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+ 
+UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933 
+Release No. 9711 / January 27, 2015 
+ 
+SECURITIES EXCHANGE ACT O F 1934 
+Release No. 74141 / January 27, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3621 / January 27, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16361 
+ 
+ 
+ 
+In the Matter of 
+ 
+ OPPENHEIMER & CO. INC.,    
+ 
+Respondent. 
+ 
+ 
+ 
+ 
+ORDER INSTITUTING 
+ADMINISTRATIVE AND CEASE-AND-
+DESIST PROCEEDINGS PURSUANT TO 
+SECTION 8A OF THE SECURITIES ACT 
+OF 1933 AND 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 Section 8A of the Securities Act of 1933 (“Securities Act”) and Sections 
+15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) against Oppenheimer & 
+Co. Inc. (“Oppenheimer” or “Respondent”). 
+ 
+II. 
+ 
+In anticipation of the institution of these proceedings, Oppenheimer has submitted an Offer 
+of Settlement (the “Offer”) which the Commission has determined to accept.  Oppenheimer admits 
+the Commission’s jurisdiction over it and over the subject matter of these proceedings, admits the 
+facts set forth in Sections III.B, III.C, III.D, and III.F below, acknowledges that its conduct violated 
+the federal securities laws, and consents to the entry of this Order Instituting Administrative and 
+Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Sections 
+2 
+ 
+15(b) and 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. 
+ 
+III. 
+ 
+On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 
+ 
+A. SUMMARY 
+ 
+1. Oppenheimer engaged in two separate courses of conduct, the first during the 
+period July 2008 through May 2009 (“Oppenheimer I”) and the second during the period 
+October 2009 through December 2010 (“Oppenheimer II”), each of which violated the federal 
+securities laws.   
+ 
+Oppenheimer I 
+ 
+2. Between July 2008 and May 2009, Oppenheimer executed sales of billions of 
+shares of penny stocks2 for an account in the name of its customer, Gibraltar Global Securities, Inc. 
+(“Gibraltar”) —a broker-dealer licensed in the Bahamas.  Although Gibraltar purportedly 
+maintained a proprietary account, Oppenheimer knew that Gibraltar was actually executing 
+transactions and providing brokerage services for its customers, many of whom were U.S. persons. 
+Through this conduct, Gibraltar acted as a broker in the United States even though it was not 
+registered with the Commission as required by the federal securities laws.   
+ 
+3. Although Gibraltar was exempt from paying U.S. taxes on its own profits from 
+sales of securities in the U.S., it used its exempt status as a means to enable its U.S. customers to 
+avoid paying taxes.  Gibraltar accomplished this by providing Oppenheimer with an Internal 
+Revenue Service (“IRS”) Form W-8BEN, which purportedly exempted Gibraltar from U.S. tax 
+withholding based on a false certification that Gibraltar was the sole owner of all of the income 
+generated in its Oppenheimer account.  Oppenheimer, however, knew that Gibraltar’s customers 
+(and not Gibraltar) were the beneficial owners of the securities deposited, sold and or transferred.  
+As a result Oppenheimer knew or should have known that Gibraltar’s IRS withholding form was 
+false and could not be relied on.  Presented with a false withholding form, and information 
+revealing that many Gibraltar customers were U.S. persons, Oppenheimer was required to begin 
+withholding taxes from the gross proceeds from sales of securities in the Gibraltar account, which 
+it did not do.   Oppenheimer failed to properly withhold and remit taxes to the IRS, and therefore 
+became liable for taxes it was obligated to withhold.  Oppenheimer, however, failed to record this 
+liability and resulting expenses, which caused its books and records to become inaccurate.  
+                                                 
+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 The securities qualified as “penny stocks” because they did not meet any of the exceptions from the 
+definition of a “penny stock,” as defined by Section 3(a)(51) of the Exchange Act and Rule 3a51-1 
+thereunder. 
+3 
+ 
+Oppenheimer’s records were also inaccurate because they reflected the account in which 
+Gibraltar’s customers’ shares were deposited, sold and transferred as a proprietary account of 
+Gibraltar, rather than an account for Gibraltar’s customers. 
+ 
+4. Oppenheimer was responsible for reporting suspicious activity to the U.S. Treasury 
+Department’s Financial Crimes Enforcement Network (“FinCEN”) on Suspicious Activity Reports 
+(“SARs”).  In  instances when suspicious activity occurred in the Gibraltar account, Oppenheimer 
+failed to file the requisite SARs.  Suspicious activities included instances where Gibraltar deposited 
+into, and sold out of, its Oppenheimer account large quantities of penny stocks which should have 
+raised concern that Gibraltar and its customers might be participating in unregistered offerings or 
+sales of securities in violation of Section 5 of the Securities Act.  In some instances, Gibraltar 
+deposited billions of shares of penny stocks into its Oppenheimer account and then simply 
+transferred them to other U.S. broker-dealers without any apparent legitimate economic or business 
+purpose.      
+ 
+5. By allowing Gibraltar to operate as a broker-dealer servicing U.S. customers 
+through its account at Oppenheimer, Oppenheimer willfully
+3 aided and abetted and was a cause of 
+Gibraltar’s violation of Section 15(a) of the Exchange Act.  In addition, by failing to recognize 
+liabilities and expenses associated with its failure to properly withhold and remit back-up 
+withholding taxes from sales proceeds in the Gibraltar account, Oppenheimer also willfully 
+violated Section 17(a) of the Exchange Act and Rule 17a-3(a)(2), which requires broker-dealers to 
+maintain ledgers accurately reflecting liabilities and expenses.  By recording transactions for 
+Gibraltar’s customers in an account inaccurately maintained on Oppenheimer’s books and records 
+as Gibraltar’s proprietary account, Oppenheimer also willfully violated Rule 17a-3(a)(9).  Finally, 
+Oppenheimer willfully violated Section 17(a) of the Exchange Act and Rule 17a-8 by failing to file 
+SARs in connection with Gibraltar’s suspicious activities.    
+ 
+Oppenheimer II 
+ 
+6. From October 6, 2009 through December 10, 2010, Oppenheimer, through a 
+registered representative then associated with Oppenheimer who held a position as a Financial 
+Advisor (“FA”) and his immediate supervisor, a Branch Office Manager, willfully violated 
+Sections 5(a) and (c) of the Securities Act when it engaged in the unregistered distribution of the 
+securities of Quasar Aerospace, Inc. (“QASP”), Encounter Technologies, Inc. (“ENTI”), My 
+Social Income, Inc. (“MSOA”), Strategic Rare Earth Metals, Inc. (“SREH”), Sebastian River 
+Holdings, Inc. (“SBRH”), and Shot Spirit Corporation (“SSPT”) on behalf of a customer (the 
+“Customer”).  The over 2.5 billion cumulative shares sold through the Customer’s account 
+generated approximately $12,000,000 in proceeds of which Oppenheimer was paid $588,400 in 
+commissions.  
+                                                 
+3 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 
+ 
+ 
+7. No registration statement was on file or in effect as to the Customer’s offers and 
+sales of securities as required by Section 5 of the Securities Act.  In certain instances, the 
+securities were restricted because the Customer acquired them directly or indirectly from the 
+issuers, or from affiliates of the issuers, in transactions or chains of transactions not involving 
+any public offering.  The only exemption applicable to offers and sales of restricted securities 
+into the public markets is Securities Act Section 4(a)(1)’s exemption for “transactions by any 
+person other than an issuer, underwriter, or dealer.”  The Customer’s offers and sales of those 
+restricted securities into the public market did not, however, comply with the Rule 144 safe 
+harbor from being considered a statutory underwriter.  More particularly, the Customer did not 
+hold the securities of each of the six non-reporting issuers for at least a year prior to resale, as 
+required by Rule 144(d); and there was a lack of adequate current public information available 
+for QASP, MSOA, ENTI and SREH at the time of the Customer’s resale, as required by Rule 
+144(c).    
+ 
+8. Thus, the Customer’s offers and resales did not comply with Rule 144 or qualify 
+for Section 4(a)(1) or any other exemption under the federal securities laws, and violated 
+Sections 5(a) and (c).   
+ 
+9. Oppenheimer willfully violated Sections 5(a) and (c) of the Securities Act in 
+executing the Customer’s orders to sell the securities of the six issues.  It cannot claim an 
+exemption from Section 5 liability under Section 4(a)(4) of the Securities Act which exempts 
+from the registration requirements of Section 5 “brokers’ transactions.”  John A. Carley, 
+Exchange Act Rel. No. 57,246, 2008 WL 268598, *8 (Jan. 31, 2008) (Commission opinion).  To 
+rely on the exemption, the broker-dealer must, among other things, conduct a reasonable inquiry 
+and, after such an inquiry, it must not be “aware of circumstances indicating that the person for 
+whose account the securities are sold is an underwriter with respect to the securities or that the 
+transaction is part of a distribution of the securities of the issuer.”  15 U.S.C. § 77d(a)(4); 17 
+CFR § 230.144(g)(4).  
+ 
+10. Oppenheimer personnel, including Branch Office personnel and senior 
+management, recognized red flags previously identified by the Commission as indicative of 
+illegal unregistered distributions and did not properly follow up on those red flags and analyze 
+the information in order to be able to rely on the Section 4(a)(4) exemption.  Distribution by 
+Broker-Dealers of Unregistered Securities, Securities Act Rel. No. 33-4445 (Feb. 2, 1962) 
+(Commission interpretative release).  As a result, Oppenheimer personnel did not conduct a 
+reasonable inquiry to determine whether the Customer’s offers and resales were exempt from the 
+Section 5 registration requirements.   
+ 
+11. In failing to establish and implement policies and procedures reasonably designed 
+to prevent and detect Oppenheimer personnel’s violations of Section 5, Oppenheimer also failed 
+reasonably to supervise.  In this regard, Oppenheimer failed to establish procedures reasonably 
+designed to achieve compliance with Section 5, for example, in formulating policies related to 
+sales of penny stocks; and failed to implement such procedures as existed for purposes of 
+5 
+ 
+determining whether Oppenheimer’s personnel conducted a reasonable inquiry regarding 
+whether the Customer’s resale transactions complied with Rule 144. 
+ 
+B.        RESPONDENT  
+ 
+12. Oppenheimer, a New York corporation, is a broker-dealer and an investment 
+adviser registered with the Commission and headquartered in New York, New York.  
+Oppenheimer is a subsidiary of Oppenheimer Holdings, Inc., a publicly traded company with 
+securities registered with the Commission pursuant to Section 12(b) of the Exchange Act. 
+ 
+C. OTHER ENTITY RELEVANT TO OPPENHEIMER I 
+ 
+13. Gibraltar Global Securities, Inc., is a broker-dealer, investment management and  
+advisory firm established in 2004 that is domiciled in the Commonwealth of the Bahamas.  
+Gibraltar is licensed and regulated by the Securities Commission of the Bahamas.  Gibraltar 
+serviced its customers through an account it maintained at Oppenheimer (among other U.S. 
+broker-dealers).  In 2013, the Commission charged Gibraltar and its president with violating 
+Section 15(a) of the Exchange Act and Section 5 of the Securities Act.  (SEC v. Gibraltar Global 
+Securities, Inc. and Warren A. Davis, 13 cv 2575 (S.D.N.Y.))  Gibraltar is also a defendant in SEC 
+v. Carillo Huettel LLP, et al., 13 cv 1735 (S.D.N.Y.), in which the Commission, in 2013, charged 
+Gibraltar with violations of Section 5 of the Securities Act and the antifraud provisions of the 
+federal securities laws in connection with pump-and-dump schemes concerning two penny stocks.   
+  
+D. OPPENHEIMER I FACTS  
+14. In May 2007, Gibraltar opened an account at Oppenheimer.  In its account opening 
+documents, Gibraltar described itself simply as a broker-dealer in the business of investments.  
+Oppenheimer designated Gibraltar as a high risk account because, among other reasons, it was 
+located in the Bahamas.  At the time, Oppenheimer knew that Gibraltar was a foreign broker-
+dealer. 
+ 
+15. As part of its account opening documents, Gibraltar submitted an IRS Form W-
+8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding,” 
+which exempted Gibraltar from tax withholding and information reporting of securities sales 
+proceeds to the IRS, based upon Gibraltar’s status as a foreign entity.  In its IRS Form W-8BEN, 
+Gibraltar falsely represented that it was the beneficial owner of all the income generated in its 
+account at Oppenheimer and that “the beneficial owner [was] not a U.S. person.” 
+ 
+16. Oppenheimer knew or should have known that Gibraltar’s Form W-8BEN was 
+false because, among other things, Gibraltar instructed Oppenheimer to accept deposits and 
+execute sales for Gibraltar’s clients, some of whom maintained U.S. addresses.  Oppenheimer also 
+knew or should have known that it could not rely on the Form W-8BEN.  However, during the 
+period February 2009 through June 2009, Oppenheimer failed to withhold taxes from the sales of 
+securities in Gibraltar’s account and similarly failed to remit the amounts that it was obligated to 
+withhold and report the sales proceeds to the IRS.  Oppenheimer also failed to recognize liabilities 
+6 
+ 
+and expenses associated with its failure to withhold taxes from sales of securities in Gibraltar’s 
+account.    
+ 
+17. Gibraltar used its Oppenheimer account almost exclusively to deposit, sell and 
+transfer shares of penny stocks into the United States on behalf of its customers.  From July 2008 
+through June 2009, Gibraltar conducted approximately 1,800 trades in its Oppenheimer account.  
+Almost all of those trades were orders to sell, resulting in proceeds over $14.68 million from the 
+sale of approximately 7.6 billion shares of over 92 different issuers.  Gibraltar also used its 
+Oppenheimer account to distribute billions of shares of over 130 different issuers of thinly traded 
+penny stocks into U.S. markets by depositing shares and instructing Oppenheimer to transfer those 
+shares to other broker-dealers.   
+ 
+18. Oppenheimer knew or was reckless in not knowing that Gibraltar was selling shares 
+on behalf of its customers and that Gibraltar was not the beneficial owner of the securities sold.  In 
+fact, in or about January 2009 Gibraltar’s president informed Oppenheimer personnel that 
+Gibraltar’s customers wanted to liquidate shares of penny stocks.  Gibraltar’s president told 
+Oppenheimer that even though the securities to be liquidated were deposited into Gibraltar’s 
+account and in Gibraltar’s name, those securities actually belonged to its underlying customers.  
+ 
+19. Oppenheimer was aware of additional facts showing that Gibraltar was not the 
+beneficial owner of certain securities in the Gibraltar account.  In fact, beginning by at least 
+November 2008, several Oppenheimer employees, including a registered representative and his 
+assistant, accepted share certificates for deposit into Gibraltar’s account that were titled “Gibraltar 
+Global Securities fbo (or “for the benefit of”) [Gibraltar’s customer].”  Gibraltar also instructed 
+Oppenheimer’s registered representatives via e-mail to deposit shares of numerous penny stock 
+issuers electronically through the facilities of the Depository Trust Company.   In its e-mails to 
+Oppenheimer, Gibraltar stated that the deposits were “for the benefit of” or “fbo” its customers.  In 
+certain instances, Gibraltar forwarded its customers’ instructions to Oppenheimer.  In other 
+instances, Gibraltar’s customers were also Oppenheimer’s customers.   A number of Gibraltar’s 
+customers maintained U.S. addresses.    
+ 
+20. Oppenheimer employees also became aware that Gibraltar had used its account to 
+service brokerage customers by processing securities transfers between Gibraltar’s customers and 
+Oppenheimer’s own customers.  On certain occasions Gibraltar requested that Oppenheimer 
+transfer shares from Gibraltar’s Oppenheimer account to other Oppenheimer customers’ accounts 
+and vice versa.  Oppenheimer described these transfers as “third party journals” or “journals.”  To 
+approve journals, Gibraltar provided Oppenheimer with letters of authorization to transfer 
+securities from the Gibraltar account to its clients’ individual accounts at Oppenheimer.   To 
+complete journals, Oppenheimer’s representatives were required to fill out questionnaires stating 
+the specific purpose of the journals and the relationship between the parties sending and receiving 
+the shares.  On at least one occasion concerning a journal between Gibraltar and another 
+Oppenheimer U.S. customer, Oppenheimer’s employees stated on the questionnaire that the 
+purpose of the journal was to transfer stock to a “client of Gibraltar.”  Thus, Oppenheimer knew 
+7 
+ 
+that some of its own customers were also Gibraltar’s customers, and that Gibraltar was servicing 
+them through transfers between the accounts.  
+ 
+21. In January 2009, Oppenheimer’s Anti-Money Laundering (“AML”) Officer 
+inquired about a suspicious journal (i.e., a transfer) between Gibraltar and another Oppenheimer 
+customer located in California.  As a result, Oppenheimer assigned a surveillance analyst to review 
+Gibraltar’s activity.  Oppenheimer’s surveillance analyst concluded that Gibraltar’s activities 
+needed to be “escalated” because they raised red flags, namely that Gibraltar:  (i) was a foreign 
+broker-dealer doing business in the U.S.; (ii) selling “low-priced stock” on behalf of customers; 
+and (iii) that it immediately wired the proceeds out of the Oppenheimer account.  Oppenheimer’s 
+surveillance analyst also reviewed Gibraltar’s website.   The analyst concluded that Gibraltar’s 
+website offered trading, charged competitive commissions and provided customer statements 
+online.  In addition to the surveillance analyst, other Oppenheimer personnel—including its 
+registered representatives servicing the Gibraltar account—visited Gibraltar’s website in 
+connection with their “know your customer” obligations.  Gibraltar’s website described itself as a 
+Bahamian “off-shore” broker-dealer and offered its trading, commissions, and numerous other 
+services commonly provided by brokers.   
+ 
+22.   Oppenheimer’s AML Policies and Procedures prohibited “foreign financial 
+institutions” (“FFIs”) from trading on behalf of customers instead requiring each customer of a FFI 
+to create a separate account transacting on a fully disclosed basis.  To obtain an exemption from 
+Oppenheimer’s prohibition, FFIs were required to submit an application explaining (among other 
+things) the purpose of the account.  In connection with Oppenheimer’s surveillance analyst’s 
+January 2009 investigation into the suspicious third party journal, Gibraltar submitted a request to 
+maintain a single account at Oppenheimer notwithstanding the fact that it was trading on behalf of 
+customers.  Gibraltar’s exemption request, which was ultimately denied, stated that Gibraltar was a 
+“stock broker-dealer.”  The exemption request further indicated that Gibraltar intended to provide 
+trading services on behalf of customers, and that the “markets served” were the “United States, 
+Canada, [and] Europe.”     
+ 
+23. From July 2008 through June 2009, Oppenheimer routinely accepted large deposits 
+of penny stocks from Gibraltar either electronically or by accepting physical certificates.  These 
+deposits identified certain U.S. persons (individuals and/or entities) on the face of the security 
+certificates or as the beneficial owners of the shares.  Thereafter Oppenheimer followed Gibraltar’s 
+instructions to either sell the shares or transfer them to other broker-dealers.  The transactions were 
+suspicious because, although the deposits were made into Gibraltar’s proprietary account, the 
+securities belonged to Gibraltar’s customers and were in fact titled “for the benefit of” or “fbo” 
+Gibraltar’s customers.  In addition, Gibraltar deposited large blocks of penny stocks and sold a 
+significant portion of those securities shortly after deposit.  Accordingly, these deposits (and 
+subsequent sales) on behalf of Gibraltar’s customers should have raised red flags that Gibraltar was 
+participating in unlawful offerings or sales of securities that may have required registration or 
+exemption from registration.   
+ 
+8 
+ 
+ 24. Gibraltar’s deposits (and subsequent sales and transfers) of penny stocks were also 
+indicia of suspicious activity under Oppenheimer’s AML Policies and Procedures.  Oppenheimer’s 
+AML Policies and Procedures required Oppenheimer personnel to raise red flags such as clients 
+delivering physical certificates representing large blocks of thinly traded or low priced securities.  
+Nevertheless, Oppenheimer did virtually nothing to monitor Gibraltar’s sales of penny stocks and 
+failed to conduct any due diligence or further inquiry.  Oppenheimer’s personnel responsible for 
+reviewing Gibraltar’s trading failed to do anything to review Gibraltar’s sales to confirm that they 
+were legitimate transactions, as required by Oppenheimer’s AML Policies and Procedures, and not 
+suspicious transactions that required reporting.  Moreover, had due diligence and further inquiry 
+been conducted as required, Oppenheimer’s personnel would have likely detected additional 
+indicia of possible market manipulation; specifically, that Gibraltar’s deposits, sales and transfers 
+of thinly traded penny stock often coincided with suspicious news stories and dubious promotion.  
+Furthermore, on certain occasions after April 2009, Oppenheimer received regulatory or other 
+inquiries concerning Gibraltar’s activity.  On at least one occasion, Oppenheimer received a 
+specific inquiry asking whether Oppenheimer had AML concerns about Gibraltar’s possible 
+activity in unregistered offerings or sales of securities.  Because of AML-related inquiries and 
+other red flags of potential misconduct in the Gibraltar account, Oppenheimer had reason to 
+suspect that the transactions involved unlawful activity.   
+ 
+25. Oppenheimer had reason to suspect that Gibraltar’s U.S. customers may not have 
+been paying taxes (or not reporting income to the IRS) on the profits from the sales of their stocks 
+made by Gibraltar through the Oppenheimer account.  For example, Oppenheimer knew or should 
+have known that: (i) Gibraltar was selling penny stocks on behalf of its customers—many of whom 
+maintained addresses in the U.S.; (ii) Gibraltar’s IRS Form W-8BEN was false because it certified 
+that Gibraltar was the beneficial owner of the income in the Oppenheimer account; and (iii) 
+Gibraltar was located in a jurisdiction that it considered a tax haven.  As mentioned, on certain 
+occasions, various Oppenheimer employees (including certain Oppenheimer registered 
+representatives) accessed Gibraltar’s website.  Gibraltar’s website advertised that its customers 
+were not required to pay taxes on their profits.   
+ 
+E. OPPENHEIMER I VIOLATIONS 
+ 
+Broker-Dealer Registration Violations 
+ 
+ 26. Section 3(a)(4) of the Exchange Act defines a “broker” as “any person engaged 
+in the business of effecting transactions in securities for the account of others.”   Being “engaged in 
+the business”  is demonstrated by, among other things, regularity of participation through active 
+solicitation, the dollar amount of securities sold, and the extent to which advertisement and 
+investor solicitation are utilized.  
+ 
+27. In addition to regularity of participation, Section 3(a)(4) also requires that the 
+person effect securities transactions on behalf of others.  Among the indicia that a person is 
+effecting transactions on behalf of others are:  (1) active solicitation of investors; (2) receiving 
+9 
+ 
+transaction-based compensation; (3) facilitating or participating in the execution of transactions; 
+and (4) handling the securities or funds of others in connection with securities transactions.     
+ 
+28. Gibraltar used its Oppenheimer account to act as a “broker” within the meaning of 
+Section 3(a)(4) of the Exchange Act.  As described in Section III.D above, Gibraltar advertised its 
+brokerage services through its website.   Gibraltar solicited U.S. customers through its website, and 
+earned commissions executing transactions on behalf of United States persons through its 
+Oppenheimer account.  Gibraltar also took an active role in handling the securities and funds of 
+U.S. customers which was facilitated by Oppenheimer. 
+ 
+29. Oppenheimer knew that Gibraltar was acting as a broker within the meaning of 
+Section 3(a)(4) of the Exchange Act and that Gibraltar was engaged in brokerage activities in the 
+United States.  Oppenheimer also knew that Gibraltar:  (1) maintained a website that advertised its 
+services; (2) executed transactions on behalf of its customers through Oppenheimer; (3) charged 
+commissions; and (4) actively handled securities and funds for its customers.  In addition, 
+Oppenheimer knew that Gibraltar was not registered as a broker in the U.S.  
+ 
+30. By accepting share deposits on behalf of Gibraltar’s customers and thereafter 
+executing sales (and transfers) of penny stocks for proceeds of over $14.68 million, Oppenheimer 
+provided substantial assistance and aided and abetted and was a cause of Gibraltar’s violation of 
+Section 15(a) of the Exchange Act, which requires any broker or dealer that uses the mails or any 
+means of interstate commerce to effect transactions in, or to induce or attempt to induce purchases 
+or sales of securities (other than an exempted security or commercial paper, bankers’ acceptances, 
+or commercial bills) to register with the Commission in accordance with Section 15(b).   
+ 
+Anti-Money Laundering Violations  
+ 
+31. The Bank Secrecy Act (“BSA”), as amended by the USA PATRIOT Act, and  
+implemented under rules promulgated by FinCEN, requires that broker-dealers file Suspicious 
+Activity Reports (“SARs”) with FinCEN to report a transaction (or a pattern of transactions of 
+which the transaction is a part) conducted or attempted by, at, or through the broker-dealer 
+involving or aggregating to at least $5,000 that the broker-dealer knows, suspects, or has reason to 
+suspect: (1) involves funds derived from illegal activity or is conducted to disguise funds derived 
+from illegal activities; (2) is designed to evade any requirements of the Bank Secrecy Act; (3) has 
+no business or apparent lawful purpose and the broker-dealer knows of no reasonable explanation 
+for the transaction after examining the available facts; or (4) involves use of the broker-dealer to 
+facilitate criminal activity.  31 C.F.R. § 1023.320(a)(2) (“SAR Rule”). 
+ 
+32. Exchange Act Rule 17a-8 requires broker-dealers to comply with the reporting,  
+record-keeping and record retention requirements of the BSA. The failure to file a SAR as required 
+by the SAR Rule is a violation of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder, 
+and is enforceable by the Commission. 
+ 
+10 
+ 
+33. As a result of Gibraltar’s activity described in Section III.D above, Oppenheimer 
+knew, suspected or had reason to suspect that Gibraltar was using its Oppenheimer account to 
+facilitate unlawful activity, specifically, that Gibraltar was using its Oppenheimer account to:   
+ 
+a. participate in unregistered offerings and sales of securities in violation of 
+Section 5 of the Securities Act;   
+ 
+b. engage in penny stock market manipulation, in violation of Sections 10(b) 
+of the Exchange Act and 17(a) of the Securities Act;   
+ 
+c. evade the payment of U.S. taxes (or not report income to the IRS);   
+ 
+d. operate as a broker-dealer in the U.S. in violation of Section 15(a) of the 
+Exchange Act; and 
+ 
+e. Moreover, Gibraltar’s deposits and subsequent transfers of penny stocks 
+were suspicious because they lacked any apparent business or lawful 
+purpose. 
+ 
+  34. By failing to file SARs with FinCEN as required by the BSA as amended by the 
+PATRIOT Act with respect to any of Gibraltar’s activity described above, Oppenheimer willfully 
+violated Section 17(a) of the Exchange Act and Rule 17a-8.   
+ 
+Books-and-Records Violations 
+ 
+ 35. Section 17(a) of the Exchange Act provides that each broker-dealer “shall  
+keep for prescribed periods such records, furnish such copies thereof, and make and disseminate 
+such reports as the Commission, by rule, prescribes as necessary or appropriate in the public 
+interest, for the protection of investors, or otherwise in furtherance of the purposes of this title.”  
+Under Section 17(a)(1) of the Exchange Act and Rule 17a-3 promulgated thereunder, broker-dealer 
+are required to make and keep current certain specified books and records relating to their business.  
+Under Rule 17a-3(a)(2) broker-dealers are required to maintain “[l]edgers (or other records) 
+reflecting all assets and liabilities, income and expense and capital accounts.”  The requirement to 
+maintain books and records under Rule 17a-3 requires that they also be accurate.  Oppenheimer’s 
+books and records were inaccurate because they failed to recognize Oppenheimer’s tax liability 
+and expenses associated with the Gibraltar account.  
+ 
+36. U.S. broker-dealers are required to report sales of securities by each customer 
+(including the customer’s tax identification number (“TIN”)) who is a U.S. person to the IRS.  
+Sales of securities for customers who are not U.S. persons, however, are exempt from reporting.  
+U.S. broker-dealers are required to withhold 28% of all proceeds of sales of securities by U.S. 
+persons if they have not provided a Form W-9 with a valid TIN.  No such withholding is required 
+for customers who are not U.S. persons if their foreign status is established by a valid Form W-
+11 
+ 
+8BEN.  A U.S. broker-dealer may only rely on a Form W-8BEN to establish foreign status absent 
+actual knowledge or reason to know that the form is inaccurate otherwise.     
+ 
+37. As described in Section III.D above, Gibraltar submitted a Form W-8BEN, 
+“Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding,” in order to 
+obtain exemption from tax withholding.  Gibraltar’s W-8BEN certified, under penalties of perjury, 
+that Gibraltar was the sole owner of the income generated in its Oppenheimer account and that the 
+beneficial owner was not a U.S. person.  This certification was false.  Gibraltar was transacting on 
+behalf of its underlying customers—many of whom maintained U.S. addresses.   These underlying 
+customers (and not Gibraltar) were the beneficial owners of the securities sold from (and the 
+income generated in) Gibraltar’s account.  By submitting the false W-8BEN, Gibraltar was able to 
+avoid having Oppenheimer withhold taxes and/or report proceeds of the sale of securities income 
+to the IRS.   
+ 
+38. As described in Section III.D above, by February 2009 at the latest, Oppenheimer 
+became aware that Gibraltar deposited and sold securities for the benefit of Gibraltar’s underlying 
+customers.  It therefore knew or had reason to know that Gibraltar’s W-8BEN was false and could 
+no longer rely on Gibraltar’s W-8BEN.  At that point it was obligated to withhold 28% of the gross 
+proceeds from the sale of securities in Gibraltar’s account.    
