO and +securities of a company whose founder, chairman of the board, and chief innovation officer is the +Forepont venture partner whose shares were also transferred to the Cayman Fund. Moreover, all +the securities transferred to the Cayman Fund for purposes of these in-kind exchanges had been +acquired by the individuals at various times prior to the fund’s close but were transferred to the +fund at the individuals’ purported cost basis in those securities. Because Forepont did not provide +advance disclosure to the limited partners of the Cayman Fund of these material facts concerning +the transfers and the associated conflicts of interest or the relationships between Forepont and the +individuals whose securities were transferred to the fund, Forepont also violated its fiduciary duty +to the Cayman Fund and thereby violated Section 206(2) of the Advisers Act in connection with +these retroactive transfers. + +6 +Compliance Rule Failures + + 16. In addition, Forepont failed to comply with the requirement that every investment +adviser registered with the Commission adopt and implement written policies and procedures +reasonably designed to prevent violations of the Advisers Act and the rules thereunder. See Rule +206(4)-7(a). While Forepont’s written policies and procedures referenced the custody rule, they +were not reasonably designed and implemented to prevent violations of the rule. Similarly, +although the compliance manual contained generic language regarding potential conflicts of +interest, Forepont also lacked written policies or procedures reasonably designed and implemented +to prevent violations of Sections 206(2) or 206(3) of the Advisers Act with respect to principal or +other transactions giving rise to the type of conflicts described above. + +Violations + +17. Section 206(2) of the Advisers Act makes it “unlawful for any investment adviser . +. . to engage in any transaction, practice, or course of business which operates as a fraud or deceit +upon any client or prospective client.” Section 206(3) of the Advisers Act prohibits an investment +adviser from, directly or indirectly, “acting as principal for his own account, knowingly to sell any +security to or to purchase any security from a client … without disclosing to such client in writing +before the completion of such transaction the capacity in which he is acting and obtaining the +consent of the client to such transaction.” + 18. Section 206(4) of the Advisers Act prohibits an investment adviser from engaging +in acts, practices or courses of business that are fraudulent, deceptive, or manipulative, as defined +by the Commission in rules and regulations promulgated under the statute. Rule 206(4)-2 provides +that it is a fraudulent, deceptive, or manipulative act, practice or course of business within the +meaning of Section 206(4) for a registered investment adviser to have custody of client assets +unless the adviser complies with the custody rule. Among other things, Rule 206(4)-2 requires +registered investment advisers with custody of client funds or securities to have independent public +accountants conduct surprise examinations of those client funds or securities, or to have private fund +clients timely distribute to their investors annual audited financial statements prepared in accordance +with GAAP. Rule 206(4)-7 requires, among other things, that an investment adviser registered +with the Commission adopt and implement written policies and procedures reasonably designed to +prevent violation of the Advisers Act and rules thereunder. + + 19. As a result of the conduct described above, Forepont willfully1 violated Sections +206(2), 206(3) and 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder. + +1 “Willfully,” for purposes of imposing relief under Sections 15(b) of the Exchange Act and 203(e) of the Advisers +Act, “‘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)). 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). The decision in The Robare Group, Ltd. v. SEC, which construed the term “willfully” for purposes of +a differently structured statutory provision, does not alter that standard. 922 F.3d 468, 478 -79 (D.C. Cir. 2019) +(setting forth the showing required to establish that a person has “willfully omit[ted]” ma terial information from a +required disclosure in violation of Section 207 of the Advisers Act). + +7 + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in the Offer. + + Accordingly, pursuant to Sections 203(e) and 203(k) of the Advisers Act, it is hereby +ORDERED that: + + A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Sections 206(2), 206(3), and 206(4) of the Advisers Act and Rules 206(4)-2 +and 206(4)-7 thereunder. + +B. Respondent is censured. + + C. Within 21 days of the entry of the Order, Forepont shall pay a civil monetary +penalty in the amount of $150,000 to the 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. + + D. 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 +Forepont 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 George Stepaniuk, Assistant +Regional Director, Securities and Exchange Commission, New York Regional Office, 100 Pearl +Street, Suite 20-100, New York, NY 10004. + +8 + 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, Respondent 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/2023/AAER-4465.txt b/raw/aaer/2023/AAER-4465.txt new file mode 100644 index 0000000000000000000000000000000000000000..d388fd986eaa188bba00bc5015f361c6aa54be06 --- /dev/null +++ b/raw/aaer/2023/AAER-4465.txt @@ -0,0 +1,243 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release 98611 / September 28, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release 4465/ September 28, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21754 + + +In the Matter of + + TAL Education Group, + +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 TAL Education Group (“TAL” 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 +1 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 periodic reporting, books and records, and +internal accounting controls provisions of the federal securities laws by TAL, a foreign private +issuer headquartered in the People’s Republic of China (“PRC”), during the first three quarters of +its 2020 fiscal year. 2 +2. These violations stemmed from deceptive conduct by persons then working at the +TAL subsidiary operating TAL’s “Light Class” Business Line, who, at the direction of a then +mid-level manager, forged numerous “chops,” or seals, and created phony contracts with third +parties, all for the purpose of artificially inflating the Light Class Business Line’s revenue. +3. Due in part to TAL’s internal accounting controls with respect to its Light Class +Business Line having been deficient during the period of the aforementioned conduct, that conduct +resulted in TAL’s consolidated reported net revenues and net income being misstated, during the +first three quarters of its 2020 fiscal year, in the aggregate, by $86.1 million and $26.6 million, +respectively. See Charts at Figs. 1 and 2, infra. This, in turn, necessitated the filing of a +restatement by TAL.3 +RESPONDENT +4. TAL Education Group (“TAL”), incorporated in the Cayman Islands and having +its principal place of business in the PRC, has at all relevant times been in the business of +providing smart learning solutions. TAL’s American Depository Shares have at all relevant +times been registered with the Commission pursuant to Section 12(b) of the Exchange Act and +traded on the New York Stock Exchange under the symbol “TAL.” Also at all relevant times, +TAL has filed periodic and other reports, including on Forms 20-F and 6-K, with the +Commission pursuant to Section 13(a) of the Exchange Act and related rules thereunder. + +FACTS + +5. TAL launched its Light Class Business Line during its 2018 fiscal year through a +consolidated subsidiary. The Light Class Business Line consisted of both business-to-consumer +(“B2C”) tutoring products and business-to-business (“B2B”) revenue-sharing agreements +between TAL and PRC-based telecom operators. + +6. TAL’s Light Class Business Line generated minimal revenues during TAL’s 2019 +fiscal year. During, however, the first three quarters of TAL’s 2020 fiscal year (which +encompassed March 1, 2019 through November 30, 2019), revenue purportedly attributable to +the Light Class Business Line increased dramatically, to purportedly account for between 3% +and 4% of TAL’s total reported revenue. + + +2 TAL’s 2020 fiscal year ran from March 1, 2019 to February 29, 2020. + +3 See Annex to TAL’s Form 6-K filed April 28, 2020 (“Corrections to Certain Line Items of Previously Released +Financial Statements for the First, Second and Third Quarters of Fiscal Year 2020 ”). +3 +7. By late March 2020, TAL discovered that a purported Light Class Business Line +B2B contract was a forgery and sought to verify if other contracts and documentation related to the +Light Class Business Line were similarly forged. On April 7, 2020, TAL announced that it had +discovered the forging of contracts and other documentation in its Light Class business, in +violation of its business conduct and internal control policies, that it had reported the suspected +responsible employee to local police, and that the police had taken that person into custody. TAL +also terminated that employee. + +8. The subject former TAL employee, along with a former subordinate, were +eventually convicted in a PRC court of, among other things, forging company seals for the +purpose of artificially inflating the Light Class Business Line’s revenue. Both were sentenced to +prison. + +9. The subject former TAL employee was, at the time of the offending conduct, a mid- +level manager of TAL’s Light Class Business Line and, as noted above, the other person +prosecuted criminally was his subordinate. In order to inflate the revenues attributable to the B2B +component of the Light Class Business Line where they worked, these two former TAL employees +forged, photoshopped, and fraudulently altered corporate seals and contracts purporting to have +been executed by numerous PRC-based telecom operators. + +10. The aforementioned deceptive acts caused TAL’s reported net income and net +revenues for the first three quarters of its 2020 fiscal year to be misstated, in the aggregate, by a +total of $26.6 million and $86.1 million, respectively. These misstatements led to TAL’s filing the +restatement, cited in n. 3 above, quantifying the impact of the deceptive acts upon TAL’s originally +reported net income and net revenue figures for the three quarters, which are summarized here: + +Fig. 1: TAL’s REPORTED NET INCOME (in thousands of USD) + + +Fiscal Quarter Reported Net +(Loss)/Income +Restated Net +(Loss)/Income +Difference % Under-/Over- +Statement +Q1 2020 (10,216) (19,068) (8,852) 46.42% +Q2 2020 (17,373) (26,500) (9,127) 34.44% +Q3 2020 25,035 16,420 (8,615) 52.46% + +Fig. 2: TAL’s REPORTED NET REVENUES (in thousands of USD) + + +Fiscal Quarter Reported Net +Revenues +Restated Net +Revenues +Difference % Overstatement +Q1 2020 702,770 673,414 (29,356) 4.35% +Q2 2020 936,626 913,195 (23,431) 2.57% +Q3 2020 862,357 829,017 (33,340) 4.02% + +11. TAL also acknowledged, in its Annual Report on Form 20-F for its 2020 fiscal +year, that a material weakness it identified in its internal control over financial reporting relating to +4 +its Light Class Business Line had contributed to its failure to prevent and detect the +aforementioned overstatements earlier. + +TAL’s Remedial Efforts +12. In determining to accept TAL’s Offer, the Commission considered remedial steps +undertaken by TAL. + +VIOLATIONS + +13. As a result of the conduct described above, TAL violated Section 13(a) of the +Exchange Act and Rules 12b-20 and 13a-16 thereunder, which require every issuer of a security +registered pursuant to Section 12 of the Exchange Act to file with the Commission information, +documents, reports and certifications as the Commission may require, and require that these reports +contain such further material information as may be necessary to make the required statements not +misleading. + +14. As a result of the conduct described above, TAL also 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 the transactions and dispositions +of their assets. + +15. Finally, as a result of the conduct described above, TAL 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 +generally accepted accounting principles. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent TAL’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent TAL shall 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 Rules12b-20 and 13a-16 thereunder, and + +B. Respondent TAL shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $1.25 million 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. + +C. Payment must be made in one of the following ways: + +5 +(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 TAL 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 20549-5553. + +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, 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/2023/AAER-4466.txt b/raw/aaer/2023/AAER-4466.txt new file mode 100644 index 0000000000000000000000000000000000000000..50cdb4b490046c66a650baa9e674668933c6683c --- /dev/null +++ b/raw/aaer/2023/AAER-4466.txt @@ -0,0 +1,593 @@ + + + + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98615 / September 28, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4466 / September 28, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21755 + + +In the Matter of + +CLEAR CHANNEL +OUTDOOR HOLDINGS, +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 Clear Channel Outdoor Holdings, Inc. (“CCOH” +or “Respondent”). + +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 Respondent 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. This matter concerns violations of the anti-bribery, recordkeeping, and internal +accounting controls provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”) by Clear +Channel Outdoor Holdings, Inc. (“CCOH”), a Texas-headquartered company in the out-of-home +advertising industry, in connection with the actions of its agent, CCOH’s former indirect, majority- +owned Chinese subsidiary, Clear Media Limited (“Clear Media”). From at least 2012 through +2017, Clear Media bribed Chinese government officials, both directly and through third parties, to +obtain concession contracts required to sell advertising services to public and private sector clients +for display on public bus shelters, street furniture, and billboards. In addition, Clear Media used +sham intermediaries and false invoices to generate cash for off-book consultants engaged to win +advertising business from government and private customers. From at least 2012 through 2019 +(the “relevant period”), CCOH failed to ensure that sufficient internal accounting controls were in +place at Clear Media. CCOH received approximately $16.4 million in benefits as a result of Clear +Media’s improper payments, which were inaccurately recorded as legitimate business expenses in +CCOH’s consolidated books and records. + +RESPONDENT + +2. CCOH is a Delaware corporation headquartered in San Antonio, Texas. +Throughout the relevant period until May 2019, CCOH’s then-corporate parent, iHeartMedia2 (as +defined herein), owned the majority of CCOH’s outstanding shares. In May 2019, CCOH fully +separated from iHeartMedia as part of the latter’s Chapter 11 bankruptcy proceedings, emerging as +a standalone, publicly traded company; at this time, iHeartMedia ceased to own any shares of +CCOH. CCOH’s common stock is and, throughout the relevant period, was registered with the +Commission pursuant to Section 12(b) of the Exchange Act and trades on the New York Stock +Exchange under the Ticker “CCO.” CCOH reported a total revenue of $2.7 billion for 2019 and, at +that time, had approximately 5,900 employees worldwide. + +OTHER RELEVANT ENTITIES AND INDIVIDUALS + +3. iHeartMedia, Inc. (“iHeartMedia”) is a Delaware corporation headquartered in +San Antonio, Texas, which served as CCOH’s ultimate corporate parent and owned the majority of +CCOH’s outstanding shares and total voting power until May 2019. During the beginning of the +relevant period prior to 2014, iHeartMedia was named CC Media Holdings, Inc. + + +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 During the beginning of the relevant period prior to 2014, the iHeartMedia subsidiary which owned CCOH’s +shares was named Clear Channel Communications, Inc. + + +3 + + +4. Clear Channel International (“CCI”) was, during the relevant period, a CCOH +division based in London, England. + +5. Clear Media Limited was, during the relevant period, a Bermuda-incorporated +holding company, headquartered in Guangzhou, China, through which CCOH conducted business +in China. Since 2005, Clear Media Limited was majority-owned by CCOH. Since December +2001, Clear Media Limited listed a portion of its shares on the Hong Kong Stock Exchange. Clear +Media Limited, in turn, operated through a joint venture entity (together, “Clear Media”) between +Clear Media Limited and a PRC-incorporated company controlled by Related Group (“JV +Partner”). Clear Media’s books and records were consolidated into CCOH’s consolidated +financial statements for purposes of Commission filings through fiscal year 2020, when CCOH +sold its interest in the Clear Media business. + +6. Related Group was, during the relevant period, a group of companies operating in +China that were controlled by Executive A’s close family member (“Executive A’s Relative”) and +included, among others, JV Partner and various cleaning and maintenance entities used by Clear +Media. + +7. Executive A, a Chinese citizen and resident, was, during the relevant period, Clear +Media’s principal executive officer. + +8. Executive B, a Singaporean citizen and Chinese resident, was, during the relevant +period, a senior executive officer of Clear Media. + +FACTS + +Background: CCOH’s control over Clear Media + +9. CCOH acquired an interest in certain advertising companies associated with +Executive A and Executive A’s Relative in China in 1998. In 2001, Clear Media Limited listed its +shares on the Main Board of the Stock Exchange of Hong Kong Limited, and CCOH reorganized +its holding through Clear Media. From 2005 through March 2020, CCOH held a majority of Clear +Media’s shares. CCOH provided out-of-home advertising services in China solely through Clear +Media and, through CCI, consolidated Clear Media’s results in its financial statements. + +10. During the relevant period, Executive A served as Clear Media’s principal +executive officer. CCOH exercised control of Clear Media through the participation of two to +three executives on Clear Media’s board of directors, including in positions as Executive Chairman +and Deputy Chairman of its board. + Executives from CCOH’s finance, legal, and compliance +functions also participated regularly in Clear Media’s board meetings, as well as in certain Clear +Media audit committee meetings. + + + +4 + +11. CCOH controlled the majority of voting shares of Clear Media. CCOH set +financial goals for Clear Media; supervised Clear Media’s financial performance, management, +and organization; and defined Clear Media management’s scope of responsibility. Using U.S.