+ 
+39. A U.S. broker-dealer that fails to back up withhold 28% of all proceeds of sales of 
+securities (and thereafter remit) taxes when it knows or has reason to know of facts indicating that 
+a withholding exemption form (such as a W-8BEN) is false or inaccurate is jointly and severally 
+liable for any amounts that were required to be withheld. 
+ 
+40. As described in Section III.D above during the period February 2009 through June 
+2009, Oppenheimer failed to withhold 28% of the gross proceeds from sales of securities in the 
+Gibraltar account and remit the amounts withheld to the IRS.  Accordingly, Oppenheimer was 
+liable for the amounts it was obligated to withhold and remit to the IRS.  As a result Oppenheimer 
+incurred an expense that it also failed to record in its books, records and ledgers.  Oppenheimer’s 
+books, records and ledgers were inaccurate because they did not reflect the tax withholding 
+liabilities and resulting expenses. 
+ 
+41. Pursuant to Rule 17a-3(a)(2) of the Exchange Act Oppenheimer was required to 
+maintain “[l]edgers (or other records) reflecting all assets and liabilities, income and expense and 
+capital accounts.”  Beginning in February 2009, these records did not accurately reflect tax 
+liabilities and associated expenses relating to the Gibraltar account.   
+ 
+42. Because its ledgers were inaccurate, Oppenheimer violated Section 17(a) of the 
+Exchange Act and Rule 17a-3(a)(2). 
+ 
+43. Rule 17a–3(a)(9) of the Exchange Act requires broker-dealers to maintain records 
+for each cash and margin account, showing, among other things, the name and address of the 
+beneficial owner.  As set forth above, Oppenheimer violated Section 17(a) and Rule 17a-3(a)(9) of 
+12 
+ 
+the Exchange Act by recording transactions for Gibraltar’s customers in an account inaccurately 
+maintained on Oppenheimer’s books and records as Gibraltar’s proprietary account. 
+ 
+F. OPPENHEIMER II FACTS 
+ 
+44. In October 2009, the Customer opened an account with Oppenheimer.  Its first 
+deposit, on October 6, 2009, was of 200 million QASP shares.  
+ 
+45. The Customer acquired penny stocks in the six issuers through wrap-around 
+agreements or through third-party stock purchase agreements.  In both scenarios, the transactions 
+were predicated upon the issuer owing a debt with no convertibility provision to an affiliate of the 
+issuer or an unaffiliated third party, such as a service provider, for more than one year.   
+  
+46. With respect to the securities of four issuers, QASP, MSOA, SBRH, and SSPT, the 
+Customer entered into wrap-around agreements with each issuer and an affiliate of the issuer 
+pursuant to which the affiliate assigned to the Customer the right to collect an amount owed to the 
+affiliate by the issuer in exchange for the Customer giving a promissory note to the issuer.  The 
+agreements between the Customer and issuer each added a convertibility provision pursuant to 
+which the Customer could convert the debt now owed to it by the issuer into common stock.  The 
+Customer then converted the debt into shares of the issuer, deposited and liquidated the shares in 
+its Oppenheimer account, and withdrew the proceeds.   
+  
+47. With respect to the securities of two issuers, ENTI and SREH, the Customer 
+entered into a stock purchase agreement with a third-party purportedly unaffiliated with the issuer 
+to whom the issuer owed a debt.  On the same day or shortly before the Customer entered the 
+agreement, the third party converted its debt into issuer shares with the consent of the issuer, even 
+though no conversion provision had been previously included with the debt.  Pursuant to the stock 
+purchase agreement, the third party then sold those shares to the Customer. 
+ 
+ 48. In most instances, the Customer had deposited and liquidated each tranche of the 
+six issuers’ penny stocks through its Oppenheimer account shortly after acquiring them.  In any 
+event, the Customer had liquidated all tranches of each issuer’s securities in less than eight months. 
+ 
+49. As a result of this pattern of acquisition and liquidation, the Customer owned the 
+following percentages of the outstanding shares over the dates given: 
+ 
+ 
+Security  Date range Percentage owned by Customer 
+QASP December 2009 to February 2010 23% 
+MSOA March 19, 2010 to June 29, 2010 18% 
+SBRH June 10, 2010 to July 27, 2010    49.6% 
+ENTI June 22, 2010 to July 28, 2010 31% 
+ 
+13 
+ 
+50. No registration statement was filed with the Commission or in effect with respect to 
+the conversion of the debt into shares, the Customer’s initial purchase of the securities, or the 
+Customer’s subsequent resales.  The Customer’s resales were effected through interstate 
+commerce.  
+ 
+51. The Customer represented to Oppenheimer that its resales qualified for the Rule 
+144 safe harbor and the Securities Act Section 4(a)(1) exemption from registration.   
+ 
+52. The Customer’s resales of the securities of all six issuers did not qualify for 
+exemption from registration because the Customer did not meet Rule 144(d)’s one-year holding 
+period requirement.  
+ 
+53. The Customer’s resales of four of the issuers—QASP, MSOA, ENTI, and SREH—
+also did not qualify for exemption from registration because there was no adequate current public 
+information available with respect to those issuers as required by Rule 144(c).   
+ 
+54. QASP shares were deposited at Oppenheimer by Deposit/Withdrawal At 
+Custodian, which is an electronic transfer of the shares from the transfer agent.  With respect to the 
+securities of the other five issuers, the Customer deposited the shares at Oppenheimer in the form 
+of physical certificates.   
+  
+55. The per-share price of the securities was in many cases below one cent, and never 
+exceeded $0.24 per share.  
+ 
+56. From the time the Customer began selling penny stocks through its Oppenheimer 
+account, Oppenheimer was aware or should have been aware that the Customer was engaging in 
+illegal unregistered distributions of securities based on the presence of red flags.  
+ 
+57. During the relevant period, for example, Oppenheimer personnel were aware that 
+the Customer’s business model was to acquire and immediately liquidate large blocks of shares for 
+the purpose of raising capital to finance penny stock issuers. 
+ 
+58. On January 13, 2009, the Financial Industry Regulatory Authority (“FINRA”) 
+issued Notice to Members 09-05 in which FINRA reminded firms of their obligations to determine 
+whether sales comply with the registration requirements of the federal securities laws.  FINRA 
+listed the red flags that broker-dealers should be on the alert for in identifying illegal unregistered 
+distributions.  The red flags were consistent with red flags previously identified by the Commission 
+as indicative of illegal unregistered distributions.   
+ 
+59. Oppenheimer’s compliance department issued internal guidance in October 2009, 
+in response to FINRA Notice 09-05, expressly referencing certain of these red flags which broker-
+dealers should be on the alert for in identifying illegal unregistered distributions.  The red flags 
+included the following: (i) a customer opens a new account and delivers physical certificates 
+representing a large block of thinly traded or “low-priced securities”; (ii) a customer has a pattern 
+14 
+ 
+of depositing physical share certificates, immediately selling the shares, and then withdrawing the 
+proceeds from the account; (iii) a customer deposits share certificates that have been recently 
+issued or represent a large percentage of the float of the security; and (iv) the lack of a restrictive 
+legend on deposited shares seems inconsistent with the date the customer acquired the securities or 
+the nature of the transactions in which the securities were acquired.   
+ 
+60. The Customer’s account activity exhibited a pattern of red flags identified in 
+Commission precedent and the FINRA notice indicating the transactions were part of illegal 
+unregistered distributions.  For example, the Customer opened the account in October 2009 and 
+deposited 2.5 billion shares of penny stocks, mostly in the form of physical certificates.  In many 
+instances, the Customer obtained the shares pursuant to conversion provisions put in place 
+coincident with or shortly before each share issuance.  The Customer had a pattern of depositing 
+and liquidating the shares and withdrawing the proceeds from each sale.  The certificates deposited 
+did not have restricted legends even though the Customer had only recently acquired them in a 
+private transaction with the issuer or third parties who themselves had recently acquired them from 
+the issuer.  In addition, the cumulative number of shares owned and sold over relatively short 
+periods of time constituted a significant percentage of the issued and outstanding shares.  The per 
+share price of each liquidated share of the six issuers was generally sub-penny and never exceeded 
+$0.24.   
+   
+61. Oppenheimer personnel became aware of these red flags raised by the Customer’s 
+account activity but did not reasonably follow up to determine whether the transactions were part 
+of an illegal unregistered distribution.  Because many of the Customer’s transactions described 
+above were for shares priced below a penny, the FA had to obtain senior management personnel’s 
+exceptions to the firm’s policy prohibiting the sale of sub-penny shares.  In granting the FA’s 
+requests, certain senior management personnel became aware of certain of these red flags.  
+ 
+62. Oppenheimer personnel did not conduct a reasonable inquiry sufficient to claim 
+reliance on the Section 4(a)(4) exemption.   
+ 
+63. For resale transactions of the securities of QASP, Oppenheimer did not ascertain 
+reasonably that an exemption from registration was available.  For the majority of the QASP 
+deposits and resales, Oppenheimer personnel did not gather any other information or inquire about 
+them.  Oppenheimer personnel did not receive attorney opinion letters from the Customer for any 
+deposits and resales.   
+ 
+64. For resale transactions of the securities of the remaining five issuers, the relevant 
+Branch Office generally made inquiries consisting of contacting the transfer agent; conducting 
+searches of databases for information, including adequate current public information, on the issuer; 
+and reviewing the agreement and other paperwork the Customer provided to determine that the 
+Customer owned the shares being deposited.  The Branch Office personnel conducting this inquiry 
+did not, however, reasonably review this information with a view towards determining whether the 
+transactions met any exemption from the registration requirements; nor could they have, as they 
+did not adequately understand Section 5 or Rule 144’s requirements.  As a result, these inquiries 
+15 
+ 
+either revealed facts that called into question the availability of the purported Rule 144 safe harbor, 
+on which the Branch Office personnel failed to follow up, or did not sufficiently address facts 
+necessary to support the representations of the Customer that a Rule 144 safe harbor was available 
+for its resale transactions.     
+ 
+65. In connection with most of the deposits of the securities of the five issuers, the 
+Customer also submitted an attorney opinion letter written on behalf of the issuer or the Customer 
+and directed to the transfer agent.  Those letters identified Rule 144 as the applicable safe harbor 
+allowing the Customer to use the Section 4(a)(1) exemption from the registration requirements of 
+the Securities Act and purported to explain why Rule 144 was available.  These attorney opinion 
+letters indicated that the legal conclusions were based primarily on documents provided by and 
+representations made by the Customer and issuers, and they indicated that the attorneys did not 
+independently verify the facts forming the basis for their opinions.      
+ 
+66.  Given that the pattern of recurring red flags of which Oppenheimer personnel was 
+aware strongly suggested that the Customer was engaged in illegal unregistered distributions of 
+securities, the attorney opinion letters that the Customer submitted did not provide Oppenheimer 
+with a reasonable basis upon which to conclude that the Rule 144 safe harbor was available.  First, 
+the letters with respect to ENTI and SREH applied only to the sale of the third-party to the 
+Customer, and on their face did not apply to the Customer’s resale of the shares.  Second, none of 
+the letters set forth all of the elements of Rule 144, nor did they explain how those elements were 
+met in the context of facts known to Oppenheimer which indicated that the elements were not met.  
+Third, all of the attorney opinion letters were based primarily on conclusory representations by the 
+issuers and the Customer.   
+ 
+67.  During the relevant period, Oppenheimer’s policies and procedures did not address 
+compliance with Section 5, including how to conduct a reasonable inquiry to determine whether a 
+customer’s transactions were subject to an available exemption from the registration requirements 
+of Section 5, except in relation to compliance with certain requirements of Rule 144.   
+ 
+68.       In response to trading in penny stocks, among other things, Oppenheimer 
+formulated policies designed to limit customers’ transactions in penny stocks and address capital 
+costs of clearing the stocks.  Although these policies purportedly sought to address potential 
+unregistered distributions, among other regulatory risks, no feature of the policies reflected 
+consideration of Section 5 requirements, except for the limited consideration of affiliate status. 
+  
+69.       Oppenheimer also did not adequately implement its policies and procedures to 
+prevent or detect Oppenheimer personnel’s Section 5 violations.   
+ 
+70. Before September 2010, Oppenheimer’s written policy required that all shares 
+subject to Rule 144 be reviewed and cleared by the firm’s National Sales department.  With respect 
+to physical stock certificates, the practice at the relevant Branch Office for identifying “restricted” 
+securities, however, was to see whether the certificate bore a restricted legend, and route only those 
+certificates bearing such a legend to this department.  The Branch Office did not route to this 
+16 
+ 
+department those certificates without a legend, even if they were accompanied by a Rule 144 
+opinion letter from outside counsel, unless it determined the customer may be an affiliate of the 
+issuer.   
+ 
+71.      Beginning around September 2010, Oppenheimer eliminated certain procedures 
+designed to detect or prevent Section 5 violations concerning resales of securities not stamped 
+“restricted” and accompanied by an opinion letter when Oppenheimer had the National Sales 
+department perform a limited review of the certificates bearing no restricted legends.  Personnel 
+from this National Sales department reviewed the deposit of SSPT shares, described above, under 
+this limited review but did not detect that the transactions failed to meet the requirements of Rule 
+144.   
+ 
+G. OPPENHEIMER II VIOLATIONS 
+   
+Section 5 Violations 
+ 
+72. Sections 5(a) and 5(c) of the Securities Act prohibit the offer and sale of securities 
+through interstate commerce or the mails, unless a registration statement is filed with the 
+Commission and is in effect, or the offer and sale are subject to an exemption.   
+ 
+73. No registration statement was filed with the Commission or in effect with respect to 
+the conversion of the debt into shares, the Customer’s initial purchase of the securities, or the 
+Customer’s subsequent resales.  The Customer’s resales were effected through interstate 
+commerce. 
+  
+74. Rule 144 provides a non-exclusive safe harbor for individuals or entities to sell 
+restricted or affiliate-owned shares without being deemed to be a statutory underwriter and 
+therefore qualify for Securities Act Section 4(a)(1)’s exemption from registration for “transactions 
+by any person other than an issuer, underwriter, or dealer.”  To qualify for the safe harbor, the 
+resale must meet each of the following conditions: the individual or entity must hold the shares of a 
+non-reporting issuer for at least a year prior to reselling them and there must be adequate current 
+public information available.  17 C.F.R. § 230.144(c) & (d).   
+  
+75. The Customer’s resale of the securities of the six issuers did not meet Rule 144’s 
+holding period requirement.  In circumstances involving a conversion or exchange of securities, 
+Rule 144(d)(3)(ii) allows a security holder which acquired a security in exchange for other 
+securities of the same issuer to tack the holding period back to the date at which the surrendered 
+security was first acquired.  The debts the Customer converted to acquire the shares did not qualify 
+as “securities” for purposes of Rule 144(d)(3)(ii).  See Reves v. Ernst & Young, 494 U.S. 56, 65 
+(1990).  Additionally, in this case, even if the debt had been a security from the outset, the 
+Customer could not tack back its holding period to that of previous affiliated owners.  See Resales 
+of Restricted and Other Securities, Securities Act Rel. No. 33-6099 (August 2, 1979), 1979 WL 
+174360 (at Item 33).  Thus, the Customer could not tack its holding period back to the onset of the 
+original debt.  Lastly, Rule 144(d)(2) requires payment in full before the holding period can 
+17 
+ 
+commence.  In this instance, the wrap-around agreements indicated that the Customer paid for the 
+QASP, MSOA, SBRH, and SSPT securities with a promissory note, which does not qualify as full 
+payment in this case.  17 C.F.R. §230.144(d)(2).  The Customer paid for the shares around the time 
+of the conversions, at which time the holding period commenced. 
+ 
+76. Further, the Customer’s resales of QASP, MSOA, ENTI, and SREH also did not 
+qualify for exemption from registration because there was no adequate current public information 
+available with respect to those issuers as required by Rule 144(c).   
+ 
+77. Section 4(a)(4) of the Securities Act exempts from the registration requirements of 
+Section 5 “brokers’ transactions executed upon customers’ orders on any exchange or in the over-
+the-counter market but not the solicitation of such orders.”  Section 4(a)(4) of the Securities Act is 
+unavailable when a broker-dealer “knows or has reasonable grounds to believe that the selling 
+customer’s part of the transaction is not exempt from Section 5 of the Securities Act.”  John A. 
+Carley, Exchange Act Rel. No. 57246, 2008 WL 268598, *8.  To rely on this exemption, the 
+broker-dealer must, among other things, conduct a reasonable inquiry into the facts surrounding the 
+proposed unregistered sale, and after such inquiry it must not be “aware of circumstances 
+indicating that the person for whose account the securities are sold is an underwriter with respect to 
+the securities or that the transaction is part of a distribution of the securities of the issuer.”  15 
+U.S.C. § 77d(a)(4); 17 CFR § 230.144(g)(4).  Section 2(a)(11) of the Securities Act defines an 
+underwriter as “any person who has purchased from an issuer, with a view to, or offers or sells for 
+an issuer in connection with, the distribution of any security, or participates or has a direct or 
+indirect participation in any such undertaking, or participates or has a participation in the direct or 
+indirect underwriting of any such undertaking.”  15 U.S.C. § 77b(a)(11). 
+ 
+78. From the time the Customer began selling penny stocks through its Oppenheimer 
+account, Oppenheimer was aware or should have been aware that the Customer was engaging in 
+illegal unregistered distributions of securities.   
+ 
+79. There were ample red flags, as noted in paragraph 61 of Section III.F above, of 
+which Oppenheimer personnel, including senior management, were aware that required 
+Oppenheimer to conduct a reasonable inquiry.   
+   
+80. A reasonable inquiry must be an “adequate inquiry under the circumstances.”  
+Wonsover, 205 F.3d at 409.  “The amount of inquiry called for necessarily varies with the 
+circumstances of particular cases.  A dealer who is offered a modest amount of a widely traded 
+security by a responsible customer, whose lack of relationship to the issuer is well known to him, 
+may ordinarily proceed with considerable confidence.  On the other hand, when a dealer is offered 
+a substantial block of a little-known security, either by persons who appear reluctant to disclose 
+exactly where the securities came from, or where the surrounding circumstances raise a question as 
+to whether or not the ostensible sellers may be merely intermediaries for controlling persons or 
+statutory underwriters, then searching inquiry is called for.”  Distribution by Broker-Dealers of 
+Unregistered Securities, Securities Act Rel. No. 33-4445 (emphasis added).    
+ 
+18 
+ 
+            81.     Given the specific red flags associated with the Customer’s deposits and resales of 
+the six securities, as noted in Section III.F above, Oppenheimer was required to engage in a 
+searching inquiry to properly rely on the Section 4(a)(4) brokers’ transaction exemption.  See 
+World Trade Financial Corp., et al., Exchange Act Rel. No. 66114, 8 (Jan. 6, 2012) (Commission 
+opinion), petition denied, 739 F.3d 1243 (9th Cir. 2014); Stone Summers & Co., et al., 45 S.E.C. 
+105, 108 (1972) (Commission opinion).  However, Oppenheimer personnel did not conduct a 
+reasonable inquiry sufficient to claim reliance on the Section 4(a)(4) exemption.   
+ 
+82. Brokers, however, in the face of recurring red flags suggesting that their customers 
+are engaging in unregistered distributions of securities, cannot satisfy their reasonable inquiry 
+obligations by relying on the mere representations of their customers, the issuers, or counsel for the 
+same, without reasonably investigating the potential for opposing facts.  See World Trade 
+Financial Corp. v. SEC, 739 F.3d 1243, 1249 (9th Cir. 2014) (rejecting the argument that under the 
+circumstances the duty of reasonable inquiry was met by reliance on third parties in conformity 
+with industry practice and stating “brokers rely on third–parties at their own peril, and will not 
+avoid liability through that reliance when the duty of reasonable inquiry rests with the brokers”);  
+Wonsover, 205 F.3d at 415-16 (rejecting broker’s argument that under the circumstances he 
+justifiably relied on the clearance of sales by his firm’s restricted stock department, the transfer 
+agent, and counsel).  A broker-dealer cannot “rely upon the absence of restrictive legends on the 
+stock certificates when the circumstances surrounding the transaction indicate the need for a 
+thorough investigation.”  Transactions in Securities of Laser Arms Corporations by Certain 
+Broker-Dealers, Exchange Act Rel. No. 34-28878, 13 (Feb. 14, 1991) (Commission opinion). 
+ 
+83. As described in paragraphs 64 and 65 of Section III.F, Oppenheimer personnel 
+collected information and made certain inquiries which either revealed facts that called into 
+question the availability of the purported Rule 144 safe harbor, on which the Branch Office 
+personnel failed to follow up, or did not sufficiently address facts necessary to support the 
+representations of the Customer that a Rule 144 safe harbor was available for its resale 
+transactions.  
+  
+84. Oppenheimer personnel received attorney opinion letters in connection with most 
+of the deposits of the securities of the five issuers other than QASP.  A broker may reasonably rely 
+on an attorney opinion concluding that an exemption from registration is available only where: (1) 
+that opinion letter describes “the relevant facts in sufficient detail to provide an explicit basis for 
+the legal conclusions stated,” Sales of Unregistered Securities by Broker-Dealers, Exchange Act 
+Rel. No. 9239 (July 7, 1971); and (2) the broker’s reasonable independent investigation does not 
+uncover contrary facts.   As noted in paragraph 67 of Section III.F, in the context of the red flags 
+known to Oppenheimer personnel, they could not rely on these letters because: (1) the letters with 
+respect to ENTI and SREH applied only to the sale of the third-party to the Customer, and on their 
+face did not apply to the Customer’s resale of the shares; (2) none of the letters set forth all of the 
+elements of Rule 144, nor did they explain how those elements were met in the context of facts 
+known to Oppenheimer which indicated that the elements were not met; and (3) all of the attorney 
+opinion letters were based primarily on conclusory representations by the issuers and the 
+Customer.   
+19 
+ 
+ 85.  As a consequence, Oppenheimer and its personnel could not claim the brokers’ 
+transaction exemption under Section 4(a)(4) with respect to the Customer’s unregistered resales of 
+securities, and willfully violated Sections 5(a) and (c).     
+ 
+ Failure Reasonably to Supervise   
+ 
+86. Section 15(b)(4)(E) of the Exchange Act provides that the Commission may 
+sanction a broker-dealer for failing reasonably to supervise, with a view to preventing violations of 
+the federal securities laws, another person subject to its supervision who commits such a violation.   
+ 
+87. Broker-dealers must establish procedures reasonably designed to prevent and detect 
+the particular violation at issue.  See Midas Securities, LLC, et al., Exchange Act Rel. No. 66200, 
+2012 WL 169138 at*12 (Jan. 20, 2012) (Commission opinion).  Procedures addressing the 
+unregistered sale of securities that fail to instruct sales staff on how to identify an illegal 
+unregistered distribution, such as providing guidance setting forth: (1) “‘reasonable inquiry’ 
+procedures … when customers [seek] to sell large amounts of an unknown stock to the public 
+without registration,” and (2) “how to determine whether a proposed sale was exempt from 
+registration, including asking their customer how, when, and under what circumstances the 
+customer acquired the stock” may be unreasonable.  Id.     
+ 
+88.  As described in paragraphs 68 and 69 of Section III.F, Oppenheimer did not 
+establish policies and procedures that addressed compliance with Section 5, including how to 
+conduct a reasonable inquiry to determine whether a customer’s transactions were subject to an 
+available exemption from the registration requirements of Section 5, except in relation to 
+compliance with certain requirements of Rule 144.   
+ 
+89.       Although Oppenheimer’s policies related to penny stocks purportedly sought to 
+address potential unregistered distributions, among other regulatory risks, except for the limited 
+consideration of affiliate status, no feature of the policies reflected consideration of the 
+requirements to comply with Section 5 and related rules and Commission interpretative statements.  
+ 
+90. In addition to establishing reasonable policies and procedures, a broker-dealer must 
+also have effective systems in place to implement them.  See Quest Capital Strategies, Inc., 
+Exchange Act Rel. No. 44935, 2001 WL 1230619 at *6 (Oct. 15, 2001) (Commission opinion).  A 
+system of follow up and review when irregularities are detected is also a critical part of the 
+implementation of policies and procedures.  See World Trade Fin. Corp., Exchange Act Rel. No. 
+66114, *11-12 (Jan. 6, 2012) (Commission opinion).  
+ 
+91.       Oppenheimer also did not adequately implement its policies and procedures to 
+prevent or detect Oppenheimer personnel’s Section 5 violations.  Before September 2010, 
+Oppenheimer’s written policy required that all shares subject to Rule 144 be reviewed and cleared 
+by a National Sales department, but the Branch Office did not route to this department physical 
+stock certificates without a restricted legend, even if they were accompanied by a Rule 144 opinion 
+letter from outside counsel, unless it determined the customer may be an affiliate of the issuer.  If 
+20 
+ 
+the firm’s written policy had been reasonably implemented and all certificates subject to Rule 144 
+had been routed to this department for review, Oppenheimer might have detected and prevented 
+Oppenheimer personnel’s Section 5 violations. 
+ 
+92.      Beginning around September 2010, Oppenheimer eliminated certain procedures 
+designed to detect or prevent Section 5 violations concerning resales of securities not stamped 
+“restricted” and accompanied by an opinion letter when Oppenheimer had the National Sales 
+department perform a limited review of the certificates bearing no restricted legends.  As a result, 
+they did not prevent the resulting SSPT resale that violated Sections 5(a) and (c) which they 
+otherwise might have if they had subjected the transactions to the more fulsome review for 
+compliance with the requirements of Rule 144. 
+ 
+ 93.      As a result of Oppenheimer’s failure to establish reasonable policies and procedures 
+and failure to implement its policies and procedures, Oppenheimer failed reasonably to supervise 
+with a view to prevent and detect the violations of Section 5 by Oppenheimer personnel.   
+  
+H.     UNDERTAKINGS 
+ 
+Oppenheimer has undertaken to: 
+ 
+94. Independent Compliance Consultant.   With respect to its retention of an 
+independent compliance consultant, Oppenheimer has agreed to the following undertakings: 
+ 
+a. Oppenheimer will retain the services of an independent consultant (the 
+“Independent Consultant”) that is not unacceptable to the Commission 
+staff.  The Independent Consultant’s compensation and expenses shall be 
+borne exclusively by Oppenheimer.  Prior to the retention of the 
+Independent Consultant, Oppenheimer will provide to the staff of the 
+Commission a copy of the engagement letter detailing the Independent 
+Consultant’s responsibilities, which includes the reviews to be made by 
+the Independent Consultant as described in this Order.
+ 
+ 
+b. Oppenheimer shall require that the Independent Consultant conduct a 
+review of Oppenheimer’s policies and procedures as they relate to 
+compliance with Section 5 of the Securities Act,
+ Bank Secrecy Act, the 
+Patriot Act, Oppenheimer’s AML program and proper recognition of 
+liabilities and expenses associated with accounting for failure to withhold 
+taxes and report on income on accounts of foreign entities trading on 
+behalf of customers, and to report income for U.S. customers trading 
+through foreign financial institutions.   
+ 
+ 
+c. Within one hundred twenty (120) days after the entry of this Order, the 
+Independent Consultant shall submit a written and dated report of its 
+finding to Oppenheimer and to the Commission staff (the “Report”).  
+21 
+ 
+Oppenheimer shall require that each Report include a description of the 
+review performed, the names of the individuals who performed the review, 
+the conclusions reached, the Independent Consultant’s recommendations 
+for changes in or improvements to Oppenheimer’s policies and 
+procedures, and a procedure for implementing the recommended changes 
+in or improvements to Oppenheimer’s policies and procedures.  
+ 
+d. Oppenheimer shall adopt all recommendations contained in the Report 
+within sixty (60) days of the Report; provided, however, that within thirty 
+(30) days after the date of the Report, Oppenheimer shall in writing advise 
+the Independent Consultant and the Commission staff of any 
+recommendations that Oppenheimer considers to be unduly burdensome, 
+impractical, or inappropriate.  With respect to any recommendation that 
+Oppenheimer considers unduly burdensome, impractical, or inappropriate, 
+Oppenheimer 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. 
+ 
+ 
+e. As to any recommendation with respect to Oppenheimer’s policies and 
+procedures on which Oppenheimer and the Independent Consultant do not 
+agree, Oppenheimer and the Independent Consultant shall attempt in good 
+faith to reach an agreement within sixty (60) days after the date of the 
+Report. Within fifteen (15) days after the conclusion of the discussion and 
+evaluation by Oppenheimer and the Independent Consultant, Oppenheimer 
+shall require that the Independent Consultant inform Oppenheimer and the 
+Commission staff in writing of the Independent Consultant’s final 
+determination concerning any recommendation that Oppenheimer 
+considers to be unduly burdensome, impractical, or inappropriate.  
+Oppenheimer shall abide by the determinations of the Independent 
+Consultant and, within thirty (30) days after final agreement between 
+Oppenheimer and the Independent Consultant or final determination of the 
+Independent Consultant, whichever occurs first, Oppenheimer shall adopt 
+and implement all of the recommendations that the Independent 
+Consultant deems appropriate.
+ 
+ 
+f. Within thirty (30) days of Oppenheimer’s adoption of all of the 
+recommendations in the Report that the Independent Consultant deems 
+appropriate, as determined pursuant to the procedures set forth herein, 
+Oppenheimer shall certify in writing to the Independent Consultant and 
+the Commission staff that Oppenheimer has adopted and implemented all 
+of the Independent Consultant’s recommendations in the Report.  
+Thereafter, beginning one hundred eighty days (180) after the entry of this 
+Order, the Independent Consultant shall conduct such review as it deems 
+appropriate to verify that Oppenheimer has appropriately implemented the 
+22 
+ 
+recommendations in the Report.  Prior to two hundred and ten (210) days 
+after the entry of this Order, the Independent Consultant shall confirm to 
+the Commission staff that Oppenheimer has adopted and implemented all 
+of the Independent Consultant’s recommendations in the Report.  Unless 
+otherwise directed by the Commission staff, all Reports, certifications, and 
+other documents required to be provided to the Commission staff shall 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
+ and Gerald Hodgkins, Associate Director, Division of 
+Enforcement, Securities and Exchange Commission, 100 F Street, NE, 
+Washington, DC 20549-6010, or such other address as the Commission 
+staff may provide. 
+ 
+g. On the anniversary of the date of the certification described in 
+subparagraph 94(f), for a period of four (4) years, the Independent 
+Consultant shall conduct a review to determine whether: (1) Oppenheimer 
+is implementing all of the Independent Consultant’s recommendations 
+adopted pursuant to the foregoing provisions and this provision;  and, (2) 
+there have been any changes in the law or Oppenheimer’s business 
+operations such that the recommendations should be amended and updated 
+to take into account any such changed circumstance.  Within forty-five 
+(45) days after each anniversary date of the certification, the Independent 
+Consultant shall submit a written and dated report of its findings to 
+Oppenheimer and the Commission staff (the “Anniversary Report”).   
+Oppenheimer shall require that each Anniversary Report include a 
+description of the review performed, the names of the individuals who 
+performed the review, the conclusions reached, and any further 
+recommendations concerning changes in or improvements to 
+Oppenheimer’s policies and procedures directed at effecting 
+implementation of the recommendations in the initial Report or an 
+Anniversary Report or directed at addressing any changes in the law or 
+business.  Any recommendations made in an Anniversary Report shall be 
+subject to the same processes set forth in subparagraphs 94(d) through 
+94(f).  Each successive review pursuant to this subparagraph shall include 
+a review of any recommendations implemented as a result of the Report or 
+Anniversary Report.   
+ 
+h. Oppenheimer shall cooperate fully with the Independent Consultant and 
+shall provide the Independent Consultant with access to such of its files, 
+books, records, and personnel as are reasonably requested by the 
+Independent Consultant for review.   
+ 
+i. To ensure the independence of the Independent Consultant, Oppenheimer: 
+(1) shall not have the authority to terminate the Independent Consultant or 
+23 
+ 
+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.   
+ 
+j. Oppenheimer shall require the Independent Consultant to enter into an 
+agreement that provides for the period of engagement and for a period of 
+two (2) years from completion of the engagement, the Independent 
+Consultant shall not enter into any employment, consultant, attorney-
+client, auditing or other professional relationship with Oppenheimer, or 
+any of its present or former affiliates, directors, officers, employees, or 
+agents acting in their capacity as such.  The agreement will also provide 
+that the Independent Consultant will require that any firm with which the 
+Independent Consultant is affiliated or of which the Independent 
+Consultant is a member, and any person engaged to assist the Independent 
+Consultant in the performance of the Independent Consultant’s 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 Oppenheimer, 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 (2) years after the engagements.  
+ 
+95. Recordkeeping.  Oppenheimer shall preserve for a period of not less than six years 
+from the end of the fiscal year last used, the first two years in an easily accessible 
+place, any record of its compliance with the undertakings set forth herein. 
+ 
+96. Deadlines.  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. 
+ 
+97. Certifications of Compliance by Respondents.  Oppenheimer shall certify, in 
+writing, compliance with its 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 Oppenheimer agrees to provide such evidence.  The certification 
+and supporting material shall be submitted to Scott W. Friestad, Associate 
+Director, Division of Enforcement, Securities and Exchange Commission, 100 F 
+Street, N.E., Washington, D.C.  20549-5010 and Gerald Hodgkins, Associate 
+Director, Division of Enforcement, Securities and Exchange Commission, 100 F 
+Street, NE, Washington, DC 20549-6010, or such other address as the staff of the 
+24 
+ 
+Commission may provide, 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 Oppenheimer’s Offer. 
+ 
+Accordingly, pursuant to Section 8A of the Securities Act and Sections 15(b) and 21C of 
+the Exchange Act it is hereby ORDERED that Oppenheimer:  
+ 
+1. cease and desist from committing or causing any violations and any future 
+violations of Sections 15(a) and 17(a) of the Exchange Act and Rules 17a-3 and 
+17a-8 thereunder and of Section 5 of the Securities Act;   
+ 
+2. is censured; 
+ 
+3. shall pay to the Commission $10 million comprised of $4,168,400 in disgorgement; 
+$753,471 in prejudgment interest; and $5,078,129 in civil penalties.  A penalty 
+amount that includes an additional $10 million is appropriate for the conduct at 
+issue herein, however, in light of the civil money penalty paid by Oppenheimer to 
+FinCEN in In the Matter of Oppenheimer & Co. Inc., Number 2015-01, no 
+additional penalty is being ordered at this time.  Oppenheimer’s total obligation to 
+pay in this proceeding would be $20 million in the event it fails to pay its $10 
+million of a civil money penalty to FinCEN. 
+Payment of disgorgement, prejudgment interest, and $78,129 in civil penalties will 
+be due ten (10) days after institution of this Order, with the remaining $5,000,000 in 
+civil penalties, and interest accrued pursuant to 31 U.S.C. 3717, due no later than 
+the second anniversary of the institution of this Order.  The Commission 
+acknowledges that Oppenheimer has placed certain assets in escrow which 
+Oppenheimer believes will satisfy the payment required to be made by the second 
+anniversary of the institution of this Order; however, Oppenheimer retains its 
+payment obligation irrespective of any amounts realized by payment from, sale of, 
+or redemption of, any escrowed assets. 
+ 
+If any payment is not made by the date the payment is required by this Order, the 
+entire outstanding balance of disgorgement, prejudgment interest, and civil 
+penalties, plus any additional interest accrued pursuant to SEC Rule of Practice 600 
+or pursuant to 31 U.S.C. 3717, shall be due and payable immediately, without 
+further application.  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;  
+25 
+ 
+ 
+(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 (for transfer to the general fund of United States Treasury in 
+accordance with Exchange Act Section 21F(g)(3)) 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 Oppenheimer & Co. 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 Scott W. Friestad, Associate Director, Division of 
+Enforcement, Securities and Exchange Commission, 100 F Street, NE, Washington, 
+DC 20549-5030 and Gerald Hodgkins, Associate Director, Division of 
+Enforcement, Securities and Exchange Commission, 100 F Street, NE, Washington, 
+DC 20549-6010.    
+4.  shall comply with the undertakings enumerated in Section III.H above. 
+ 
+  
+By the Commission. 
+ 
+ 
+ 
+ 
+Brent J. Fields 
+Secretary 

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+1 
+ 
+UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74177 / January 29, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3624 / January 29, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16293 
+ 
+ 
+In the Matter of 
+ 
+LAURIE BEBO, and  
+            JOHN BUONO, CPA 
+ 
+Respondents. 
+ 
+ORDER MAKING FINDINGS, AND 
+IMPOSING REMEDIAL SANCTIONS AND 
+A CEASE-AND-DESIST ORDER AGAINST 
+JOHN BUONO 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 to accept the Offer of Settlement submitted by John Buono, CPA (“Buono” or 
+“Respondent”) pursuant to Rule 240(a) of the Rules of Practice of the Commission, 17 C.F.R. § 
+201.240(a), for the purpose of settlement of these proceedings initiated against Respondent on 
+December 3, 2014, pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 
+(“Exchange Act”) and Rule 102(e) of the Commission’s Rules of Practice. 
+ 
+ II. 
+ 
+ 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 
+Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Against John 
+Buono Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) 
+of the Commission’s Rules of Practice (“Order”), as set forth below. 
+ 
+III. 
+ 
+2 
+ 
+On the basis of this Order and Respondent’s Offer of Settlement (“Offer”), the Commission 
+finds that1: 
+A.  Summary 
+1. This matter involves disclosure fraud, a fraudulent scheme, lying to auditors, and 
+reporting, record-keeping and internal controls violations by Laurie Bebo (“Bebo”) and Buono, 
+respectively the CEO and CFO of Assisted Living Concepts, Inc. (“ALC”).  During the relevant 
+period, ALC was a publicly-traded assisted living and senior residence provider headquartered in 
+Menomonee Falls, Wisconsin. 
+2. From 2009 through early 2012, Bebo and Buono knew, or were reckless in not 
+knowing, that ALC misrepresented in its Forms 10-K and 10-Q that it was in compliance with 
+occupancy and financial covenants included in a lease pursuant to which ALC leased eight of its 
+senior residence facilities.  Furthermore, Bebo and Buono undertook an elaborate scheme to hide 
+ALC’s lack of compliance with the covenants.  Bebo and Buono engaged in the misconduct to 
+avoid defaulting on the lease, which would have required, among other things, ALC to pay the 
+landlord the amount of rent due on the remaining term of the lease.  That amount was between $16 
+million and $25 million in the relevant time frame.   
+3. To execute the scheme, Bebo and Buono directed ALC personnel to include in the 
+lease covenant calculations large numbers of fabricated occupants who did not reside at the 
+facilities.  Bebo and Buono further directed ALC personnel to record journal entries increasing 
+revenue associated with the fabricated occupancy in the accounts for the leased facilities.  ALC 
+made a corresponding journal entry decreasing revenue each period to mask the fraud in ALC’s 
+accounting records.  To establish the number of fabricated occupants to be included in the covenant 
+calculations, ALC personnel, at Bebo and Buono’s direction, reverse-engineered the requisite 
+number of fabricated occupants needed to meet the covenants.  Then, shortly after the end of each 
+quarter, ALC provided the facilities’ landlord with covenant calculations which included the 
+fabricated occupants and the associated revenue, thus falsely showing that ALC was meeting the 
+covenants. 
+4. In furtherance of the scheme, Bebo and Buono each quarter created lists identifying 
+the fictitious occupants and their associated lengths of stay at the facilities.  These lists contained 
+the following types of non-residents that Bebo and Buono directed ALC to include in the covenant 
+calculations: (1) Bebo’s family members and friends; (2) family members (including the seven-
+year old nephew) of one of Bebo’s friends; (3) employees who did not travel to, let alone stay at, 
+the facilities; (4) employees of the leased facilities, who lived nearby and rarely or never stayed at 
+those facilities; (5) employees who had been terminated by ALC or employees who ALC 
+anticipated hiring but who had not yet started; (6) employees who ALC listed as occupants of 
+multiple facilities for the same time period; and (7) other individuals who were neither ALC 
+employees nor residents of the leased facilities.  
+5. ALC’s landlord never agreed to the inclusion of such individuals in the covenant 
+calculations.  In addition, ALC’s landlord never knew that ALC was including such individuals in 
+                                                 
+1The 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 
+ 
+the covenant calculations and never knew that ALC would have failed the covenants, by significant 
+amounts, without their inclusion. 
+6. Nevertheless, in each ALC Form 10-K and 10-Q from the third quarter of 2009 to 
+the fourth quarter of 2011, Bebo and Buono certified the accuracy of ALC’s representations that it 
+was in compliance with the lease covenants.  Bebo and Buono knew, or were reckless in not 
+knowing, that ALC’s representations about the lease covenants were false, misleading, and omitted 
+material information. 
+ B. Respondents 
+7. Bebo, age 43, is a resident of Hartland, Wisconsin.  From November 2006 through 
+May 2012, when she was terminated, Bebo was ALC’s President and Chief Executive Officer.  
+From May 2008 through July 2012, Bebo was also a member of ALC’s Board of Directors.   
+8. Buono, age 51, is a resident of Pewaukee, Wisconsin.  From October 2006 through 
+July 2013, Buono was ALC’s Chief Financial Officer, Senior Vice President, and Treasurer.  From 
+March 1988 through at least September 2013, Buono was a licensed certified public accountant in 
+the state of Wisconsin.   
+ C. Relevant Entities 
+9. ALC was a Nevada corporation with its principal place of business in Menomonee 
+Falls, Wisconsin.  Between November 2006 and July 2013, ALC’s common stock was registered 
+with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the New York 
+Stock Exchange.  During the relevant time period, ALC’s primary business was the operation of 
+senior living residences in the United States.  In February 2013, ALC agreed to be sold to a private 
+equity firm.  In July 2013, when the sale was completed, ALC’s stock ceased trading on the New 
+York Stock Exchange. 
+10. Ventas, Inc. (“Ventas”) is a Delaware corporation with its principal place of 
+business in Chicago, Illinois.  Ventas’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.  Ventas is a 
+real estate investment trust (“REIT”) with a portfolio of nearly 1,500 senior housing and healthcare 
+properties in the United States and Canada.   
+ D. ALC and the Ventas Lease 
+11. During the relevant time period, approximately 2008 through mid-2012, ALC 
+operated more than 200 senior living residences in the United States, totaling more than 9,000 
+units.  ALC employed approximately 4,200 people, approximately 200 of whom worked at:  (1) 
+ALC’s corporate headquarters; or (2) regional or divisional levels, which meant that they worked 
+out of their home or at a regional office.  The remainder of ALC’s employees worked at the 
+assisted living facilities themselves.  For the years 2008 through 2012, ALC’s annual revenues 
+ranged from $225 to $234 million. 
+12. In 2007, Bebo and ALC’s Board of Directors were interested in expanding ALC’s 
+operations and were offered an opportunity to acquire the operations of a firm which operated eight 
+4 
+ 
+assisted living facilities that the firm leased from Ventas and were located in Alabama, Florida, 
+Georgia, and South Carolina (the “Ventas facilities”).  In order to acquire the operations of the 
+Ventas facilities, ALC was required to enter into a lease with Ventas.   
+13. As of January 1, 2008, ALC acquired the operations of the Ventas facilities and 
+simultaneously entered into a lease with Ventas to operate those facilities (the “Ventas lease”).  
+These facilities were comprised of approximately 540 total units.  The Ventas lease specifically 
+provided that it could only be modified by a writing signed by authorized representatives of both 
+ALC and Ventas and that all “notices, demands, requests, consents, approvals and other 
+communications” under the lease were to be in writing with a copy to Ventas’s general counsel. 
+14. ALC entered the Ventas lease even though it considered various provisions of the 
+lease to be potentially onerous.  For instance, the lease contained financial covenants (the 
+“financial covenants”), which required that ALC maintain: (1) a quarterly occupancy of at least 
+65% at each individual Ventas facility; (2) a trailing twelve-month occupancy of at least 75% at 
+each individual facility; (3) a trailing twelve-month occupancy of at least 82% for the eight-facility 
+portfolio; (4) a trailing twelve-month coverage ratio of at least 0.8 for each facility; and (5) a 
+trailing twelve-month coverage ratio of at least 1.0 for the entire portfolio.  The lease defined 
+“coverage ratio” as each facility’s cash flow for an applicable period, divided by ALC’s rent 
+payments to Ventas for that facility.  The cash flow component of the coverage ratio calculation 
+generally correlated to a facility’s occupancy, such that a decline in occupancy would result in an 
+attendant decline in coverage ratio, and vice-versa. 
+15. The lease’s default provisions had significant consequences to ALC.  In the event 
+that ALC violated any of the financial covenants, Ventas could:  (1) terminate the lease in its 
+entirety; (2) evict ALC from all eight facilities; and (3) require ALC to pay damages equal to the 
+net present value of the unpaid rent for the remaining term of the lease (through March 2015) for 
+the entire portfolio.  These damages as of ALC’s 2009, 2010, and 2011 fiscal year end would have 
+been $24.9 million, $20.9 million and $16.7 million, respectively.  For ALC’s 2009, 2010 and 
+2011 fiscal years, the damage amounts approximated 101%, 81%, and 46% respectively of ALC’s 
+income from operations before income taxes, and 56%, 45%, and 31% respectively of ALC’s cash 
+flows from operations.  Such amounts were material to ALC’s financial statements. 
+16. While Bebo was a strong proponent of entering the Ventas lease, certain ALC 
+officers and directors advocated against entering the lease because of the lease’s many 
+disadvantageous provisions, including those referenced above related to the financial covenants.  In 
+response to those concerns, Bebo assured the directors that she was confident that ALC could meet 
+the financial covenants.   
+17. On January 7, 2008, ALC filed a Form 8-K which announced that it had entered the 
+lease with Ventas.  The Form 8-K specifically disclosed the financial covenants and the 
+consequences for non-compliance discussed above, and ALC attached the lease as an exhibit to the 
+filing. 
+E. Less Than a Year After Entering the Ventas Lease, Bebo and Buono     
+Realized that a Financial Covenant Default Was Likely  
+5 
+ 
+18. Under the terms of the Ventas lease, ALC was required to demonstrate its 
+compliance with the financial covenants on a quarterly basis.  In that regard, ALC was required to 
+provide Ventas within 45 days of the end of a quarter:  trailing twelve month income statements for 
+each Ventas facility and for the entire portfolio; quarterly financial statements for each facility, 
+prepared in accordance with Generally Accepted Accounting Principles (“GAAP”); and schedules 
+documenting compliance with the financial covenants.  In addition, an ALC executive was 
+required to attest to the completeness and accuracy of such information by signing an officer’s 
+certificate and providing it to Ventas along with the information. 
+19. Bebo, Buono, and various members of ALC’s accounting department regularly 
+reviewed and monitored occupancy and coverage ratios at the Ventas facilities to ensure that ALC 
+was meeting the financial covenants and to prepare the required documentation.  Both Bebo and 
+Buono were generally aware of the facilities’ occupancy rates and coverage ratios at all times in 
+the relevant time period.   In addition, ALC’s board required Bebo and Buono to report on ALC’s 
+compliance with the covenants in advance of meetings.  At each board meeting during the relevant 
+time period (from 2008 through early 2012), Bebo and Buono reported that ALC was in 
+compliance with the covenants. 
+20. Ventas also paid close attention to ALC’s compliance, and considered occupancy 
+and coverage ratio to be key metrics of its properties’ performance.  For these reasons, Ventas 
+reviewed and scrutinized the financial covenant calculations, quarterly financial statements and 
+other information which accompanied ALC’s officer certificates.  Ventas personnel also held 
+quarterly conference calls with Bebo and Buono and periodically visited the facilities, during 
+which Ventas representatives asked detailed questions about the financial performance of the 
+Ventas facilities. 
+21. Shortly after ALC assumed operations of the Ventas facilities, occupancy began 
+declining.  In response to concerns raised by the board in the August 2008 meeting regarding 
+ALC’s ability to meet the financial covenants, Buono prepared a memo for the November board 
+meeting.  That memo, which Bebo reviewed and approved, stated that ALC needed immediate 
+improvement at four of the facilities to meet the financial covenants.  By mid-January 2009, Bebo 
+and Buono both knew that ALC would likely default on one or more of the financial covenants in 
+the near future.   
+F. Bebo and Buono’s Scheme to Include ALC Employees and Other Non-
+Residents in the Ventas Lease Covenant Calculations  
+22. In an attempt to avoid defaulting on the financial covenants, Bebo initially devised 
+a plan to include ALC employees who stayed overnight at the Ventas facilities as occupants of the 
+properties for purposes of the financial covenant calculations.  At certain times, a limited number 
+of ALC corporate, regional and divisional level employees travelled to the Ventas facilities as part 
+of their normal job responsibilities.  In an effort to save money, Bebo had directed that some of 
+those employees stay overnight at the facilities in lieu of staying at a hotel.   
+23. Bebo sought the advice of ALC’s general counsel on the permissibility of including 
+employees who stayed at the Ventas facilities in the financial covenant calculations.  In response, 
+on January 19, 2009, the general counsel wrote Bebo and Buono an email advising them that for 
+6 
+ 
+such a practice to be permissible under the Ventas lease, ALC needed to fully disclose the practice 
+to Ventas and obtain Ventas’s approval in writing.  Nevertheless, ALC never obtained Ventas’s 
+written approval to include employees in the covenant calculations or disclosed to Ventas the 
+scheme discussed herein. 
+24. Beginning in the first quarter of 2009, occupancy at the Ventas facilities had 
+declined to the point where ALC was in violation of certain financial covenants in the Ventas lease.  
+Rather than report the defaults to Ventas, ALC’s board of directors, or ALC’s shareholders, Bebo 
+directed Buono and his staff to include employees and other non-residents in the financial covenant 
+calculations.   
+25. Among the non-residents that ALC included in the financial covenant calculations at 
+Bebo and Buono’s direction were: 
+a. ALC employees who never stayed at or traveled to the Ventas facilities;  
+b. ALC employees who occasionally stayed at the Ventas facilities, but were 
+included in the financial covenant calculations beyond the limited periods 
+that they actually stayed at the facilities;  
+c. ALC employees who worked at the Ventas facilities, who lived nearby and 
+did not stay overnight at the facilities;  
+d. Bebo’s friends and family members, including her parents and her husband 
+(under different last names than Bebo);  
+e. Family members, including the seven-year old nephew, of one of Bebo’s 
+friends;  
+f. Former ALC employees who had been terminated by the company;  
+g. Employees who ALC anticipated hiring but who had not yet started working 
+for the company;  
+h. ALC employees and other individuals who ALC listed as occupants of 
+multiple Ventas facilities for the same time period; and  
+i. Other individuals who were neither ALC employees nor residents of the 
+Ventas facilities.  
+26. At Bebo and Buono’s direction, from the third quarter of 2009 to the fourth quarter 
+of 2011, ALC included between 45 and 103 non-residents, such as those persons described in the 
+preceding paragraph, in the Ventas financial covenant calculations.  When ALC included such non-
+residents in the financial covenant calculations, ALC generally included each non-resident in the 
+calculations for every day of the quarter.  For each quarter during that time period, ALC would have 
+failed certain occupancy and coverage ratio requirements in the Ventas lease, by significant 
+margins, without the inclusion of such non-residents in the financial covenant calculations. 
+7 
+ 
+27. Ventas never agreed to, and was unaware of, ALC’s inclusion of such non-residents 
+in the financial covenant calculations.  Ventas was also unaware that, without the inclusion of such 
+individuals, ALC would have failed the financial covenant calculations.   
+G. ALC’s Process for Including Employees and Other Non-Residents in the 
+Ventas Lease Covenant Calculations  
+28. To effectuate the above-described scheme, ALC personnel developed a complex 
+process to determine the required number of employees and other non-residents needed to meet the 
+financial covenants.  The process involved the following steps, all of which were performed as 
+directed by Buono, with Bebo’s approval, or performed by Bebo and Buono themselves.   
+29. First, after the end of each month in a given quarter, ALC accounting personnel 
+determined the amount by which ALC would fail any of the financial covenants.  Then, ALC 
+personnel reverse-engineered the number of non-residents necessary for the month to at least meet, 
+if not exceed, the financial covenants.  In doing so, ALC presumed that each non-resident would be 
+included in the financial covenant calculations for every day of the month.   
+30. ALC then prepared monthly journal entries which recorded revenue associated with 
+the non-residents’ inclusion in the financial covenant calculations.  These journal entries:  (1) 
+increased revenue for the individual Ventas facilities; and (2) decreased revenue in the same 
+amount in a corporate revenue account.  Either Buono or Bebo initialed the entry before it was 
+recorded in ALC’s books and records.   
+31. After the revenue for the last month of a given quarter was recorded, ALC 
+accounting personnel performed the financial covenant calculations, including the above-
+referenced non-resident occupancy and revenue adjustments, to ensure that all the financial 
+covenants had been met.   
+32. Following the end of each quarter, after ALC calculated the number of non-residents 
+to include in the financial covenant calculations, Bebo personally determined the identities of the 
+non-residents that ALC would include in the financial covenant calculations, and provided a list of 
+such individuals to Buono and ALC accounting personnel, who then provided the list to ALC’s 
+auditors.  
+33. Each quarter, beginning with the first quarter of 2009, ALC prepared and sent to 
+Ventas: (1) the quarterly financial covenant calculations which included the above-referenced non-
+residents and attendant revenue, and thus showed ALC meeting or exceeding the financial 
+covenants; (2) financial statements for the Ventas facilities which incorporated the revenue 
+associated with the non-residents; and (3) an officer’s certificate signed by Buono in which he 
+attested that the information provided was complete and accurate and that the financial statements 
+for the Ventas facilities complied with GAAP.  The quarterly materials ALC sent to Ventas did not 
+reference the inclusion of non-residents in the covenant calculations. 
+H. Bebo and Buono Actively Sought to Prevent Ventas from Learning           
+About the Inclusion of Non-Residents in the Covenant Calculations 
+8 
+ 
+34. At Buono’s and Bebo’s direction, ALC personnel did not provide Ventas with any 
+information indicating that ALC had included non-residents in the financial covenant calculations.  
+As a result, Ventas was unaware that ALC was including non-residents in the financial covenant 
+calculations.  Moreover, rather than disclose the inclusion of the non-residents in the financial 
+covenant calculations, Bebo and Buono employed a variety of measures to hide the practice from 
+Ventas. 
+35. For instance, on a number of occasions, Bebo or Buono provided Ventas with 
+fictitious explanations for quarterly occupancy or coverage ratio changes at the Ventas facilities in 
+lieu of providing the only possible truthful explanation, which was an increase or decrease in the 
+number of non-residents being included in the financial covenant calculations. 
+36. On at least two occasions, Buono changed the number of non-residents being 
+included in the financial covenant calculations to avoid arousing suspicion on the part of Ventas.  
+Buono did so to make it appear that ALC was exceeding the financial covenants, as opposed to just 
+meeting them, or to make changes in the number of non-residents so that changes in occupancy 
+and coverage ratio ALC reported to Ventas appeared less dramatic and more realistic.   
+37. On another occasion, ALC had to revise the number of non-residents included in 
+the financial covenant calculations, because it had initially reported occupancy to Ventas in excess 
+of 100%.  At Buono’s direction, ALC told Ventas that the initial reporting was due to an 
+accounting error and did not disclose that the revision related to the number of non-residents 
+included in the financial covenant calculations. 
+38. In summer 2011, ALC was exploring a sale of the company, and was preparing due 
+diligence materials to be reviewed by potential buyers, one of which was Ventas.  Bebo directed 
+ALC’s investment bankers not to provide Ventas with actual occupancy figures at the Ventas 
+facilities but permitted the investment bankers to provide such information to other interested 
+buyers. 
+39. Moreover, Bebo attempted to thwart Ventas’s ability to determine actual occupancy 
+during Ventas’s periodic inspections of the Ventas facilities.  To that end, Bebo: (a) restricted 
+Ventas from visiting certain facilities at particular times, and (b) directed that resident name tags be 
+removed from their doors during Ventas’s inspections, such that Ventas could not manually count 
+the number of occupied rooms.  
+40. In March 2012, Bebo tried to convince ALC’s board not to disclose the inclusion of 
+non-residents in the Ventas financial covenant calculations to the remaining potential bidders 
+interested in purchasing ALC.    
+I. ALC’s False and Misleading Disclosures in its Commission Filings      
+ 
+41. ALC’s Forms 10-K for the years ending December 31, 2009, 2010 and 2011 (which 
+Bebo and Buono signed) and its Forms 10-Q for the first three quarters of those years (which 
+Buono signed) contained the representation that ALC was in compliance with the financial 
+covenants in the Ventas lease. 
+9 
+ 
+42. Moreover, ALC’s Form 10-K for the year ending December 31, 2011 and its Forms 
+10-Q for the second and third quarter of that year contained the following representation:  “ALC 
+does not believe that there is a reasonably likely degree of risk of breach of the [Ventas financial] 
+covenants.”   
+43.  As a result of the improper inclusion of employees and other non-residents in the 
+Ventas financial covenant calculations, and the fact that ALC would have failed the covenants 
+without the inclusion of such persons, the above-described statements in ALC’s Forms 10-K and 
+10-Q were false, misleading, and omitted material information. 
+44. In connection with each of the above-referenced Forms 10-K and 10-Q, Bebo and 
+Buono signed certifications which certified that:  (1) ALC’s filings did not contain any material 
+misstatements or omissions; (2) ALC’s filings fairly presented in all material respects ALC’s 
+financial condition, results of operation and cash flows; and (3) they had designed or caused to be 
+designed such internal controls to provide reasonable assurance regarding the reliability of 
+financial reporting and the preparation of financial statements in accordance with GAAP.    
+45. Given the inclusion of employees and other non-residents in the Ventas financial 
+covenant calculations, Bebo and Buono either knew, or were reckless in not knowing, that ALC’s 
+above-referenced Forms 10-K and 10-Q and the above-referenced certifications were false, 
+misleading, and omitted material information. 
+46.    In each of the above-referenced Forms 10-K and 10-Q, ALC additionally failed to 
+disclose a loss contingency associated with ALC’s violation of the Ventas financial covenants and 
+the impact of such contingency on ALC’s operations and financial statements.  Such a disclosure 
+was required under GAAP.  Accounting Standards Codification (“ASC”) 450-20-50-3.  Buono 
+either knew, or was reckless in not knowing, that ALC’s filings improperly failed to disclose such a 
+loss contingency.  
+ J. Bebo and Buono Made False Representations to ALC’s Auditors 
+47. In connection with the audits of ALC’s financial statements for the years ending 
+December 31, 2009, 2010 and 2011, and in connection with the reviews of ALC’s quarterly 
+financial statements for the first three quarters of those years, Bebo and Buono signed 
+representation letters addressed to ALC’s auditors in which they falsely represented that ALC had 
+“complied with all aspects of contractual agreements that would have a material effect on the 
+financial statements in the event of a noncompliance.”  Bebo, Buono, and ALC’s auditors 
+understood these representations to attest to compliance with the Ventas financial covenants.   
+48. Given the inclusion of employees and other non-residents in the Ventas financial 
+covenant calculations, Bebo and Buono either knew, or were reckless in not knowing, that their 
+above-described representation to ALC’s auditors was false, misleading, and omitted material 
+information. 