- +based email systems, CCOH executives approved Clear Media’s budget and significant +transactions, including tenders for concessions. CCOH also controlled the adoption of Clear +Media’s compliance policies and the hiring, firing, and compensation of Executive A and other +Clear Media executives. Clear Media reported to CCOH through the Executive Chairman of Clear +Media’s board of directors, a role filled by a CCOH executive for Asia Pacific from 2012 until +2015. Thereafter, the Executive Chairman of Clear Media’s board reported to CCOH’s head of the +CCI division. CCOH conducted annual audits of Clear Media, including compliance, operational, +and SOX audits. + +Clear Media made improper payments to obtain and retain business in China +and inaccurately documented and recorded the payments. + +12. From at least 2012 through 2017, acting directly and through third parties, Clear +Media provided improper benefits to obtain and renew concessions and advertising contracts in +China and failed to appropriately document and record those payments in its books and records. + +13. To obtain concession contracts from local Chinese government transport +authorities, Clear Media provided cash-equivalent gift cards, golf clubs, vases, and other expensive +and unidentified gifts and entertainment, some of which were provided “due to being in the +negotiation process with clients for a renewal.” Executive A spent hundreds of thousands of +dollars, subject to no advance review or approval, on government officials for first-class travel, +hotel rooms, meals, and entertainment. Clear Media’s documentation often failed to identify the +officials who received the benefits or to specify the amount spent on each official’s behalf. In one +instance in September 2015, Clear Media employees were cautioned by local Clear Media +management not to “describe the purposes of the Hospitality Costs too specifically, e.g., for the +purpose of winning the contract.” + +14. Clear Media also provided improper benefits to government officials through +vendors known as “cleaning and maintenance entities,” which helped obtain Clear Media’s +concession contracts as well as build, clean, and maintain its advertising displays. Many of Clear +Media’s cleaning and maintenance vendors were Related Group companies. Contrary to Clear +Media’s policies, Clear Media made certain payments to the cleaning and maintenance entities +based solely on oral agreements, often disguising payments for the benefit of government officials +as various “subsidies” or “special request” expenses. Written contracts Clear Media had with such +entities often lacked specificity as to payment rates and amounts, and certain contracts did not have +anti-corruption provisions or audit rights, contrary to Clear Media’s policies. Further, the cleaning +and maintenance entities did not detail the services they provided, as Clear Media’s policies +required before paying vendors. + +15. In addition to cleaning and maintenance expenses, the budget Clear Media allocated +to cleaning and maintenance entities included salaries, bonuses, entertainment, and other expenses. + + +5 + +Records indicate that Clear Media also maintained an annual reserve of $525,000 to $600,000 for +“special funding” or “special request funding” for ad hoc requests, and that “from discussions in +Hangzhou [in 2017,] special request funding ha[d] been used [in Hangzhou] solely for Government +official entertaining.”3 + +16. In December 2016, Clear Media’s Hangzhou branch spent $12,800 on customer +entertainment while it was seeking the renewal of a priority concession with a Hangzhou transit +authority (the “Hangzhou Concession”). In January 2017, Clear Media provided its Hangzhou +branch with approximately $14,000 to entertain government officials “due to the need to +renegotiate” the Hangzhou Concession. Clear Media’s Hangzhou branch then transferred +approximately $20,350 to its cleaning and maintenance entity, classifying the payment as a +“subsidy” or an “allowance.” The same month, the Hangzhou Concession was renewed. + +17. Similarly, the general manager of Clear Media’s cleaning and maintenance entity in +Shanghai told CCOH’s internal auditors during a 2017 audit that his main responsibility, along +with Executive A, was to maintain a “close relationship” with Shanghai government officials, +including through entertainment, in order to avoid having the Shanghai concession put out for +public tender. He stated that Clear Media would lose the concession in an open tender because it +was unable to compete based on price. Clear Media entered into a ten-year concession agreement +with Shanghai public transit authorities in December 2016. + +18. In addition to improper payments made to obtain concession contracts, Clear Media +engaged in a “customer development expense” scheme from at least 2013 through 2017. Through +this scheme, Clear Media developed an off-book cash fund for payments made to undisclosed +consultants to win, grow, or retain advertising business from approximately 70 private and +government customers. Clear Media purportedly considered the identities of the consultants to be +sensitive and confidential information and did not properly diligence or document them. In some +cases, Clear Media withdrew cash directly from its bank account for personnel to pay the +undisclosed consultants. In others, Clear Media created false invoices and tax records to justify +cash payments to three shell company intermediaries that provided no actual services. The shell +companies, whose legal representatives included Executive A’s driver and personal assistant, were +controlled by Related Group. After a series of cash deposits and withdrawals through layers of +bank accounts held in the names of employees of Clear Media and Related Group companies, +Clear Media sales directors distributed the cash to 19 different undisclosed consultants. The +payments ranged from two to five percent of the advertising contracts’ value. Clear Media had no +written agreements with the consultants or records of the payments made to them. + + + +3 All U.S. dollar payment amounts and other U.S. dollar figures relating to Clear Media identified in this Order were +converted from Chinese RMB or the Hong Kong Dollar at the exchange rate prevailing at the relevant time. + + +6 + +From 2012 through 2017, CCOH’s internal auditors identified +bribery-related concerns and internal accounting control deficiencies at Clear Media. + +19. From 2012 through 2017, CCOH’s internal auditors repeatedly reported elevated +bribery risks at Clear Media and concerns regarding Clear Media’s compliance program and +internal accounting controls, including in relation to cleaning and maintenance vendors; travel, +gifts, and entertainment; compliance training; and whistleblower hotline implementation. While +CCOH audit reports identified certain remedial actions to be taken by Clear Media, CCOH failed +to ensure that Clear Media took adequate steps to sufficiently address these repeated concerns. In +some cases, CCOH’s internal auditors erroneously reported that audit issues were remediated +based on information provided by Clear Media, only to note the same issues in later audits; failed +to elevate certain concerns they identified at Clear Media; and failed to adequately test high-risk +transactions to detect long-running payment schemes. + +20. In 2012, CCOH’s internal auditors reported that Clear Media had made +discretionary payments to cleaning and maintenance entities in China that could not be traced to +written contracts. Clear Media also paid the majority of the salaries of the entities’ senior +management. Although Clear Media was using the cleaning and maintenance entities to interface +with government officials, it required no compliance representations or training for the employees +of these entities. CCOH Internal Audit also flagged Clear Media’s failure to implement a +whistleblower hotline. + +21. In 2013, CCOH’s internal auditors reported that the issues raised in their 2012 +compliance audit had been addressed by Clear Media management, without describing how certain +issues, some of which became the subject of repeat audit findings in 2014 and 2015, were resolved. +Similarly, in 2014, CCOH’s internal auditors concluded, based solely on assertions by certain +Clear Media managers, that Clear Media used no intermediaries for dealings with municipal +governments. In fact, however, Clear Media was making substantial ongoing payments to cleaning +and maintenance entities, which past internal audits had found interacted with local officials on +Clear Media’s behalf. Nevertheless, in September 2014, CCOH’s internal auditors assigned Clear +Media a “marginal” rating due to concerns related to gifts and entertainment for government +officials, among other issues, and recommended that expense approval and documentation +processes and procedures be improved at Clear Media. + +22. In connection with a 2015 specific scope audit focusing on the company’s Shanghai +branch, CCOH’s internal auditors found that Clear Media continued to pay cleaning and +maintenance entities at undocumented rates based on oral agreements and to employ the entities’ +senior management, and their Audit Report recommended that contracts going forward formally +document rates payable to the entities. In a subsequent 2015 compliance audit, the auditors +reported that some gifts and entertainment Clear Media provided to government officials may +violate relevant anti-corruption laws. Examples included a set of gifts provided “due to being in +the negotiation process with clients for a renewal,” as well as cash-equivalent gifts, golf clubs, and +other items provided at the request of government officials. In its Audit Report, CCOH’s internal +auditors recommended that Clear Media create a clear policy governing appropriate gift and + + +7 + +hospitality practices, to be agreed to and monitored by CCOH compliance and Clear Media’s local +compliance officer. + +23. CCOH’s internal auditors reported to CCOH’s management or audit committee in +2015, 2016, and 2017 that some of Clear Media’s gift and entertainment expenses for government +officials may be “problematic” or “high risk” under applicable anti-corruption laws and carried +risks of fines and reputational damage. A 2016 Audit Report also flagged gaps in Clear Media’s +provision of compliance training below the senior management level and in publicizing its +whistleblower hotline, while the auditors failed to perform any testing of Clear Media’s due +diligence files and contracts to verify the accuracy of Clear Media’s assertions about its use of third +parties, contrary to their standard testing protocol. + +24. Following three “marginal” compliance ratings in three years, Clear Media entered +a cycle of “unsatisfactory” audit findings beginning in 2017 based primarily on continued concerns +about cleaning and maintenance vendors. A January 2017 report issued by Clear Media’s internal +auditor, reviewed by CCOH’s internal auditors and a CCI executive, reported that the cleaning and +maintenance entities’ government interactions included obtaining approvals and negotiating +penalties and concession contracts for Clear Media. Despite the elevated corruption risks of this +relationship, Clear Media’s payments to the entities included “special request expenses” and +“allowances” intended to enable the entities “to maintain or build[] up relationships with local +authorities.” Clear Media also subsidized the entities’ salary and rent, purchased their vehicles, +and provided bonuses and trips for their personnel. Cleaning and maintenance agreements +automatically renewed without due diligence or competitive bidding. + +25. In 2017, during a specific scope audit focusing on Clear Media’s Shanghai and +Hangzhou branches, CCOH’s internal auditors also noted concerns in their work papers about the +significant entertainment expenditures for Hangzhou government officials “due to the need to +renegotiate” the Hanghzhou Concession in early 2017. These specific concerns were not reflected +in the summary report provided to CCOH’s management and presented to CCOH’s audit +committee. + +In 2017, Clear Media blocked CCOH’s internal auditors’ access to records. + +26. Given the risks surrounding Clear Media’s payments to cleaning and maintenance +entities, in 2017, CCOH’s internal auditors requested support concerning the entities’ monthly +expenditures, as well as for the payments made to entertain officials renegotiating the Hangzhou +Concession in early 2017. Executive A blocked CCOH’s internal auditors, Clear Media’s internal +auditor, and Executive B from obtaining access to the requested records. + +27. Following the 2017 audit, CCOH’s internal auditors raised concerns about access to +records with Clear Media management and with Clear Media’s Chairman of the Board and Audit +Committee Chair. Executive A’s actions were then reported to CCOH’s senior executives and +audit committee. CCOH’s internal auditors assigned Clear Media an “unsatisfactory” audit rating + + +8 + +due largely to CCOH’s internal auditors’ inability to provide assurance on the appropriateness or +validity of Clear Media’s payments to cleaning and maintenance vendors. + +In 2018, a misappropriation scheme came to light, revealing additional +weaknesses in Clear Media’s internal accounting controls. + +28. In January 2018, a Clear Media cashier confessed to Chinese authorities that he had +participated in a decade-long misappropriation scheme. Clear Media’s board engaged local +counsel and the Hong Kong branch of an accounting firm to investigate the misappropriation. In +February 2018, Clear Media’s external auditors also identified suspicious commission payments +made to entities related to Executive A. Clear Media’s investigation found that: + +• Between 2007 and 2017, at least three Clear Media employees engaged in a +series of unrecorded and allegedly unauthorized transactions to +misappropriate approximately USD $10.2 million; + +• Between 2011 and 2018, undisclosed, “off-book” bank accounts in Clear +Media’s name were used to receive government subsidies totalling at least +USD $5.2 million that were not recorded as income; and + +• Between at least 2015 and 2017, Clear Media made approximately USD +$9.8 million in cash “customer development” payments, both through Clear +Media personnel and Related Group shell companies, to 19 secret +consultants to obtain or retain business with approximately 70 government +and private customers. + +29. Executive A prevented investigators from interviewing Related Group employees +regarding the “customer development” expenses and from accessing its records. Clear Media +eventually permitted external legal counsel in China to contact five of the 19 consultants by +telephone, all of whom denied making improper payments. Investigators had no access, however, +to the secret consultants’ books and records to verify how the “customer development” fees were +used. + +30. While CCOH did not become aware of the “customer development” expense +scheme until 2018, later investigation revealed that Clear Media’s payments to secret consultants +began no later than 2013. CCOH’s monitoring of Clear Media failed to detect the repeated, large +cash withdrawals and commission payments that Clear Media made for at least five years, from +2013 through 2017, in furtherance of the “customer development” scheme. + +31. At the same time, as of 2018, many of the issues CCOH’s internal auditors did +identify in audits of Clear Media since 2012 remained insufficiently or only partially remediated by +Clear Media. For example, a compliance questionnaire Clear Media completed in March 2018 +reflected that Clear Media did not conduct due diligence on agents, did not require approval of new +suppliers before processing payments to them, did not obtain required legal department approval of + + +9 + +related party transactions, did not include CCOH’s anti-bribery contractual provisions and audit +clauses in its model contracts, and did not publicize the CCOH whistleblower hotline. + +32. In March 2018, Clear Media provided information regarding its investigation to the +Hong Kong Stock Exchange, which temporarily suspended trading in Clear Media securities in +April 2018. CCOH made a parallel disclosure to the Commission in anticipation of a delayed +filing of its annual report. About the same time, the Hong Kong office of CCOH’s external +auditors disclaimed its 2017 audit opinion of Clear Media’s financials. CCOH’s external auditors +in the United States determined that Clear Media’s internal control over financial reporting had a +material weakness related to approvals and segregation of duties within cash management and +banking processes. Gaps surrounding vendor payments and cash disbursement were deemed a +significant deficiency. + +33. To remediate these issues, Clear Media engaged an accounting firm (“Accounting +Firm”) to review its internal control over financial reporting. Accounting Firm’s September 2018 +recommendations were similar to those CCOH’s internal auditors had made from 2012 to 2017 +regarding Clear Media’s governance of supplier management, conflicts of interest, related party +transactions, employee expense claims, and whistleblowing. Accounting Firm’s recommendations +also addressed Clear Media’s “customer development” expenses and internal audit function. + +Throughout 2019, Clear Media continued to block access to financial records +and pay cleaning and maintenance entities without adequate support. + +34. Executive A continued to deny CCOH’s internal auditors access to financial +records related to the cleaning and maintenance entities’ expenses in 2019. CCOH’s internal +auditors reported this to their executive management, along with continuing concerns regarding +Clear Media’s whistleblowing hotline implementation and provision of meals and entertainment. + +35. Accounting Firm assigned Clear Media “unsatisfactory” ratings in two internal +audits it conducted in 2019. Accounting Firm found that Clear Media continued to pay substantial +“business development assistance fees” to cleaning and maintenance entities related to acquiring or +renewing concession rights; there were no formal contractual agreements in respect to these +services or bases to support the amounts paid. Accounting Firm concluded that these payments +created a “critical risk” to Clear Media’s operational performance, financial statements, and +reputation or could result in legal fines and penalties. Accounting Firm further found a high risk +associated with Clear Media’s payments to the entities to clean and maintain bus shelters, which +also lacked an adequately documented basis, and recommended clarification of pricing models and +monitoring of payments for appropriateness. + +36. In May 2019, CCOH legally separated from its former ultimate parent company, +had a new class of stockholders, and formed a new board of directors. Despite various remedial +efforts, by the end of 2019, CCOH still could not assure itself that Clear Media’s payments to +cleaning and maintenance entities were being spent appropriately, consistent with CCOH +management’s policies, and in compliance with anti-corruption laws. In November 2019, CCOH + + +10 + +announced a strategic review of its interest in Clear Media. In March 2020, CCOH disposed of its +interest in Clear Media. + +LEGAL STANDARDS AND VIOLATIONS + +37. Under Exchange Act Section 21C(a), 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 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. + +38. As a result of the conduct described above, Respondent violated Section 30A of the +Exchange Act, which prohibits any issuer with a class of securities registered pursuant to Section +12 of the Exchange Act or with reporting obligations pursuant to Section 15(d) of the Exchange +Act, or any officer, director, employee, or agent of such issuer, or any stockholder acting on behalf +of an issuer, from making use of the mails or any means or instrumentality of interstate commerce +corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of +any money, or offer, gift or promise to give anything of value to any foreign official, for purposes +of influencing any act or decision of such foreign official in his official capacity in order to assist +such issuer in obtaining or retaining business for or with any person. + +39. As a result of the conduct described above, Respondent violated Section +13(b)(2)(A) of the Exchange Act, which requires issuers with a class of securities registered +pursuant to Section 12 of the Exchange Act and issuers with reporting obligations 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. + +40. As a result of the conduct described above, Respondent violated Section +13(b)(2)(B) of the Exchange Act, which requires issuers with a class of securities registered +pursuant to Section 12 of the Exchange Act and issuers with reporting obligations pursuant to +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. + +Disgorgement and Civil Penalties + +41. The disgorgement and prejudgment interest referenced in Section IV below is +consistent with equitable principles, does not exceed Respondent’s net profits from its violations, + + +11 + +and returning the money to Respondent would be inconsistent with equitable principles. +Therefore, in these circumstances, distributing disgorged funds to the United States Treasury is the +most equitable alternative. The disgorgement and prejudgment interest referenced in Section IV +below shall be transferred to the general fund of the United States Treasury, subject to Section +21F(g)(3) of the Exchange Act. + +Cooperation and Remediation + +42. In determining to accept the Offer, the Commission considered CCOH’s +cooperation and remedial efforts. + +43. CCOH’s cooperation included: (1) promptly sharing facts developed in its own +internal investigation; (2) proactively producing relevant documents, including documents from +Clear Media, both prior to and following the sale of CCOH’s interest in Clear Media, that were +located overseas; (3) producing, in real time, documentation of audits of Clear Media internal +controls during the course of the investigation; (4) providing translations of documents; (5) +facilitating the production of documents from third parties; and (6) facilitating the Commission’s +staff’s interviews of current and former employees of CCOH’s foreign subsidiaries and of certain +third parties. + + +44. CCOH’s remediation efforts include: (1) disposing of its interest in Clear Media; +(2) enhancing CCOH’s anti-corruption compliance policies, procedures, and related internal +accounting controls surrounding third-party due diligence, contracting, payments, and monitoring; +gifts, meals, entertainment, and travel; conflicts of interest; and the monitoring and remediation of +internal audit issues and actions; (3) implementing annual compliance reviews of internal +accounting controls across its business units; (4) increasing human and financial resources for +compliance, including the hiring of a dedicated Compliance Director; (5) introducing ethics and +compliance considerations into performance evaluations and compensation decisions; and (6) +enhancing online and live anti-corruption training programs. + +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 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. + + B. Respondent shall pay disgorgement of $16,355,567, prejudgment interest of +$3,760,920, and a civil monetary penalty in the amount of $6,000,000 to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, subject to + + +12 + +Exchange Act Section 21F(g)(3). Respondent shall pay $13,058,243.50 within 30 days after entry +of the Order; and the remaining balance in one-third equal installments under the following +schedule: 305 days, 335 days, and 365 days after the entry of the Order until the full amount and +interest is paid. Payments shall be applied first to post-order interest, which accrues pursuant to +SEC Rule of Practice 600 and 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. + + 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 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 +CCOH 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, Chief, FCPA Unit, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549-5631. + + 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 (as defined herein), 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 + + +13 + +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/2023/AAER-4467.txt b/raw/aaer/2023/AAER-4467.txt new file mode 100644 index 0000000000000000000000000000000000000000..22fd4c0f437b80cb6e6987ba132a60fdff2887a3 --- /dev/null +++ b/raw/aaer/2023/AAER-4467.txt @@ -0,0 +1,404 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11248 / September 28, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98616 / September 28, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4467 / September 28, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21761 + +In the Matter of + +EXELON CORPORATION and +COMMONWEALTH EDISON +COMPANY, + +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 Exelon Corporation (“Exelon”) and Commonwealth Edison Company (“ComEd”) +(referred to collectively as “Respondents”). + +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, Respondents admit the Commission’s +jurisdiction over them and the subject matter of these proceedings, and 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’ Offers, the Commission finds1 that: + +Summary + + These proceedings arise out of violations of the antifraud, books and records, and internal +accounting control provisions of the Securities Act and the Exchange Act by Respondents as a +result of a multi-year scheme by ComEd to corruptly influence and reward Michael Madigan +(“Madigan”), the then-Speaker of the Illinois House of Representatives, for his assistance with +respect to legislation affecting ComEd’s business. The scheme occurred from around 2011 +through 2019 and involved ComEd arranging for various Madigan associates to obtain jobs, +vendor subcontracts, and monetary payments associated with those jobs and vendor subcontracts, +for the benefit of Madigan and Madigan’s associates, with the intent to influence and reward +Madigan. + +Respondents + +1. Exelon, a Pennsylvania corporation headquartered in Chicago, Illinois, is a utility +services holding company that trades on the NASDAQ Stock Market under the symbol “EXC.” It +reported revenues of $19 billion, operating income of $3.3 billion, and net income of nearly $2.2 +billion for the year ended December 31, 2022. +2. ComEd, an Illinois corporation headquartered in Chicago, Illinois is a subsidiary of +Exelon. ComEd is 99% owned by Exelon and has common stock purchase warrants registered +pursuant to Section 12(g) of the Exchange Act. ComEd also files separate audited financial +statements with the Commission as it offers and sells debt securities under the Securities Act. +ComEd entered into a deferred prosecution agreement (“DPA”) with the United States Attorney +for the District of Northern Illinois (“USAO” or “criminal authorities”) on July 17, 2020. USA v. +Commonwealth Edison Company, No. 1:20-cr-00368 (N.D. Ill.). As part of the agreement, ComEd +admitted that the information set forth in the Statement of Facts attached to the DPA is true and +accurate and agreed to pay a criminal fine of $200 million. +Other Relevant Individuals +3. Anne R. Pramaggiore (“Pramaggiore”) served as the chief executive officer of +ComEd from approximately March 2012 to May 2018. +4. Michael Madigan (“Madigan”) was Speaker of the Illinois House of +Representatives during the relevant period. + +1 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 +Facts +A. Background +5. ComEd is the largest utility company in Illinois, employing over 6,000 individuals +and delivering electricity to approximately 70 percent of Illinois’s population. As a utility, ComEd +is subject to extensive regulation by the State of Illinois. The State of Illinois regulates the rates +that ComEd may charge its customers, as well as the rate of return ComEd may realize from its +business operations. + +6. The Illinois General Assembly, which is comprised of the Illinois House of +Representatives and the Illinois Senate, routinely considers bills and passes legislation that has a +substantial impact on ComEd’s operations and profitability, including legislation that affects the +regulatory process ComEd uses to determine the rates ComEd charges its customers for the +delivery of electricity. In order for legislation to become law, it must be passed by both houses of +the Illinois General Assembly – the Illinois House of Representatives and the Illinois Senate. +7. In December 2016, the Illinois Future Energy Jobs Act (FEJA) was passed into law +by the Illinois General Assembly. Among other things, FEJA renewed the regulatory process that +was beneficial to ComEd, ensuring a continued favorable rate structure. +8. During the relevant period, Madigan was speaker of the Illinois House of +Representatives. ComEd understood that, as speaker, Madigan was able to exercise control over +what measures were called for a vote in the House of Representatives and had influence and +control over his fellow lawmakers concerning legislation, including legislation that affected +ComEd. Starting around 2011, Madigan and his longtime confidant, a lobbyist and consultant to +ComEd during the relevant time period (referred to hereinafter as “Lobbyist”) sought to obtain +from ComEd jobs, vendor subcontracts, and monetary payments associated with those jobs and +subcontracts for various associates of Madigan, such as precinct captains who operated within +Madigan’s legislative district. +B. The Scheme +9. In an effort to corruptly influence and reward Madigan to assist ComEd with +respect to legislation concerning ComEd and its business, ComEd arranged for various Madigan +associates to obtain jobs, vendor contracts and subcontracts, and monetary payments associated +with those jobs and vendor subcontracts. In some instances, these associates did little to no work +for which they were hired. In particular, during the same time frame that ComEd was making +payments to Madigan’s associates, ComEd was also seeking Madigan’s support with certain +legislation beneficial to ComEd, including the FEJA legislation, which would ensure a continued +favorable rate structure for ComEd. ComEd, in the DPA, acknowledged that the reasonably +foreseeable anticipated benefits to ComEd of such legislation exceeded $150,000,000. + + +4 +i. Payments to Madigan’s Associates + +10. From around 2011 through 2019, ComEd made indirect payments, totaling +approximately $1,324,500, to certain Madigan associates, who did little to no work for ComEd. + +11. ComEd made the indirect payments through third-party vendors. These third-party +vendors entered into contracts with ComEd to provide consulting and related services. In reality, a +substantial portion of the money that was paid to these vendors under the contracts went to +subcontractors who were Madigan associates and performed little to no work for ComEd. The +purpose of these payments was to corruptly influence and reward Madigan in connection with the +advancement and passage of legislation in the Illinois General Assembly that was favorable to +ComEd. + +12. An individual (referred to hereinafter as “Consultant”) and his company (“referred +to hereinafter as “Consulting Firm”) had a political consulting contract with ComEd from 2005 to +2019. Consultant advised ComEd on matters related to the City of Chicago and Cook County, +Illinois. From 2016 to May 2019, Consultant and Consulting Firm submitted monthly invoices to +ComEd for amounts that ranged between $32,750 and $37,500. Beginning in August 2011, and +until 2019, Consultant hired associates of Madigan as subcontractors. + +13. Between 2016 and 2019, Consultant entered into contracts with and submitted +invoices to ComEd. These contracts and invoices were purportedly for advice on “legislative +issues” and “legislative risk management activities.” In reality, a substantial portion of this +compensation paid to Consulting Firm was intended for payment to Madigan’s associates, who did +little or no work for ComEd. Consultant and Consulting Firm did not supervise or direct the +activities of the subcontractors, even though they were subcontracted under and worked for +Consulting Firm. Since these payments to Consulting Firm’s subcontractors were made through +Consulting Firm, these payments were not reflected in ComEd’s vendor payment system. +Therefore, no payments to the Consulting Firm subcontractors could be identified in ComEd’s +vendor payment system. + +14. Certain senior executives and agents of ComEd were aware of the payments to +Madigan’s associates from their inception until they were discontinued in or around 2019. They +were also aware that the purpose of these payments to Madigan’s associates was to corruptly +influence and reward Madigan in connection with his official duties and to advance ComEd’s +business interests. + +15. These executives structured the payments to the Madigan associates using +Consulting Firm so that they would not be identifiable in ComEd’s vendor payment system. + +16. During the course of the scheme, ComEd sought approval from Madigan and +Lobbyist before discontinuing any payments to Madigan’s associates despite the fact that these +individuals did little to no work for ComEd. As with the payments to Madigan associates through +Consulting Firm, payments made to Madigan associates through other third-party vendors were not + +5 +identifiable in ComEd’s vendor payment system. Former ComEd executives designed these +payment arrangements in part to conceal the size of the payments and to assist ComEd in denying +responsibility for oversight of Madigan’s associates. + +ii. Pramaggiore Falsified Documents in Connection with Payments to Madigan’s +Associates. +17. In January of 2017 and 2018, Pramaggiore signed false and misleading documents +in connection with the renewal of Consultant’s contract. The documents, called “Single Source +Justification” forms, were required by ComEd’s relevant internal policy for a contract for services +that allowed ComEd to avoid a competitive bidding process. The purpose of the Single Source +Justification forms was to explain ComEd’s decision to retain services of a vendor in a +noncompetitive manner and required the approval of a ComEd executive. The Single Source +Justification forms signed by Pramaggiore were false and misleading because they created the +appearance that all monies paid to Consultant under his contract with ComEd were for, among +other things, Consultant’s “unique insight & perspective to promote ComEd and its business +matters to further develop, execute and manage its Government Relations presence” and “specific +knowledge that cannot be sourced from another consultant/supplier.” The Single Source +Justification form did not explain that a large amount of the fees paid to Consultant would be used +to pay certain Madigan associates who performed little or no work for ComEd. +iii. Retention of Law Firm +18. In approximately 2011, ComEd agreed to enter into a contract with a law firm of a +Madigan associate (“Law Firm”), in part, for the purpose of influencing and rewarding Madigan in +connection with his official duties. ComEd entered into a contract with Law Firm pursuant to +which ComEd agreed to give Law Firm a minimum of 850 hours of attorney work per year. +However, when Law Firm’s contract came up for renewal in 2016, certain ComEd employees +sought to reduce the number of hours of legal work because there was not enough appropriate legal +work to give to Law Firm to fill the previously agreed-upon 850 annual hours and ComEd paid +only for hours worked. The Madigan associate who owned the firm then complained to Lobbyist +about ComEd’s effort to reduce the amount of work it provided to the firm. On or about January +20, 2016, Lobbyist sent an email to Pramaggiore that stated, in part: +I am sure you know how valuable [attorney] is to our Friend…. I know the drill +and so do you. If you do not get involve [sic] and resolve this issue of 850 hours +for his law firm per year then he will go to our Friend. Our Friend will call me +and then I will call you. Is this a drill we must go through? For me, [lobbyist] and +I am sure you I just do not understand why we have to spend valuable minutes on +items like this when we know it will provoke a reaction from our Friend. +2 +Pramaggiore responded to the email on the same day, stating “Sorry. No one informed me. I am +on this.” Pramaggiore then tasked a ComEd employee, who was assigned as a “project manager” + +2 “Our friend” is how Lobbyist often referred to Madigan. + +6 +to assist with the project of obtaining legislative approval of FEJA, to ensure that Law Firm’s +contract was renewed. The project manager had no oversight authority over ComEd’s legal +department but was assigned the task of ensuring Law Firm’s contract was renewed because the +work provided to the law firm was designed, in part, to corruptly influence and reward Madigan +in connection with Madigan’s official duties, including the promotion and passage of FEJA. In or +around June 2016, ComEd agreed to renew Law Firm’s contract with substantially reduced +annual hours. + +C. Misleading Statements +19. On at least two occasions in the fall of 2016, Pramaggiore made materially +misleading statements to Exelon investors regarding ComEd’s lobbying and legislative efforts in +support of the FEJA legislation. On October 26, 2016, during an Exelon earnings call, Pramaggiore +spoke about the potential legislation: +This is [Pramaggiore]. We are -- I think what we are seeing right now is that there +is a bit of an opening of a door. The legislature has a temporary budget in place +and Chicago Public School funding is behind them and so I think we see an +opportunity in the veto session. We also think there is a lot of work to be done to +get there. We have pulled together a coalition to come in with an agreed bill as +much as possible and we are in the process of putting that together now. But we +do think there is the potential that this would be entertained in the veto session. +At the time of her statement, Pramaggiore was aware of, participating in, and at times directing, a +scheme where ComEd was engaging in an effort to corruptly influence and reward a government +official to secure favorable legislation. Pramaggiore’s statement that ComEd was pulling +together a “coalition to come in with an agreed bill” was misleading because it omitted the fact +that part of ComEd’s lobbying activities included its efforts to corruptly influence and reward +Madigan with respect to the FEJA legislation. +20. A month later, on November 30, 2016, ComEd issued a press release +regarding an agreement reached to pass FEJA. The press release, which was posted on +Exelon’s public website, quotes Pramaggiore as stating the following: +We have worked with many stakeholders including consumer advocates, +environmentalists, community leaders, among others, to ensure this bill +has the best outcome for customers, our economy and our environment +and the communities we serve. We appreciate the strong bipartisan +support of members of the General Assembly, the four caucus’ +professional staff, the labor unions, members of the Clean Jobs Coalition +and other stakeholders who have helped us shape this comprehensive +energy package that will bring tremendous value to our state and our +customers. + +7 +21. The statement that ComEd’s legislative success was due to legitimate efforts such +as working with stakeholders and earning support from members of the General Assembly was +misleading because it omitted that ComEd was engaging in an effort to corruptly influence and +reward a government official to secure favorable legislation. At the time of these statements, +Pramaggiore was aware of and was participating in ComEd’s payments to certain Madigan +associates, including payments to certain Madigan associates who did little to no work for ComEd, +and payments to Law Firm. Around the time of these misleading statements, Exelon granted +446,000 shares to employees through its long-term incentive plans and sold 318,000 shares to +employees at a discounted price through its employee stock purchase plan. + +Legal Standard and Violations +22. Under Securities Act Section 8A and Exchange Act Section 21C(a), 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 Securities Act and Exchange Act or any regulation +thereunder, and upon any 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. + +23. As a result of the conduct described above, Respondents violated Section 17(a)(2) +of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, which +prohibit fraudulent conduct in the offer or sale of securities and in connection with the purchase or +sale of securities. + +24. As a result of the conduct described above, Respondents violated Section +13(b)(2)(A) of the Exchange Act, which requires issuers with a class of securities registered +pursuant to Section 12 of the Exchange Act and issuers with reporting obligations 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. + +25. As a result of the conduct described above, Respondents violated Section +13(b)(2)(B) by failing to devise and maintain a system of internal accounting controls that was +sufficient to provide reasonable assurances that assets are used, and transactions are executed, only +in accordance with management’s general or specific authorization, including in a manner +consistent with Respondents’ policies. + +Deferred Prosecution Agreement + +26. On July 17, 2020, Respondent ComEd entered into a DPA with the USAO. USA v. +Commonwealth Edison Company, No. 1:20-cr-00368 (N.D. Ill.). ComEd acknowledged in the +DPA, among other things, that it was responsible for the actions of its current and former officers, +employees, and agents as charged in the Information filed in connection with the DPA and as set +forth in the Statement of Facts to the DPA. The DPA had a term of three years and required +ComEd to meet certain obligations, as set forth in the DPA. ComEd fulfilled all the obligations of +the DPA, and the three-year term ended on July 17, 2023. On July 17, 2023, the USAO moved to + +8 +dismiss the Information and the charge against ComEd. The Court granted the USAO’s motion +and issued an order dismissing the charge and terminating the criminal case against ComEd. + +Cooperation and Remediation +27. In determining to accept the Offers, the Commission considered remedial acts +promptly undertaken by Respondents and cooperation afforded the Commission staff. This +included significant remedial measures to enhance their compliance program. +Undertaking +28. Respondent Exelon has undertaken to assist the Commission staff in the +administration of a distribution plan, including any and all efforts to distribute to affected +investors the monetary relief described in paragraph IV below. In connection with such +assistance, Respondent Exelon will produce, without service or notice of subpoena, any and all +documents and other information reasonably requested by the Commission staff. +29. In determining whether to accept the Offers, the Commission has considered this +undertaking. +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 that: + + A. Pursuant to Section 8A of the Securities Act, Respondents cease and desist from +committing or causing any violations and any future violations of Section 17(a) of the Securities +Act. + + B. Pursuant to Section 21C of the Exchange Act, Respondents 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 promulgated thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the +Exchange Act. + +C. Respondent Exelon shall, within 14 days of the entry of this Order, pay a civil +money penalty in the amount of $46,200,000.00 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; + + +9 +(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 +Exelon 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 Brian D. Fagel, +Division of Enforcement, Securities and Exchange Commission, 175 West Jackson Blvd, Suite +1450, Chicago, Illinois 60604. + + D. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is +created for the penalty referenced in paragraphs IV.C. 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 Exelon 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 Exelon’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 +Exelon 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 + + +10 +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 Exelon 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/2023/AAER-4469.txt b/raw/aaer/2023/AAER-4469.txt new file mode 100644 index 0000000000000000000000000000000000000000..bbea117ba2b557f7b178d4702791e67eca91913b --- /dev/null +++ b/raw/aaer/2023/AAER-4469.txt @@ -0,0 +1,497 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11251 / September 29, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98629 / September 29, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4469 / September 29, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21766 + + +In the Matter of + +NEWELL BRANDS INC. +and MICHAEL B. POLK, + +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 Newell Brands Inc. (“Newell”) and Michael B. Polk (“Polk”) (collectively, +“Respondents”). +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 with respect to Polk, +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’ Offers, the Commission finds1 that: +SUMMARY +1. This matter involves Newell’s misleading statements regarding non-GAAP +financial measures that it called “core sales growth” and “core sales,” which Newell described in +its earnings releases as giving investors “a more complete understanding of underlying sales +trends.” Newell explained that the core sales measure would allow investors to understand “sales +on a consistent basis” by removing from its “net sales” measure the effects of acquisitions, +divestitures, and foreign currency fluctuations. Newell disclosed its year-over-year core sales +growth rate as part of the headline of its quarterly earnings releases. Newell also provided +investors guidance about its expected core sales growth rate, and analysts followed Newell’s +publicly announced core sales growth. +2. From Q3 2016 through Q2 2017 (the “Relevant Period”), Newell announced core +sales growth rates that were misleading because Newell did not also disclose that its publicly +disclosed core sales growth rate was higher as the result of actions taken by Newell that were +unrelated to its actual underlying sales trends. Internal communications during this period +recognized that Newell’s sales were disappointing and had fallen short of management’s goals. In +response, Newell’s then-CEO, Polk, approved plans to pull forward sales from future quarters, +asked employees to examine accruals established for customer promotions in order to determine if +they could be reduced, and agreed with decisions to reclassify consideration payable to customers +that resulted in the value of that consideration not being deducted as required by generally accepted +accounting principles (GAAP). These actions, which Newell did not disclose, increased Newell’s +publicly disclosed core sales growth rates during the Relevant Period, and, as a result, Newell’s +and Polk’s descriptions of Newell’s growth to investors as “strong” and “solid” were misleading. +RESPONDENTS +3. Newell Brands Inc. is a Delaware corporation with its principal place of business +in Atlanta, Georgia. Newell’s common stock is registered pursuant to Section 12(b) of the +Exchange Act and trades on the Nasdaq under the symbol “NWL.” Newell is required to file +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. +4. Michael B. Polk, age 62, resides in Bergen County, New Jersey. Polk was the +CEO of Newell (previously known as Newell Rubbermaid Inc.) from July 2011 through June +2019. + +1 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 +FACTS +5. Newell is a consumer goods company that sells products under brands such as +Rubbermaid, Sharpie, Elmer’s, Graco, and Calphalon. Newell Brands Inc. was known as Newell +Rubbermaid Inc. until April 2016, when the company acquired Jarden Corporation (“Jarden”). +A. Newell’s “Core Sales” and “Core Sales Growth” Measures +6. Core sales and core sales growth were important non-GAAP financial measures to +Newell.2 Newell stated in its earnings releases that its “management believes that these non- +GAAP financial measures and the information they provide are useful to investors since these +measures . . . permit investors to view the company’s performance using the same tools that +management uses to evaluate the company’s past performance . . . and prospects for future +performance.” +7. Newell also stated in its earnings releases that its “management believes that core +sales provides a more complete understanding of underlying sales trends.” The core sales measure +purportedly presented “sales on a consistent basis” by adjusting net sales to exclude the impacts of +acquisitions, planned and completed divestitures, and foreign currency changes. Newell then +determined and disclosed its year-over-year core sales growth in terms of dollars and percent +growth. +8. Newell and Polk understood core sales growth to be material, relevant information +to investors and emphasized Newell’s core sales growth rate in its earnings releases. Newell +typically announced its year-over-year core sales growth rate as part of the headline at the top of its +quarterly earnings releases. Newell also issued guidance to investors providing its expectations for +annual core sales growth, and analysts reported and estimated Newell’s core sales growth rates +using the information disclosed by Newell. +B. Newell’s Use of Pull Forwards, Accrual Reductions, and Reclassifications +9. During the last month of each quarter in the Relevant Period, Newell employees +determined that its sales were inadequate to achieve management goals, including internal targets, +guidance to investors, or analyst estimates. As part of an effort to achieve those goals, Polk was +made aware of and approved plans to pull forward sales scheduled for subsequent quarters. To do +so, Newell employees identified orders scheduled for delivery early the following quarter and + +2 A non-GAAP financial measure is a numerical measure of a registrant’s historical or future +financial performance, financial position, or cash flows that (i) excludes amounts, or is subject to +adjustments that have the effect of excluding amounts, that are included in the most directly +comparable measure calculated and presented in accordance with GAAP in the statement of +income, balance sheet, or statement of cash flows (or equivalent statements) of the issuer; or (ii) +includes amounts, or is subject to adjustments that have the effect of including amounts, that are +excluded from the most directly comparable measure so calculated and presented. 