+49. In connection with the same audits and reviews, ALC, at Bebo’s and Buono’s 
+direction, provided the auditors with the above-referenced lists, created by Bebo and Buono, 
+identifying fictitious occupants at the Ventas facilities and their associated lengths of stay at the 
+facilities. 
+10 
+ 
+50. Moreover, in connection with the audit of ALC’s financial statements for the year 
+ending December 31, 2011, Bebo and Buono signed a representation letter addressed to ALC’s 
+auditors that represented that Bebo and Buono had no knowledge of any allegations of fraud or 
+suspected fraud by any ALC employee.  Bebo and Buono either knew, or were reckless in not 
+knowing, that such statement was false and misleading, given that in approximately November 
+2011, an ALC employee confronted Bebo and Buono with  concerns that the inclusion of 
+employees in the Ventas financial covenant calculations was fraudulent. 
+ K. The Scheme Unravels 
+51. In April 2012, Ventas filed a lawsuit against ALC unrelated to the financial 
+covenants.  At the time, Ventas was unaware that ALC had been including employees and other 
+non-residents in the financial covenant calculations.  
+52. In connection with related settlement negotiations with Ventas, Bebo tried to 
+convince ALC’s board not to disclose to Ventas ALC’s inclusion of employees and other 
+nonresidents in the Ventas financial covenant calculations.  Bebo actively lobbied against a 
+director’s demand that ALC include in any settlement proposal specific language whereby Ventas 
+would release claims arising from ALC’s inclusion of employees in the financial covenant 
+calculations.   
+53. Bebo’s efforts were unsuccessful, and ALC sought a release from Ventas expressly 
+relating to the inclusion of employees in the financial covenant calculations and the quarterly 
+certifications ALC sent to Ventas.  After receiving ALC’s request for the release, Ventas moved to 
+amend its complaint against ALC to include allegations relating to ALC’s inclusion of employees 
+in the covenant calculations. 
+54. In June 2012, ALC and Ventas settled the lawsuit, which included a release of all 
+claims related to the Ventas lease.  As part of the settlement, ALC purchased the Ventas facilities 
+and certain other facilities from Ventas for an amount far greater than the appraised value of the 
+facilities.  ALC paid approximately $100 million to settle the litigation and purchase the facilities, 
+even though independent third party appraisals only valued the purchased facilities at $62.8 
+million.  Thus, in its financial statements for the second quarter of 2012, ALC included as an 
+expense $37.2 million for “lease termination and settlement” and also wrote off the entirety of the 
+remaining lease intangible assets associated with the Ventas facilities, which were approximately 
+$8.96 million.   
+L. Violations 
+55. As a result of the conduct described above, Buono willfully violated Section 10(b) 
+of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection 
+with the purchase or sale of any security involving: a) the use of any device, scheme, or artifice 
+to defraud; b) the making of material misrepresentations or omissions; and c) any act, practice, or 
+course of business which operates or would operate as a fraud or deceit upon any person.  Also, 
+by engaging in the conduct described above, Buono willfully aided and abetted and caused 
+ALC’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. 
+11 
+ 
+56. As a result of the conduct described above, Buono willfully aided and abetted and 
+caused ALC’s violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 
+thereunder, which require issuers with securities registered under Section 12 of the Exchange Act 
+to file factually accurate annual and quarterly reports.  Also, Buono willfully aided and abetted 
+and caused ALC’s violations of Rule 12b-20 of the Exchange Act, which requires the addition to 
+such reports any further material information necessary to make the required reports not 
+misleading. 
+57. As a result of the conduct described above, Buono willfully violated Exchange 
+Act Rule 13a-14, which requires an issuer’s principal executive officer and principal financial 
+officer to certify each periodic report containing financial statements filed by the issuer pursuant to 
+Section 13(a) of the Exchange Act. 
+58. As a result of the conduct described above, Buono willfully violated Exchange 
+Act Section 13(b)(5), which 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 Exchange Act Section 13(b)(2).  Also, Buono willfully violated 
+Exchange Act Rule 13b2-1, 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). 
+59. As a result of the conduct described above, Buono willfully violated Exchange 
+Act Rule 13b2-2, which prohibits any director or officer of an issuer from, directly or indirectly 
+from: (a) making or causing to be made a materially false or misleading statement; or (b) 
+omitting or causing another person to omit to state a material fact necessary in order to make 
+statements made, in light of the circumstances under which such statements were made, not 
+misleading, to an accountant in connection with financial statement audits, reviews, or 
+examinations or the preparation or filing of any document or report required to be filed with the 
+Commission. 
+60. By engaging in the conduct described above, Buono willfully aided and abetted 
+and caused ALC’s violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, 
+which requires an issuer of securities registered under Section 12 of the Exchange Act to make 
+and keep accurate books, records, and accounts, and to devise and maintain a sufficient system of 
+internal accounting controls. 
+IV. 
+In view of the foregoing, the Commission deems it appropriate and in the public interest for 
+to impose the sanctions agreed to in Respondent’s Offer. 
+  
+ Accordingly, it is hereby ORDERED, effective immediately, that: 
+ 
+ A. Buono shall cease and desist from committing or causing any violations and any 
+future violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and13(b)(5) of the Exchange 
+Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1, and 13b2-2 thereunder.  
+ 
+12 
+ 
+B. Buono 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. 
+ 
+C. Buono, pursuant to Section 4C of the Exchange Act and Rule 102(e) of the 
+Commission’s Rules of Practice, is denied the privilege of appearing or practicing before the 
+Commission as an accountant. 
+ 
+D. Buono shall, within 10 days of the entry of this Order, pay a civil money penalty in 
+the amount of $100,000.00 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;  
+ 
+(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 John 
+Buono 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 Robert Burson, Division of Enforcement, 
+Securities and Exchange Commission, 175 West Jackson, Suite 900, Chicago, IL 60604.   
+ 
+ 
+ By the Commission. 
+ 
+ 
+       Brent J. Fields 
+       Secretary 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933 
+Release No. 9719 / January 30, 2015 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74183 / January 30, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3625 / January 30, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16033 
+ 
+ 
+In the Matter of 
+ 
+AIRTOUCH COMMUNICATIONS, INC.,  
+HIDEYUKI KANAKUBO, AND 
+JEROME KAISER, CPA, 
+ 
+Respondents. 
+ 
+ 
+ 
+ 
+ORDER MAKING FINDINGS, 
+AND IMPOSING REMEDIAL 
+SANCTIONS AND A CEASE-
+AND-DESIST ORDER 
+PURSUANT TO SECTION 8A 
+OF THE SECURITIES ACT 
+OF 1933 AND SECTION 21C 
+OF THE SECURITIES 
+EXCHANGE ACT OF 1934 AS 
+TO AIRTOUCH 
+COMMUNICATIONS, INC. 
+AND HIDEYUKI KANAKUBO  
+ 
+ 
+  
+I. 
+ On August 22, 2014, the Securities and Exchange Commission (“Commission”) instituted 
+proceedings 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 AirTouch Communications, 
+Inc., Hideyuki Kanakubo, and Jerome Kaiser, CPA (collectively, “Respondents”), and additionally 
+as to Kaiser, pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the 
+Commission’s Rules of Practice. 
+ 
+II. 
+ 
+ Respondents AirTouch Communications, Inc. (“AirTouch”) and Hideyuki Kanakubo 
+(“Kanakubo”) 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 
+ 2 
+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 AirTouch and Kanakubo 
+consent to the entry of this Order Making Findings and Imposing Remedial Sanctions and a Cease-
+and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the 
+Securities Exchange Act of 1934 as to AirTouch Communications, Inc. and Hideyuki Kanakubo 
+(“Order”), as set forth below. 
+ 
+III. 
+ 
+ On the basis of this Order and Respondents AirTouch’s and Kanakubo’s Offers, the 
+Commission finds1 that: 
+ 
+Summary 
+ 
+1. This matter involves fraudulent financial misstatements by AirTouch, a 
+Newport Beach, California issuer, its founder and former president and CEO Kanakubo, and its 
+former CFO and corporate secretary Jerome Kaiser, CPA (“Kaiser”), in the company’s voluntarily 
+filed Form 10-Q for the third quarter of 2012, and to an investor in connection with a $2 million 
+loan made to the company in the fall of 2012.   
+2. In the third quarter of 2012, AirTouch improperly recognized net revenues 
+of $1.031 million based on $1.24 million of inventory shipped to a Florida entity.  This revenue 
+recognition was improper because, as Kanakubo and Kaiser knew, or were reckless in not 
+knowing, a fulfillment and logistics agreement executed contemporaneously with the Florida 
+entity’s purchase order—and upon which the purchase order was conditioned—relieved that entity 
+of any obligation to pay AirTouch unless and until an AirTouch customer purchased the inventory.  
+Kanakubo and Kaiser also knowingly, recklessly or negligently made false representations and 
+omissions about this revenue to an AirTouch investor and lender.  This conduct in inflating the 
+revenues and obtaining financing was also deceptive and constituted a scheme to defraud.  
+3. In early 2013, AirTouch filed a Form 8-K disclosing its intention to restate 
+net revenues for the third quarter of 2012, based on erroneous revenue recognition.   
+Respondents 
+ 
+4. AirTouch Communications, Inc. is a Delaware corporation with its 
+principal place of business in Newport Beach, California.  AirTouch’s common stock is quoted on 
+the OTC Pinks under the symbol “ATCH.”   AirTouch develops and sells telecommunications 
+equipment designed to integrate mobile telephones into landline telephone systems within a 
+consumer’s home.   
+                                                 
+1  The findings herein are made pursuant to Respondent AirTouch’s and Kanakubo’s Offers of 
+Settlement and are not binding on any other person or entity in this or any other proceeding.  
+ 
+ 3 
+5.  Hideyuki Kanakubo resides in Irvine, California.  He is AirTouch’s 
+founder and former president, CEO, and director.  At all relevant times, Kanakubo was responsible 
+for the management of AirTouch’s business.  As of May 31, 2014, Kanakubo beneficially owned 
+or controlled 1,858,143 shares of AirTouch common stock, or 9% of the company’s total 
+outstanding shares.  Kanakubo resigned as president and CEO in March 2013.   
+6. Jerome Kaiser, CPA resides in Santa Barbara, California.  Kaiser is a 
+licensed Certified Public Accountant and an active member in the AICPA and California Society 
+of Public Accountants.  Kaiser holds a BS in Accounting and an MS in Business Taxation.  He is 
+AirTouch’s former CFO and corporate secretary.  At all relevant times, Kaiser was responsible for 
+the management of AirTouch’s business.  As of May 31, 2014, Kaiser owned options to acquire 
+520,096 shares of AirTouch common stock at a strike price of $2 per share.   He resigned from 
+AirTouch in April 2013. 
+Background 
+ 
+7. In or around early 2012, AirTouch developed a new product, the “U250 
+SmartLinx”, designed for sale to Mexico’s largest provider of landline telephone services (the 
+“Mexican Entity”).     
+8. On July 30, 2012, AirTouch contacted a Florida provider of logistics and 
+fulfillment services (the “Florida Entity”) about the possibility of warehousing AirTouch’s U250 
+SmartLinx product for possible sale to the Mexican Entity.  AirTouch had never done business 
+with the Florida Entity prior to July 30, 2012. 
+9. During contract negotiations related to this potential warehousing 
+arrangement, the Florida Entity’s CEO told Kanakubo that the Florida Entity was not buying any 
+product from AirTouch, but rather would only warehouse the U250 SmartLinx inventory for 
+eventual delivery to the Mexican Entity or other customers of AirTouch.  AirTouch’s salesperson 
+relayed the same information to Kaiser.   
+10. On July 30, 2012, Kaiser sent Kanakubo a Fulfillment and Logistics 
+Agreement between AirTouch and the Florida Entity (the “Agreement”), asking him to 
+immediately review and sign it, which Kanakubo did.  The Agreement included, among other 
+terms, the following provisions:    
+a) “Section 3 (Orders and Acceptance):  [The Florida Entity]’s purchase orders are 
+subject to purchase orders by [the Mexican Entity] and/or any other customer that 
+may be assigned from time to time by AirTouch.  In the event [the Mexican Entity] 
+or any of the customers does not fulfill the purchase orders and/or cancels the 
+orders, [the Florida Entity] shall have the right to return these products to AirTouch 
+and obtain a full credit equal to the original purchase amount with no offsets or 
+deductions or any kind.”; 
+b) “Section 5 (Resale to [the Mexican Entity] and/or Assigned Customers by 
+AirTouch):  [The Florida Entity] shall store the merchandise until shipment of the 
+Products and shall invoice AirTouch for storage of the products, in/out control, 
+ 4 
+invoicing, stock reconciliation, at 1.5% of the invoice value for the first 30 days and 
+an additional 1% for each additional 30 days.”; and 
+c) “Section 6 (Payment):  [The Florida Entity] shall pay for Products in 90 days in 
+accordance with the payment terms invoiced by AirTouch.  However, [the Florida 
+Entity] shall not be obligated to pay AirTouch until the Products have been received 
+by [the Mexican Entity] and [the Florida Entity] has received full payment therefor, 
+at which time then [the Florida Entity] shall pay AirTouch for the Products within 
+10 days thereafter.” 
+11. The same day, the Florida Entity issued a $1.74 million “purchase order” 
+for 20,000 U250 SmartLinx (the “Purchase Order”).  The Purchase Order stated a payment term of 
+“Net 90” but also stated that its payment terms were “according to term sheet.”   The Agreement 
+was the “term sheet.”  Kaiser received emails where representatives of the Florida Entity described 
+the Purchase Order as “conditional” upon AirTouch’s execution of the Agreement.  Kanakubo was 
+also made aware that the Florida Entity would not issue the Purchase Order unless AirTouch first 
+executed the Agreement. 
+12. On July 31, 2012, the Florida Entity sent Kaiser the counter-signed 
+Agreement and the Purchase Order in a single email.   Before forwarding this email to AirTouch’s 
+controller, he deleted the Agreement as an attachment, and forwarded only the Purchase Order. 
+13. AirTouch shipped approximately $1.24 million of inventory to the Florida 
+Entity during the third quarter of 2012, pursuant to the Agreement and the Purchase Order.  
+AirTouch recognized revenue on all $1.24 million of inventory shipped to the Florida Entity during 
+the quarter. 
+14. In October 2012, in connection with AirTouch’s quarterly review, 
+AirTouch’s controller provided its outside independent accountant with a copy of the Purchase 
+Order, but not the Agreement.  The outside independent accountant did not receive the Agreement 
+since Kaiser had never provided AirTouch’s controller with the agreement. 
+15. When discussing the purported receivable AirTouch booked from the 
+Florida Entity at board meetings, Kanakubo and Kaiser did not inform AirTouch’s outside 
+directors, including the chairman of the audit committee, that shipments to the Florida Entity were 
+controlled by the Agreement.  
+16. AirTouch did not receive any payment from the Florida Entity during the 
+third quarter of 2012, and likewise received no commitment from the Mexican Entity that it would 
+buy product shipped to the Florida Entity, or otherwise.  
+1.   AirTouch’s Form 10-Q for the Third Quarter 2012  
+17. On November 14, 2012, AirTouch filed its Form 10-Q for the third quarter 
+of 2012, reporting net revenues of $1,031,747.  Without the revenue recognized on the inventory 
+shipped to the Florida Entity, AirTouch would not have had any positive revenue for the quarter.   
+ 5 
+18. Under Generally Accepted Accounting Principles (“GAAP”), revenue 
+cannot be recognized unless it is “realized or realizable” and “earned.”   
+19. AirTouch’s recognition of revenues for the inventory shipped to the Florida 
+Entity did not comply with GAAP.  Because AirTouch did not sell any product to the Florida 
+Entity—the Purchase Order and the Agreement merely documented, for tracking purposes, the 
+transfer of AirTouch inventory to the Florida Entity in contemplation of future sales—the revenue 
+associated with shipments to the Florida Entity was not realized, realizable or earned.   
+20. AirTouch’s revenue recognition policy, which was disclosed in the 10-Q 
+and was consistent with the requirements of GAAP, permitted the recognition of revenue only 
+where:  “(1) persuasive evidence of an arrangement exists in the form of an accepted purchase 
+order or equivalent documentation; (2) delivery has occurred, based on shipping terms, or services 
+have been provided; (3) the company’s price to the buyer is fixed or determinable, as documented 
+on the accepted purchase order or similar documentation; and (4) collectability is reasonably 
+assured.” 
+21. Given the terms of the Purchase Order and the Agreement, AirTouch had no 
+reasonable assurance of collectability from the Florida Entity because AirTouch did not have a 
+valid receivable to collect from the Florida Entity.     
+22. Kanakubo and Kaiser signed certifications intended to be made pursuant to 
+the Sarbanes-Oxley Act of 2002, stating that the Form 10-Q fairly presented AirTouch’s financial 
+condition and results.     
+23. Kanakubo and Kaiser knew, or were reckless in not knowing, that 
+AirTouch’s Form 10-Q contained materially false or misleading statements concerning reported 
+net revenues and compliance with GAAP or AirTouch’s revenue recognition policy.   
+24. The false and misleading statements in AirTouch’s Form 10-Q occurred in 
+connection with the purchase or sale of securities. 
+25. The false and misleading statements in AirTouch’s Form 10-Q were 
+material.  These statements would have been viewed by a reasonable investor as significantly 
+altering the total mix of available information, given that AirTouch would not have had any 
+positive revenues for the quarter if it did not recognize the revenue from the Florida Entity.  The 
+Form 10-Q also reflected AirTouch’s largest revenues ever reported for a quarter.   
+26. Kanakubo and Kaiser each knew about the Agreement but did not provide it 
+to others involved in AirTouch’s financial reporting process, including the controller, the chairman 
+of the audit committee, and the company’s outside independent accountant.  This and other 
+deceptive conduct contributed to a revenue recognition scheme and operated as a fraud.  
+27. Because of Kanakubo’s and Kaiser’s positions as AirTouch’s senior 
+management, their scienter is attributable to AirTouch. 
+28. At all relevant times, Kanakubo and Kaiser were the company’s principal 
+officers; they were the members of management in charge of AirTouch’s day-to-day management, 
+ 6 
+policies, and operations; and they were responsible for preparing and signing AirTouch’s SEC 
+filings.   
+2.  Misstatements and Omissions Made to an Investor  
+29. In or around 2012, Kanakubo and Kaiser solicited a short term bridge loan 
+from an existing AirTouch investor (“Investor A”), in exchange for a promissory note and a 
+warrant to purchase 100,000 shares of AirTouch common stock.  Investor A recommended the 
+loan and warrant acquisition opportunity to a related entity, for which he served as the authorized 
+agent during the due diligence process.   
+30. On October 3, 2012, Kanakubo falsely told Investor A by email that the 
+inventory to be shipped by AirTouch to the Florida Entity—which he mischaracterized as an 
+“authorized fulfillment house” for the Mexican Entity—pertained to an existing purchase order 
+from the Mexican Entity.    
+31. Around the same time, Kaiser provided Investor A’s representatives with 
+the Purchase Order, but did not provide them with or disclose the existence of the Agreement. 
+32. On October 17, 2012, AirTouch received the loan of $2 million from 
+Investor A in exchange for a warrant to purchase its common stock.   
+33. On October 19, 2012, Kanakubo approved a $15,000 bonus payment to 
+Kaiser for his work on raising capital.  The same day, Kanakubo authorized a $15,000 payment to 
+himself in connection with unused vacation time.    
+34. Kanakubo and Kaiser knew, or were reckless in not knowing, that their 
+statements to Investor A concerning revenues from the Florida Entity were materially false and 
+misleading.   
+35. Kanakubo and Kaiser also failed to act with reasonable care because   
+they did not ensure that Investor A was provided with all material information necessary to make 
+their statements to him concerning the inventory shipped to the Florida Entity not misleading. 
+36. The false and misleading statements and omissions to Investor A occurred 
+in the offer or sale of, and in connection with the purchase or sale of, securities. 
+37. Kanakubo’s and Kaiser’s false and misleading statements to Investor A, and 
+their failure to disclose the terms of the Agreement, were material.  Kanakubo’s and Kaiser’s 
+statements to Investor A, and the terms of the Agreement, would have been viewed by a reasonable 
+investor as significantly altering the total mix of available information because, among other 
+reasons, AirTouch had not sold any of the inventory warehoused with the Florida Entity to the 
+Mexican Entity, and thus had no basis to represent that it expected to collect revenue from the 
+Florida Entity.   
+38. Kanakubo and Kaiser persuaded Investor A over several months into 
+loaning AirTouch $2 million based on a distorted view of AirTouch’s financial relationships with 
+the Mexican Entity and the Florida Entity.  They led Investor A to believe that AirTouch would 
+ 7 
+receive a substantial financial commitment from the Mexican Entity, which would then provide 
+AirTouch with sufficient cash flow for AirTouch to service and repay the loan.  These inducements 
+by Kanakubo and Kaiser, along with other deceptive conduct, contributed to an offering fraud 
+scheme and a fraudulent transaction.   
+39. Because of Kanakubo’s and Kaiser’s positions as AirTouch’s senior 
+management, their scienter and their negligence are attributable to AirTouch. 
+40. At all relevant times, Kanakubo and Kaiser were the company’s principal 
+officers; there were the members of management in charge of AirTouch’s day-to-day management, 
+policies, and operations; and they were responsible for negotiating with Investor A, providing 
+Investor A with due diligence materials, and for preparing and signing AirTouch’s SEC filings.   
+3.  AirTouch’s Restatement 
+41. In January 2013, AirTouch’s board of directors commenced an internal 
+investigation concerning the net revenues reported in the Form 10-Q for the third quarter of 2012.    
+42. AirTouch’s board of directors and its outside auditor subsequently received 
+the Agreement, and determined to restate reported revenues for the third quarter of 2012. 
+43. AirTouch filed a Form 8-K on February 7, 2013, announcing errors in 
+revenue recognition and the intention to file an amended Form 10-Q.  No amended Form 10-Q has 
+been filed. 
+ 
+Violations 
+44. As a result of the conduct described above, Respondents AirTouch and 
+Kanakubo violated 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 and sale of securities and in 
+connection with the purchase or sale of securities.   
+IV. 
+ 
+In view of the foregoing, the Commission deems it appropriate, in the public interest to 
+impose the sanctions agreed to in Respondents AirTouch’s and  Kanakubo’s Offers. 
+ 
+ Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange 
+Act, it is hereby ORDERED that: 
+ 
+A. Respondents AirTouch and Kanakubo shall 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) of the Exchange Act and Rule 10b-5 thereunder.   
+ 8 
+B.   Respondent Kanakubo is prohibited, pursuant to Section 8A(f) of the Securities 
+Act and Section 21C(f) of the Exchange Act, for five years following the date of entry of this 
+Order, from acting as an officer or director of any issuer that has a class of securities registered 
+pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 
+15(d) of the Exchange Act.  
+C. Respondent Kanakubo shall pay a civil money penalty in the amount of $50,000 to 
+the Securities and Exchange Commission.  Payment shall be made within 365 days of entry of the 
+Order.  If 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, without further application.  Payment must be made 
+in one of the following ways:   
+ 
+(1) Respondent Kanakubo may transmit payment electronically to the 
+Commission, which will provide detailed ACH transfer/Fedwire 
+instructions upon request;  
+ 
+(2) Respondent Kanakubo 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 Kanakubo 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 
+Kanakubo 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 Diana Tani, Assistant Regional 
+Director, Enforcement, Securities and Exchange Commission, Los Angeles Regional Office, 444 
+South Flower St., Suite 900, Los Angeles, CA  90071. 
+ 
+ D. Respondent Kanakubo shall pay disgorgement of $15,000, which represents profits 
+gained as a result of the conduct described herein, to the Securities and Exchange Commission.  
+Payment shall be made within 365 days of entry of the Order.  If payment is not made by the date 
+the payment is required by this Order, any interest accrued pursuant to SEC Rule of Practice 600, 
+shall be due and payable immediately, without further application.  Payment must be made in one 
+of the following ways:   
+ 
+ 9 
+(1) Respondent Kanakubo may transmit payment electronically to the 
+Commission, which will provide detailed ACH transfer/Fedwire 
+instructions upon request;  
+ 
+(2) Respondent Kanakubo 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 Kanakubo 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 
+Kanakubo 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 Diana Tani, Assistant Regional 
+Director, Enforcement, Securities and Exchange Commission, Los Angeles Regional Office, 444 
+South Flower St., Suite 900, Los Angeles, CA 90071. 
+ 
+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 Kanakubo, and further, any debt for disgorgement, prejudgment interest, civil penalty 
+or other amounts due by Respondent Kanakubo 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 Kanakubo 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 

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+                U.S. SECURITIES AND EXCHANGE COMMISSION 
+         Litigation Release No. 23191 / February 6, 2015 
+
+ Accounting and Auditing Enforcement Release No. 3629  
+          Securities and Exchange Commission v. Joseph A. Kostelecky , Civil Action No. 1:15-cv-00017-CSM (D.N.D.) 
+
+         SEC Charges Sales Executive in North Dakota for Enabling Financial Fraud 
+         
+
+         The Securities and Exchange Commission today charged a former senior sales executive living in North Dakota for his role in a financial fraud that occurred at a Canadian oil-and-gas services company Poseidon Concepts Corp. 
+
+         The SEC alleges that Joseph A. Kostelecky, who was the company's only senior executive in the U.S., was among those responsible for Poseidon's fraudulent reporting of approximately $100 million in revenues for contracts that were either non-existent or uncollectable.  Poseidon's business in the U.S. was focused on renting above-ground fluid storage tanks for oil-and-gas hydraulic fracturing operations.  According to the SEC's complaint filed in federal court in North Dakota, Kostelecky directed Poseidon's accounting staff to record revenues for inadequately documented transactions and made false assurances to several members of Poseidon's management in Canada that transactions with U.S. customers were valid and collectible.  Poseidon consequently issued three quarterly financial statements from January to November 2012 with materially inflated revenues while its stock was trading in the U.S. and Canada.  The magnitude of the overstatements was substantial, comprising approximately 64 to 72 percent of total revenues reported over the first three fiscal quarters of 2012. 
+
+         When Poseidon later announced publicly that it would need to restate its financials due to the inflated revenues, its stock price collapsed and the company eventually filed for bankruptcy.  Poseidon was based in Calgary and operated a subsidiary with offices in Denver and Dickinson, N.D., where Kostelecky still resides. 
+
+         Kostelecky agreed to settle the SEC's charges by paying a $75,000 penalty and being barred from serving as an officer or director of a U.S. publicly-traded company.  Without admitting or denying the SEC's allegations, Kostelecky consented to a final judgment enjoining him from violations of Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The SEC's action against Kostelecky was filed in conjunction with an enforcement proceeding by the Alberta Securities Commission against Poseidon's senior management, including Kostelecky. 
+
+         The SEC's investigation was conducted by Lee Robinson, Donna Walker, and Ian Karpel in the Denver Regional Office.   The SEC appreciates the assistance of the Alberta Securities Commission. 
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raw/aaer/2015/AAER-3631.txt

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+UNITED STATES OF AMERICA  
+Before the  
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934  
+Release No. 74229 / February 6, 2015 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3631 / February 6, 2015 
+ADMINISTRATIVE PROCEEDING  
+File No. 3-14724  
+ 
+In the Matter of  
+Christopher J. Kelly, ACA  
+ 
+: 
+: 
+: 
+: 
+: 
+: 
+ORDER GRANTING APPLICATION FOR 
+REINSTATEMENT TO APPEAR AND PRACTICE 
+BEFORE THE COMMISSION AS AN ACCOUNTANT 
+RESPONSIBLE FOR THE PREPARATION OR 
+REVIEW OF FINANCIAL STATEMENTS REQUIRED 
+TO BE FILED WITH THE COMMISSION 
+ 
+On January 30, 2012, Christopher J. Kelly, ACA (“Kelly”) was denied the privilege of 
+appearing or practicing before the Commission as an accountant as a result of settled public 
+administrative proceedings instituted by the Commission against Kelly pursuant to Rule 
+102(e)(1)(ii) of the Commission's Rules of Practice.1  This order is issued in response to Kelly’s 
+application for reinstatement to appear and practice before the Commission as an accountant 
+responsible for the preparation or review of financial statements required to be filed with the 
+Commission. 
+ Kelly was found to have engaged in improper professional conduct with respect to his 
+role on the Ernst & Young LLP UK (“E&Y UK”) audits of the 2004-2006 financial statements 
+for Symmetry Medical Sheffield LTD, f/k/a Thornton Precision Components, Limited (“TPC”).  
+The Commission found that, during the relevant period, Kelly’s actions during the audit 
+engagements were unreasonable and failed to conform to applicable professional standards.  
+Kelly failed to (i) adequately plan, staff and supervise the audits; (ii) properly review and 
+adequately test TPC’s journal entries, including top-side journal entries designed to inflate 
+revenue; (iii) obtain sufficient competent evidential matter regarding TPC’s accounts receivable; 
+and (iv) properly document in the audit work papers the results of audit testing.        
+ 
+In his capacity as a preparer or reviewer, or as a person responsible for the preparation or 
+review of financial statements of a public company to be filed with the Commission, Kelly 
+                                                 
+1 See Accounting and Auditing Enforcement Release No. 3359 dated January 30, 2012.  Kelly was 
+permitted, pursuant to the order, to apply for reinstatement after two years upon making certain showings. 
+ 
+ 2 
+attests that he will undertake to 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.  Kelly is not, at this time, seeking to appear or 
+practice before the Commission as an independent accountant.  If he should wish to appear and 
+practice before the Commission as an independent accountant, he will be required to submit an 
+application to the Commission showing that he has complied and will comply with the terms of 
+the original order in this regard.  Therefore, Kelly’s suspension from practice before the 
+Commission as an independent accountant continues in effect until the Commission determines 
+that a sufficient showing has been made in this regard in accordance with the terms of the 
+original order. 
+ 
+Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for 
+reinstatement and provides that the Commission may reinstate the privilege to appear and 
+practice before the Commission “for good cause shown.”2  This “good cause” determination is 
+necessarily highly fact specific. 
+ 
+On the basis of information supplied, representations made, and undertakings agreed to 
+by Kelly, it appears that he has complied with the terms of the January 30, 2012 order denying 
+him the privilege of appearing or practicing before the Commission as an accountant, that 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, 
+and that Kelly, by undertaking to 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, in his 
+practice before the Commission as a preparer or reviewer of financial statements required to be 
+filed with the Commission, 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 
+Christopher J. Kelly, ACA is hereby reinstated to appear and practice before the Commission as 
+an accountant responsible for the preparation or review of financial statements required to be 
+filed with the Commission. 
+ 
+By the Commission. 
+ 
+ 
+Brent J. Fields 
+Secretary  
+                                                 
+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 section 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). 
+ 

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raw/aaer/2015/AAER-3633.txt

@@ -0,0 +1,112 @@
+   
+ 
+UNITED STATES OF AMERICA  
+Before the  
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934  
+Release No. 74233 / February 9, 2015 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3633 / February 9, 2015 
+ADMINISTRATIVE PROCEEDING  
+File No. 3-13722 
+ 
+In the Matter of  
+Mark V. Sever, CPA  
+ 
+: 
+: 
+: 
+: 
+: 
+: 
+ORDER GRANTING APPLICATION FOR 
+REINSTATEMENT TO APPEAR AND PRACTICE 
+BEFORE THE COMMISSION AS AN ACCOUNTANT 
+ 
+On December 17, 2009, Mark V. Sever, CPA (“Sever”) was denied the privilege of 
+appearing or practicing as an accountant before the Commission as a result of settled public 
+administrative proceedings instituted by the Commission against Sever pursuant to Section 4C of 
+the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the 
+Commission's Rules of Practice.1  This order is issued in response to Sever’s application for 
+reinstatement to practice before the Commission as an accountant. 
+ 
+From 1997 through the third quarter of 2001, Sever was a Professional Practice Director 
+in Ernst & Young LLP’s (“E&Y”) National Office, and served as the Independent Review 
+Partner for E&Y’s audits of Bally Total Fitness Holding Corporation’s (“Bally”) financial 
+statements.  Then, as the National Director of Area Professional Practice, Sever remained 
+involved with Bally’s 2001-2003 audits.  In connection with Bally’s 2001-2003 financial 
+statements, Bally engaged in fraudulent financial accounting and, further, made false and 
+misleading disclosures regarding a $55 million special charge in its 2002 Form 10-K.  During the 
+relevant period, the Commission found that Sever knew or should have known that E&Y’s 
+unqualified audit opinions regarding Bally’s 2001-2003 financial statements, which stated that 
+E&Y had conducted its audits in accordance with auditing standards generally accepted in the 
+United States (“GAAS”) and that Bally’s financial statements were presented in conformity with 
+accounting principles generally accepted in the United States (“GAAP”), were false because 
+E&Y’s audits of Bally’s financial statements were not performed in accordance with GAAS and 
+                                                 
+1 See Accounting and Auditing Enforcement Release No. 3084 dated December 17, 2009.  Sever was permitted, 
+pursuant to the order, to apply for reinstatement after three years upon making certain showings. 
+   
+Bally’s financial statements were not presented in conformity with GAAP.  As a result of Sever’s 
+conduct relating to the false and misleading audit opinions, the Commission found that Sever 
+was a cause of Bally’s violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 and 
+was a cause of and willfully aided and abetted Bally’s violations of Sections 13(a) and 
+13(b)(2)(A) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 12b-20, 13a-1, 
+13a-11, and 13a-13 thereunder.  The Commission further found that Sever was a cause of E&Y’s 
+violation of Section 10A(b) of the Exchange Act. 
+ 
+Sever has met all of the conditions set forth in the original order and, in his capacity as an 
+independent accountant, has stated that he will comply with all requirements of the Commission 
+and the Public Company Accounting Oversight Board, including, but not limited to all 
+requirements relating to registration, inspections, concurring partner reviews and quality control 
+standards.  In his capacity as a preparer or reviewer, or as a person responsible for the 
+preparation or review, of financial statements of a public company to be filed with the 
+Commission, Sever attests that he will undertake to 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.   
+ 
+Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for 
+reinstatement, and provides that the Commission may reinstate the privilege to appear and 
+practice before the Commission “for good cause shown.”2  This “good cause” determination is 
+necessarily highly fact specific. 
+ 
+ On the basis of the information supplied, representations made, and undertakings agreed 
+to by Sever, it appears that he has complied with the terms of the December 17, 2009 order 
+denying him the privilege of appearing or practicing before the Commission as an accountant, 
+that 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, and that Sever, by undertaking to 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, in his practice before the Commission as a preparer or reviewer of financial 
+statements required to be filed with the Commission, and that Sever, by undertaking to comply 
+with all requirements of the Commission and the Public Company Accounting Oversight Board, 
+including, but not limited to, all requirements relating to registration, inspections, concurring 
+partner reviews and quality control standards, in his practice before the Commission as an 
+independent accountant has shown good cause for reinstatement.  Therefore, it is accordingly, 
+ 
+ 
+ 
+                                                 
+2 Rule 102(e)(5)(i) provides: 
+ 
+“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) 
+of this section 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). 
+   
+ 
+ 
+ 
+ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that 
+Mark V. Sever, CPA is hereby reinstated to appear and practice before the Commission as an 
+accountant. 
+ 
+By the Commission. 
+ 
+ 
+ 
+Brent J. Fields  
+Secretary  
+ 

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raw/aaer/2015/AAER-3634.txt

@@ -0,0 +1,112 @@
+   
+    
+UNITED STATES OF AMERICA  
+Before the  
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934  
+Release No. 74234 / February 9, 2015 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3634 / February 9, 2015 
+ADMINISTRATIVE PROCEEDING  
+File No. 3-13127 
+ 
+In the Matter of  
+Jeffrey P. Jorissen, CPA  
+ 
+: 
+: 
+: 
+: 
+: 
+: 
+ORDER GRANTING APPLICATION FOR 
+REINSTATEMENT TO APPEAR AND PRACTICE 
+BEFORE THE COMMISSION AS AN ACCOUNTANT 
+RESPONSIBLE FOR THE PREPARATION OR 
+REVIEW OF FINANCIAL STATEMENTS REQUIRED 
+TO BE FILED WITH THE COMMISSION 
+ 
+On August 12, 2008, Jeffrey P. Jorissen, CPA (“Jorissen”) was suspended from appearing 
+or practicing before the Commission as an accountant as a result of settled public administrative 
+proceedings instituted by the Commission against Jorissen pursuant to Rule 102(e)(3)(i) of the 
+Commission's Rules of Practice.1  This order is issued in response to Jorissen’s application for 
+reinstatement to appear and practice before the Commission as an accountant responsible for the 
+preparation or review of financial statements required to be filed with the Commission. 
+The Commission found that Jorissen had been permanently enjoined by a United States 
+District Court from future violations of Rule 13b2-1 under the Securities Exchange Act of 1934 
+(“Exchange Act”) and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) and 
+(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.  In a complaint filed 
+on February, 22, 2006 the Commission alleged, among other things, that from the first quarter of 
+2000 through the third quarter of 2002, Sun Communities, Inc. (“Sun”) engaged in false financial 
+record-keeping and reporting. The complaint alleged that Sun's financial statements failed to properly 
+account for losses resulting from Sun's investment in a joint venture involved in the development of 
+manufactured housing communities. The Commission alleged that contrary to generally accepted 
+accounting principles, Sun failed to account for any of the joint venture's losses during seven quarters 
+and underreported Sun's share of the losses in four additional quarters. The complaint also alleged 
+that Sun maintained an improper "cookie jar reserve" and improperly smoothed earnings, and that 
+Sun's false financial statements were incorporated in documents filed with the SEC, including 
+                                                 
+1 See Accounting and Auditing Enforcement Release No. 2862 dated August 12, 2008.  Jorissen was permitted, 
+pursuant to the order, to apply for reinstatement after two years upon making certain showings. 
+ 
+ 2 
+quarterly reports, annual reports, and non-periodic filings. The complaint alleged that Jorissen, in his 
+position as Chief Financial Officer, initiated and directed Sun's false record-keeping and reporting.  
+ 
+In his capacity as a preparer or reviewer, or as a person responsible for the preparation or 
+review, of financial statements of a public company to be filed with the Commission, Jorissen 
+attests that he will undertake to 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.  Jorissen is not, at this time, seeking to appear 
+or practice before the Commission as an independent accountant.  If he should wish to resume 
+appearing and practicing before the Commission as an independent accountant, he will be 
+required to submit an application to the Commission showing that he has complied and will 
+comply with the terms of the original suspension order in this regard.  Therefore, Jorissen’s 
+suspension from practice before the Commission as an independent accountant continues in 
+effect until the Commission determines that a sufficient showing has been made in this regard in 
+accordance with the terms of the original suspension order. 
+ 
+Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for 
+reinstatement, and provides that the Commission may reinstate the privilege to appear and 
+practice before the Commission “for good cause shown.”2  This “good cause” determination is 
+necessarily highly fact specific. 
+ 
+On the basis of information supplied, representations made, and undertakings agreed to 
+by Jorissen, it appears that he has complied with the terms of the August 12, 2008 order 
+suspending him from appearing or practicing before the Commission as an accountant, that 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, 
+and that Jorissen, by undertaking to 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, in 
+his practice before the Commission as a preparer or reviewer of financial statements required to 
+be filed with the Commission, has shown good cause for reinstatement.  Therefore, it is 
+accordingly, 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+                                                 
+2 Rule 102(e)(5)(i) provides: 
+ 
+“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) 
+of this section 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 
+ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that 
+Jeffrey P. Jorissen, CPA is hereby reinstated to appear and practice before the Commission as an 
+accountant responsible for the preparation or review of financial statements required to be filed 
+with the Commission. 
+ 
+By the Commission. 
+ 
+ 
+Brent J. Fields  
+Secretary  

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+UNITED STATES OF AMERICA  
+Before the  
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934  
+Release No. 74235 / February 9, 2015 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3635 / February 9, 2015 
+ADMINISTRATIVE PROCEEDING  
+File No. 3-13248 
+ 
+In the Matter of  
+Kevin Morano, CPA  
+ 
+: 
+: 
+: 
+: 
+: 
+: 
+ORDER GRANTING APPLICATION FOR 
+REINSTATEMENT TO APPEAR AND PRACTICE 
+BEFORE THE COMMISSION AS AN ACCOUNTANT 
+RESPONSIBLE FOR THE PREPARATION OR 
+REVIEW OF FINANCIAL STATEMENTS REQUIRED 
+TO BE FILED WITH THE COMMISSION 
+ 
+On September 29, 2008, Kevin Morano, CPA (“Morano”) was suspended from appearing 
+or practicing before the Commission as an accountant as a result of settled public administrative 
+proceedings instituted by the Commission against Morano pursuant to Rule 102(e)(3)(i) of the 
+Commission's Rules of Practice.1  This order is issued in response to Morano’s application for 
+reinstatement to appear and practice before the Commission as an accountant responsible for the 
+preparation or review of financial statements required to be filed with the Commission. 
+The Commission found that Morano had been permanently enjoined by a United States 
+District Court from future violations of Section 17(a) of the Securities Act of 1933, and Sections 
+10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 
+13a-14, 13b2-1, and 13b2-2 thereunder, and from aiding and abetting 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.  In its complaint in the injunctive action, the Commission alleged, 
+among other things, that Morano, while serving as its Chief Financial Officer, permitted Lumenis 
+Ltd. to recognize revenue in a number of transactions despite red flag warnings that should have 
+prevented such recognition.  As a result, Morano made materially false and misleading 
+statements in periodic reports filed with the Commission in 2002 and 2003, including by 
+certifying the accuracy of financial statements contained in those reports. 
+ 
+                                                 
+1 See Accounting and Auditing Enforcement Release No. 2892 dated September 29, 2008.  Morano was permitted, 
+pursuant to the order, to apply for reinstatement after five years upon making certain showings. 
+ 
+ 2 
+In his capacity as a preparer or reviewer, or as a person responsible for the preparation or 
+review, of financial statements of a public company to be filed with the Commission, Morano 
+attests that he will undertake to 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.  Morano is not, at this time, seeking to appear 
+or practice before the Commission as an independent accountant.  If he should wish to resume 
+appearing and practicing before the Commission as an independent accountant, he will be 
+required to submit an application to the Commission showing that he has complied and will 
+comply with the terms of the original suspension order in this regard.  Therefore, Morano’s 
+suspension from practice before the Commission as an independent accountant continues in 
+effect until the Commission determines that a sufficient showing has been made in this regard in 
+accordance with the terms of the original suspension order. 
+ 
+Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for 
+reinstatement, and provides that the Commission may reinstate the privilege to appear and 
+practice before the Commission “for good cause shown.”2  This “good cause” determination is 
+necessarily highly fact specific. 
+ 
+On the basis of information supplied, representations made, and undertakings agreed to 
+by Morano, it appears that he has complied with the terms of the September 29, 2008 order 
+suspending him from appearing or practicing before the Commission as an accountant, that 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, 
+and that Morano, by undertaking to 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, in 
+his practice before the Commission as a preparer or reviewer of financial statements required to 
+be filed with the Commission, 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 
+Kevin Morano, CPA is hereby reinstated to appear and practice before the Commission as an 
+accountant responsible for the preparation or review of financial statements required to be filed 
+with the Commission. 
+ 
+By the Commission. 
+ 
+ 
+Brent J. Fields 
+Secretary  
+                                                 
+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 section 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). 
+ 

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+ 
+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74240 / February 10, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3636 / February 10, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16381 
+ 
+ 
+In the Matter of 
+ 
+WILLIAM SLATER, CPA and 
+PETER E. WILLIAMS, III 
+ 
+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 William Slater and Peter E. Williams, III 
+(“Respondents”). 
+ 
+II. 
+  
+ In anticipation of the institution of these proceedings, the Respondents have submitted 
+Offers of Settlement (the “Offers”) that the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings 
+herein, except as to the Commission’s jurisdiction over each and over the subject matter of these 
+proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease-
+and-Desist Proceedings Pursuant to Section 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 misstated revenues in the professional services organization at 
+Saba Software, Inc. (“Saba” or “the Company”), a Silicon Valley-based enterprise software 
+company.  The misstatements were the result of the falsification of time records over a period of 
+more than four years by professional services managers in multiple geographies directing 
+consultants in Saba’s Indian subsidiary (the India Consulting Group or “ICG”) to falsify time 
+records by either recording time in advance of performance of work or failing to record time for 
+hours worked in order to achieve their quarterly revenue and margin targets.   
+ 
+ 2. As a result, Saba reported materially false financial results in its financial 
+statements filed with the Commission over the period from October 4, 2007 through January 6, 
+2012.  As Saba announced on August 6, 2012 and November 5, 2012, management has determined 
+that the Company is required to restate its financial statements for fiscal years 2008 through 2011, 
+as well as the first two quarters of fiscal 2012, as a result of misconduct.  The Company expects 
+that the restatement will change the time period during which the affected revenues are recognized, 
+generally shifting the timing of such revenues to later periods.  
+ 
+ 3. Saba’s former Chief Financial Officers, William Slater and Peter E. Williams, III, 
+realized Saba stock-sale profits and received bonuses during the 12-month periods following the 
+filings containing financial results that Saba is required to restate.  The Commission does not allege 
+that Slater and Williams participated in the misconduct giving rise to the restatement.  Slater and 
+Williams have not, however, reimbursed Saba for stock-sale profits and bonuses they are required 
+to reimburse the Company under Section 304(a) of the Sarbanes-Oxley Act.   
+ 
+Respondents 
+ 
+ 4. William Slater, age 63, is a resident of San Diego, California.  He served as Chief 
+Financial Officer and Principal Accounting Officer of Saba from December 9, 2008 through 
+October 27, 2011.  He served as Chief Financial Officer, Vice President and Treasurer of another 
+public company from November 10, 2011 to February 15, 2013.  Slater was licensed as a certified 
+public accountant in New York from 1978 to 2003, when his license became inactive.   
+ 
+ 5. Peter E. Williams III, age 53, is a resident of Hillsborough, California.  Prior to 
+joining Saba as General Counsel in October 1999, Williams was a partner at an international law 
+                                                 
+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 
+firm.  Williams has been Saba’s Secretary from the time of the Company’s inception in April 1997.  
+Williams served as Saba’s Chief Financial Officer and Principal Accounting Officer from March 
+2004 to July 2007 and then again, on an interim basis, from October 27, 2011 until January 7, 
+2012.  Since July 2007, Williams has also served as Executive Vice President, Corporate 
+Development.  Williams has been licensed to practice law in California since 1987.  He has never 
+been licensed as a certified public accountant. 
+ 
+ 6. Saba Software, Inc. (“Saba” or “the Company”) is a Delaware corporation 
+headquartered in Redwood Shores, California.  The software company provides cloud-based 
+enterprise learning, talent management and social networking tools to businesses and large 
+organizations.  At all relevant times, Saba’s common stock has been registered pursuant to Section 
+12 of the Exchange Act.  From its IPO in April 2000 until July 31, 2006, its common stock was 
+registered pursuant to Section 12(g).  Thereafter, until June 2013, it was registered pursuant to 
+Section 12(b).  It traded on the Nasdaq Global Market until it was suspended on April 9, 2013, and 
+then it was delisted effective June 17, 2013 for failure to remain compliant with its SEC reporting 
+obligations.  Upon its delisting and deregistration from Section 12(b), it reverted to its previous 
+Section 12(g) registration.  Its common stock is currently registered pursuant to Section 12(g) and 
+traded on the OTC Markets.  Saba has not filed any periodic reports since January 6, 2012, when it 
+filed its Form 10-Q for the quarter ended November 30, 2011.   
+ 
+Facts 
+ 
+A. Saba’s Falsification of Time Records 
+ 
+ 7. Saba’s professional services historically have accounted for about one third of its 
+approximately $120 million in yearly revenues.  Professional services have been delivered to 
+customers worldwide by (1) customer-facing field consultants in North America and Europe 
+(“Field Consultants”) and (2) off-shore technical development services provided to the Field 
+Consultants by the Company’s India Consulting Group (“ICG Consultants”).  ICG is an 
+organization within Saba’s Indian subsidiary designed to help the Company deliver professional 
+services to its customers at a lower cost than comparable consultants in North America and 
+Europe.  By 2011, ICG employed 50-60 consultants who generated approximately 14,000 hours of 
+billable work per quarter, which constituted about 17% of consulting revenue and 6% of total 
+revenue per quarter.   
+ 
+ 8. Both Field Consultants and ICG Consultants were required to record time worked 
+on customer projects in a timesheet database.  Hours input into the system by Field or ICG 
+Consultants were approved on a weekly basis by project managers in North America and Europe, 
+and revenue for the professional services organization was then measured based on the approved 
+number of hours in the timesheet database.   
+ 
+ 9. Saba disclosed in its public filings that it recognized revenue for both “time and 
+materials” and “fixed fee” contracts as the services were performed.  This revenue recognition 
+treatment was consistent with GAAP only if Saba could demonstrate that (1) its customers have 
+historically paid a consistent rate for its services (measured by Vendor Specific Objective Evidence 
+ 4 
+or “VSOE”) and (2) it could accurately estimate how many hours it took to complete projects 
+(“ability to estimate”).  Therefore, Saba’s finance personnel depended on accurate time records to 
+ensure that Saba recognized revenue in accordance with GAAP. 
+ 
+ 10. From at least 2008 through the second quarter of Saba’s fiscal 2012, Saba 
+professional services employees and managers engaged in two time-keeping practices that led to its 
+false revenue recognition.  First, there were multiple incidents of ICG Consultants recording hours 
+and billing customers for the performance of professional services in advance of performing those 
+services in order to accelerate revenue recognition and achieve quarterly revenue targets (“pre-
+booking”).  Second, ICG and Field Consultants regularly failed to report professional services time 
+worked in order to conceal budget overruns from management and finance, instead recording that 
+time to non-billable project codes or not at all (“under-booking”).   
+ 
+ 11. These improper time-keeping practices precluded the time records from serving as 
+reliable evidence under GAAP to recognize revenue in the manner that Saba did.  As such, Saba 
+management has concluded that Saba cannot demonstrate VSOE for the period from 2008 through 
+the second quarter of fiscal 2012.  Over that period, therefore, Saba was required to recognize 
+professional services revenues on a completed contract basis, which would have required it to defer 
+substantially all of its professional services revenue and much of its license revenue (where 
+software licenses were bundled with professional services) until the contract was completed.  
+Accordingly, virtually all of Saba’s professional services revenue was misstated over the relevant 
+time period because revenue was recognized earlier than it should have been under the applicable 
+accounting principles. 
+ 
+12. The practices of pre-booking and under-booking were directed by and known to 
+numerous individuals in the professional services organization and ICG, including the two most 
+senior Saba employees overseeing the professional services organization in North America over 
+the relevant time period.  Those senior Saba employees were told on multiple occasions by the 
+finance department that the Company’s accountants and auditors needed to understand exactly how 
+many hours were being worked and when (regardless of whether or not they were billed to the 
+customer) in order to ensure that revenue was recognized accurately, and they understood that 
+inaccurate time-keeping would lead to misstatements in Saba’s reported professional services 
+revenue and violate the Company’s policies regarding financial reporting, including the Code of 
+Business Conduct and the Revenue Recognition Policy.   
+  
+B. Scope and Impact of the Fraud  
+ 
+ 13. Saba’s professional services revenues, gross margins and income were materially 
+overstated in its periodic filings from October 4, 2007 through January 6, 2012 as a result of the 
+time-reporting misconduct.   
+ 
+14. The practices of pre-booking and under-booking, and the fundamental inaccuracy 
+in Saba’s time records revealed by these practices, have led Saba management to conclude that it 
+can no longer rely on its calculation of VSOE of fair value for professional services.  In this 
+circumstance, ASC 985-605 (Certain Revenue Arrangements That Include Software Elements) and 
+ 5 
+ASC 605-35 (Revenue Recognition) require that the Company defer to the point where services are 
+complete, rather than recognize over the period where services are performed, standalone services 
+revenue and revenue on software license and cloud services agreements that contain bundled 
+professional services.  Accordingly, Saba has determined and announced that it is required to 
+restate its financial statements for the years 2008, 2009, 2010 and 2011, and the first two quarters 
+of 2012, due to its material non-compliance with GAAP.  Although Saba has not yet filed its 
+required restatement, the cumulative impact of this alternative revenue recognition treatment is 
+approximately $70 million over the period from 2008 through the second fiscal quarter of 2012.   
+The Company expects that the restatement will change the time period during which the affected 
+revenues are recognized, generally shifting the timing of such revenues to later periods. 
+ 
+15. These misstatements are material.  First, based on the Company’s own estimates, 
+the restated financials will reflect overstatements of gross revenue and profit of more than 5% in 
+each year for the period 2008 through 2011.  Second, the effect of the inflated revenue was that 
+Saba met analyst expectations for EPS in certain quarters and caused at least one year (2010) to 
+reflect net income when, but for the inflated revenue, the Company should have reported a net loss.   
+ 
+C. Saba’s Required Restatement 
+ 
+ 16. On August 6, 2012, Saba announced that, following an internal accounting review, 
+management had determined that its annual financial results for fiscal years 2011 and 2010, as well 
+as the first and second quarters of fiscal year 2012, should be restated as a result of instances of 
+improper time-recording that it had identified in the Company’s professional services business.  On 
+November 5, 2012, Saba announced that management had determined that the Company’s annual 
+financial results for fiscal years 2009 and 2008 would also need to be restated. 
+ 
+D. Compensation of CFOs Slater and Williams  
+ 
+ 17.  During the 12-month periods that followed the filing of the periodic reports 
+requiring restatement, Slater and Williams received bonuses and realized profits from sales of Saba 
+stock.   
+ 
+ 18. Slater and Williams have not reimbursed those amounts to Saba. 
+  
+Violations 
+ 
+ 
+ 19. Section 304 of the Sarbanes-Oxley Act of 2002  requires the chief financial officer 
+of any issuer required to prepare an accounting restatement due to material noncompliance with the 
+securities laws as a result of misconduct to reimburse the issuer for (i) any bonus or incentive-
+based or equity-based compensation received by that person from the issuer during the 12-month 
+periods following the false filings, and (ii) any profits realized from the sale of securities of the 
+issuer during those 12-month periods.  Section 304 does not require that a chief financial officer 
+engage in misconduct to trigger the reimbursement requirement.  Slater and Williams both realized 
+Saba stock-sale profits and received bonuses during the 12-month periods following the filings 
+ 6 
+containing financial results that Saba is required to restate.  They have not, to date, reimbursed the 
+Company for those amounts.  Slater and Williams have, therefore, violated Sarbanes-Oxley 
+Section 304. 
+ 
+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, pursuant to Section 21C of the Exchange Act, that: 
+ 
+ A. Respondents Slater and Williams cease and desist from committing or causing any 
+violations and any future violations of Section 304 of the Sarbanes-Oxley Act. 
+ 
+ B. Respondent Slater shall, within 30 days of the entry of this Order, reimburse Saba 
+for a total of $337,375 pursuant to Section 304(a) of SOX.  Respondent shall simultaneously deliver 
+proof of satisfying this reimbursement obligation to Erin Schneider, Division of Enforcement, 
+Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San Francisco, 
+California 94104.   
+ 
+ C. Respondent Williams shall, within 30 days of the entry of this Order, reimburse 
+Saba for a total of $141,992 pursuant to Section 304(a) of SOX.  Respondent shall simultaneously 
+deliver proof of satisfying this reimbursement obligation to Erin Schneider, Division of 
+Enforcement, Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San 
+Francisco, California 94104.   
+ 
+ 
+  
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74262 / February 11, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3637 / February 11, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-15965 
+ 
+ 
+In the Matter of 
+ 
+CHILD, VAN WAGONER & 
+BRADSHAW, PLLC, RUSSELL 
+E. ANDERSON, CPA, and 
+MARTY VAN WAGONER, CPA,  
+ 
+Respondents. 
+ 
+ 
+ORDER MAKING FINDINGS 
+AND IMPOSING REMEDIAL 
+SANCTIONS 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. 
+ 
+ On July 8, 2014, the Securities and Exchange Commission (“Commission”) instituted 
+public administrative and cease-and-desist proceedings against Child, Van Wagoner & Bradshaw, 
+PLLC (“CVB”), Russell E. Anderson, CPA (“Anderson”), and Marty Van Wagoner, CPA (“Van 
+Wagoner”) (collectively “Respondents”), pursuant to Sections 4C and 21C of the Securities 
+Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of 
+Practice and also against CVB and Anderson pursuant to Rule 102(e)(1)(iii) of the Commission’s 
+Rules of Practice.  Respondents have submitted an Offer of Settlement (the “Offer”) which the 
+Commission has determined to accept.  
+ 
+II. 
+ 
+ Solely for the purpose of settling 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 
+Making Findings and Imposing Remedial Sanctions (“Order”), as set forth below.  
+ 
+ 
+ 
+ 2 
+ 
+III. 
+ 
+ On the basis of this Order and Respondents’ Offer, the Commission finds1 that:  
+ 
+SUMMARY 
+ 
+1. Between March 2010 and June 2011, CVB, an accounting firm based in Salt Lake 
+City, Utah, and Anderson and Van Wagoner, two of its partners, served as the independent 
+auditors of Yuhe International, Inc. (“Yuhe”), a China-based company whose stock was 
+previously registered with the Commission and traded on Nasdaq.  These proceedings arise from 
+Respondents’ failures to comply with Public Company Accounting Oversight Board (“PCAOB”) 
+Auditing Standards (“PCAOB Standards”) in their 2009 and 2010 audits of Yuhe.  Among other 
+failures, CVB and Anderson failed to:  (a) properly plan the audits and supervise assistants; (b) 
+properly assess audit risk and materiality; (c) properly consider fraud and illegal acts; and (d) act 
+with due professional care.  In his role as engagement quality review partner, Van Wagoner failed 
+to act with due professional care because he was aware, or should have been aware, of audit 
+deficiencies but did not address them.  Additionally, by virtue of his failure to comply with 
+professional standards during Yuhe’s 2010 audit, Van Wagoner also violated the engagement 
+quality review standard set forth in AS 7. 
+ 
+ 2.  The Respondents’ failures in the 2009 audit arose principally because CVB and 
+Anderson effectively performed no audit work of their own and instead relied on the audit work 
+papers of Yuhe’s prior auditor which had begun the 2009 audit, but then abruptly resigned without 
+completing it.  Even though neither CVB nor Anderson planned, performed, or supervised the prior 
+firm’s audit work, they took that firm’s work papers, performed at best a cursory review of them, 
+and then issued an audit report containing an unqualified opinion on Yuhe’s financial statements—
+all within only approximately three weeks of accepting the Yuhe engagement.   
+ 
+ 3.  CVB and Anderson also performed a deficient audit of Yuhe’s 2010 financial 
+statements.  During planning for the 2010 audit, CVB and Anderson assessed Yuhe as lacking 
+effective internal controls such that no controls reliance could be utilized in performing the audit.  
+Specifically, they documented within CVB’s planning work papers that “the auditor is concerned 
+about the risk of material misstatement” due to Yuhe’s “inability to perform proper procedures 
+necessary to produce a reliable financial statement.”  They also noted that Yuhe personnel 
+appeared to lack the experience and ability to create financial statements using accounting 
+principles generally accepted in the United States (“US GAAP”).  Yet, despite this assessment, 
+CVB and Anderson failed to implement auditing procedures that addressed the risks identified.  