17 C.F.R. +§ 244.101(a)(1). A non-GAAP financial measure does not include financial measures required +to be disclosed by GAAP. § 244.101(a)(3). + 4 +obtained customer permission to deliver those orders in the current quarter. Newell employees +then informed Polk of the volume of orders that had been pulled forward. +10. Newell’s divisions were responsible for calculating whether accruals established for +the cost of customer promotional incentives, discounts, and rebates should be adjusted to account +for Newell’s historical sales and payments to customers for those incentives. In response to +shortfalls in sales during the Relevant Period, Polk instructed employees during the quarterly +closing process to scrutinize these accruals to determine whether funds could be released from +those accruals, which would have the effect of increasing the quarter’s core sales announced by +Newell. +11. During the Relevant Period, Newell reclassified certain forms of consideration +payable to customers as costs of goods sold or as selling, general, and administrative expenses +rather than deductions from revenue. Although deductions from revenue reduced net sales and +therefore core sales, amounts classified as costs of goods sold or selling, general, and +administrative expenses did not affect core sales. These reclassifications therefore created the +appearance of higher sales and sales growth. In addition, because Newell did not make a +corresponding adjustment to the classifications in the prior year’s net sales and core sales +calculations, an additional portion of the publicly disclosed sales “growth” was attributable only to +the reclassification of this consideration, rather than actual growth in Newell’s underlying sales. +These reclassifications were significant components of revenue growth necessary to understanding +Newell’s operations during the Relevant Period. Polk was aware of these decisions and their effect +on publicly disclosed sales growth. +12. Together, the effect of these actions on core sales growth resulted in Newell +announcing misleading core sales growth figures in each quarter during the Relevant Period +because they did not provide an accurate or complete disclosure of “underlying sales trends,” +despite Newell’s statements that investors should look to core sales growth to obtain this +information. +13. Newell’s quarterly sales were less than management’s goals each quarter during the +Relevant Period. In internal communications, Polk expressed his disappointment that Newell’s +sales had fallen short of management’s goals. However, Newell and Polk publicly announced +Newell’s core sales growth and characterized its growth as “strong” or “solid” without disclosing +the impact of the actions described above. During the Relevant Period, Newell lacked disclosure +controls and procedures that were reasonably designed to ensure that its disclosures regarding core +sales growth were accurate and complete. +14. For Q3 2017, Newell announced year-over-year core sales growth of 0.4%, and for +Q4 2017, Newell announced a year-over-year decline in core sales of -1.9%. +Third Quarter of 2016 +15. Toward the end of Q3 2016, Polk understood that Newell was facing order +shortfalls in two regions, which were “driving the miss” in Newell’s results. Polk encouraged +Newell employees to “leave no stone unturned,” including by seeking customer permission to get + 5 +“October dated orders to ship in September.” However, even with the addition of orders pulled +forward from the next quarter, Newell’s sales in Q3 2016 were inadequate to meet management’s +goals. +16. During the quarterly closing process that quarter, Newell management discussed +other adjustments that would have the effect of increasing Newell’s publicly disclosed core sales +growth. One adjustment that increased Newell’s publicly disclosed core sales growth was the +reclassification of a type of consideration payable to customers that Newell called “freight +allowances,” which were provided to customers to cover shipping costs. Newell’s legacy Jarden +divisions, unlike its legacy Newell Rubbermaid divisions, had previously classified freight +allowances as deductions from revenue. Newell decided in Q3 2016 to reclassify that +consideration on its income statement as costs of goods sold as part of an effort to harmonize the +practice of the Jarden divisions with that of the Newell Rubbermaid divisions. Because the core +sales measure was not affected by costs of goods sold, this change created the appearance of +increasing Newell’s core sales. +17. In addition, Newell only made this adjustment in 2016, without making a +corresponding adjustment for the prior-year base number for 2015 against which Newell had +calculated its year-over-year core sales growth. Polk was told that this reclassification created the +appearance of a benefit to core sales growth because Newell was not making a corresponding +adjustment to the prior-year base number, and that Newell therefore “need[ed] to think about +disclosure.” However, Newell did not disclose that a significant portion of its publicly disclosed +core sales growth had resulted from the reclassification of freight allowances on its income +statement, not the underlying sales trends that core sales growth ostensibly represented. +18. In its quarterly earnings release, included as an exhibit to a Form 8-K on October +28, 2016, Newell stated that its core sales growth in Q3 2016 was 3.0%, meeting analyst +expectations. In the earnings release, Newell and Polk referred to Newell’s “competitive levels of +quarterly core sales growth and leading levels year to date,” as well as Newell’s “very good +performance in the third quarter.” Polk attributed that growth to the strong growth of certain +divisions. During an investor conference in November, Polk spoke about Newell’s “strong” +growth, characterizing Newell’s core sales growth as “a measure of the underlying growth in the +business.” When making these statements, neither Newell nor Polk disclosed that the publicly +announced core sales growth rate was higher as a result of the actions described above, and +therefore did not fully reflect Newell’s underlying sales trends. +Fourth Quarter of 2016 +19. In the earnings release included as an exhibit to a Form 8-K on October 28, 2016, +Newell issued “Updated 2016 Full Year Guidance.” Newell stated that it had raised the lower end +of its 2016 full year guidance range for core sales growth from 3% to 3.5%. During an investor +conference on November 15, 2016, Newell explained that this outlook implied that year-over-year +core sales growth for the last quarter of the full year (Q4 2016) would be at least 2.5%. +20. At the end of Q4 2016, it became apparent to Newell and Polk that Newell’s sales +were again falling short. Polk noted internally that “[w]e are short because of the lack of orders.” + 6 +He received an email stating that, although Newell had shipped some orders in December that had +previously been expected to ship in January, Newell had nonetheless missed its target because of +“a lack of orders,” because there was “extraordinary [sic] light shipment activity” in certain +regions, and because “incoming January orders didn’t actually materialize to support” the targets. +21. Summarizing the quarter’s results internally, Polk described them as “a massive +miss” and “disappointing.” Polk told his leadership team not to book new accruals and told +financial personnel that they should “scrub” existing accruals established for the cost of customer +promotional incentives, discounts, and rebates, in order to identify accruals that should be reduced. +During the quarterly closing process in January 2017, Polk told financial and business unit +management that they should “turn over every rock looking for gross to net opportunities,” “not +additional accruals,” and he outlined the negative consequences for Newell and its employees if the +company did not achieve its core sales targets. +22. In Newell’s Q4 2016 earnings release, which was included as an exhibit to a Form +8-K on February 6, 2017, Newell stated that its quarterly core sales growth was 2.5%, which +appeared to meet its guidance and resulted in annual core sales growth of 3.7%. Polk characterized +these results in the earnings release as “competitive” and “very strong.” In the Q4 2016 earnings +call, Polk similarly said that Newell had achieved solid fourth-quarter and strong full-year results. +He communicated the same message in a February investor conference, stating that Newell had +“delivered solid outcomes in Q4.” When making these statements, neither Newell nor Polk +disclosed that the publicly announced core sales growth rate was higher as a result of the actions +described above, and therefore did not fully reflect Newell’s underlying sales trends. +First Quarter of 2017 +23. Newell again faced disappointing sales in Q1 2017 that Polk understood would +cause a “big miss on core.” Polk was informed that employees were “looking aggressively at +orders to pull in” from the next quarter. He encouraged employees to pursue reductions of accruals +from prior years as a means of achieving Newell’s core sales targets, and offered them an incentive +for doing so. +24. Although preliminary internal reports immediately after the end of the quarter +indicated that Newell’s Q1 2017 core sales growth was about 1%, Newell ultimately announced +2.5% core sales growth to investors, beating analyst expectations. Internal reporting after the +quarter ended demonstrated that Newell was able to achieve target core sales growth and exceed +investor expectations due to accrual reductions and accounting changes that had nothing to do with +underlying sales trends. +25. Despite the internal assessments indicating that Newell’s performance had fallen +short of management’s goals, the headline of Newell’s earnings release, which was included as an +exhibit to a Form 8-K on May 8, 2017, stated that Newell had achieved “strong first quarter +results,” including 2.5% core sales growth. Newell and Polk stated in the earnings release that +Newell’s “first quarter results provide strong evidence of our team’s capacity to perform while we +transform,” that Newell had “delivered competitive core sales growth of 2.5 percent,” and that the +“core sales results were broad based.” In the earnings call held that day, Polk similarly described + 7 +Newell’s core sales growth as a “competitive outcome.” When making these statements, neither +Newell nor Polk disclosed that the publicly announced core sales growth rate was higher as a result +of the actions described above, and therefore did not fully reflect Newell’s underlying sales trends. +Second Quarter of 2017 +26. Newell’s performance fell short of management’s goals again in Q2 2017, in part as +a result of reduced orders and a warehouse fire that affected its second-largest business segment. +Preliminary reporting sent to Polk showed that, without the effect of various adjustments, Newell’s +year-over-year core sales growth for Q2 2017 would have been only 0.2%. During the quarterly +closing process, Newell management discussed that accrual reductions and the reclassification of +consideration payable to customers on Newell’s income statement would increase the core sales +figures that Newell would communicate to investors. +27. Newell adopted accounting changes that were inconsistent with GAAP and resulted +in Newell reporting inflated growth in its net sales and core sales. Newell reclassified certain +consideration payable to customers, including penalties paid to customers for failing to adhere to +shipping requirements, and credits to compensate customers for distributing goods to individual +stores. Rather than deducting from revenue the amount of that consideration in a manner +consistent with GAAP, Newell reclassified the consideration as costs of goods sold, which +increased Newell’s reported net sales and core sales. In addition, because Newell made these +adjustments in Q2 2017 without making a corresponding adjustment to the sales that it had +recorded for Q2 2016, these adjustments had the effect of appearing to further increase Newell’s +year-over-year growth in net sales and core sales. The benefit of these accounting adjustments was +large enough to offset the negative impact on Newell’s performance from the warehouse fire and +other issues. +28. Management received input from a member of the Audit Committee that not +adjusting the prior year’s base could be judged after the fact to be overly aggressive. Newell’s +auditor also raised concerns about these changes in its communications to management and +Newell’s Audit Committee, identifying as a misstatement Newell’s classification of consideration +payable to customers as costs of goods sold, and its failure to reclassify the prior period amounts. +Newell proceeded with the reclassification despite these warnings. +29. In its earnings release, which was included as an exhibit to a Form 8-K on +August 4, 2017, Newell reported core sales growth of 2.5%, which Newell and Polk described as +“a solid set of results” and “competitive growth.” During Newell’s quarterly earnings call, Polk +told investors that Newell had “delivered a solid set of second quarter results,” including +“consistent, competitive top line growth” and “standout core sales growth” in “many” of its +businesses. When making these statements, neither Newell nor Polk disclosed that the publicly +announced core sales growth rate was higher as a result of the actions described above, included +adjustments that were inconsistent with the determination of core sales growth in prior periods, and +did not fully reflect Newell’s underlying sales trends. +30. In its Form 10-Q filed on August 9, 2017, Newell reported net sales and cost of +products sold amounts in its financial statements that reflected the misclassification of + 8 +consideration payable to customers in a manner inconsistent with GAAP. This misclassification +was material because it resulted in Newell significantly overstating year-over-year growth in net +sales and failing to disclose that its actual year-over-year core sales growth was nearly flat. In +addition, Newell did not disclose that the benefit from the reclassification constituted a material +change to its core sales growth calculation. +C. Premature Revenue Recognition as a Result of “Pick and Holds” +31. Newell also recognized revenue prematurely during the Relevant Period, as a result +of employees involved in shipping and transportation in certain divisions sending shipments early +to customers without their approval in a practice referred to as “pick and holds.” So that these +shipments would not arrive to customers earlier than scheduled, Newell employees arranged for +third parties to pick up shipments from Newell and then store them for days or weeks until they +could be delivered on the dates in the next quarter that had been requested by the customers. +Newell prematurely recognized revenue for those shipments during the quarters in which they were +picked up by carriers, before the revenue recognition criteria of ASC 605 (Revenue Recognition) +were satisfied. These criteria required, among other things, that a shipment be made pursuant to an +arrangement with the customer, and that the customer take title and assume the risks and rewards +of ownership for delivery to occur. In its Forms 10-Q and 10-K for these periods, Newell reported +in its financial statements net sales and income that reflected this revenue, which had been +recognized earlier than permitted by GAAP but in amounts that were less than 0.1% of net sales in +each quarter during the Relevant Period. +D. Polk’s Representations, and Newell’s Offer and Sale of Securities +32. As CEO of Newell during the Relevant Period, Polk was involved in the +preparation and review of Newell’s Commission filings, signed Newell’s Forms 10-K and 10-Q, +and participated in Newell’s earnings calls. Polk signed management representation letters to +Newell’s auditor, letters which stated that Newell’s financial statements had been prepared and +presented in accordance with GAAP and that the effects of any uncorrected misstatements were +immaterial. Polk also signed certifications attached to Newell’s Forms 10-K and 10-Q during the +Relevant Period that the information contained in those filings “fairly present[ed], in all material +respects, the financial condition and results of operations of the Company.” +33. Newell offered and sold securities during the Relevant Period. +VIOLATIONS +34. 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). + 9 +35. 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). +36. In addition, Section 13(a) of the Exchange Act requires issuers such as Newell to +file periodic reports with the Commission containing such information as the Commission +prescribes by rule. Quarterly and annual reports for issuers such as Newell must comply with +Regulation S-K Item 303, which during the Relevant Period required, 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 required 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 +required that the discussion and analysis in Forms 10-K “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 required that the discussion and analysis in Forms 10-Q shall discuss material +changes in such known trends, uncertainties, or results of operations, including an identification of +any significant elements of the registrant’s income from continuing operations which are not +necessarily representative of the registrant’s ongoing business. +37. Newell did not disclose that the reclassification of consideration payable to +customers was a change that caused Newell’s reported net sales and financial information not to be +indicative of its future operating results, and was a significant component of revenue growth +necessary to understand Newell’s results of operations during the Relevant Period; that its use of +pull forwards created an uncertainty that was reasonably expected to have a material effect on its +future revenue and cause reported financial information not to be necessarily indicative of future +operating results; or that the actions described above materially increased Newell’s publicly stated +core sales and core sales growth. During the Relevant Period, Newell lacked disclosure controls +and procedures that were reasonably designed to ensure that its disclosures regarding core sales +growth were accurate and complete. +38. 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. + 10 +Scienter is not an element of a violation of the books-and-records and internal controls provisions. +See Ponce v. SEC, 345 F.3d 722, 737 n.10 (9th Cir. 2003). +39. 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. 