+They performed an audit based upon the basic audit procedures within their prescribed checklists 
+without modification, failed to extend procedures to address the known risk of material 
+misstatement, and relied heavily on management representations.  They also failed to provide 
+meaningful direction and supervision to the foreign audit staff CVB hired to perform fieldwork in 
+China (hereafter, “Foreign Audit Staff”).  Despite these deficiencies, and without the application of 
+                                                 
+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 
+due professional care in his role as engagement quality reviewer, Van Wagoner provided his 
+concurrence on the issuance of the audit report.   
+ 
+RESPONDENTS 
+ 
+ 4. Child, Van Wagoner & Bradshaw, PLLC, located during the pertinent period in 
+Salt Lake City, Utah, is a Utah professional limited liability company and public accounting firm 
+formerly registered with the PCAOB.  CVB acted as Yuhe’s independent auditor initially from 
+March 12, 2008 to December 7, 2009, and then again from March 9, 2010 to June 17, 2011.  CVB 
+performed public company audits2 of, and issued audit reports containing unqualified opinions on, 
+the financial statements of Yuhe for Yuhe’s fiscal years ending December 31, 2008, December 31, 
+2009, and December 31, 2010.  CVB resigned as Yuhe’s independent auditor on June 17, 2011, 
+following public disclosure by Yuhe that a purported business acquisition by Yuhe had, in fact, 
+never occurred.  During the time of its Yuhe audits, CVB had four audit partners and two non-audit 
+partners.  CVB ceased to do public company audits as of August 1, 2012.  CVB is no longer 
+registered with the PCAOB, but remains “active” and in “good standing” in the records of the State 
+of Utah Division of Corporations and Commercial Code.   
+ 
+5. Russell E. Anderson, age 53, is a Certified Public Accountant (“CPA”) licensed to 
+practice in Utah.  Anderson served as CVB’s engagement partner for the 2008, 2009, and 2010 
+Yuhe audits and was responsible for making all significant decisions regarding the engagements.  
+During 2009 and 2010, Anderson was also CVB’s “quality control partner.”  He is a resident of 
+West Valley City, Utah. 
+ 
+6.  Marty Van Wagoner, age 52, is a CPA licensed to practice in Utah.  Van Wagoner 
+served as CVB’s engagement quality review partner for the 2008, 2009 and 2010 audits of Yuhe.  
+He is a resident of Eagle Mountain, Utah. 
+   
+RELEVANT ENTITY 
+  
+ 7. Yuhe International, Inc. is a Nevada corporation whose principal offices are located 
+in Weifang, Shandong Province, People’s Republic of China.3  Yuhe sells day-old chicken 
+broilers, i.e., chickens that are bred and raised for meat production, and claims to be the largest 
+supplier of day-old broilers in China.  All of Yuhe’s operations are carried out in China.  Its 
+common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act, 
+and was traded on the Nasdaq Capital Market.  On October 20, 2010, Yuhe completed a registered 
+public offering in the United States of more than four million shares of its common stock at a price 
+of $7 per share, raising approximately $27 million.  On July 21, 2011, Nasdaq suspended trading 
+of Yuhe’s common stock, and, on December 16, 2011, Nasdaq filed a Form 25 with the 
+                                                 
+2 A public company audit is defined as an engagement to audit the financial statements of an “issuer” as that term is 
+defined in Section 3(a)(8) of the Exchange Act. 
+ 
+3 On October 18, 2013, the Commission filed a civil injunctive action against Yuhe and its Chief Executive Officer 
+(“CEO”), alleging violations of the antifraud provisions of the Securities Act of 1933 and the Exchange Act, as well 
+as the books and records, internal controls, and reporting provisions of the Exchange Act.  SEC v. Yuhe Int’l, Inc. 
+and Gao Zhentao, Civil Action No. 1:13-CV-01598-RCL (D.D.C., filed Oct. 18, 2013). 
+ 4 
+Commission to delist the common stock, which is now quoted on OTC Link.  Yuhe’s fiscal year 
+ends on December 31. 
+ 
+FACTS 
+ 
+ Background 
+ 
+8. CVB audited Yuhe’s financial statements for its fiscal year ending December 31, 
+2008, and issued an audit report containing an unqualified opinion.  In order to perform field work 
+in China for this audit, CVB contracted with accounting personnel in a Shanghai, China 
+independently owned member firm of an international public accounting network firm (hereafter, 
+“Shanghai Office”).  In conducting Yuhe’s 2008 audit, CVB did not place any reliance on Yuhe’s 
+internal controls due to CVB’s assessment that Yuhe’s internal controls were ineffective.  As a 
+result, CVB conducted a fully substantive audit and did not reduce any substantive testing in its 
+audit procedures based upon assessment or testing of internal controls. 
+ 
+9. CVB continued its engagement as Yuhe’s auditor for Yuhe’s 2009 fiscal year, and 
+conducted interim reviews of Yuhe’s financial statements for that fiscal year’s first, second, and 
+third quarters.  However, in late 2009 during Yuhe’s fourth fiscal quarter, the Shanghai Office was 
+acquired by another international public accounting firm (hereafter, the “Acquiring Firm”). 
+ 
+10. Following this acquisition, on December 7, 2009, the Audit Committee of Yuhe’s 
+Board of Directors appointed the Acquiring Firm as Yuhe’s independent auditor.  Under the 
+engagement agreement, the Acquiring Firm was to perform the 2009 year-end audit and opine on 
+the 2009 financial statements.  Thereafter, from December 2009 through February 2010, the 
+individuals who were formerly the Shanghai Office personnel working on Yuhe’s audits, but now 
+employees of the Acquiring Firm, planned and executed the Yuhe audit under the Acquiring 
+Firm’s supervision and in accordance with the Acquiring Firm’s audit approach. 
+ 
+11. During its audit procedures and fieldwork, the Acquiring Firm identified in Yuhe’s 
+books and records, as of February 2010, ongoing related party transactions which Yuhe had earlier 
+asserted in a public filing would be discontinued by December 31, 2009.  In the prior year, Yuhe’s 
+management had concluded that the related party transactions constituted violations of Section 402 
+of the Sarbanes-Oxley Act of 2002 and that a material weakness existed over the lack of review 
+and approval of related party loans, due to Yuhe’s management permitting these transactions 
+without Board of Director approval.  On March 5, 2010, the Acquiring Firm resigned from the 
+engagement, and Yuhe’s Form 8-K filing cited the prohibited related party loan, the material 
+weakness over the review and approval of such loans, and a material weakness related to Yuhe’s 
+inability to properly close its books as the reasons for the Acquiring Firm’s resignation.  At the 
+time of its resignation, the Acquiring Firm’s audit field work for the 2009 audit of Yuhe was 
+incomplete. 
+ 
+12. Yuhe’s due date for filing its 2009 Form 10-K with the Commission was March 31, 
+2010, less than a month after the Acquiring Firm’s resignation.  With such a short time period 
+before its filing deadline, Yuhe approached CVB to return as its independent auditor and complete 
+the 2009 audit.  Respondents accepted Yuhe’s request and, on March 9, 2010, CVB re-engaged as 
+ 5 
+Yuhe’s independent auditor.  Only twenty-one days later, on March 30, 2010, Anderson, with Van 
+Wagoner’s concurrence, issued CVB’s audit report containing an unqualified opinion on Yuhe’s 
+financial statements for the 2009 fiscal year. 
+ 
+CVB and Anderson’s 2009 Audit of Yuhe 
+ 
+13. Auditing standards require an auditor to adequately plan and perform an audit and 
+properly supervise assistants.  AU § 311.01.4  Audit planning involves developing an overall 
+strategy for the expected conduct and scope of the audit.  The nature, extent, and timing of 
+planning vary with the size and complexity of the entity, experience with the entity, and knowledge 
+of the entity’s business.  In planning the audit, the auditor should consider, among other matters, 
+the entity’s business, accounting policies and procedures, and planned assessed level of control 
+risk.  AU § 311.03.  Supervision involves directing the efforts of assistants who are involved in 
+accomplishing the objectives of the audit and determining whether those objectives are 
+accomplished.  AU § 311.01, .11-.13.  Elements of supervision include, among others, instructing 
+assistants, keeping informed of significant problems encountered, and reviewing the work 
+performed.  AU § 311.11-.13. 
+ 
+14. After reengaging as Yuhe’s auditor for the 2009 audit, CVB and Anderson did not 
+perform their own audit of Yuhe.  Instead, CVB and Anderson sought and obtained the audit work 
+papers of the Acquiring Firm from its incomplete fieldwork for the short period it was Yuhe’s 
+auditor.  Between approximately March 9 and March 30, 2010, CVB’s acting audit manager for 
+the 2009 Yuhe audit, a senior associate at CVB who was not a CPA, collected and reviewed the 
+incomplete audit work papers of the Acquiring Firm.  The acting audit manager did not request that 
+any additional audit procedures be performed, and did not provide review notes for additional 
+clarification or documentation to be added to the substantive audit procedures.  In fact, no 
+additional meaningful substantive audit procedures were performed for the Yuhe audit by CVB or 
+Anderson or anyone acting at their direction.   
+ 
+15. As a result of not performing their own audit of Yuhe, neither CVB nor Anderson 
+participated in the planning, execution, or supervision of any audit procedures performed for 
+Yuhe’s 2009 audit.  Neither CVB nor Anderson formulated a specific audit plan for Yuhe’s 2009 
+audit, or conducted formal audit planning meetings.  Moreover, neither CVB nor Anderson made 
+sufficient inquiry into Yuhe’s business, recent developments, accounting policies and procedures, 
+or control risk.  Additionally, CVB and Anderson did not provide direction or guidance to the 
+accounting staff in China who performed the audit field work. 
+ 
+16. The auditor should consider audit risk and materiality both in (a) planning the audit 
+and designing auditing procedures and (b) evaluating whether the financial statements taken as a 
+whole are presented fairly, in all material respects, in conformity with generally accepted 
+accounting principles.  The auditor should consider audit risk and materiality in the first 
+circumstance to obtain sufficient competent evidential matter on which to properly evaluate the 
+financial statements in the second circumstance.  AU § 312.12.   
+ 
+                                                 
+4 References to auditing standards in this Order are to PCAOB Standards in effect at the time the audit work was 
+performed. 
+ 6 
+17. As a result of not performing their own audit of Yuhe, neither CVB nor Anderson 
+participated in assessing audit risk or materiality for Yuhe’s 2009 audit.  CVB and Anderson 
+simply accepted the assessment of materiality that the Acquiring Firm had documented without 
+any consideration of how the amounts were established or if those amounts were appropriate.  As 
+part of the work that CVB and Anderson had done for the quarterly reviews, there was no planning 
+or assessments documented that correspond to the procedures that were ultimately performed.   
+ 
+18. The audit approach used by the Acquiring Firm for Yuhe’s 2009 audit differed 
+significantly from that of CVB and Anderson’s audit approach in the 2008 audit of Yuhe.  For the 
+2009 audit, the Acquiring Firm’s audit approach contemplated an intended reliance on Yuhe’s 
+internal controls which, if effective, would have allowed the Acquiring Firm to reduce its 
+substantive testing.  However, for the 2008 audit, CVB and Anderson had assessed Yuhe’s internal 
+control over financial reporting as weak to the point of planning to obtain no audit comfort from 
+testing them.  Further, the testimony of Anderson shows that he and CVB continued to place no 
+reliance on controls for the 2009 audit.  When CVB re-engaged as Yuhe’s auditor, CVB and 
+Anderson failed to adjust the audit approach used by the Acquiring Firm, or explain in their work 
+papers why reliance on Yuhe’s internal controls was appropriate. 
+ 
+19. Auditing standards require an auditor to plan and perform an audit to obtain 
+reasonable assurance about whether the financial statements are free of material misstatement, 
+whether caused by error or fraud.  AU § 316.01.  Among other things, members of the audit team 
+should discuss the potential for material misstatement due to fraud.  Discussions should include an 
+exchange of ideas or “brainstorming” among the audit team members, including the auditor with 
+final responsibility for the audit, about how and where they believe the entity’s financial statements 
+might be susceptible to material misstatement due to fraud, how management could perpetrate and 
+conceal fraudulent financial reporting, and how assets of the entity could be misappropriated.  AU 
+§ 316.14.  Auditing standards require an auditor to make inquiries of management and others 
+within the entity to obtain their views about the risks of fraud and how they are addressed.  AU 
+§316.14-.27. 
+ 
+20. By not planning or performing the 2009 audit of Yuhe, CVB and Anderson did not 
+seek to obtain reasonable assurance that Yuhe’s financial statements were free of material 
+misstatement, whether by error or fraud.  CVB and Anderson did not consider the risks of material 
+misstatement due to fraud at Yuhe, did not meet to discuss the susceptibility of Yuhe’s financial 
+statements to material misstatement due to fraud, and did not inquire of Yuhe management or its 
+employees about fraud in connection with CVB and Anderson’s issuance of its 2009 audit report. 
+ 
+21.   AU § 317 notes that audit procedures applied for the purpose of forming an opinion 
+on the financial statements may bring possible illegal acts to the auditor’s attention.  Examples of 
+these procedures include reading minutes; inquiring of the client’s management and legal counsel 
+concerning litigation, claims, and assessments; and performing substantive tests of details of 
+transactions or balances.  Auditing standards require an auditor to make inquiries of management 
+concerning the client’s compliance with laws and regulations, including, where applicable, the 
+client’s policies relative to the prevention of illegal acts.  AU § 317.08.   
+ 
+ 7 
+22. There is no documentary evidence suggesting any inquiries by CVB or Anderson of 
+Yuhe’s management concerning Yuhe’s policies related to the prevention of illegal acts and 
+compliance with laws and regulations.  Here, such inquiries would have been appropriate, given (i) 
+the resignation of the prior auditor; (ii) the continued existence of prohibited loans; (iii) the number 
+and type of audit adjustments included in the Acquiring Firm’s incomplete audit work papers that 
+CVB obtained, which indicated a lack of knowledge within Yuhe of financial reporting practices 
+common to the United States; (iv) the weak or non-existent control environment; and (v) the use of 
+personal bank accounts for Yuhe payments, which would have indicated higher risk and potentially 
+triggered additional procedures and inquiries. 
+ 
+23. Auditing standards also require an auditor to consider the risks surrounding related 
+party transactions.  AU § 334.  An auditor should obtain an understanding of management 
+responsibilities, the relationship of each component to the total entity, the business purpose served 
+by the various components of the entity, and the controls over management activities.  AU § 
+334.05.  After identifying related party transactions, the auditor should apply the procedures he 
+considers necessary to obtain satisfaction concerning the purpose, nature, and extent of these 
+transactions and their effect on the financial statements.  The procedures should be directed toward 
+obtaining and evaluating sufficient competent evidential matter and should extend beyond inquiry 
+of management.  AU § 334.09. 
+ 
+24. CVB and Anderson did not consider the risks surrounding related party transactions 
+during the 2009 Yuhe audit.  Instead, CVB and Anderson relied upon work performed and 
+assessments made by the Acquiring Firm whose work papers were incomplete.  CVB and 
+Anderson did not inquire of management independently as part of their audit, nor did they hold any 
+discussions with the Audit Committee concerning related party transactions.   
+ 
+25. Under auditing standards, the observation of inventories is mandated as a generally 
+accepted auditing procedure.  AU § 331.01.  CVB and Anderson did not perform an inventory 
+observation during the 2009 audit of Yuhe.  An inventory observation was done by the Acquiring 
+Firm.  Moreover, when the Acquiring Firm performed the observation, it only performed limited 
+counts because it placed some reliance on Yuhe’s internal controls relating to inventory.   
+ 
+26. Auditing standards require auditors to exercise due professional care throughout the 
+audit.  AU § 230.  Due professional care requires that the auditor exercise professional skepticism, 
+which means a questioning mind and a critical assessment of audit evidence.  Moreover, gathering 
+and objectively evaluating audit evidence requires the auditor to consider the competency and 
+sufficiency of the evidence.  Since evidence is gathered and evaluated throughout the audit, 
+professional skepticism should be exercised throughout the audit process.  By failing to adhere to 
+the auditing standards set forth above, CVB and Anderson failed to exercise due professional care 
+during the 2009 Yuhe audit.   
+ 
+27. Van Wagoner, as engagement quality review partner, also failed to exercise due 
+professional care in Yuhe’s 2009 audit.  Van Wagoner had responsibility for reviewing the audit 
+work for the 2009 audit.  He was aware that CVB and Anderson had not planned, conducted, or 
+supervised an audit of Yuhe and had instead taken, and were relying upon, the work papers of a 
+different audit firm.  Despite having this knowledge, Van Wagoner concurred in CVB’s issuance 
+ 8 
+of an audit report containing an unqualified opinion on Yuhe’s financial statements for fiscal year 
+2009. 
+ 
+28. Under the third standard of field work, sufficient competent evidential matter is to 
+be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable 
+basis for an opinion regarding the financial statements under audit.  AU § 326.01.  CVB and 
+Anderson did not contribute or provide supervision in the inspection, observation, inquiry, or 
+confirmation processes of the 2009 audit of Yuhe—all of which were done by the Acquiring Firm. 
+ 
+29.   Audit documentation is the written record of the basis for the auditor’s conclusions 
+that provides the support for the auditor’s representations in the auditor’s report.  Audit 
+documentation also is the basis for the review of the quality of the work because it provides the 
+reviewer with written documentation of the evidence supporting the auditor’s significant 
+conclusions.  Among other things, audit documentation includes records of the planning and 
+performance of the work, the procedures performed, evidence obtained, and conclusions reached 
+by the auditor.  AS 3, ¶ 2. 
+ 
+30. CVB and Anderson failed to properly document the 2009 audit.  They failed to 
+document how they accepted and utilized the work of another firm, how they were able to 
+supervise assistants performing audit procedures before CVB was engaged on the audit, how they 
+obtained evidence, and how they reached conclusions. 
+ 
+31.   Obtaining representations from management is required for audits performed in 
+accordance with PCAOB Standards, as outlined in AU § 333.  While such representations are part 
+of the evidence obtained by an independent auditor, they cannot substitute for the application of the 
+auditing procedures needed to afford a reasonable basis for an opinion regarding the financial 
+statements under audit.  AU § 333.02.  In the 2009 audit of Yuhe, CVB and Anderson obtained 
+written representations without applying auditing procedures which would have been necessary to 
+form a basis for their opinion.   
+ 
+CVB and Anderson’s 2010 Audit of Yuhe 
+ 
+32. Yuhe engaged CVB to conduct an audit of its 2010 financial statements.  CVB and 
+Anderson documented that Yuhe presented a significant risk of material misstatement because 
+Yuhe lacked the ability to perform the proper procedures necessary to produce reliable financial 
+statements, and Yuhe personnel lacked the experience and ability to create financial statements in 
+accordance with US GAAP, understand Yuhe’s transactions, and account for them properly.  
+Accordingly, citing a weak controls environment, CVB and Anderson planned their audit assuming 
+no controls reliance.   
+ 
+33.   For the 2010 audit, CVB increased the planning materiality threshold to over 230% 
+of the prior year’s number, even though CVB and Anderson continued to believe that they could 
+not rely on Yuhe’s internal controls and there was not a proportionate increase in net income.  
+Additionally, CVB and Anderson did not document their rationale for increasing materiality in 
+2010. 
+ 
+ 9 
+34. Despite assessing a weak controls environment, CVB and Anderson’s approach to 
+the audit consisted mostly of a perfunctory completion of checklists and certain substantive testing 
+procedures, along with a review of those checklists by CVB and Anderson and did not include a 
+proper consideration of risk and materiality.   
+ 
+35. For the 2010 Yuhe audit, CVB and Anderson contracted with personnel in China to 
+perform fieldwork on CVB’s behalf.  However, CVB and Anderson did not play a substantive role 
+in audit supervision and, instead, sent checklists to the Foreign Audit Staff to use without specific 
+instructions, detailed work plans, or appropriate modifications based on identified risks.  CVB and 
+Anderson failed to provide the Foreign Audit Staff specific guidance on the procedures to be 
+performed, the audit objectives to be accomplished, or the need to maintain proper audit 
+documentation in accordance with AU § 311 and AS 3.   
+ 
+36.  CVB’s audit manager gave the work papers created by the Foreign Audit Staff 
+only a cursory review with no follow up or substantive dialogue as to their content or findings.  
+Neither CVB nor Anderson questioned the substantive work performed by the Foreign Audit Staff 
+or provided any review comments or requests for additional procedures.  CVB and Anderson failed 
+to comply with the provisions of AU § 311 as outlined in paragraph 13.    
+ 
+37. Whenever the auditor has concluded that there is significant risk of material 
+misstatement of the financial statements, the auditor should consider this conclusion in 
+determining the nature, timing, or extent of procedures; assigning staff; or requiring appropriate 
+levels of supervision.  The knowledge, skill, and ability of personnel assigned significant 
+engagement responsibilities should be commensurate with the auditor’s assessment of the level 
+of risk for the engagement.  Ordinarily, higher risk requires more experienced personnel or more 
+extensive supervision by the auditor with final responsibility for the engagement during both the 
+planning and the conduct of the engagement.  Higher risk may cause the auditor to expand the 
+extent of procedures applied, apply procedures closer to or as of year end, particularly in critical 
+audit areas, or modify the nature of procedures to obtain more persuasive evidence.  AU § 
+312.17.   
+ 
+38. CVB and Anderson documented during the fraud risk discussion concerns about the 
+risk of material misstatement due to Yuhe’s inability to perform proper procedures necessary to 
+produce reliable financial statements.  Despite CVB and Anderson having assessed Yuhe’s 
+internal controls as ineffective and its personnel as lacking in experience to produce US GAAP 
+financial statements, CVB and Anderson failed to properly consider the risk of material 
+misstatement and design appropriate audit procedures to address the identified risks.   
+ 
+39.   CVB and Anderson failed to properly consider the possibility of fraud or modify 
+and extend the audit procedures based on such considerations in 2010.  CVB and Anderson also 
+identified as a risk the use of personal bank accounts to transact company business and the risk of 
+personal funds being intermingled with business funds.  To address the risk identified, CVB and 
+Anderson assigned two Hong Kong based individuals on the Foreign Audit Staff to perform 
+procedures to address these risks.  However, neither CVB nor Anderson supervised or reviewed 
+the procedures carried out by these two individuals.  AU § 312.17 states that higher risk requires 
+more experienced personnel or more extensive supervision by the auditor with final 
+ 10 
+responsibility for the engagement during both the planning and the conduct of the engagement. 
+AU § 316.01 requires an auditor to plan and perform an audit to obtain reasonable assurance about 
+whether the financial statements are free of material misstatement, whether caused by error or 
+fraud.  By not properly addressing the risks that were identified, or supervising the staff assigned 
+to the task, CVB and Anderson failed to properly consider and address the risk associated with 
+fraud on the financial statements.   
+ 
+40.  Even though CVB and Anderson assessed Yuhe’s internal controls as ineffective and 
+its personnel as lacking in experience to produce US GAAP financial statements, CVB and 
+Anderson relied on discussions with management by the Foreign Audit Staff and on evidence 
+supplied by management throughout their audit as their sole basis for audit evidence in certain 
+areas.  CVB and Anderson’s overreliance on management’s representations, especially in light of 
+their assessment of management’s abilities, was inappropriate.  While such representations from 
+management are part of the evidential matter the independent auditor obtains, they are not a 
+substitute for the application of those auditing procedures necessary to afford a reasonable basis for 
+an opinion regarding the financial statements under audit.  AU § 333.02.   
+ 
+41. In late March 2011, CVB and Anderson completed Yuhe’s 2010 audit and issued 
+an audit report containing an unqualified opinion on Yuhe’s financial statements for fiscal year 
+2010. 
+ 
+42. Under the auditing standard governing engagement quality review which was 
+effective for Yuhe’s 2010 audit, the engagement quality reviewer should evaluate 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 7, ¶ 9.  The 
+engagement quality reviewer should evaluate the significant judgments that relate to engagement 
+planning, including the consideration of the auditing firm’s recent engagement experience with the 
+company and risks identified in connection with the firm’s client acceptance and retention process, 
+the consideration of the company’s business, recent significant activities, and related financial 
+reporting issues and risks, and the judgments made about materiality and the effect of those 
+judgments on the engagement strategy.  AS 7, ¶ 10.  To evaluate such judgments and conclusions, 
+the engagement quality reviewer should, to the extent necessary to satisfy the requirements, hold 
+discussions with the engagement partner and other members of the engagement team and review 
+documentation.  AS 7, ¶ 9.  In an audit, the firm may grant permission to the client to use the 
+engagement report only after the engagement quality reviewer provides concurring approval of 
+issuance.  AS 7, ¶ 13. 
+ 
+43.  Van Wagoner failed to fulfill the requirements of AS 7 for Yuhe’s 2010 audit.  
+Specifically, the work papers do not evidence any communications between the audit team and 
+Van Wagoner throughout the year or during the audit process.  The emails among team members 
+show that the vast majority of Van Wagoner’s communications appear perfunctory and lacking in 
+substantive information or commentary.  There is no evidence that he reviewed or evaluated the 
+audit planning process, the assessment of materiality, or the consideration and assessment of fraud 
+risks in a manner that would fulfill professional responsibilities.   
+ 
+ 
+ 11 
+Yuhe’s Public Offering and Fraud 
+ 
+44. On June 2, 2010, Yuhe filed its Form S-3 Registration Statement and Prospectus 
+with the Commission, which became effective on June 23, 2010.  On October 19, 2010, Yuhe filed 
+its Preliminary Prospectus Supplement, and, on October 20, 2010, it filed its Final Prospectus 
+Supplement.  CVB’s audit report containing an unqualified opinion for 2009 was included in those 
+filings, as each incorporated Yuhe’s 2009 Form 10-K.  From October 20, 2010 to November 2, 
+2010, Yuhe conducted a public offering, selling 4.14 million newly issued shares of common stock 
+at a price of $7.00 per share, and receiving net proceeds in excess of $27 million.   
+ 
+ 45. On December 31, 2009, and January 4, 2010, Yuhe filed Forms 8-K announcing 
+that on December 24, 2009, it had entered into an agreement with Waifang Dajiang Corporation 
+to purchase thirteen breeder farms for an aggregate price of approximately $15.2 million.  Prior 
+to the acquisition, Yuhe owned only fourteen breeder farms, which meant the acquisition would 
+increase Yuhe’s capacity by 60%.  From January 2010 through June 2011, in press releases and 
+filings with the Commission, Yuhe provided numerous updates concerning the status of the 
+acquired farms.  However, on June 17, 2011, Yuhe hosted a conference call during which Yuhe 
+disclosed for the first time that the acquisition had never been completed and that the funds had, 
+instead, been placed in a private account controlled by the CEO.  On the same day shortly after 
+the conference call, CVB resigned as Yuhe’s independent auditor, stating that reliance should no 
+longer be placed on its previously issued audit report for 2010.  
+ 
+VIOLATIONS 
+ 
+Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice 
+ 
+ 46. As a result of the conduct described above, Respondents 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) of the Exchange Act and 
+Rule 102(e)(1)(ii) provide, in pertinent part, that the Commission may censure or deny, 
+temporarily or permanently, the privilege of appearing or practicing before the Commission to 
+any person who is found by the Commission to have engaged in improper professional conduct. 
+Section 4C(b) and Rule 102(e)(1)(iv) define improper professional conduct with respect to 
+persons licensed to practice as accountants. 
+ 
+47. Under Section 4C(b) and Rule 102(e)(1)(iv)(B), the term “improper professional 
+conduct” means one of two types of negligent conduct: (1) a single instance of highly 
+unreasonable conduct in circumstances for which heightened scrutiny is warranted; or (2) 
+repeated instances of unreasonable conduct that indicate a lack of competence. 
+ 
+48. Respondents’ failures to abide by PCAOB Standards during the 2009 and 2010 
+Yuhe audits constitute repeated instances of unreasonable conduct.  Additionally, the actions of 
+CVB and Anderson during the 2009 Yuhe audit constitute a single instance of highly unreasonable 
+conduct in circumstances in which heightened scrutiny was warranted.  As a result, the 
+Respondents have demonstrated a lack of competence to practice before the Commission.   
+ 
+ 12 
+49. As a result of the conduct described above, CVB willfully violated and Anderson 
+willfully aided and abetted CVB’s violations of Section 10A(a)(1) and (2) of the Exchange Act 
+and Rule 2-02(b)(1) of Regulation S-X 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.  Section 4C(a)(3) of the 
+Exchange Act and Rule 102(e)(1)(iii) 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 willfully violated, or willfully aided and abetted the violation of, any 
+provision of the securities laws or the rules and regulations issued thereunder.     
+ 
+CVB Violated and Anderson Caused CVB’s Violations of Section 10A(a)(1) and (2) of the 
+Exchange Act and Rule 2-02(b)(1) of Regulation S-X 
+ 
+50. Under Section 21C of the Exchange Act, the Commission may enter a cease and 
+desist order against any person who commits a violation or is or was a “cause” of another’s 
+primary violation if the person knew or should have known that his act or omission would 
+contribute to the primary violation.  Negligence is sufficient to establish “causing” liability under 
+Section 21C of the Exchange Act when a person is alleged to have caused a primary violation 
+that does not require scienter.  See KPMG LLP v. SEC, 289 F.3d 109, 112 (D.C. Cir. 2002). 
+ 
+51. Sections 10A(a)(1) and (2) of the Exchange Act require that each audit of the 
+financial statements of an issuer by a registered public accounting firm must include, in accordance 
+with generally accepted auditing standards (“GAAS”), procedures designed to detect illegal acts 
+and identify related party transactions that are material to the financial statements.  “[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).   