1998). +40. Section 13(b)(5) of the Exchange Act prohibits any person from knowingly +circumventing or knowingly failing to implement a system of internal accounting controls or +knowingly falsifying any book, record, or account subject to Section 13(b)(2)(A). +41. Rule 100(b) of Regulation G of the Exchange Act prohibits registrants, and persons +acting on their behalf, from making public a non-GAAP financial measure that contains an untrue +statement of material fact or omits to state a material fact necessary in order to make the +presentation of the non-GAAP financial measure, in light of the circumstances under which it is +presented, not misleading. +42. Exchange Act Rule 13a-14 requires that the principal executive officer of an issuer +sign a certification stating that, based on their knowledge, the issuer’s Forms 10-K and 10-Q fairly +present, in all material respects, the financial condition and results of operations of the issuer. +43. Exchange Act Rule 13a-15(a) requires every issuer of a security registered pursuant +to Section 12 of the Exchange Act to maintain disclosure controls and procedures designed to +ensure that information required to be disclosed by an issuer in reports it files or submits under the +Exchange Act is recorded, processed, summarized, and reported within the time periods specified +in the Commission’s rules and forms. +44. Based on the foregoing, the Commission finds that Newell 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); +Exchange Act Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a); and Rule 100(b) of Regulation +G. +45. Based on the foregoing, the Commission finds that Polk violated Exchange Act +Section 13(b)(5), Exchange Act Rules 13a-14, 13b2-1, and 13b2-2, and Rule 100(b) of Regulation +G, and was a cause of Newell’s violations of Securities Act Sections 17(a)(2) and 17(a)(3); +Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B); Exchange Act Rules 12b-20, 13a-1, +13a-11, 13a-13, and 13a-15(a); and Rule 100(b) of Regulation G. +NEWELL’S COOPERATION AND REMEDIATION +46. In determining to accept Newell’s Offer, the Commission considered the +cooperation it provided during the Commission’s investigation, including by disclosing +information about conduct that the Staff had not yet uncovered through its own investigation, + 11 +conducting an internal investigation regarding this conduct, and identifying key documents found +in that investigation. This cooperation substantially advanced the quality and efficiency of the +Staff’s investigation and conserved Commission resources. The Commission also considered +remedial acts undertaken by Newell subsequent to the period of misconduct, including changes to +senior management; improvements in Newell’s control environment and quarterly close process; +and its investigation, training, and discipline of employees involved in “pick and holds.” +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 that: +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent Newell cease and desist from committing or causing any violations and any future +violations of Securities Act Sections 17(a)(2) and 17(a)(3); Exchange Act Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B); Exchange Act Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a); +and Rule 100(b) of Regulation G. +B. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent Polk cease and desist from committing or causing any violations and any future +violations of Securities Act Sections 17(a)(2) and 17(a)(3); Exchange Act Sections 13(a), +13(b)(2)(A), 13(b)(2)(B), and 13(b)(5); Exchange Act Rules 12b-20, 13a-1, 13a-11, 13a-13, 13a- +14, 13a-15(a), 13b2-1, and 13b2-2; and Rule 100(b) of Regulation G. +C. Newell shall, within 14 days of the entry of this Order, pay a civil money penalty in +the amount of $12,500,000 to the Securities and Exchange Commission. Polk shall, within 14 +days of the entry of this Order, pay a civil money penalty in the amount of $110,000 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) 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 + 12 +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, Division of Enforcement, +Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. +D. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is +created for the penalties referenced in paragraph C 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’ payments 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 any +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. +E. Newell acknowledges that the Commission is not imposing a civil penalty in excess +of $12,500,000 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 Newell 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 Newell, petition the Commission to reopen this matter and seek an order directing that +Newell pay an additional civil penalty. Newell 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, in accordance with Polk’s Offer, 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 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 +Polk 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 Polk 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). + 13 +By the Commission. + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4470.txt b/raw/aaer/2023/AAER-4470.txt new file mode 100644 index 0000000000000000000000000000000000000000..2e0f8e7b7ff92fdcbb696065ad5f5b4f45fbb4b4 --- /dev/null +++ b/raw/aaer/2023/AAER-4470.txt @@ -0,0 +1,266 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98667 / September 29, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4470 / September 29, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21777 + +In the Matter of + +JONATHAN J. FERRIE +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 +Jonathan J. Ferrie (“Respondent” or “Ferrie”) 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.3 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. Ferrie, age 33, received his undergraduate degree in Accounting in 2010, and a +Master’s degree in Business Administration (MBA) in 2021. From April 2018 to November 2021, +Ferrie was Financial Controller of the Individual and Family Plans (“IFP”) division of Cigna +Group’s (“Cigna”) health insurance business. +2. Cigna was, at all relevant times, a Delaware corporation with its principal place of +business in Bloomfield, Connecticut. Cigna was engaged in the business of health insurance and +health services. At all relevant times, Cigna’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 September 18, 2023, the Commission filed a complaint against Ferrie in SEC +v. Ferrie (Civil Action No. 3:23-cv-01217). On September 27, 2023, the court entered an order +permanently enjoining Ferrie, by consent, from future violations of Section 10(b) of the +Exchange Act and Rule 10b-5 thereunder. The court also ordered Ferrie to pay $16,039.78 in +disgorgement of ill-gotten gains from his sales of stock while in possession of material non- +public information concerning Cigna, and $1,497.17 in prejudgment interest; and a $16,039.78 +civil money penalty. +4. The Commission’s complaint alleged, among other things, that Ferrie, while he +was Financial Controller of Cigna’s IFP division, illegally traded in Cigna stock while in +possession of material non-public information. The Complaint alleged that in June 2021 Ferrie, +by virtue of his role as Financial Controller, learned of unexpected and unfavorable information +regarding the profitability of the IFP division during the second quarter of Cigna’s fiscal year +(quarter ended June 30, 2021). The Complaint alleged that in mid-June 2021, soon after learning +this information, Ferrie purchased put options which would be profitable to Ferrie if Cigna’s +stock price substantially declined. The Complaint alleged that Ferrie profited from his options +trading in August 2021 when Cigna announced certain unexpected and unfavorable profitability +information similar to what Ferrie had earlier seen within the IFP division. + + + + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Ferrie’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Ferrie is suspended from appearing or practicing before the Commission as an +accountant. + +B. 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. + +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; + +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. + 4 + +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, including any orders in SEC v. +Ferrie, Civil Action No. 3:23-cv-01217, 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); + 5 + +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. +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; + 6 + +(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/2023/AAER-4471.txt b/raw/aaer/2023/AAER-4471.txt new file mode 100644 index 0000000000000000000000000000000000000000..9cc5b6c68be5c84eb525d6d71e91bc9d1e200909 --- /dev/null +++ b/raw/aaer/2023/AAER-4471.txt @@ -0,0 +1,460 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98779 / October 23, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4471 / October 23, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21784 + +In the Matter of +LUTHER C. SPEIGHT, III, CPA, AND +LUTHER SPEIGHT & COMPANY, +LLC, +Respondents. + + +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 Luther +C. Speight, CPA (“Speight” or “Respondent”) and Luther Speight & Company (“LSC” or +“Respondent”) (collectively, “Respondents”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + +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 + +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 +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, and the findings contained in Section III.3 below, which are admitted, Respondents +consent 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 Respondents’ Offer, the Commission finds that: + +1. Luther C. Speight, III (“Speight”), age 67, is a resident of New Orleans, +Louisiana. Speight is a certified public accountant licensed in Louisiana, Tennessee and Georgia. +He is the founder, 95% owner, and partner-in-charge of LSC, and managing partner on its audit +engagements. + +2. Luther Speight & Company, LLC (“LSC”) is a Louisiana limited liability +company based in New Orleans, LA. LSC is a certified public accounting and consulting firm that +provides consulting, auditing and accounting services. + +3. On September 27, 2023, the Commission filed a complaint against Respondents in +SEC v. Luther C. Speight, III and Luther Speight & Company, LLC (Civil Action No. 1:23-cv- +4384-AT). On October 4, 2023, the court entered an order permanently enjoining Respondents, by +consent, from future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. +Speight was also enjoined from serving as the engagement manager, engagement partner, or +engagement quality reviewer in connection with any audit of financial statements or audit report, +which Speight should reasonably expect to be submitted to the Municipal Securities Rulemaking +Board’s Electronic Municipal Market Access (“EMMA”) website, and LSC was enjoined from +participating in the audit of financial statements which LSC should reasonably expect to be +submitted to EMMA. Respondents were also ordered to pay, jointly and severally, disgorgement +and prejudgment interest $14,961 and a civil penalty of $30,000. + +4. The Commission’s complaint alleged, among other things, that in connection with +their audit of a school board’s financial statements, Respondents failed to perform their audit in +accordance with Generally Accepted Auditing Standards (“GAAS”). The complaint alleged that, +on January 2, 2020, LSC, through Speight, issued an auditor’s report stating that it had conducted +the audit of the school board’s fiscal year 2019 financial statements in accordance with GAAS. +The complaint alleged that that statement was false because Speight and LSC did not comply with +GAAS in many important and material respects, and the financial statements also contained +various errors that had to be corrected. The complaint alleged that Speight and LSC knew, or +should have known, that their statement that they had performed their audit in accordance with +GAAS was false and that the school board would use the auditor’s report to sell municipal bonds to +investors. The complaint alleged that the school board unknowingly used the auditor’s report to +sell $120 million of bonds to an investor in March 2020. + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondents’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Speight is suspended from appearing or practicing before the Commission as an +accountant. + +B. LSC is suspended from appearing or practicing before the Commission as an +accountant. + +C. After 3 years from the date of the Order, Speight may request that the Commission +consider Speight’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, Speight +shall submit a written statement attesting to an undertaking to have Speight’s work reviewed by the +independent audit committee of any public company for which Speight works or in some other +manner acceptable to the Commission, as long as Speight 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, Speight shall submit a statement prepared by the audit committee(s) +with which Speight will be associated, including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Speight will be associated; + +2. A description of Speight’s role on the specific audit committee(s) with which +Speight 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 Speight’s service on the specific audit +committee; and + 4 + +5. A statement noting whether Speight 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, Speight must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Speight shall submit the following additional information: + +1. A statement from the public accounting firm (the “Firm”) with which Speight 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 Speight 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 Speight will not receive appropriate supervision; and + +3. A statement from Speight indicating that the PCAOB has taken no disciplinary +actions against Speight 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, Speight shall provide +documentation showing that Speight is currently licensed as a certified public accountant (“CPA”) +and that Speight has resolved all other disciplinary issues with any applicable state boards of +accountancy. If Speight is not currently licensed as a CPA, Speight shall provide documentation +showing that Speight’s licensure is dependent upon reinstatement by the Commission. + +H. In support of any application for reinstatement, Speight shall also submit a signed +affidavit truthfully stating, under penalty of perjury: + +1. That Speight has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in SEC v. +Luther C. Speight, III and Luther Speight & Company, LLC, or any related +Commission proceedings, including any orders requiring payment of +disgorgement or penalties; + +2. That Speight 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 Speight, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a + 5 +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Speight, 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 Speight’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 Speight 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. Speight shall also provide a detailed description of: + + 6 +1. Speight’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 Speight reported for +such work; and + +2. Speight’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 Speight provides the documentation and attestations required in this Order and +the Commission (1) discovers no contrary information therein, and (2) determines that Speight +truthfully and accurately attested to each of the items required in Speight’s affidavit, and the +Commission discovers no information, including under Paragraph J, indicating that Speight has +violated a federal securities law, rule or regulation or rule of professional conduct applicable to +Speight since entry of the Order (other than by conduct underlying Speight’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 Speight 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 Speight to provide an explanation as to the +facts and circumstances pertaining to the matter setting forth why Speight believes cause for +reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate Speight for cause shown. + +M. If the Commission declines to reinstate Speight pursuant to Paragraphs K and L, it +may, at Speight’s request, hold a hearing to determine whether cause has been shown to permit +Speight to resume appearing and practicing before the Commission as an accountant. + +N. After 3 years from the date of the Order, LSC may request that the Commission +consider LSC’s reinstatement by submitting an application to the attention of the Office of the +Chief Accountant. + +O. 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, LSC shall +submit a written statement attesting to an undertaking to have LSC’s work reviewed by the +independent audit committee of any public company for which LSC works or in some other +manner acceptable to the Commission, as long as LSC practices before the Commission in this + 7 +capacity and will comply with any Commission or other requirements related to the appearance and +practice before the Commission as an accountant. + +P. 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 +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, LSC shall submit +a statement prepared by the audit committee(s) with which LSC will be associated, including the +following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which LSC will be associated; + +2. A description of LSC’s role on the specific audit committee(s) with which LSC +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 LSC’s service on the specific audit +committee; and + +5. A statement noting whether LSC will be able to act unilaterally on behalf of the +Audit Committee as a whole. + +Q. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, LSC must be +registered with the PCAOB and LSC shall submit the following additional information: + +1. A statement regarding LSC’s legal status and whether it has merged or become +affiliated with any other legal entity; + +2. A statement that LSC registered with the PCAOB in accordance with the +Sarbanes-Oxley Act of 2002; + +3. A statement that LSC has, within the prior one (1) year period hired an +independent CPA consultant (the “Consultant”) who is not unacceptable to the +staff of the Division of Enforcement of the Commission (the “Staff”) and is +affiliated with a public accounting firm registered with the PCAOB, that has +conducted a review of LSC’s quality control system, including the inspection +and review of selected audit and review engagements of the firm over the past +two annual periods preceding the commencement of the review, and other +testing of the audit, supervisory, and quality control procedures of the firm as +are necessary. The statement should further provide that the review did not +identify any criticisms of or potential defects in LSC’s quality control system + 8 +that would indicate that any of LSC’s associated persons will not receive +appropriate supervision. LSC agrees to require the Consultant, if and when +retained, to enter into an agreement that provides that for the period of review +and for a period of two (2) years from completion of the review, the +Consultant shall not enter into any employment, consultant, attorney-client, +auditing or other professional relationship with LSC, 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 they are affiliated or of which they are a member, and +any person engaged to assist the Consultant in performance of their duties +under this Order shall not, without prior consent of the Staff, enter into any +employment, consultant, attorney-client, auditing or other professional +relationship with LSC, or any of its present or former affiliates, directors, +officers, employees, or agents acting in their capacity as such for the period of +the review and for a period of two (2) years after the review; and + +4. A statement from LSC indicating that the PCAOB has taken no disciplinary +actions against LSC since seven (7) years prior to the date of the Order other +than for the conduct that was the basis for the Order. + +R. In support of any application for reinstatement, LSC shall provide documentation +showing that LSC is currently licensed as a CPA and that LSC has resolved all other disciplinary +issues with any applicable state boards of accountancy. If LSC is not currently licensed as a CPA, +LSC shall provide documentation showing that LSC’s licensure is dependent upon reinstatement +by the Commission. + +S. In support of any application for reinstatement, LSC shall also submit a signed +affidavit truthfully stating, under penalty of perjury: + +1. That LSC has complied with the Commission suspension Order, and with any +related orders and undertakings, including any orders in SEC v. Luther C. +Speight, III and Luther Speight & Company, LLC, or any related Commission +proceedings, including any orders requiring payment of disgorgement or +penalties; + +2. That LSC 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 LSC, 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); + + 9 +4. That LSC, 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 LSC’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 none of LSC’s employees, partners, or professional staff’s conduct is 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. That LSC 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. + 10 + +T. LSC shall also provide a detailed description of: + +1. LSC’s professional history since the imposition of the Order, including + +(a) all engagements including audit and attestation work; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the primary contact person at +such regulated entity; and + +2. LSC’s plans for any future appearance or practice before the Commission. + +U. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +V. If LSC provides the documentation and attestations required in this Order and the +Commission (1) discovers no contrary information therein, and (2) determines that LSC truthfully +and accurately attested to each of the items required in LSC’s affidavit, and the Commission +discovers no information, including under Paragraph U, indicating that LSC has violated a federal +securities law, rule or regulation or rule of professional conduct applicable to LSC since entry of +the Order (other than by conduct underlying LSC’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. + +W. If LSC 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 U, the burden shall be on LSC to provide an explanation as to the facts +and circumstances pertaining to the matter setting forth why LSC believes cause for reinstatement +nonetheless exists and reinstatement would not be contrary to the public interest. The Commission +may then, in its discretion, reinstate LSC for cause shown. + +X. If the Commission declines to reinstate LSC pursuant to Paragraphs V and W, it +may, at LSC’s request, hold a hearing to determine whether cause has been shown to permit LSC +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/2023/AAER-4472.txt b/raw/aaer/2023/AAER-4472.txt new file mode 100644 index 0000000000000000000000000000000000000000..7c1e1ba389c9c19ced5bddf75ef7568dbb50a737 --- /dev/null +++ b/raw/aaer/2023/AAER-4472.txt @@ -0,0 +1,268 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98788 / October 23, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4472 / October 23, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21785 + +In the Matter of + +MARCO A. PEREZ, aka MARC +PEREZ, +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 Marco +A. Perez, aka Marc Perez (“Respondent” or “Perez”) 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, the subject matter of these proceedings, and the findings contained in Section +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. Perez, age 58, served as an accounting manager of General Finance Corp. +(“General Finance”) from 2014 to October 2021. + + 2. General Finance was, at all relevant times, a Delaware corporation with its +principal place of business in Pasadena, California. General Finance was engaged in the business of +providing mobile, liquid, and pod storage space. At all relevant times, General Finance’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 Nasdaq Global Market. + + 3. On October 11, 2023, a bifurcated judgment was entered against Perez, +permanently enjoining him from future violations of Sections 10(b) and 14(e) of the Exchange Act +and Rules 10b-5 and 14e-3 thereunder, in the civil action entitled Securities and Exchange +Commission v. Marco A. Perez, et al., Civil Action Number 2:23-cv-08079, in the United States +District Court for the Central District of California. Perez was also ordered to pay, in amounts to +be determined, disgorgement of ill-gotten gains from his sales of stock while participating in the +fraud plus prejudgment interest and a civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Perez on or +about February 2, 2021, learned that General Finance was in negotiations to be acquired by +another public company. Perez then purchased shares of General Finance’s common stock in +his and a relative’s brokerage accounts. Perez also tipped two other relatives who then +purchased shares of General Finance common stock. On April 15, 2021, General Finance +announced that it would be acquired through a combination merger and tender offer. Perez and +his relatives then sold their shares of General Finance common stock. + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Perez’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Perez 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 +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. + 4 + +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. If Respondent is licensed as a certified public accountant (“CPA”), then in support +of any application for reinstatement, Respondent shall provide documentation showing that +Respondent’s license is current and that Respondent has resolved all other disciplinary issues with +any applicable state boards of accountancy. If Respondent’s CPA licensure is dependent upon +reinstatement by the Commission, then Respondent shall provide documents reflecting this +requirement. If Respondent has never been licensed as a CPA, then Respondent shall submit a +signed affidavit truthfully stating under penalty of perjury that Respondent has never been licensed +as a CPA. + +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 SEC v. +Perez, et al., Civil Action Number 2:23-cv-08079, in the United States +District Court for the Central District of California, 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; + + 5 +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. + +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: + 6 + +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/2023/AAER-4473.txt b/raw/aaer/2023/AAER-4473.txt new file mode 100644 index 0000000000000000000000000000000000000000..c7b4c48dc17b7ddcb39f94eb5e772039a7612bb3 --- /dev/null +++ b/raw/aaer/2023/AAER-4473.txt @@ -0,0 +1,269 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98849 / November 2, 2023 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4473 / November 2, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21792 +In the Matter of + +ROYAL BANK OF CANADA, + +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 (the “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 (the “Exchange Act”), against Royal Bank of Canada (the +“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 (the “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 internal accounting control deficiencies relating to accounting +for internally developed software (“IDS”) costs by Respondent Royal Bank of Canada. From 2008 +through 2020, Respondent experienced a growth in IDS spending to support the growth of the +organization. However, development of its control environment did not keep pace and internal +accounting control deficiencies affected Respondent’s cost capitalization accounting for IDS +projects. Respondent applied a single capitalization rate to certain of its IDS project costs but +lacked a reliable mechanism for determining the appropriate capitalization rate to apply. Among +other issues, Respondent’s deficient internal accounting controls resulted in Respondent +capitalizing certain costs that were ineligible for capitalization under the appropriate accounting +methodology. Respondent also lacked sufficient internal accounting controls to assess for +indicators of impairment and to recognize amortization when assets were available for use, which +resulted in Respondent carrying certain capitalized IDS assets on its balance sheet when those +assets should have been impaired or amortized over their useful life. +2. As a result of these issues, Respondent violated Section 13(b)(2)(A) and Section +13(b)(2)(B) of the Exchange Act. +Respondent +3. Royal Bank of Canada is a Canadian chartered bank with its corporate headquarters +located in Toronto, Ontario, Canada and its head office located in Montreal, Quebec, Canada. +Respondent’s common shares are registered pursuant to Section 12(b) of the Exchange Act and +listed on the New York Stock Exchange and the Toronto Stock Exchange under the ticker “RY.” +Respondent’s consolidated financial statements filed with the Commission are prepared in +accordance with International Financial Reporting Standards. +Background +A. Internally Developed Software and International Accounting Standard 38 +4. IDS is software that a firm develops internally rather than purchasing from a third- +party provider. Under International Accounting Standard 38 (“IAS 38”), certain project costs +incurred by an entity in creating an IDS application may be capitalized as an intangible asset on the +entity’s balance sheet. The capitalized costs are then amortized over the course of the estimated +useful life of the application. In order to qualify as an internally developed intangible asset, IAS 38 +requires, among other things, that the application being worked on provide probable future +economic benefit to the firm and that its cost to develop be reliably measured. According to IAS + +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 +38, costs outside of the development phase, including those associated with maintaining or +decommissioning in-use IDS applications, must be expensed. +5. In general, the costs associated with developing IDS largely consist of employee +salaries and benefits, and fees paid to third-party contractors. Not all of these costs may qualify for +capitalization under IAS 38. Costs incurred in the “research phase”—the investigation and +planning for development of an IDS project— are ineligible for capitalization and must be +expensed as incurred. After the “research phase” is complete, costs incurred in the “development +phase” to design, create, and install the new IDS application may be capitalized. +B. International Accounting Standard 36 +6. IAS 36 requires an entity to assess at the end of each reporting period whether there +is any indication that certain assets, including internally developed intangible assets like IDS, may +be impaired. IAS 36 provides a non-exhaustive list of indicators of impairment, including for +example, whether evidence exists that the asset is at risk of obsolescence. +7. Any indicator of impairment requires the entity to then consider whether the +carrying amount of the asset exceeds its recoverable amount and, if yes, to reduce the carrying +amount to its recoverable amount. For example, when an entity no longer uses an IDS application, +the asset is impaired and its carrying amount should be written down to the amount to be recovered +through its use, which is typically zero. +C. Respondent’s IDS Accounting +8. During the relevant period, Respondent’s IDS accounting, including capitalization, +was governed by its internal accounting policy, which was intended to align with IAS 38 and 36. +9. During that time, Respondent’s process for capitalizing IDS project costs depended +on the Canadian dollar-value of the project. Projects estimated to cost more than CAD $5 million +(increased to more than CAD $10 million in 2020) were designated as “large program” projects +and individually reviewed to determine the amount of costs eligible for capitalization. Projects that +had an expected cost of CAD $5 million or less (later increased to CAD $10 million or less) were +subjected to the “Pool Method.” +10. The Pool Method aggregated the costs of Respondent’s smaller IDS projects and +capitalized a percentage of those costs by applying a single capitalization rate. Respondent +implemented the Pool Method for administrative ease due to the time and expense it would have +taken to assess each small project for capitalization. By 2020, the IDS pool grew to include in +excess of 1,200 individual software projects. +11. Respondent employed the Pool Method as an accounting convention and treated the +capitalization rate as an accounting estimate. Respondent’s internal accounting policy required +that the capitalization rate be assessed on an annual basis and adjusted if necessary to reflect the +nature of Respondent’s actual expenditures. Respondent amortized the costs capitalized under the +Pool Method over the course of three years starting one year from the date the costs were incurred. + + 4 +12. Respondent’s spending on IDS, and capitalization of associated costs, has grown +over the years. Respondent capitalized approximately CAD $658 million of IDS assets in 2011. +That amount grew to CAD $1.1 billion by 2021. Likewise, the amount spent on pooled projects +grew from approximately CAD $100 million at the inception of the pool to approximately CAD +$600–700 million in 2020. By way of comparison, for fiscal year ended October 31, 2021 RBC +reported non-interest expenses of approximately CAD $25.9 billion, with net income of +approximately CAD $16 billion. +13. As Respondent’s IDS spending increased to support the growth of the organization, +development of its control environment did not keep pace and internal accounting control +deficiencies affected Respondent’s cost capitalization accounting for IDS projects. +D. Control Deficiencies in Respondent’s Pool Method +i. Respondent’s Internal Accounting Controls Over its IDS Capitalization +Rate Were Insufficient. +14. From 2008 through 2016, the internal accounting systems relied upon by +Respondent to develop and assess the ongoing reasonableness of its capitalization rate estimate +were insufficient to comply with IAS 38. These systems constituted internal accounting controls +for purposes of section 13(b)(2)(B) of the Exchange Act. +15. In or around 2008, Respondent set an initial capitalization rate of 78 percent. +Thereafter and through 2016, Respondent used a simple calculation to determine whether that rate +should remain in effect. Respondent (1) added up salary and benefits, for its employees and the +fees paid to third-party contractors who worked on IDS pool projects and (2) divided that number +by the total costs incurred (salary, benefits, and professional fees plus rent, utilities, and training) +(the “Capitalization Rate Calculation”). If the result of the Capitalization Rate Calculation +approximated the 78 percent rate Respondent was using, Respondent maintained the use of that +rate. During the entirety of this period, Respondent did not alter the 78 percent capitalization rate. +16. The Capitalization Rate Calculation was an insufficient method of satisfying the +requirements of IAS 38. The calculation did not adequately differentiate between capitalizable and +noncapitalizable costs, including by treating some research-phase costs as capitalizable when IAS +38 requires they be expensed. +ii. Respondent’s Internal Accounting Controls Over its IDS Capitalization +Remained Insufficient. +17. In 2017, Respondent stopped doing the Capitalization Rate Calculation for pool +projects and began conducting capitalization rate studies to validate the 78 percent capitalization +rate. Respondent conducted the rate studies by sampling projects within the pool and surveying +employee tasks to extrapolate an average capitalization rate for the pool. Respondent conducted +studies in each of the following years except 2018. + + 5 +18. Until 2021, when Respondent altered its study processes, these rate studies were +insufficient support for the 78 percent capitalization rate and did not provide reasonable assurances +that Respondent complied with IAS 38 in estimating the capitalization rate for pooled projects. +19. As Respondent developed the process for conducting capitalization rate studies +during this period, it recognized that the rate studies lacked reliability for a number of reasons, +including issues concerning methodology and the reliability of underlying data used in the studies. +20. The rate studies’ insufficiencies derived from, among other things, unreliable +sampling and response rates to surveys, incomplete information, lack of documentation for certain +third-party contracts, and the inclusion in the project pool of projects that were ineligible for +capitalization and obsolete projects that should have been impaired and written off. These projects +were in the pool because Respondent lacked an appropriate system to identify and exclude these +projects. Once a project made it into the pool, RBC also lacked an effective process for +determining whether it should remain in the pool. This included projects that were started but then +canceled (and thus impaired) and should have been written off prior to their complete amortization +within three years of initial utilization. +21. Because of the overall lack of reliability of the rate studies, Respondent was unable +to assess whether its estimated capitalization rate of 78 percent was reasonable and complied with +IAS 38. Respondent maintained the 78 percent capitalization rate through 2020. +E. Accounting Controls Over Large Programs +22. From at least 2017 into 2020, the large program projects also lacked sufficient +internal accounting controls over impairment and amortization of IDS assets. +23. Respondent’s process for identifying impaired IDS assets for large program +projects relied on the business units that used IDS applications (and the team that helped those +business units stay on budget) to report to the accounting team that IDS applications were +impaired, or that indicators of impairment existed that warranted an impairment assessment. +24. With regard to amortization, under IAS 38, capitalized costs should start to +amortize once the project application is available for use. If an application is available for use but +not amortized, the capitalized costs of that project remain as an unamortized asset on the balance +sheet, resulting in an overstatement of assets and an understatement of period expenses. +25. Respondent did not have an effective process of identifying and reporting impaired +IDS assets within its large program projects to provide reasonable assurance of compliance with +IAS 36, including not properly segregating duties, or to identify the proper starting point for +amortization under IAS 38. +Violations +26. As a result of the conduct described above, Respondent violated Section +13(b)(2)(A) of the Exchange Act, which requires public companies to “make and keep books, + + 6 +records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the issuer.” +27. As a result of the conduct described above, Respondent violated Section +13(b)(2)(B) of the Exchange Act, which requires, among other things, public companies to “devise +and maintain a system of internal accounting controls sufficient to provide reasonable assurances +that . . . (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. . . .” +Respondent’s Remedial Efforts +In determining to accept the Offer, the Commission considered remedial acts undertaken by +Respondent, including instituting additional internal accounting controls over the makeup of the +pool, and altering its rate study methodology to conduct the studies more frequently and make the +sampling more representative of the overall project pool. These corrective measures included the +following: centralizing the IDS capitalization rate assessment process, implementing an automated +solution to improve the overall control environment respecting the IDS capitalization rate process; +undertaking an initiative to improve inputs into the project management system; conducting +enhanced training for project managers on differences between development (capitalizable) and +maintenance (non-capitalizable) expenditures; conducting capitalization rate studies on a quarterly +rather than annual basis; and formalizing the impairment review process. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Royal Bank of Canada’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 and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. +B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $6,000,000.00 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. +Respondent shall receive an offset against the civil money penalty consisting of the United States +dollar (“USD”) value of amounts paid by Respondent to Canadian regulatory authorities +concerning the matters set forth herein (the “Canadian Payments”). The USD value of the +Canadian Payments shall be determined at the Canadian dollar (“CAD”)-to-USD exchange rate of +1 CAD = .75 USD. Promptly upon making the Canadian Payments, Respondent shall provide the +Commission staff with confirmation that such payments have been made and evidence of such +payments in the form of copies of wire transfer records, checks, or money orders, or in a form +otherwise acceptable to the Commission staff. + + 7 +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 +Respondent 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 Scott A. Thompson, Division of +Enforcement, Securities and Exchange Commission, 1617 J.F.K. Blvd., Suite 520, Philadelphia, +PA 19103. +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/2023/AAER-4474.txt b/raw/aaer/2023/AAER-4474.txt new file mode 100644 index 0000000000000000000000000000000000000000..5e54385a786b548af4e7a5696be55bcd22102a51 --- /dev/null +++ b/raw/aaer/2023/AAER-4474.txt @@ -0,0 +1,1404 @@ + + + + + + + + + + + + + + + + SEC.gov | SAExploration Holdings, 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\/935146","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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SAExploration Holdings, Inc., et al. , No. 20-CV-08423 (S.D.N.Y. filed Oct. 8, 2020) + + SEC Obtains Final Judgment Against Former Executive For His Role in $100 Million Accounting Fraud + + + + On November 15, 2023, the U.S. District Court for the Southern District of New York entered the final judgment against Brian A. Beatty for his role in a multi-year accounting fraud that occurred while he was CEO and COO of Houston-based seismic data company SAExploration Holdings, Inc. (SAE). The SEC’s amended complaint alleges that Beatty and three other former SAE executives falsely inflated the revenue of SAE by approximately $100 million and concealed their theft of millions of dollars from the company. + + According to the SEC’s amended complaint, Beatty and his co-defendants caused SAE to file materially false and misleading public statements after SAE entered into a series of seismic data acquisition contracts totaling approximately $140 million with a purportedly unrelated Alaska-based company that was, in fact, controlled by two of his co-defendants. The amended complaint alleges that SAE improperly recorded approximately $100 million in revenue in light of the Alaskan company’s inability to pay and the SAE executives’ control of the company. As also alleged, Beatty and his co-defendants misappropriated $12 million from SAE and routed approximately half of those funds back to SAE to create the false impression that the related Alaskan company was actually paying SAE for seismic data. The co-defendants allegedly kept the remainder of the misappropriated funds for themselves. + + Without denying the SEC’s allegations, Beatty consented to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act of 1933; Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934; Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, 13b2-2, and 13a-14 thereunder; and Section 304(a) of the Sarbanes-Oxley Act of 2002 (“SOX”). The final judgment also orders Beatty to pay $219,940 in disgorgement plus $41,763 in prejudgment interest, for a total of $261,703. Beatty was also ordered to reimburse SAE $441,995 pursuant to Section 304(a) of the SOX. + + The U.S. District Court for the Southern District of New York entered a final consent judgment against SAE on December 17, 2020. + + The SEC’s ongoing litigation against other defendants is being conducted by Peter Lallas, Dean Conway, and Yael Berger, and supervised by James Connor. + + + SEC Complaint + Amended SEC Complaint + Final Judgment - Brian A. Beatty + Final Judgment - SAExploration Holdings, Inc. + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + Amended SEC Complaint + + + + + Final Judgment - Brian A. Beatty + + + + + Final Judgment - SAExploration Holdings, Inc. + + + + + + + + + + + + + + + + + + + + + + + + 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/2023/AAER-4475.txt b/raw/aaer/2023/AAER-4475.txt new file mode 100644 index 0000000000000000000000000000000000000000..06c65419e6c38a25b38999d63cfdab5a1b890b93 --- /dev/null +++ b/raw/aaer/2023/AAER-4475.txt @@ -0,0 +1,119 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11255 / November 28, 2023 +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99033 / November 28, 2023 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4475 / November 28, 2023 +ADMINISTRATIVE PROCEEDING +File No. 3-18020 + +In the Matter of +DANIEL L. +ROTHBAUM, CPA + +: +: +: +: +: +: +CORRECTED 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 OTHER THAN AS A MEMBER +OF AN AUDIT COMMITTEE + +On June 9, 2017, the Commission issued a consented Order Instituting Public +Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, +Making Findings and Imposing Remedial Sanctions (the “Suspension Order”) against +Respondent Daniel Rothbaum, CPA.1 The Suspension Order denied Rothbaum the privilege of +appearing or practicing before the commission as an accountant but permitted him, after three +years from the date of