+ 
+52. As a result of the conduct described above, CVB violated Sections 10A(a)(1) and 
+(2) of the Exchange Act by not designing procedures to detect illegal acts and identify related party 
+transactions that were material to the financial statements, and Anderson caused CVB’s violations 
+of Sections 10A(a)(1) and (2) of the Exchange Act. 
+ 
+53. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state 
+whether the audit was made in accordance with generally accepted auditing standards.  “Thus, an 
+auditor violates Regulation S-X Rule 2-02(b)(1) if it issues a report stating that it had conducted its 
+audit in accordance with PCAOB Standards when it had not.”  See In re Andrew Sims, CPA, Rel. 
+No.34-59584, AAER No. 2950 (Mar. 17, 2009). 
+ 
+54. As a result of the conduct described above, CVB violated Rule 2-02(b)(1) of 
+Regulation S-X by issuing an audit report stating that it had conducted its audit in accordance 
+with PCAOB Standards when it had not, and Anderson caused CVB’s violation of, Rule 2-
+02(b)(1) of Regulation S-X. 
+ 
+ 
+ 13 
+FINDINGS  
+ 
+ 55. Based on the foregoing, the Commission finds that Respondents 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. 
+ 
+ 56. Based on the foregoing, the Commission finds that CVB willfully violated and 
+Anderson willfully aided and abetted CVB’s violations of Sections 10A(a)(1) and (2) of the 
+Exchange Act and Rule 2-02(b)(1) of Regulation S-X 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. 
+ 
+ 57.  Based on the foregoing, the Commission finds that CVB violated Sections 
+10A(a)(1) and (2) of the Exchange Act, and Anderson caused CVB’s violations of Sections 
+10A(a)(1) and (2) of the Exchange Act. 
+ 
+ 58. Based on the foregoing, the Commission finds that CVB violated Rule 2-02(b)(1) 
+of Regulation S-X, and Anderson caused CVB’s violation of Rule 2-02(b)(1) of Regulation S-X. 
+ 
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate and in the public interest to 
+impose the sanctions agreed to in the Respondents’ Offer.   
+ 
+ Accordingly, it is hereby ORDERED that: 
+ 
+ A. CVB shall cease and desist from committing or causing any violations and any 
+future violations of Sections 10A(a)(1) and (2) of the Exchange Act. 
+ 
+ B. CVB shall cease and desist from committing or causing any violations and any 
+future violations of Rule 2-02(b)(1) of Regulation S-X. 
+ 
+ C. CVB is denied the privilege of appearing or practicing before the Commission as 
+an accountant.  
+ 
+ D.  Anderson shall cease and desist from committing or causing any violations and any 
+future violations of Sections 10A(a)(1) and (2) of the Exchange Act. 
+ 
+ E. Anderson shall cease and desist from committing or causing any violations and any 
+future violations of Rule 2-02(b)(1) of Regulation S-X. 
+ 
+ F. Anderson is denied the privilege of appearing or practicing before the 
+Commission as an accountant.  After three years from the date of this Order, Anderson 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:  
+ 
+ 14 
+  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 Anderson’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: 
+ 
+   (a)  Anderson, or the public accounting firm with which he is 
+associated, is registered with the PCAOB in accordance with the Sarbanes-Oxley Act of 2002, 
+and such registration continues to be effective; 
+ 
+   (b)   Anderson, or the registered public accounting firm with which he 
+is associated, has been inspected by the PCAOB and that inspection did not identify any 
+criticisms of or potential defects in Anderson’s or the firm’s quality control system that would 
+indicate that the respondent will not receive appropriate supervision; 
+ 
+   (c) Anderson has resolved all disciplinary issues with the PCAOB, and 
+has complied with all terms and conditions of any sanctions imposed by the PCAOB (other than 
+reinstatement by the Commission); and 
+ 
+   (d) Anderson acknowledges his responsibility, as long as Anderson 
+appears or practices before the Commission as an independent accountant, to comply with all 
+requirements of the Commission and the PCAOB, including, but not limited to, all requirements 
+relating to registration, inspections, concurring partner reviews and quality control standards. 
+ 
+ G. The Commission will consider an application by Anderson 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 Anderson’s character, integrity, 
+professional conduct, or qualifications to appear or practice before the Commission. 
+ 
+ H. CVB and Anderson shall pay, jointly and severally, disgorgement of $78,000 and 
+prejudgment interest of $12,506.81, and Anderson shall pay a civil money penalty in the amount of 
+$40,000, within 60 days of the entry of this Order, to the United States Treasury.  If timely 
+payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717.  Payment must 
+be made in one of the following ways: 
+ 
+(1)  Respondents may make direct payment from a bank account via Pay.gov through the 
+SEC website at http://www.sec.gov/about/offices/ofm.htm; or 
+ 
+ 15 
+(2)  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-deliver 
+or mail to: 
+ 
+  Enterprise Services Center 
+  Accounts Receivable Branch 
+  HQ Bldg., Room181, AMZ-341 
+  6500 South MacArthur Boulevard 
+  Oklahoma City, OK 73169 
+ 
+ Payments by check or money order must be accompanied by a cover letter identifying CVB 
+and/or Anderson 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 Edward G. Sullivan, Senior Trial 
+Counsel, Division of Enforcement, 950 East Paces Ferry Road, N.E., Suite 900, Atlanta, Georgia 
+30326.  
+ 
+ I. Van Wagoner is denied the privilege of appearing or practicing before the 
+Commission as an accountant.  After three years from the date of this Order, Van Wagoner 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 Van Wagoner’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: 
+ 
+   (a)  Van Wagoner, or the public accounting firm with which he is 
+associated, is registered with the PCAOB in accordance with the Sarbanes-Oxley Act of 2002, 
+and such registration continues to be effective; 
+ 
+   (b)   Van Wagoner, or the registered public accounting firm with which 
+he is associated, has been inspected by the PCAOB and that inspection did not identify any 
+criticisms of or potential defects in Van Wagoner’s or the firm’s quality control system that 
+would indicate that the respondent will not receive appropriate supervision; 
+ 
+   (c) Van Wagoner has resolved all disciplinary issues with the PCAOB, 
+and has complied with all terms and conditions of any sanctions imposed by the PCAOB (other 
+than reinstatement by the Commission); and 
+ 
+   (d) Van Wagoner acknowledges his responsibility, as long as Van 
+Wagoner appears or practices before the Commission as an independent accountant, to comply 
+ 16 
+with all requirements of the Commission and the PCAOB, including, but not limited to, all 
+requirements relating to registration, inspections, concurring partner reviews and quality control 
+standards. 
+ 
+ J. The Commission will consider an application by Van Wagoner 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 Van Wagoner’s 
+character, integrity, professional conduct, or qualifications to appear or practice before the 
+Commission. 
+ 
+ By the Commission. 
+ 
+ 
+        Brent J. Fields 
+        Secretary 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+ 
+SECURITIES ACT OF 1933 
+Release No. 9725 / February 13, 2015 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74273 / February 13, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3638 / February 13, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16386 
+ 
+ 
+In the Matter of 
+ 
+TRACI J. ANDERSON, CPA,  
+TIMOTHY W. CARNAHAN, 
+AND 
+CYIOS CORPORATION 
+ 
+Respondents. 
+ 
+ 
+ 
+ 
+ORDER INSTITUTING 
+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 
+  
+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: (i) Traci J. Anderson, CPA (“Anderson”) pursuant to Sections 4C1 and 21C of 
+the Securities Exchange Act of 1934 (“Exchange Act”) and 102(e)(1)(iii)2 of the Commission’s 
+                                                 
+1  Section 4C provides, in relevant part, that:  
+ The Commission may censure any person, or deny, temporarily or permanently, to any person the 
+privilege of appearing or practicing before the Commission in any way, if that person is found . . . 
+(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character 
+or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have 
+willfully violated, or willfully aided and abetted the violation of, any provision of the securities 
+laws or the rules and regulations thereunder. 
+2  Rule 102(e)(1)(iii) 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 willfully violated, or 
+ 2 
+Rules of Practice; and (ii) Timothy W. Carnahan (“Carnahan”) and CYIOS Corporation 
+(“CYIOS”) pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Section 
+21C of the Exchange Act.   
+II. 
+After an investigation, the Division of Enforcement and the Office of the Chief Accountant 
+allege that: 
+ A.  RESPONDENTS 
+1. Traci J. Anderson, CPA, age 46 and a resident of Charlotte, North Carolina, has 
+functioned as a contract CFO to CYIOS Corporation since July 2007.  From 2003 through August 
+2010 Anderson was the sole proprietor of a PCAOB-registered public accounting firm and was 
+engaged as CYIOS Corporation’s auditor from September 2005 until she resigned in July 2007 to 
+become the company’s internal accountant.  Anderson consented to a PCAOB order dated August 
+12, 2010 pursuant to which she was barred from being an associated person of a registered public 
+accounting firm.  Additionally, Anderson consented in January 2012 to an order pursuant to which 
+she forfeited her CPA license in North Carolina.  Anderson remains licensed as a CPA in Florida. 
+2. Timothy W. Carnahan, age 47 and a resident of Pompano Beach, Florida, is the 
+founder and is disclosed as the sole officer and director of CYIOS.  Between 2006 and November 
+2012, Carnahan signed and certified each of CYIOS’s periodic filings in the capacities of principal 
+executive and principal financial officer. 
+3. CYIOS Corporation, a Nevada corporation headquartered in Washington D.C., is 
+a Department of Defense contractor providing: systems integration; web and database 
+development; business process management and improvement; and solutions for compliance with 
+Sarbanes-Oxley regulations and Defense Contract Audit Agency and performance-based 
+contracting for government contractors.  Its common stock was registered under Section 12(g) of 
+the Exchange Act and was traded on the OTC Bulletin Board (Symbol: CYIO).  After receiving a 
+letter dated May 12, 2014 from the Commission’s Division of Corporation Finance informing 
+CYIOS that it was not in compliance with its reporting requirements under Section 13(a) of the 
+Exchange Act, CYIOS filed a Form 15-12G on May 30, 2014 terminating the registration of its 
+common stock.    
+B. ANDERSON WAS UNLAWFULLY ASSOCIATED WITH CYIOS AFTER THE 
+PCAOB BARRED HER FROM ASSOCIATING WITH A REGISTERED 
+PUBLIC ACCOUNTING FIRM 
+4. Section 105(c)(7)(B) of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) states 
+that it is “unlawful for any person that is ... barred from being associated with a registered public 
+accounting firm [...] willfully to become or remain associated with any issuer […] in an 
+accountancy or financial management capacity [...] without the consent of the [PCAOB] or the 
+                                                                                                                                                             
+willfully aided and abetted the violation of any provision of the Federal securities laws or the rules 
+and regulations thereunder. 
+ 3 
+Commission.”  Section 105(c)(7)(B) also states that it is unlawful for any “issuer […] that knew, or 
+in the exercise of reasonable care should have known, of such suspension or bar, to permit such an 
+association, without the consent of the Board or the Commission.”   
+5. On August 12, 2010, the PCAOB filed a settled action against Anderson and her 
+firm, Traci Jo Anderson, for multiple deficiencies in audit work performed between 2007 and 2009 
+on public companies engagements unrelated to CYIOS (the “PCAOB Order”).3  The PCAOB 
+Order, which was and is available on its website, revoked the registration of her accounting firm 
+and barred Anderson from being an associated person of a registered public accounting firm.   
+6. Following the issuance of the PCAOB Order, Anderson advised each of her firm’s 
+public company audit clients that she must withdraw because she had been barred by the PCAOB 
+as a result of violations of PCAOB rules and auditing standards.   
+7. Around the same time, Anderson orally notified Carnahan—who was already aware 
+of the PCAOB’s investigation of Anderson— and CYIOS’s then Director of Finance about the 
+existence of the PCAOB Order and directed him to the PCAOB website.   Consequently, CYIOS 
+and Carnahan knew or, in the exercise of reasonable care, should have known that Anderson had 
+been barred from associating with a registered public accounting firm. 
+8. After the PCAOB Order was issued, Anderson continued to perform accountancy 
+and financial management services for CYIOS.  It was Carnahan’s decision to maintain CYIOS’s 
+business relationship with Anderson.  Anderson’s services included providing CFO and general 
+accounting services, assisting CYIOS’s CEO in preparing Commission filings – including Forms 
+10-Q and 10-K – as well as other prohibited services.  CYIOS paid Anderson at least $244,035 for 
+her services between August 2010 and June 2014. 
+9. Anderson never requested or received consent from the PCAOB or the Commission 
+to remain associated with CYIOS in this capacity.   
+C. CYIOS FAILED TO MAKE PERIODIC FILINGS REQUIRED UNDER 
+SECTION 13(A) OF THE EXCHANGE ACT  
+10. Section 13(a) of the Exchange Act and the rules promulgated thereunder require 
+issuers with classes of securities registered pursuant to Section 12 of the Exchange Act to file 
+periodic and other reports with the Commission.  Rules 13a-1 and 13a-13 require, respectively, the 
+filing of accurate annual and quarterly reports (i.e., Forms 10-K and 10-Q). 
+11. CYIOS ceased making filings required under Section 13(a) of the Exchange Act 
+after it filed its third quarter 2012 Form 10-Q in November 2012.  Specifically, CYIOS failed to 
+file its 2012 Form 10-K, its 2013 Forms 10-Q and 10-K, and its first quarter 2014 Form 10-Q.4  
+CYIOS filed a Form 15-12g on May 30, 2014 which terminated the registration of its common 
+                                                 
+3  See PCAOB Release No. 105-2010-007, available at 
+http://pcaobus.org/Enforcement/Decisions/Documents/Traci_Jo_Anderson.pdf. 
+4  CYIOS filed Forms 12b-25 to disclose it was unable to file its 2012 Form 10-K or first quarter 2013 Form 
+10-Q when due, but did not do so for subsequently due filings. 
+ 4 
+stock.  Carnahan authorized each filing CYIOS made with the Commission and was responsible 
+for CYIOS not making filings required under Section 13(a) of the Exchange Act. 
+D. CARNAHAN FAILED TO ASSESS INTERNAL CONTROLS 
+ i. Legal Requirements 
+12. In relevant part, Rule 13a-15(a) states that every issuer with a class of securities 
+registered under Section 12 of the Exchange Act and was either required to file an annual report 
+pursuant to Section 13(a) or 15(d) of the Exchange Act for the prior fiscal year or had filed an 
+annual report for the prior fiscal year, must maintain internal control over financial reporting 
+(“ICFR”).  Rule 13a-15(f) defines ICFR as process designed by the issuer’s executive management 
+to provide reasonable assurance regarding the reliability of financial reporting and the preparation 
+of financial statements for external purposes in accordance with generally accepted accounting 
+principles.    
+13. Rule 13a-15(c) requires management of such issuers to evaluate, with the 
+participation of the principal executive and principal financial officers (or persons performing 
+similar functions) the effectiveness of the issuer’s ICFR as of the end of each fiscal year.  Rule 
+13a-15(c) states that there are many different ways to conduct an evaluation of internal controls 
+over financial reporting to meet the requirements of this rule, and that an issuer can comply with 
+this requirement 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”).  
+14. The registrant “must maintain evidential matter, including documentation, to 
+provide reasonable support for management’s assessment of the effectiveness of the registrant’s 
+internal control over financial reporting,” as stated in the instructions to Regulation SK, Item 308, 
+Internal Control over Financial Reporting.  The 2007 Guidance similarly states “Management is 
+responsible for maintaining evidential matter, including documentation to provide reasonable 
+support for its assessment.   
+15. Rule 13a-14, Certification of Disclosure in Annual and Quarterly Reports, requires 
+each Form 10-Q and 10-K to include certifications signed by each principal executive and 
+principal financial officer of the issuer (or persons performing similar functions).  Among other 
+things, the certifying officers must confirm that the report 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 with respect to the period 
+covered by [the] report. 
+ ii. Carnahan’s Assessments of Internal Control over Financial Reporting 
+16. CYIOS’s Forms 10-K for the fiscal years ended December 31, 2009, 2010, and 
+2011 include management’s report on ICFR, as required by Exchange Act Rule 13a-15(c) and Item 
+308 of Regulation S-K.  CYIOS also included management’s report on ICFR in its 2010, 2011, and 
+ 5 
+2012 Forms 10-Q. 5  CYIOS stated in each report that management had assessed ICFR using the 
+criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in 
+Internal Control – Integrated Framework (the “COSO Framework”). 
+17. These statements were false. CYIOS either did not evaluate ICFR, or did not 
+evaluate ICFR using the COSO Framework. 
+18. In addition, CYIOS did not maintain any documentation of management’s 
+assessments of ICFR.  As discussed in the 2007 Guidance and stated in the instructions to 
+Regulation S-K, Item 308, a registrant “must maintain evidential matter, including documentation, 
+to provide reasonable support for management's assessment of the effectiveness of the registrant's 
+internal control over financial reporting.” 
+19. For these reasons, Carnahan’s certifications that CYIOS had assessed ICFR using 
+the COSO Framework were false.     
+E. OFFERS AND SALES OF SECURITIES 
+20. After filing its 2009 Form 10-K on February 26, 2010, CYIOS issued, in exchange 
+for consulting services and debt conversions, common stock under a registration statement filed on 
+Form S-8 (No. 333-147695, filed November 29, 2007).  This registration statement incorporated by 
+reference subsequent filings, including CYIOS’s 2009 Form 10-K and 2010 Forms 10-Q.  
+F. VIOLATIONS 
+21. As a result of the conduct described above, Anderson willfully violated, CYIOS 
+violated, and Carnahan caused CYIOS’s violation of, Section 105(c)(7)(B) of Sarbanes-Oxley, 
+which prohibits a person barred from associating with a registered public accounting firm from 
+willfully becoming or remaining associated with an issuer in an accountancy or financial 
+management capacity without consent of the PCAOB or the Commission and prohibits an issuer 
+that knew or, in the exercise of reasonable care, should have known of such a bar, to permit such 
+an association, without the consent of the PCAOB or the Commission.  
+22. As a result of the conduct described above, CYIOS violated, and Carnahan caused 
+CYIOS’s violations of, Sections 17(a)(2) and 17(a)(3) of the Securities Act.  Section 17(a)(2) 
+makes it unlawful to, in the offer or sale of securities, obtain money or property by means of any 
+untrue statement of a material fact or any omission to state a material fact necessary in order make 
+the statements made, in light of the circumstances under which they were made, not 
+misleading. Section 17(a)(3) makes it unlawful to engage in any transaction, practice, or course of 
+business which operates or would operate as a fraud or deceit upon the purchaser. 
+23. As a result of the conduct described above, CYIOS violated, and Carnahan caused 
+CYIOS’s violations of, Section 13(a), and Rules 13a-1 and 13a-13 thereunder, which require 
+                                                 
+5  Issuers are not required to disclose its assessment of ICFR in quarterly filings, but CYIOS nonetheless 
+included and asserted in each 2012 Form 10-Q that management had conducted an assessment of ICFR and 
+concluded that it was “effective.”  
+ 6 
+issuers with classes of securities registered pursuant to Section 12 of the Exchange Act to file 
+periodic and other reports with the Commission. 
+24. As a result of the conduct described above, Carnahan violated Rule 13a-14 of the 
+Exchange Act, which requires an issuer’s principal executive and principal financial officer to 
+attest that the company’s “report does not contain any untrue statement of a material fact.” 
+25. As a result of the conduct described above, Carnahan violated Rule 13a-15(c) of the 
+Exchange Act, which requires each issuer’s management, with the participation of the principal 
+executive and principal financial officer, or persons performing similar functions, to perform an 
+evaluation of the company’s ICFR as of the end of each fiscal year. 
+III. 
+In view of the allegations made by the Division of Enforcement and the Office of the Chief 
+Accountant, the Commission deems it necessary an d 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 each Respondent 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 
+Section 105(c)(7)(B) of Sarbanes-Oxley. 
+C. Whether, pursuant to Section 8A of the Securities Act, CYIOS and Carnahan should 
+be ordered to cease and desist from committing or causing any violation and any future violation of 
+Sections 17(a)(2) and 17(a)(3) of the Securities Act; 
+D.  Whether, pursuant to Section 21C of the Exchange Act, CYIOS and Carnahan should 
+be ordered to cease and desist from committing or causing any violation and any future violation of 
+Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder; 
+E. Whether, pursuant to Section 21C of the Exchange Act, Carnahan should be ordered 
+to cease and desist from committing or causing any violation and any future violation of Rules 13a-
+14 and 13a-15;  
+F.  Whether, pursuant to Section 4C of the Exchange Act and Rule 102(e) of the 
+Commission’s Rules of Practice, Anderson should be censured or denied, temporarily or permanently, 
+the privilege of appearing or practicing before the Commission as an accountant;  
+ 
+G.  Whether, pursuant to Section 8A of the Securities Act and Section 21B of the 
+Exchange Act, civil penalties should be levied against Respondents; and 
+ 
+H.  Whether, pursuant to Section 8A of the Securities Act and Sections 21B and 21C, 
+respectively, of the Exchange Act, CYIOS and Anderson should be subject to disgorgement with 
+prejudgment interest. 
+ 7 
+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 Respondent s 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 ap pear 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 s 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 
+ 

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+UNITED STATES OF AMERICA 
+before the 
+SECURITIES AND EXCHANGE COMMISSION 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74493 / March 12, 2015 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3642 / March 12, 2015 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16431 
+ 
+In the Matter of 
+ 
+CYNTHIA A. SABOL, 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 Cynthia 
+A. Sabol, CPA (“Respondent” or “Sabol ”) 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 proc eedings 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 
+                                                 
+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 a nd abetting 
+the violation of any provision of the Federal securities laws or of 
+the rules and regulations thereunder. 
+ 2 
+proceedings, and the finding s 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 (the “Order”), as set forth below. 
+III. 
+On the basis of this Order and Respondent’s Offer, the Commission finds that:  
+1. Sabol, age 51, is and has been a certified public accountant licensed to practice in the 
+Commonwealth of Virginia.  From February 2004 through September 23, 2011, Sabol  served as 
+Executive Vice President, Chief Financial Officer, Secretary of the Board of Directors and 
+principal accounting officer of Commonwealth Bankshares, Inc. (“Commonwealth”).  
+2. Commonwealth was, at all relevant times, a Virginia corporation with its principal 
+place of business in Norfolk, Virginia.  Commonwealth’s common stock was initially registered 
+with the Commission pursuant to Section  12(g) of the Exchange Act and was quoted on the 
+NASDAQ National M arket under the stock  symbol “CWBS.” On July 31, 2006, after the 
+NASDAQ became a national exchange, pursuant to  Commission global order, all NASDAQ 
+National Market issuers became Section 12(b) registrants  listed on the new NASDAQ Global 
+Market (“NASDAQ”).  On September 23, 2011, the Virginia State Corporation Commission’s 
+Bureau of Financial Institutions (the “SCC”) and the Federal Deposit Insurance Corporation (the 
+“FDIC”), which insured the deposits held by the Bank, closed the Bank and entered into a purchase 
+and assumption agreement with a subsidiary of a privately held bank holding company to assume 
+the deposits of the Bank.   Commonwealth remained an inactive corporate entity until May 31, 
+2013, when the SCC terminated Commonwealth’s corporate registrat ion.  On July 31, 2013, the 
+Commission revoked Commonwealth Section 12(g) registration by consent. 
+3. On March 12 , 2015 , a final judgment was entered against Sabol, permanently 
+enjoining her from future violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) 
+and 13(b)(5) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5, 13a-
+14, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Section 13(a) of the 
+Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder, in the civil action entitled 
+United States Securities and Exchange Commission v. Edward J. Woodard, et al. , Civil Action 
+Number 2:13-civ-16, in the United States District Court for the Eastern District of Virginia.  Sabol 
+was also ordered to pay a $55,000 civil money penalty, and was barred from serving as an officer 
+or director of a public company for a period of five years. 
+4. The Commission’s complaint alleged, among other things, that: 
+a. Sabol and others  engaged in conduct that significantly misrepresented the 
+health of the construction and development loan portfolio  of Commonwealth’s bank subsidiary  
+and, as a consequence, of Commonwealth itself.   
+b. Eager to give the impression that, despite the financial crisis, all was well, 
+between in or about November 6, 2008 and August 16, 2010,  Sabol and others materially 
+understated Commonwealth’s allowance for loan and lease losses (the “ALLL”), materially 
+ 3 
+underreported Commonwealth’s non -performing loans, and materially understated and 
+underreported Commonwealth’s other real estate owned in its filings with the Commission. 
+c. In addition, throughout this period, Sabol and others made, or aided and 
+abetted Commonwealth and each other in making, false and misleading disclosures in 
+Commonwealth’s filings and earnings releases  regarding Commonwealth’s asset quality, 
+underwriting practices, credit monitoring and adequacy of its ALLL based on current collateral 
+values. 
+IV. 
+In view of the foregoing, the Commission deems it appropriate and in the public interest to 
+impose the sanction agreed to in Respondent Sabol’s Offer. 
+Accordingly, it is hereby ORDERED, effective immediately, that: 
+A. Sabol is suspended from appearing or practicing before the Commission as an 
+accountant. 
+B. After five (5) years from the da te of this order, Respondent may request that the 
+Commission consider her 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 pe rson 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’s work in her practice 
+before the Commission will be reviewed either by the independent audit committee of the 
+public company for which she works or in some other a cceptable manner, as long as she 
+practices before the Commission in this capacity; and/or 
+2. an independent accountant.  Such an application must satisfy the 
+Commission that: 
+(a) Respondent, or the publi c accounting firm with which she 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, or the registered public accounting firm with which 
+she is associated, has been inspected by the Board and that inspection did not 
+identify any criticisms of or potential defects in the respondent’s or the firm’s 
+quality con trol system that would indicate that the respondent will not receive 
+appropriate supervision; 
+(c) Respondent 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 
+ 4 
+(d) Respondent acknowledges her responsibility, as long as 
+Respondent 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. 
+C. The Commission will consider an application by Respondent to resume 
+appearing or practicing before t he Commission prov ided that her stat e CPA license is 
+current and she 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 app lication on its other merits.  The 
+Commission’s review may include consideration of, in addition to the matters referenced 
+above, any other matters relating to Respondent’s character, integrity, professional conduct, 
+or qualifications to appear or practice before the Commission. 
+ By the Commission. 
+ 
+       Brent J. Fields 
+       Secretary 

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+ 
+ 
+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+INVESTMENT ADVISERS ACT OF 1940 
+Release No. 4053 / March 30, 2015 
+ 
+INVESTMENT COMPANY ACT OF 1940 
+Release No. 31539 / March 30, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3644 / March 30, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16462 
+ 
+ 
+In the Matter of 
+ 
+LYNN TILTON; 
+ 
+PATRIARCH PARTNERS, LLC; 
+ 
+PATRIARCH PARTNERS VIII, LLC; 
+  
+PATRIARCH PARTNERS XIV, LLC; AND 
+ 
+PATRIARCH PARTNERS XV, LLC,  
+ 
+Respondents. 
+ 
+ 
+ORDER INSTITUTING 
+ADMINISTRATIVE AND 
+CEASE-AND-DESIST 
+PROCEEDINGS 
+PURSUANT TO 
+SECTIONS 203(e), 203(f) 
+AND 203(k) OF THE 
+INVESTMENT ADVISERS 
+ACT OF 1940, AND 
+SECTION 9(b) OF THE 
+INVESTMENT 
+COMPANY ACT OF 1940, 
+AND NOTICE OF 
+HEARING  
+  
+I. 
+ 
+ The Securities and Exchange Commission (“Commission”) deems it appropriate 
+and in the public interest that public administrative and cease-and-desist proceedings be, 
+and hereby are, instituted pursuant to Sections 203(e), 203(f) and 203(k) of the Investment 
+Advisers Act of 1940 (“Advisers Act”) and Section 9(b) of the Investment Company Act of 
+1940 (“Investment Company Act”) against Lynn Tilton (“Tilton”); Patriarch Partners, LLC 
+(“Patriarch”); Patriarch Partners VIII, LLC (“Patriarch VIII”); Patriarch Partners XIV, LLC 
+(“Patriarch XIV”); and Patriarch Partners XV, LLC (“Patriarch XV”) (collectively, 
+“Respondents”). 
+ 
+ 2 
+ 
+II. 
+ 
+After an investigation, the Division of Enforcement alleges that: 
+ 
+A.  SUMMARY 
+ 
+1. Since 2003, Respondents have defrauded three Collateralized Loan 
+Obligation (“CLO”) funds they manage and these funds’ investors by providing false and 
+misleading information, and engaging in a deceptive scheme, practice and course of 
+business, relating to the values they reported for these funds’ assets.  Lynn Tilton, who 
+controls and makes relevant decisions on behalf of each of the Respondents, is responsible 
+for all of these violations.   
+ 
+2. The three CLO funds, collectively known as the “Zohar Funds,” raised 
+more than $2.5 billion from investors and used these investments to make loans to 
+distressed companies.  These loans to distressed companies are the primary assets of the 
+Zohar Funds.  However, many of the distressed companies have performed poorly and 
+have not made interest payments, or have made only partial payments, to the Funds over 
+several years.   
+ 
+3. As required under the relevant deal documents, through the trustee, Tilton’s 
+entities regularly provide information to the Funds and their investors about the 
+performance of the Funds.  This information includes valuation categorizations of the 
+Funds’ assets and financial statements purportedly reflecting the financial position of each 
+Fund.  
+ 
+4. Despite the poor performance of many of the Funds’ assets, Tilton has 
+intentionally and consistently directed that nearly all valuations of these assets be reported 
+as unchanged from their valuations at the time the assets were originated.   