the Suspension Order and if certain conditions were met, to request that +the Commission consider his 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 financial statements that are required 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 Securities Exchange Act +of 1934 (“Exchange Act”); (2) a preparer or reviewer, or a person responsible for the preparation +or review, of financial statements that are required to be filed with the Commission as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act; or (3) an +independent accountant. +This order is issued in response to Rothbaum’s application for reinstatement to appear +and practice before the Commission as an accountant responsible for the preparation or review of + +1 See Accounting and Auditing Enforcement Release No. 3874, dated June 9, 2017. + + 2 +financial statements required to be filed with the Commission, other than as a member of an +audit committee. +In the Suspension Order, the Commission found that Rothbaum, as the Controller for a +subsidiary of UniTek Global Services Inc. (“UniTek”), was, among others, responsible for +UniTek materially overstating its earnings in public filings with the Commission. The +misstatements arose from the premature recognition of revenue using the percentage of +completion accounting model based on goods and services purportedly purchased from +subcontractors. Rothbaum did not fully understand the relevant accounting principles with +respect to this issue and, along with UniTek’s Chief Accounting Officer and Corporate +Controller, provided incorrect accounting advice to others and improperly relied on receipt of +subcontractor invoices rather than receipt of the related goods and services to conclude when +recognition of revenue was appropriate. As a result of this conduct, Rothbaum willfully violated +Section 17(a)(3) of the Securities Act of 1933, Section 13(b)(5) of the Exchange Act, and Rule +13b2-1 thereunder. Rothbaum also caused UniTek to violate Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. + +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 which determination is necessarily +highly fact specific. + +Rothbaum has shown good cause for reinstatement 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 +person responsible for the preparation or review of financial statements required to be filed with +the Commission, other than as a member of an audit committee. In his capacity as a person +responsible for the preparation or review of financial statements required to be filed with the +Commission, other than as a member of an audit committee, Rothbaum attests that he will have +his work reviewed by the independent audit committee of any company for which he works, or +in some other manner acceptable to the Commission, while practicing before the Commission in +this capacity. Rothbaum is not, at this time, seeking to appear or practice before the Commission +as a person responsible for the preparation or review of financial statements required to be filed +with the Commission as a member of an audit committee or as an independent accountant. If, in +the future, Rothbaum should wish to resume appearing and practicing before the Commission in +such a capacity, he will be required to submit an application to the Commission showing, among +other things, that he 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 Rothbaum, and for the reasons stated immediately above, it appears that he has complied with +the terms of the Suspension Order denying him the privilege of appearing or practicing before + +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 afforded 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 +the Commission as an accountant. No information has come to the attention of the Commission +relating to his character, integrity, professional conduct or qualifications to practice before the +Commission that would be a basis for adverse action against him pursuant to Rule 102(e) of the +Commission's Rules of Practice. As a result, Rothbaum has shown good cause for reinstatement. +Therefore, it is accordingly, + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Daniel Rothbaum, 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, other than as a member of an audit committee. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4477.pdf b/raw/aaer/2023/AAER-4477.pdf new file mode 100644 index 0000000000000000000000000000000000000000..64902ca8b0823183cb5b686df087093497224e19 Binary files /dev/null and b/raw/aaer/2023/AAER-4477.pdf differ diff --git a/raw/aaer/2023/AAER-4478.txt b/raw/aaer/2023/AAER-4478.txt new file mode 100644 index 0000000000000000000000000000000000000000..c752f8f22772ec265aa49f389f82f2fed50dd7b3 --- /dev/null +++ b/raw/aaer/2023/AAER-4478.txt @@ -0,0 +1,1389 @@ + + + + + + + + + + + + + + + + SEC.gov | Dozy Mmobuosi, 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\/938096","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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Dozy Mmobuosi, et al. Civil Action No. 23-cv-10928 (S.D.N.Y. filed December 18, 2023) + + SEC Charges Tingo Mobile Founder, Three Companies with Massive Fraud and Seeks Emergency Relief + + + + The Securities and Exchange Commission today announced charges against Mmobuosi Odogwu Banye a/k/a Dozy Mmobuosi and three affiliated U.S.-based entities of which he is the CEO–Tingo Group Inc., Agri-Fintech Holdings Inc., and Tingo International Holdings Inc.–in connection with an alleged multi-year scheme to inflate the financial performance metrics of these companies and key operating subsidiaries to defraud investors worldwide. The SEC is seeking emergency relief to prevent Defendants’ continued dissemination of materially false information to investors and to protect corporate and investor assets. + + The SEC’s complaint, filed on December 18, 2023, alleges that, since at least 2019, Mmobuosi spearheaded a scheme to fabricate financial statements and other documents of the three entities and their Nigerian operating subsidiaries, Tingo Mobile Limited and Tingo Foods PLC. The complaint further alleges that Mmobuosi made and caused the entities to make material misrepresentations about their business operations and financial success in press releases, periodic SEC filings, and other public statements. For instance, Tingo Group’s fiscal year 2022 Form 10-K filed in March 2023 reported a cash and cash equivalent balance of $461.7 million in its subsidiary Tingo Mobile’s Nigerian bank accounts. In reality, those same bank accounts allegedly had a combined balance of less than $50 as of the end of fiscal year 2022. According to the SEC’s complaint, Defendants also fabricated the customer relationships that formed the basis of their purported businesses. The complaint alleges that Mmobuosi and the entities he controls have fraudulently obtained hundreds of millions in money or property through these schemes, and that Mmobuosi has siphoned off funds for his personal benefit, including purchases of luxury cars and travel on private jets, as well as an unsuccessful attempt to acquire an English Football Club Premier League team, among other things. + + The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, charges all four Defendants with violating the anti-fraud provisions of the federal securities laws and additionally charges Nasdaq-listed Tingo Group, OTC-traded Agri-Fintech, and Mmobuosi with reporting, books and records, and internal controls violations. It also charges Mmobuosi with lying to auditors, insider trading, and failing to file Forms 4 disclosing the sales of millions of Agri-Fintech common stock for which he was the ultimate beneficial owner. The complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains and prejudgment interest, civil penalties, and the return, pursuant to Section 304 of the Sarbanes-Oxley Act, of bonuses and profits obtained by Mmobuosi from sales of Tingo Group or Agri-Fintech stock. The complaint also seeks an order prohibiting Mmobuosi from acting as an officer or director of a public company or from participating in the offering of any penny stock. + + As part of the SEC’s emergency application, the SEC seeks an order to show cause and other temporary and preliminary relief against Defendants, including a temporary restraining order: (1) freezing Mmobuosi’s assets; (2) prohibiting TIH, Agri-Fintech and Tingo Group from transferring money or property or issuing shares to Mmobuosi; (3) enjoining Defendants from selling or otherwise disposing of their respective holding in Agri-Fintech and/or Tingo Group stock; (4) prohibiting Defendants and their agents from destroying, altering, or concealing records and documents; and (5) ordering Defendants to show cause why a preliminary injunction continuing the relief set forth in any temporary restraining order as well as ordering repatriation of proceeds and a sworn accounting should not be entered. + + The SEC’s ongoing investigation is being conducted by Michael DiBattista, Christopher Mele, David Zetlin-Jones, Jeremy Brandt, Stephen Johnson, Elizabeth Baier, Gerald Gross, and Rebecca Reilly under the supervision of Tejal D. Shah, all of the SEC’s New York Regional Office. The litigation is being led by Mr. Zetlin-Jones, Mr. DiBattista, and Mr. Brandt. The SEC appreciates the assistance of Nasdaq’s Enforcement Department. +  + + + 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. 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Dozy Mmobuosi, et al., Civil Action No. 23-civ-10928 (S.D.N.Y. filed December 18, 2023) + + + + SEC Obtains Emergency Relief Against Tingo Mobile Founder, Three Companies Charged with Massive Fraud + + + + The Securities and Exchange Commission today announced that it obtained a temporary asset freeze, restraining order, and other emergency relief against Mmobuosi Odogwu Banye a/k/a Dozy Mmobuosi and three affiliated U.S.-based entities of which he is the CEO–Tingo Group Inc., Agri-Fintech Holdings Inc., and Tingo International Holdings Inc.–in connection with an alleged multi-year scheme to inflate the financial performance metrics of these companies and key operating subsidiaries to defraud investors worldwide. + + According to the SEC’s complaint, filed on December 18, 2023, since at least 2019, Mmobuosi spearheaded a scheme to fabricate financial statements and other documents of the three entities and their Nigerian operating subsidiaries, Tingo Mobile Limited and Tingo Foods PLC. The SEC has obtained emergency relief including a temporary restraining order: (1) freezing Mmobuosi’s assets; (2) prohibiting TIH, OTC-traded Agri-Fintech and Nasdaq-listed Tingo Group from transferring money or property or issuing shares to Mmobuosi; (3) enjoining Defendants from selling or otherwise disposing of their respective holding in Agri-Fintech and/or Tingo Group stock; (4) prohibiting Defendants and their agents from destroying, altering, or concealing records and documents; and (5) ordering Defendants to show cause why a preliminary injunction continuing the relief set forth in any temporary restraining order as well as ordering repatriation of proceeds and a sworn accounting should not be entered. + + The SEC’s ongoing investigation is being conducted by Michael DiBattista, Christopher Mele, David Zetlin-Jones, Jeremy Brandt, Stephen Johnson, Elizabeth Baier, Gerald Gross, and Rebecca Reilly under the supervision of Tejal D. Shah, all of the SEC’s New York Regional Office. The litigation is being led by Mr. Zetlin-Jones, Mr. DiBattista, and Mr. Brandt. The SEC appreciates the assistance of Nasdaq’s Enforcement Department, the U.K. Financial Conduct Authority, and the Israel Securities Authority. + + + 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/2023/AAER-4480.txt b/raw/aaer/2023/AAER-4480.txt new file mode 100644 index 0000000000000000000000000000000000000000..f1c07d56493c6aef7820f98b25ac34ca3db7de9e --- /dev/null +++ b/raw/aaer/2023/AAER-4480.txt @@ -0,0 +1,599 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11260 / December 22, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99228 / December 22, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4480 / December 22, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21816 + +In the Matter of + +BROOGE ENERGY LIMITED, +NICOLAAS LAMMERT +PAARDENKOOPER and +LINA SAHEB, + +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 Brooge Energy Limited (“Brooge” or “company”), Nicolaas Lammert Paardenkooper +(“Paardenkooper”), and Lina Saheb (“Saheb”) (collectively, “Respondents”). + +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 in Section VI, Respondents consent to the entry of this Order +Instituting Administrative and Cease -and-Desist Proceedings pursuant to Section 8A of the + + 2 +Securities Act and Section 21C of the Exchange Act, 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 finds1 that: + +Summary + +1. These proceedings arise out of an accounting and offering fraud by Brooge, which +is a publicly -traded company that owns and operates an oil storage facility in Fujairah, United +Arab Emirates (“UAE”). +2. Brooge went public through a special purpose acquis ition company (“SPAC”) +transaction in December 2019. Before and after going public between thirty (30) and eighty (80) +percent of Brooge’s revenues were unsupported and materially misstated from 2018 through early +2021 (“Relevant Period”). Subsequent to the SPAC transaction, Brooge registered the offer and +sale of up to $500 million in different types of securities with the Commission and an affiliate of +the company issued $200 million of 5-year senior secured bonds in the Nordic bond market. +3. The crux of the fraud was the creation of two sets of invoices. The first set consisted +of actual invoices to customers who stored oil at Brooge’s facilities in Fujairah. Customers paid +these invoices in the ordinary course. A second set of invoices which reflected significantly higher +rates and volumes were ostensibly sent to customers who never used Brooge’s facilities. These +invoices were “paid” through a complicated series of unsupported transactions involving an +affiliated or related party. Brooge’s former Chief Executive Officer (“CEO”) Paardenkooper and +former Chief Strategy Officer (“CSO”) and Interim CEO, Saheb (together “Senior Management”) +knew, or were reckless in not knowing, of the accounting fraud. + 4. Certain personnel reporting to Senior M anagement provided Brooge’s outside +auditors with only the second set of invoices along with falsified ledger entries and other documents +designed to support the inflated rates and volumes on the false second set of invoices. As a result, +Senior Management misled the auditors regarding Brooge’s revenues. Further, in order to avoid an +event of default on the Nordic bonds, an affiliate of the company created a third set of unsupported +invoices, and certain persons at the company directed the creation of add itional false documents +during the pendency of our investigation. + +Respondents + +5. Brooge Energy Limited (f/k/a Brooge Holdings Limited) (“Brooge”), was +incorporated on April 12, 2019, in the Cayman Islands with its principal office in Fujairah, UAE. +Brooge conducted its business through a wholly -owned subsidiary, Brooge Petroleum and Gas + +1 The findings herein are made pursuant to Respondents’ Offers and are not binding on any +other person or entity in this or any other proceeding. + + + 3 +Investment FZE (“BPGIC”). During the Relevant Period, BPGIC owned and operated an oil +storage facility in Fujairah, UAE, with fourteen (14) tanks and a capacity of 399,324 cubic meters. +The company’s common stock and warrants were registered with the Commission pursuant to +Section 12(b) of the Exchange Act and trade on NASDAQ as “BROG” and “BROGW.” +6. Brooge filed reports with the Commission as a foreign private issuer and prepared its +financial statements in accordance with International Financial Reporting Standards (“IFRS”) during +the Relevant Period. Brooge’s fiscal year ended December 31. Ernst & Young – Middle East (Abu +Dhabi Branch) (“E&Y) audited the company’ s financial statements for 2018 and 2019. +PricewaterhouseCoopers (Dubai Branch) (“PwC”) audited its financial statements for 2020. On +January 5, 2023, Brooge announced PwC’s resignation. Brooge retained Affiniax AAS Auditors to +audit its financial statements for 2021 and 2022. On April 26, 2023, the company announced a +restatement of its audited financial statements from 2018 through 2020. + +7. Nicolaas Lammert Paardenkooper (“Paardenkooper”), age 61, is a citizen of the +Netherlands. Paardenkooper served as CEO of the company during the Relevant Period until his +resignation on December 8, 2022. + +8. Lina Saheb (“Saheb”), age 40, is a citizen of the Republic of Iraq. Saheb served as +the CSO of the company during the Relevant Period. Upon Paardenkooper’s resignation, Saheb +served as Interim CEO until her resignation on August 8, 2023. + +Facts + +A. Relevant Background +9. On April 15, 2019, Brooge and BPGIC entered into a Business Combination +Agreement with a SPAC that had raised $180 million in an initial public offering. On November +25, 2019, the SPAC filed a proxy statement that included historical financial information for +BPGIC. According to those proxy materials, BPGIC’s revenues were $35.839 million for 2018 +and $22.042 million for the six months ended June 30, 2019 – figures that were overstated. After +receiving BPGIC’s historical and projected financial performance, the SPAC placed a value on the +proposed transaction of approximately one billion dollars. +10. Those revenue figures were used during roadshows in the United States to market +the SPAC merger to investors. On December 19, 2019, the business combinatio n closed with a +share price of $10.32. The vast majority of SPAC shareholders redeemed their shares for cash +and, as a result, the new entity Brooge received only $16.7 million from the transaction. As a +result of the inflated financials, BPGIC was able to support a higher share price for the business +combination. +11. On September 24, 2020, BPGIC issued $200 million of 5-year senior secured bonds +in the Nordic bond market. The bonds were unregistered, purportedly offered only to qualif ied +institutional buyers (“QIBs”) in reliance on Rule 144A under the Securities Act, and outside the +United States only to non -U.S. investors pursuant to Regulation S under the Securities Act. The +bonds mature in September 2025 and have a fixed semi-annual coupon of 8.50% per annum. + + 4 + +12. On April 15, 2021, Brooge filed a post-effective amendment on Form F-3 to a Form +F-1 registration statement that was previously declared effective (“Warrant Shares Registration +Statement”). The Warrant Shares Registration Statement related to the issuance of common stock +underlying 21,228,900 outstanding warrants issued after the SPAC business combination. On April +19, 2021, Brooge filed a Form F-3 shelf registration statement, which registered the offer and sale +by Brooge of up to $500 million in different types of securities and also registers the offer and sale +by an affiliated selling shareholder – namely, the majority shareholder of Brooge – of up to 6 million +Brooge shares. Brooge agreed not to issue securities pursuant to those two registration statements +during the Commission’s investigation. + +13. On August 17, 2022, Brooge issued a press release announcing that Brooge’s +“majority shareholder, BPGIC Holding Limited, has expressed an interest to acquire all the shares +of [Brooge] that it does not currently own and to take [Brooge] private . . . .” More recently, in +October 2023, Brooge disclosed that it had received a formal proposal from a maritime and shipping +company listed in the Dubai Financial Market to acquire the company. The contemplated +acquisition, which is being evaluated by the parties, is anticipated to close in the fourth quarter of +2023. + +B. Brooge’s Revenue Overstatement +14. During the Relevant Period, Brooge represented to investors, bankers and auditors +that it had a single customer contractually obligated to rent 100% of its storage capacity and certain +other services at specific rates, thereby producing revenue of approximately $44 million per year. +In reality, actual customers used a smaller portion of the storage capacity and almost no ancillary +services, at rates low er than those specified in the single -customer contract. The difference was +addressed through an accounting scheme that relied upon a false second set of invoices. From +December 2017 until at least December 2020, Brooge improperly recognized revenues by issuing +invoices to two customers, Customer A and Al Brooge International Advisory LLC (“BIA”). + + 1. Customer A Invoices + +15. Customer A is a private company with an address in Singapore that purports to be in +the business of buying and selling crude oil. On December 12, 2017, BPGIC entered into an +agreement pursuant to which Customer A leased the full 399,324 cubic meter storage capacity of all +fourteen (14) tanks for five years at a monthly rate of $5.00 per cubic meter for storage and $1.70 +for cer tain ancillary services. This agreement formed the basis of the company’s cash flow +projections. BPGIC’s cash flow projections assumed that under the terms of their agreement +Customer A paid approximately $1.997 million in storage revenue per month (399,324 * $5.00) and +$679,000 in certain ancillary services (399,324 * $1.70). Customer A never stored any oil and never +paid anything to BPGIC. + +16. BPGIC provided services to oil and gas companies that used its storage facility but +at significantly lower rates and volumes than those reflected in the contract with Customer A. These +customers were invoiced and paid in the ordinary course. For example, in December 2018, one +customer rented a tank with a storage capacity of 41,563 cubic meters at a rate of $2.30, for a total + + 5 +of $95,594.90. An invoice in that amount was issued to and paid by that customer. A second set of +invoices addressed to Customer A was created. These invoices reflected the same total amounts as +the real invoices but at the contractual storage rate of $5.00 per cubic meter. For example, the total +amount of $95,594.90 in the invoice to the customer referenced above matched the total amount in +the duplicate invoice to Customer A, but the storage rate was adjusted upward to $5.00 per c ubic +meter. To make the math consistent, the storage quantity was adjusted downward on the Customer +A invoice to 19,118.98 cubic meters. In this manner, between December 2017 and July 2019, +BPGIC created over one hundred unsupported invoices addressed to Customer A. + +17. BPGIC also created large month-end invoices addressed to Customer A to fill the +gap in projected revenues. BPGIC issued end-of-the-month invoices to Customer A on a monthly +basis from January 2018 through July 2019. The majority were in amounts ranging from $2.5-to- +$3.4 million. Again, Customer A never stored any oil with and never paid anything to BPGIC. Thus, +the end-of-the-month invoices to Customer A were false and the revenues associated with them +unsupported. To make it appear as if these invoices had been paid, BPGIC engaged in a series of +complicated transactions with BIA, an affiliated or related party, pursuant to which BIA wrote +checks to BPGIC and then BPGIC wrote checks for corresponding amounts to BIA. These were +recorded in the company’s general ledger as payments by Customer A. + +18. BIA was a private company located in Abu Dhabi and an affiliated or related party +of BPGIC. One of the owners of BIA was a shareholder in BPGIC. R epresentatives of BPGIC +opened bank accounts on behalf of BIA. BIA had no meaningful business operations aside from +participating in the misstatements of revenues associated with BPGIC. + + 2. BIA Invoices + +19. From August 2019 through at least December 2020, these improper accounting +practices continued in largely in the same manner, but with BIA in the place of Customer A. In +August 2019, BPGIC’s contract with Customer A was novated to BIA under similar terms, e.g., BIA +was obligated to lease the full 399,324 cubic meter storage capacity of all fourteen (14) tanks at a +monthly rate of $5.00 per cubic meter for storage and $1.70 for certain ancillary services. BIA never +stored any oil with BPGIC. + +20. BPGIC continued to provide services to oil and gas companies that used its storage +facility but at significantly lower rates and volumes than those reflected in the contract novated to +BIA. A second set of invoices addressed to BIA was created. These invoice s reflected the same +total amounts as the invoices sent to oil and gas companies that used the storage facility but at the +contractual storage rate of $5.00 per cubic meter with storage quantities adjusted downward to make +the math consistent. Certain of these invoices also re-characterized ancillary services as storage fees. +In this manner, between August 2019 and December 2020, BPGIC created over two hundred +unsupported invoices addressed to BIA. + +21. As it had done previously with respect to Cust omer A, BPGIC created invoices +addressed to BIA to fill the gap in projected revenues. BPGIC issued these invoices on a monthly +basis from August 2019 through at least December 2020. The majority were in amounts ranging + + 6 +from $1.5-to-$2.5 million. BIA did not store any oil with BPGIC. In order to make it appear as if +these invoices were paid, BPGIC engaged in a complicated series of transactions pursuant to which +BIA wrote checks to BPGIC and then BPGIC wrote checks in similar amounts to BIA. + + 3. Third Set of Unsupported Invoices + +22. Towards the end of 2020, market demand for BPGIC’s oil storage services increased +during the coronavirus pandemic. With tanks at or near capacity and market rates for storage close +to or above contractual amounts with Customer A and BIA, Brooge ceased the dual invoicing system +However, in May and June 2021, Brooge created another set of unsupported invoices to avoid a +potential event of default on the Nordic bonds. These invoices were addressed – but never sent – to +real customers and reflected charges for ancillary services far in excess of actual usage rates. The +result was that Brooge’s revenues and EBITDA were artificially inflated for the six months ended +June 30, 2021. + +C. Misstatements to Auditors +23. Senior Management and persons acting at their direction concealed the inflated +revenues from the company’s outside auditors, E&Y and PwC. Outside auditors were provided with +contracts and false invoices to Customer A and BIA, but the company did not provide them contracts +and invoices with actual customers. Additionally, numerous false entries to the company’s general +ledger were made and then provided to the outside auditors. + +24. BPGIC provided false audit evidence requested by E&Y and PwC as part of their +invoice testing. This included the fabrication of emails and “customer order forms.” These efforts +were intended to make it appear as if the company had business communications with Customer A +or BIA when it had not. This was done when E&Y selected a handful of Customer A and BIA +invoices for testing during the 2018 and 2019 audits and when PwC requested backup support for +ancillary service revenue from BIA during the 2020 audit. The false materials provided to PwC +include charts purporting to show which vessels were delivering oil in Fujairah, UAE, on specific +dates. In reality, those vessels were scattered throughout the world, including off the coasts of India, +Indonesia, Egypt, West Africa, and in the Gulf of Mexico. + +25. Paardenkooper signed management representation letters misrepresenting that the +company had “made available to [the outside auditors] all significant contracts, communications +(either written or oral), and other related information pertaining t o arrangements with customers” +and confirmation letters attesting falsely to account receivable balances from Customer A and BIA. + +D. Fictitious Documents Provided to the SEC Staff +26. Brooge personnel took additional steps to conceal the accounting f raud from +Commission staff. At the direction of Senior Management, Brooge employees created three +categories of false documents which were provided to Commission staff during the investigation. + +27. The first category consisted of false invoices to BIA, backdated to February 2018 – +July 2019, which purported to explain why BIA made payments for invoices to Customer A. + + 7 +BPGIC’s general ledger falsely recorded that Customer A made the payments on the invoices rather +than BIA. Paardenkooper signed the falsified, backdated invoices. In reality, the invoices were not +for any services rendered and did not exist until they were created in 2022. The second was a +Commercial Storage Agreement between BPGIC and BIA, backdated to January 22, 2018, to +provide support for the false invoices addressed to BIA that were created in 2022. The falsified, +backdated Commercial Storage Agreement was created at the direction of Senior Management. +The third was a “loan agreement,” backdated to July 17, 2017, purporting to explain other false +general ledger entries relating to the transactions. + +E. Material Overstatement of Revenue +28. Brooge’s Audit Committee hired an outside law firm and an expert accounting +consultancy firm to conduct an internal investigation, and the company eventually restated its +historical financial statements, as reflected in the chart below: + + 2018 2019 2020 + Revenue as +Restated +$6,387,348 $15,885,219 $27,191,176 +Revenue as +Originally Reported +$35,839,268 $44,085,374 $41,831,537 +29. Internal spreadsheets contemporaneously tracked actual revenue data, as compared +against the revenues that were publicly disclosed. Those internal spreadsheets reflect actual revenues +consistent with restated figures. In addition, the third set of unsupported invoices artificially inflated +revenues by approximately $3.4 million in May and June 2021. +30. As a result of these improper accounting practices, the financial statements included +in numerous of Brooge’s Commission filings were materially oversta ted including Form 20 -F +Annual Reports, Form 6-K Half-Year Reports, Form 6-K Press Releases, Form F-4 and Form 424B +Proxy Materials, Form F -1 and Form F -3 Registration Statements and Form 425 Investor +Presentations. Paardenkooper signed the majority of th ese Commission filings as the company’s +CEO. +31. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Brooge and cooperation afforded the Commission staff. These included providing to +Commission staff information from an internal investigation conducted on behalf of the Audit +Committee. + +Violations + +32. As a result of the conduct described above, Brooge violated (i) Section 17(a) of the +Securities Act, Section 10(b) of the Exchange Act and Rule 10b -5 thereunder, which prohibit +fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of + + 8 +securities; (ii) Section 14(a) of the Exchange Act and Rule 14a-9 thereunder, which prohibit material +misstatement and omissions in proxy statements; (iii) Section 13(a) of the Exchange Act and Rules +12b-20, 13a -1 and 13a -16 thereunder, which require registrants to file materially accurate and +complete periodic reports; and (iv) Section 13(b)(2)(A) of the Exchange Act, which requires +registrants to make and keep accurate books, records and accounts, and Section 13(b)(2)(B) of the +Exchange Act, which requires registrants to devise and maintain adequate internal accounting +controls. + + 34. As a result of the conduct described above, Paardenkooper violated (i) Section 17(a) +of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b -5 thereunder, which +prohibit fraudulent conduct in the offer or sale of securities and in connection with the purchase or +sale of securities; (ii) Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder, +which prohibit the falsification of books and records and lying to auditors; (iii) caused Brooge’s +violations of Section 14(a) of the Exchange Act and Rule 14a-9 thereunder, which prohibit material +misstatement and omissions in proxy statements; (iv) caused Brooge’s violations of Section 13(a) of +the Exchange Act and Rules 12b-20, 13a-1 and 13a-16 thereunder, which require registrants to file +materially accurate and complete periodic reports; and (v) caused Brooge’s violations of Sectio n +13(b)(2)(A) of the Exchange Act, which requires registrants to make and keep accurate books, +records and accounts. + + 35. As a result of the conduct described above, Saheb violated (i) Sections 17(a)(1) and +(3) of the Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder, +which prohibit fraudulent conduct in the offer or sale of securities an d in connection with the +purchase or sale of securities; (ii) Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2- +2 thereunder, which prohibit the falsification of books and records and lying to auditors; and (iii) +caused Brooge’s violations of Section 14(a) of the Exchange Act and Rule 14a-9 thereunder, which +prohibit material misstatement and omissions in proxy statements; (iv) caused Brooge’s violations +of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-16 thereunder, which require +registrants to file materially accurate and complete periodic reports; and (v) caused Brooge’s +violations of Section 13(b)(2)(A) of the Exchange Act, which requires registrants to make and keep +accurate books, records and accounts. + +IV. + +Undertakings + +Respondent Brooge has undertaken to: + +A. Retain, at Brooge’s expense within 150 days of issuance of this Order, a qualified +independent ethics and compliance consultant (the “Consultant”) with extensive experience in +developing, implementing and overseeing organizational compliance and ethics programs, not +unacceptable to the Commission staff, to conduct an ethics and compliance program assessment +focused on the components of the program delineated in paragraphs (1)-(3) below. The Consultant +shall also have expertise in, or retain someone with expertise in, interna l accounting controls and +public company financial reporting, including accounting for revenues and related party + + 9 +transactions. Brooge shall cause the Consultant to analyze Brooge’s ethics and compliance +program as it relates to the areas described in paragraphs (1)-(3) below. In discharging this +undertaking, the Consultant shall: +1. Evaluate and assess the effectiveness of Brooge’s internal accounting +controls and financial reporting policies and procedures, including but not limited to: +a. Whether Brooge’s i nternal accounting controls are sufficient to +provide reasonable assurances that the company is maintaining fair and accurate books, records +and accounts, with particular emphasis on whether they are designed to address the integrity of its +revenue accounting, and ensure consistent accuracy; and +b. Whether Brooge has specific accounting and financial reporting +controls and procedures sufficient to identify any related or affiliated parties, with any direct or +indirect affiliation with Brooge and/or its controlling shareholders, and ensure that all accounting +with respect to such parties, including but not limited to BIA, complies with applicable accounting +rules and policies; +2. Evaluate and assess whether Brooge’s corporate culture has an adverse +impact upon or impedes the company’s ability to comply fully with its disclosure obligations; + +3. Evaluate, for purposes of analyzing the areas addressed above in paragraphs +(1) and (2), whether there are proper resources, oversight and independence of the compliance and +ethics function, including seniority of corporate executives responsible for implementation and +oversight, reporting lines, autonomy and independence, compensation and rewards, consistent +discipline, resources, and access to information and personnel. The review shall include +sufficiency of training and guidance, including regarding anti-retaliation and whistleblowing; +B. Provide the Consultant with complete access and resources to review key +documents ( e.g., material agreements, counterparty due diligence, b ank records, business +principles, codes of conduct, policies and procedures, risk assessments, performance evaluation +forms, relevant internal training materials and internal communications). In reviewing the +creation, administration and implementation of the compliance and ethics program as it relates to +the areas addressed in ¶ A above, the Consultant shall conduct an assessment survey and interview +relevant personnel; +C. Provide a copy of the engagement letter detailing the Consultant’s responsibilities +to Reid A. Muoio, Assistant Director, Division of Enforcement, U.S. Securities and Exchange +Commission, 100 F Street, N.E., Washington, D.C. 20549; +D. Cooperate fully with the Consultant, including providing the Consultant with +access to Brooge’s files, books, records and personnel as reasonably requested for the above - +described review except to the extent such files, books, or records are protected from disclosure +by any applicable protection or privilege such as the attorney-client privilege or the attorney work +product doctrine. To the extent the Consultant believes that documents are being withheld +unreasonably, Brooge shall work cooperatively with t he Consultant to resolve the matter, and if + + 10 +they are unable to reach agreement after exhausting reasonable efforts to do so, the Consultant +shall promptly notify the Commission staff. To ensure the independence of the Consultant, Brooge +shall not have the authority to terminate the Consultant without prior written approval of the +Commission’s staff and shall compensate the Consultant and persons engaged to assist the +Consultant for services rendered pursuant to this Order at their reasonable and customary rates; +E. Require the Consultant to report to the Commission staff (at the address set forth +above) on his/her activities as the staff shall request; +F. Permit the Consultant to engage such assistance, clerical, legal or expert, as +necessary and at reasonable co st, to carry out his/her activities, and the cost, if any, of such +assistance shall be borne exclusively by Brooge; +G. Require, within 210 days of the issuance of this Order, unless otherwise extended +by the Commission staff for good cause, the Consultant to complete the review and report to the +Commission staff (at the address set forth above) and Brooge’s Chief Executive Officer and Board +of Directors concerning: +1. The scope and methodologies used by the Consultant in order to complete +the review; +2. Brooge’s compliance with the review; +3. The adequacy of Brooge’s existing policies, practices and procedures +regarding the matters assessed; and +4. The Consultant’s recommendations, if any, regarding modification or +supplementation of Brooge’s policies, practices and procedures related to the matters assessed (the +“Recommendations”); +H. Adopt and implement, within 120 days of Brooge’s receipt of the +Recommendations, all of the Recommendations; provided, however, that as to any +Recommendation that Brooge considers to be, in whol e or in part, unduly burdensome, +unnecessary or impractical, Brooge may submit in writing to the Consultant and the Commission +staff (at the address set forth above), within 60 days of receiving the Recommendations, an +alternative policy, practice or proce dure designed to achieve or provide appropriate comfort +regarding the same objective or purpose. Brooge and the Consultant shall then attempt in good +faith to reach an agreement relating to each Recommendation that Brooge considers to be unduly +burdensome, impractical or unnecessary, and the Consultant shall reasonably evaluate any +alternative policy, practice or procedure proposed by Brooge. Such discussion and evaluation shall +conclude within 90 days after Brooge’s receipt of the Recommendations. If Bro oge and the +Consultant do not reach a solution, the Consultant shall inform the Commission staff of such +disagreement within 14 days. Brooge and the Consultant shall discuss the disagreement with the +Commission staff. The Commission staff shall make the final determination concerning any such +Recommendation. Brooge shall abide by the determinations of the Commission staff and, within +60 days after final agreement between Brooge and the Consultant or final determination by the + + 11 +Commission staff, whichever o ccurs first, Brooge shall adopt and implement all disputed +Recommendations of the Consultant that the Commission staff deems appropriate; and +I. 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 Brooge +agrees to provide such evidence. The certification and supporting material shall be submitted to +the Commission staff (at the address set forth above) , with a copy to the Office of Chief Counsel +of the Enforcement Division, no later than sixty (60) days from the dat e of the completion of the +undertakings. +Brooge may apply to the Commission staff (at the address set forth above) for an extension +of the deadlines described above before their expiration, and upon a showing of good cause by +Brooge, the Commission staff may, in its sole discretion, grant such extensions for whatever time +period it deems appropriate. +For the period of engagement and for a period of two years from completion of the +engagement, Brooge shall not (i) retain the independent Consultant for any other professional +services outside of the services described in this Order; (ii) enter into any other professional +relationship with the independent Consultant, including any employment, consultant, attorney - +client, auditing or other professional relationship; or (iii) enter, without prior written consent of +the Commission staff, into any such professional relationship with any of the independent +Consultant’s present or former affiliates, employers, directors, officers, employees, or agents +acting in their capacity as such. +The reports by the indep endent 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 th e 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. +Provided that, none of the undertakings required in this Section IV shall be required in the +event that (1) subject to review and written approval by Commission staff (at the address set forth +above), Brooge closes , within 150 days of this Order (or such longer period of time as may be +approved for good cause by the Commission staff), on either (a) the transaction announced in its +Form 6-K, dated October 3, 2023, or (b) a similar transaction on substantially the same terms; and +(2) Brooge and its securities are no longer registered, or required to be regist ered, with the +Commission, in any capacity. + + 12 +V. + + 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, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, it is hereby ORDERED that: + + A. Brooge cease and desist from committing or causing any violations and any future +violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) +and 14(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-16 and 14a-9 thereunder. + + B. Paardenkooper cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(5) +and 14(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-16, 13b2-1, 13b2-2 and 14a-9 +thereunder. + + C. Saheb cease and desist from committing or causing any violations and any future +violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(5) and +14(a) of the Exchange Act and Rules 10b -5, 12b-20, 13a-1, 13a-16, 13b2-1, 13b2-2 and 14a -9 +thereunder. + + D. Paardenkooper is prohibited, pursuant to Section 21C(f) of the Exchange Act, 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. + + E. Saheb is prohibited, pursuant to Section 21C(f) of the Exchange Act, 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. + +F. Brooge shall, within ten (10) days of the entry of this Order, pay a civil money penalty +in the amount of $5,000,000 to the Securities and Exchange Commission. If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +G. Paardenkooper shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $100,000 to the Securities and Exchange Commission. If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +H. Saheb shall, within ten (10) days of the entry of this Order, pay a civil money penalty +in the amount of $100,000 to the Securities and Exchange Commission. If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + + + 13 +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 +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 Reid A. Muoio, Division of Enforcement, Securities +and Exchange Commission, 100 F St., NE, Washington, DC 20549. + + I. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the civil money penalties referenced in paragraphs F through H 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, 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 their 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. + + J. Brooge shall comply with the undertakings enumerated in Section IV. + + + 14 +VI. + + 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 Paardenkooper and Saheb , and further, any debt for disgorgement, prejudgment +interest, civil penalty or other amounts due by Respondents Paardenkooper or Saheb 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