+ 
+5. These actions are inconsistent with the categorization methodology set forth 
+in documents governing the Funds.  This methodology turns on, among other factors, 
+whether a distressed company has timely made interest payments to the Funds.  Instead of 
+applying this methodology, Tilton instead substitutes her own, independent discretion when 
+categorizing the Funds’ investments.  At Tilton’s direction, Respondents will not assign a 
+lower valuation category to an asset unless and until Tilton subjectively decides to stop 
+“supporting” the distressed company.  
+ 
+6. If Respondents had applied the categorization methodology set forth in the 
+documents, certain valuation ratio tests derived from the categorizations would have failed 
+by at least 2009.  As a result, based on other provisions in the documents, management fees 
+and other payments to Tilton and her entities would have been reduced by almost $200 
+million, and investors would have gained more control over the Funds’ activities, among 
+other consequences.  By applying her own discretion rather than the valuation methodology 
+set forth in the governing documents, Tilton has avoided these consequences and taken 
+ 
+ 3 
+excessive fees from the Funds.  As a result, Respondents’ practices were inconsistent with 
+disclosures and created a clear conflict of interest. 
+ 
+7. Respondents also prepare quarterly financial statements for the Funds, 
+which are provided to investors.  These financial statements include disclosures about the 
+Funds’ loan impairment policy and portfolio fair value.  Tilton certifies these financial 
+statements and represents that they are prepared in conformity with generally accepted 
+accounting principles (“GAAP”).   
+ 
+8. However, contrary to these statements, Respondents do not prepare the 
+financial statements in conformity with GAAP.  Significantly, rather than applying a 
+GAAP-compliant impairment methodology, Respondents impair assets only when Tilton 
+decides to withdraw support for a distressed company.  This approach mirrors the 
+discretionary approach Tilton uses to categorize assets and does not conform with GAAP.  
+It is also inconsistent with other disclosures in the financial statements that falsely indicate 
+that Respondents assess and consider impairment issues and the fair value of the Funds’ 
+loan assets. 
+ 
+9. Respondents have never disclosed Tilton’s discretionary valuation 
+approaches to the Funds or their investors, much less the conflict of interest these 
+approaches created.  As a result, Respondents also breached their fiduciary duties and their 
+contractual standard for managing the Zohar Funds as set forth in the relevant deal 
+documents. 
+ 
+   
+B. RESPONDENTS 
+ 
+10. Lynn Tilton, age 55, is a resident of Rumson, New Jersey and Highland 
+Beach, Florida.  Tilton manages each of the Patriarch entities described below.  She also 
+controls their decisions.   
+11. Patriarch Partners, LLC is a Delaware limited liability company with a 
+principal place of business in New York, New York.  Patriarch’s employees, including 
+Tilton, run the businesses of Patriarch VIII, Patriarch XIV, and Patriarch XV (collectively, 
+the “Patriarch Collateral Managers”).  Patriarch is indirectly owned 100% by Tilton.   
+12. Patriarch Partners VIII, LLC is a Delaware limited liability company 
+with a principal place of business in New York, New York.  Patriarch VIII has been 
+registered as a relying investment adviser with the Commission since March 2012 and is 
+the collateral manager for Zohar CDO 2003-1, Limited (“Zohar I”).  Patriarch VIII is 
+indirectly owned 100% by Tilton and a trust for the benefit of Tilton’s daughter.   
+13. Patriarch Partners XIV, LLC is a Delaware limited liability company 
+with a principal place of business in New York, New York.  Patriarch XIV has been 
+registered as a relying investment adviser with the Commission since March 2012 and is 
+the collateral manager for Zohar II 2005-1, Limited (“Zohar II”).  Patriarch XIV is 
+indirectly owned 100% by Tilton and a trust for the benefit of Tilton’s daughter.   
+ 
+ 4 
+14. Patriarch Partners XV, LLC is a Delaware limited liability company with 
+a principal place of business in New York, New York.  Patriarch XV has been registered as 
+an investment adviser with the Commission since March 2012 and is the collateral manager 
+for Zohar III, Limited (“Zohar III”).  Patriarch XV is indirectly owned 100% by Tilton and 
+a trust for the benefit of Tilton’s daughter.   
+ 
+C. FACTS 
+ 
+Structure, Strategy, and Performance of the Zohar Funds 
+ 
+15. Tilton structured the Zohar Funds as CLO funds.  A CLO fund is a 
+securitization vehicle in which a special purpose entity, the issuer, raises capital through the 
+issuance of secured notes and uses the proceeds to purchase a portfolio of commercial 
+loans.  A collateral manager, typically an investment adviser, determines what loans to 
+purchase or originate on behalf of the CLO fund.  Cash flows and other proceeds from the 
+collateral are used to repay the investor noteholders in the CLO fund. 
+ 
+16. The Zohar Funds’ investors invested in the Zohar CLO Funds in return for 
+the promise of regular interest payments and the repayment of their principal on a specified 
+maturity date.  The three Zohar CLO deals have the following details: 
+ 
+Name of Deal Date of Issuance Approximate 
+Principal Amount 
+of Notes 
+Maturity Date 
+Zohar I  2003 $532 million November 2015 
+Zohar II 2005 $1 billion January 2017 
+Zohar III 2007 $1 billion April 2019 
+ 
+17. Each Zohar deal is governed by various deal documents, including the 
+indenture and the collateral management agreement (“CMA”).   Tilton signed each 
+indenture and each CMA as Manager of the collateral manager.  
+ 
+18. The indenture describes the terms of the offering, including the maturity 
+date of the notes, information reporting requirements, and priority of payments.  The 
+indenture also describes the rights of the parties and responsibilities of the collateral 
+manager.   
+ 
+19. The CMA, a contract between the issuer and the respective Patriarch 
+Collateral Manager, engages Patriarch VIII, XIV, or XV as the collateral manager for the 
+deal and describes that entity’s obligations and compensation.   
+ 
+20. The CMA for each deal allows the Patriarch Collateral Manager to select 
+and manage the collateral to be held by the fund.  Through the Patriarch Collateral 
+Managers, Tilton used the funds raised from investors to buy or make loans to primarily 
+private, mid-sized distressed companies (the “Portfolio Companies”).  Tilton typically 
+directed more than one of the Zohar Funds to extend loans to the same Portfolio Company.  
+ 
+ 5 
+Every quarter, the investors receive an interest payment, generated from the collective 
+interest payments made by the Portfolio Companies.   
+ 
+21. In connection with the loans made to distressed companies, the Zohar Funds 
+obtained equity in the Portfolio Companies.  Tilton also obtained equity in many of the 
+Portfolio Companies through other entities she owned.   
+ 
+22. Tilton’s management strategy for the Zohar Funds is and has been to 
+improve the operations of the distressed Portfolio Companies so that the companies can pay 
+off their debt, increase in value, and eventually be sold for additional profit.  However, the 
+Portfolio Companies as a whole have performed worse than expected.   
+ 
+23. As a result, Tilton has now informed the investors in Zohar I that, without 
+an extension on the maturity date, they will suffer significant losses when their notes in the 
+CLO fund mature in November 2015.  Because of the tremendous overlap in the 
+investments across the three deals, any default in Zohar I would have significant 
+ramifications for Zohar II and Zohar III as well.   
+ 
+Tilton’s Management and Control of the Zohar Funds and the Portfolio 
+Companies  
+ 
+24. Tilton is the chief executive officer (“CEO”) and sole principal of Patriarch 
+Partners, LLC, which employs individuals in various roles to support the Zohar Funds.   
+ 
+25. Tilton and entities under her control own all of the Patriarch Collateral 
+Managers.  The Patriarch Collateral Managers have no employees of their own, but instead 
+rely on the employees of Patriarch to conduct business.  Tilton makes all significant 
+decisions relating to management of the collateral.  She also signs all transaction 
+documents on behalf of the Patriarch Collateral Managers.   
+ 
+26. The Patriarch Collateral Managers are entitled to a Senior Collateral 
+Management Fee of 1% of the amount of assets in the deal, paid quarterly, and a 
+Subordinated Collateral Management Fee (the “Subordinated Fee”) of 1% of the amount of 
+assets in the deal, also paid or accrued quarterly.  As discussed below, payment or accrual 
+of the Subordinated Fee is dependent on the performance of a valuation test.   
+ 
+27. Entities controlled by Tilton hold preference shares in the Zohar Funds.  
+Distributions on those preference shares are also contingent on the outcome of the 
+valuation test. 
+ 
+28. Tilton actively manages the business of the Portfolio Companies.  She hires 
+and fires their senior employees and provides input on their major operating decisions.  
+Tilton requires that the companies report regularly to her regarding their financial condition 
+and business prospects.  Tilton is the CEO of some of the Portfolio Companies.  In other 
+instances, Tilton is the sole manager of the Portfolio Companies that are LLCs.   
+ 
+ 6 
+ 
+Tilton Is Improperly Valuing Fund Assets and Improperly Collecting the 
+Subordinated Fee and Other Payments.  
+ 
+The Purpose, Calculation, and Publication of the OC Ratio Test  
+ 
+29. The indenture for each of the Zohar CLOs contains certain numeric tests 
+that must be met on a monthly basis.  If those tests are not met, the indenture outlines 
+certain consequences, which include increased rights by the investors to control the fund 
+and/or remove the collateral manager, and elimination of the Funds’ obligations to pay the 
+Subordinated Fee.  Failure of these tests also changes the waterfall distribution for each 
+Fund, such that investors receive earlier repayments on their principal. 
+ 
+30. One of those tests is the Overcollateralization Ratio (the “OC Ratio”) test.  
+The OC Ratio is a numeric formula that, in this case, divides the total value of the loans the 
+relevant Zohar Fund has made to Portfolio Companies by the outstanding principal balance 
+of the notes due to the Fund’s investors.   
+ 
+Value of Funds’ Loan Assets 
+OC Ratio =   CLO Investors’ Principal 
+ 
+31. The higher the OC Ratio, the greater the cushion between the value of the 
+Fund’s collateral and the principal amount of investors’ notes.  As the numerator and 
+denominator in the OC Ratio approach the same level, the chance of an investor suffering 
+losses in its principal grows.  
+ 
+32. The OC Ratio test is satisfied if the resulting percentage is at least equal to 
+the threshold percentage defined in the indenture.  For the three Zohar Funds, that 
+percentage varies, ranging from 105% to 112%.  If the OC Ratio falls below these levels, 
+then the consequences outlined in the indenture would be triggered.  Patriarch consistently 
+monitors the OC Ratio test percentage.  However, based on Tilton’s inputs, the OC Ratio 
+test has never failed, despite the substantial decline in value of the Zohar Funds’ assets. 
+ 
+33. Under the terms of the indentures, the trustee for each of the Zohar Funds is 
+required to prepare and distribute a monthly report to noteholders that contains various 
+information about the fund and its assets, including the outstanding balance of the notes, 
+interest received, a description of the loans in the portfolio, and the outcome of tests 
+relating to the collateral, including the OC Ratio test.   
+ 
+34. The indenture for each Zohar CLO also requires the collateral manager to 
+categorize each loan that the fund makes or acquires.  The category of each asset, which is 
+published in the trustee reports, determines its value for calculating the numerator of the 
+OC Ratio.  Therefore, a change in categorization of an asset results in a change to the ratio. 
+ 
+35. In the case of Zohar I and Zohar II, asset categories are numbered 1 through 
+4.  Category 4 assets are the strongest and are typically valued at the principal amount 
+ 
+ 7 
+outstanding on the loan to the Portfolio Company.  Category 1 assets are the weakest and 
+are valued at a lower amount.   
+ 
+36. For Zohar III, the numeric category designations were replaced with just 
+two categories:  “Defaulted Investment” and “Collateral Investment.”  These are equivalent 
+to Categories 1 and 4, respectively.    
+ 
+Tilton’s Control Over Improper Asset Categorizations 
+ 
+37. Each indenture contains a very specific definition for each asset category.  
+Under the Zohar I and II indentures, an asset may be categorized as a Category 4 only if it 
+meets specific criteria, most notably that the asset is “Current.”  A loan is “Current” when it 
+is not “Non-Current.”  A “Non-Current” loan is a “Defaulted Obligation” which has 
+“previously deferred and/or capitalized as principal any interest due.”  A “Defaulted 
+Obligation” is a loan “with respect to which a default as to the payment of principal and/or 
+interest has occurred (without regard to any applicable grace period or any waiver of such 
+default) but only so long as such default has not been cured.”   
+ 
+38. The Zohar III indenture approaches categorization slightly differently, but 
+the result is the same.  Under the Zohar III indenture, a loan is a “Defaulted Investment” 
+when “a default as to the payment of principal and/or interest has occurred, but only so 
+long as the default has not been cured.” 
+ 
+39. Based on these contractual definitions, the assets in the Zohar Funds should 
+be reclassified as Category 1 or Defaulted Investments when they are no longer Current, 
+i.e., when the Portfolio Company has failed to make interest payments and has not cured 
+these non-payments. 
+ 
+40. However, instead of following the definitions set forth in the indentures, 
+Tilton has consistently and intentionally used her own discretion to determine how an asset 
+should be categorized.  Respondents do not lower an asset’s valuation category unless and 
+until Tilton decides that she will no longer “support” the Portfolio Company.  By 
+“support,” Tilton means that she will continue to provide financial and managerial support 
+to the Portfolio Company.   
+ 
+41. Loans originated or acquired by the Zohar Funds were generally initially 
+assigned the highest valuation category -- a Category 4 or Collateral Investment.  Over the 
+life of the Funds, Respondents have recategorized a Portfolio Company’s loans as a 
+Category 1 or Defaulted Asset only if and when Tilton decided she would no longer 
+“support” the Portfolio Company.  
+ 
+42. As a result of Tilton’s discretionary approach to the categorization of the 
+collateral, she has classified very few Portfolio Companies as a Category 1 or Defaulted 
+Asset at any point.  For example, as of January 2014, out of 122 loans in the Zohar II 
+portfolio, only 16 were classified as Category 1.  The same pattern exists over the life of all 
+three Zohar Funds.  
+ 
+ 
+ 8 
+Consequences of Tilton’s Improper Categorization 
+ 
+43. Had Tilton followed the methodology for categorization set out in the 
+indenture, the number of Category 1 or Defaulted Investments reported in the monthly 
+trustee reports would have looked very different.  In fact, many Portfolio Companies had 
+large sums of unpaid interest, beginning by at least 2008.  Certain Portfolio Companies 
+have failed to pay as much as 90% of the interest that they owe to the Zohar Funds, yet 
+remain classified as a Category 4 or a Collateral Investment.  
+ 
+44. Had Respondents appropriately classified the Zohar Funds’ assets, Zohar II 
+and Zohar III would have failed the OC Ratio test by at least the summer of 2009.  Tilton’s 
+approach allowed Respondents to collect or accrue almost $200 million in Subordinated 
+Fees and preference share distributions to which she was not entitled.   
+ 
+45. Moreover, investors were not informed about the decline in value of the 
+Funds’ assets, regardless of whether the changes caused the OC Ratio test to fail. 
+ 
+Tilton’s Control Over Interest Payments By Portfolio Companies  
+ 
+46. Tilton has been aware of the interest payments made by the Portfolio 
+Companies and their financial condition since the Funds’ inceptions.  Tilton regularly 
+receives a quarterly interest projection, in which she is notified of the amount of interest on 
+loans a company expects to pay that quarter.  
+ 
+47.  Numerous emails show Tilton directing the amount of interest that a 
+Portfolio Company should pay, which may or may not equal the amount that the company 
+wishes to pay.  For example, in a 2011 email chain, a Patriarch employee asked Tilton for 
+guidance on interest payments from several different companies.  In response, Tilton 
+directed that one company should pay $50,000, one company should pay $142,000, and 
+one should pay $12,800.  None of these amounts matched the amount of interest due on the 
+loans to these Portfolio Companies.   
+ 
+48. Tilton makes the ultimate decision on when to accept less than the 
+contractual rate of interest from the Portfolio Companies.   
+ 
+Investors Do Not Know About Tilton’s Approach 
+ 
+49. Respondents have not at any time disclosed Tilton’s discretionary approach 
+to categorization to the Funds or their investors.  They have not disclosed that they fail to 
+consider past due interest when conducting categorization analyses and performing the OC 
+Ratio test.  Investors have not been told that the OC Ratio test would have failed at various 
+points if Tilton had performed the categorization analyses in the method anticipated by the 
+indentures.   
+ 
+50. Other parties to the transaction were similarly unaware of Tilton’s approach.  
+For example, an email from an employee at the trustee to a Patriarch employee questions 
+why there are “multiple uncollected interest payments for Zohar II and III for assets we 
+ 
+ 9 
+have flagged as Performing.”  Similarly, a rating agency employee emailed in 2010, 
+inquiring why certain Portfolio Companies were not considered defaulted in light of unpaid 
+interest.  At the time the investments were structured, the insurer for certain of the Fund 
+investments described its understanding of the meaning of Category 4 as “[c]ompanies will 
+pay current interest and most will have an amortization schedule. . . .”  Respondents also 
+have not provided information to any of these parties about Tilton’s actual, discretionary 
+categorization approach. 
+ 
+51. Respondents’ approach to categorization, and the resulting impact on the 
+OC Ratio test, were important to investors and rendered statements about asset categories 
+and OC Ratio test results false or misleading.  Respondents’ discretionary approach to 
+categorization, which was contrary to disclosures made, also represents a fraudulent and 
+deceptive scheme, practice, and course of business.   
+ 
+Tilton and the Patriarch Entities Breached Their Fiduciary Duties and Failed to 
+Meet Their Contractual Standard of Conduct in Disclosing Their Conflict of 
+Interest 
+ 
+The Patriarch Collateral Managers Are Fiduciaries and Have Agreed to a 
+Contractual Standard  of Conduct 
+ 
+52. Patriarch, the Patriarch Collateral Managers and Lynn Tilton all acted as 
+investment advisers to the Zohar Funds they managed.  As such, they owed fiduciary duties 
+to these Funds.  
+ 
+53. In addition, the CMA defines a contractual standard of conduct required by 
+the collateral manager.  Specifically, the CMA requires that the relevant Patriarch 
+Collateral Manger, “in rendering its services as Collateral Manager use reasonable care and 
+the same degree of skill and attention . . . exercised by institutional investment managers of 
+national standing generally in respect to assets of the nature and character of the Collateral 
+and for clients having similar investment objectives and restrictions.” 
+ 
+Tilton and Her Entities Have Not Disclosed The Facts Giving Rise To A Conflict 
+Of Interest 
+ 
+54. Tilton’s undisclosed approach to categorization creates a significant conflict 
+of interest.  Respondents are making decisions in a way that allows Respondents to collect 
+more money from the Funds and retain absolute control over their management, regardless 
+of the performance of the Funds’ assets.   
+ 
+55. As noted above, Tilton decides when to accept less than the full interest due 
+from Portfolio Companies.  Tilton also determines the categories for portfolio assets.  As 
+long as Tilton follows her self-designed approach to categorization, which gives her 
+absolute discretion, Respondents can keep classifying assets in the highest valuation 
+categories and prevent triggering the consequences for failure of the OC Ratio test.  In light 
+of these consequences, Tilton’s conflict of interest is and has at all times been material. 
+ 
+ 
+ 10 
+56. In breach of their fiduciary duties and contractual standard of conduct, 
+Patriarch, Tilton, and the Patriarch Collateral Managers have not disclosed Tilton’s actual 
+method of categorization or the conflict of interest that arose from use of that method.  
+They also have not given the Funds or investors a choice as to whether to consent to this 
+conflict.   
+ 
+The Zohar Funds’ Financial Statements Are Also False and Misleading. 
+ 
+Preparation of the Financial Statements 
+ 
+57. Each of the Zohar Funds is required under the terms of the indenture to 
+provide GAAP-compliant financial statements on a quarterly basis.  These financial 
+statements are prepared by Patriarch’s accounting department, approved by Tilton on behalf 
+of the Patriarch Collateral Managers, and then provided to the trustee, which makes them 
+available to investors.  Information in the financial statements about the value of the Funds’ 
+assets was important to investors.  
+ 
+58. Each financial statement contains a cover page and certification, signed by 
+Tilton.  The certification provides, in part, that the balance sheet and income statements 
+provided are prepared in accordance with U.S. GAAP.  Tilton also certifies that she has 
+reviewed the balance sheet and income statements and that those documents fairly present 
+the financial position of the relevant Zohar Fund in all material respects. 
+ 
+59. Since the inception of the Zohar Funds, Tilton has signed about fifty of 
+these certifications on behalf of the relevant Patriarch Collateral Manager, each time 
+attesting to the GAAP compliance and fair presentation of the financial statements.  
+ 
+60.  However, the financial statements are not GAAP-compliant, nor do they 
+present a fair picture of the Zohar Funds’ financial conditions.   
+ 
+ Misleading Information Relating to Asset Value and Impairment 
+ 
+61. Loans to Portfolio Companies are recorded on the Zohar Funds’ financial 
+statements at cost and make up the vast majority of assets on the balance sheet, with a 
+corresponding payable to investors in the Zohar Funds.   
+ 
+62. Under GAAP, a loan is impaired, and must be measured for impairment 
+when, based on all available information, it is probable that the creditor will be unable to 
+collect all amounts due for interest and principal based on the contract with the debtor.  
+ 
+63. Patriarch did not analyze the Zohar Funds’ loan assets for impairment in 
+accordance with GAAP or follow this required impairment methodology.   
+ 
+64. At Tilton’s direction, Patriarch does not write down loans for impairment 
+purposes but, instead, writes them off if and when Tilton determines that she will no longer 
+support a Portfolio Company.   
+ 
+ 
+ 11 
+65. The impairment decision is driven by Tilton’s categorization—when she 
+decides to change the category of an asset from a 4 to a 1, that asset will be impaired in the 
+financial statements.   
+ 
+66. Even though Patriarch does not conduct an impairment analysis that 
+complies with GAAP, Respondents tell investors that it does.  For example, under the 
+heading “Carrying Value of Collateral Debt Obligations” in the footnotes to the Zohar II 
+financial statements, the financial statements disclose: 
+ 
+In the event the Company’s expected realization of principal under a [loan 
+asset] is impaired, such that the anticipated future collections are determined 
+to be less than the carrying value of the loan, the Company will record an 
+impairment loss equal to the amount of the anticipated shortfall and will 
+thereafter carry the loan at the reduced amount.1 
+ 
+67. However, Patriarch has no procedures in place to analyze future collections 
+and no such analysis occurred.   
+ 
+68. This disclosure is misleading because it tells investors that assets would be 
+analyzed for impairment, including an assessment of anticipated collections.  Further, all 
+loans that were modified to provide a concession to a Portfolio Company that was under 
+financial duress should have been identified and measured as impaired in the Zohar Funds’ 
+financial statements.  Instead, as with categorization, Tilton decided when an asset was 
+impaired using her own discretion and did not communicate this approach to investors.   
+ 
+Misleading Disclosures Regarding Fair Value of Loans  
+ 
+69. The footnotes to the Zohar Funds’ financial statements also were and are 
+misleading in their disclosure of how loan assets are valued.   
+ 
+70. These footnotes have consistently stated that the fair value of the loans in 
+the portfolio is approximately equal to their carrying value on the balance sheet.  This 
+statement is unsupportable and misleading.  
+ 
+71. The footnotes have also consistently and misleadingly disclosed that, “[f]or 
+substantially all of the” loans, “fair values are based on estimates using present value of 
+anticipated future collections or other valuation techniques.”   
+ 
+72. In reality, there was never any analysis of present value of anticipated future 
+collections, and no analysis at all was conducted to determine fair value.  Instead, at 
+Tilton’s direction, Patriarch at all times carried these assets at cost unless and until Tilton 
+decided to stop supporting the relevant Portfolio Company.  
+ 
+73. Because Patriarch did not conduct fair value analyses, there was never any 
+basis for the affirmative assertion that cost and fair value were the same.  Moreover, these 
+                                                 
+1 The financial statements for Zohar I and Zohar III contain similar disclosures. 
+ 
+ 12 
+disclosures indicate that Patriarch does conduct an analysis of the reported fair values, 
+which is not true.  
+ 
+E. VIOLATIONS 
+ 
+74. As a result of the conduct described above, Respondents willfully violated 
+Sections 206(1), 206(2), and 206(4) of the Advisers Act, which prohibit fraudulent conduct 
+by an investment adviser. 
+ 
+75. As a result of the conduct described above, Respondents willfully violated 
+Advisers Act Rule 206(4)-8, which prohibits fraudulent conduct by advisers to “pooled 
+investment vehicles” with respect to investors or prospective investors in those pools. 
+ 
+76. As a result of the conduct described above, Patriarch alternatively willfully 
+aided and abetted and caused violations of Sections 206(1), 206(2) and 206(4) of the 
+Advisers Act and Rule 206(4)-8 promulgated thereunder, by Tilton and the Patriarch 
+Collateral Managers. 
+  
+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.  What, if any, remedial action is appropriate in the public interest against 
+Respondents pursuant to Sections 203(e) and 203(f) of the Advisers Act including, but not 
+limited to, disgorgement and civil penalties pursuant to Section 203 of the Advisers Act;  
+ 
+C. What, if any, remedial action is appropriate and in the public interest against 
+Respondents pursuant to Section 9(b) of the Investment Company Act including, but not 
+limited to, disgorgement and civil penalties pursuant to Section 9 of the Investment 
+Company Act; and 
+ 
+D.  Whether, pursuant to Section 203(k) of the Advisers Act Respondents should 
+be ordered to cease and desist from committing or causing violations of and any future 
+violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 
+promulgated thereunder, whether Respondents should be ordered to pay a civil penalty 
+pursuant to Section 203(i) of the Advisers Act and Section 9(d) of the Investment Company 
+Act, and whether Respondents should be ordered to pay disgorgement pursuant to Section 
+203(j) and 203(k)(5) of the Advisers Act and Section 9(e) of the Investment Company Act. 
+ 
+ 
+ 13 
+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 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 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 
+ 
+ 

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raw/aaer/2015/AAER-3645.txt

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+ 
+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74613 / March 31, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3645 / March 31, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16464 
+ 
+ 
+In the Matter of 
+ 
+POLYCOM, 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 Polycom, Inc. (“Polycom” 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, and except as provided herein in Section IV, 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:  
+1. Polycom, Inc., a Delaware corporation with its principal place of business in San 
+Jose, California, sells communications and collaboration technology.  Polycom’s stock is 
+registered under Section 12(b) of the Exchange Act and is quoted on the Nasdaq Global Select 
+Market under the ticker symbol “PLCM.” 
+2. Andrew M. Miller (“Miller”) was Polycom’s CEO from approximately May 2010 
+and a Polycom Director from approximately June 2010, positions which he held until July 19, 
+2013, when he resigned both positions.  
+3. From approximately May 2010 until July 2013, Polycom paid for at least 
+approximately $190,000 worth of Miller’s personal expenses without disclosing the expenses as 
+compensation to Miller on the company’s definitive proxy statements.  Among others, these 
+expenses included reimbursement for personal meals, clothing, entertainment and travel.   
+4. Miller charged some of those personal expenses to his credit card and then, in 
+order to obtain reimbursement from Polycom, submitted expense reports with false business 
+descriptions.   
+5. Miller directed his administrative assistants to pay for certain other of his personal 
+expenses with their company purchasing cards (“P-Cards”), and he provided them with false 
+business descriptions that were recorded as support for the charges.  Polycom policy permitted 
+Miller to review and approve the P-Card charges incurred by his administrative assistants, even 
+though they had been incurred at his direction and on his behalf, allowing him to dispose of 
+company assets without supervision.   
+6. Miller also charged Polycom for certain of his personal air travel, which cost 
+Polycom at least approximately $16,000.  Polycom permitted Miller to book and charge flights 
+without providing any description of their purpose, allowing him to improperly use company 
+funds without supervision.  
+7. At least approximately $80,000 of Miller’s personal expenses were incurred and 
+paid for by Polycom in connection with the company’s “CEO Circle” program, an annual 
+incentive trip offered to Polycom’s top-performing sales people.  More than $65,000 in Polycom 
+                                                 
+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 
+funds were used to pay for Miller’s travel to Indonesia and South Africa with a friend and 
+girlfriend, respectively, to purportedly conduct “site inspections” for the CEO Circle program.  
+Polycom paid for Miller and his guests to enjoy luxury accommodations, food, entertainment and 
+activities during these purported “site inspections.”  In addition, during the actual CEO Circle 
+events, Polycom paid for more than $13,000 worth of personal side-trips, spa treatments, and 
+other “incidentals” for Miller and his girlfriend, who attended as his guest.  Miller hid certain of 
+his personal CEO-Circle-related costs by directing a Polycom vendor to falsify invoices and bury 
+the charges in fake event budget line items.  
+8. Polycom thus omitted from its compensation disclosures at least the following 
+amounts of Miller’s personal expenses, by year: $15,345 in 2010; $28,478 in 2011; $115,683 in 
+2012; and $30,474 in 2013.  Polycom also omitted from its compensation disclosures any 
+description of the nature of the personal expenses that Miller had obtained. 
+9. In its 2013 proxy statement, which disclosed 2012 compensation, Polycom 
+highlighted perquisites as a metric of its corporate governance and pay-for-performance goals 
+and stated that it provided “no excessive perquisites” to its executives.    
+10. Polycom incorporated its definitive proxy statements into its annual reports by 
+reference.  
+11. As a result of the conduct described above, Polycom violated Section 14(a) of the 
+Exchange Act and Rules 14a-3 and 14a-9 thereunder.  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 provided to Named 
+Executive Officers (including CEOs) who receive more than $10,000 in perquisites in a given 
+year.  Item 402 of Regulation S-K also requires disclosure of all perquisites by type, and specific 
+identification of any perquisite greater than $25,000 or 10% of total perquisites.  Rule 14a-9 
+prohibits the use of proxy statements containing materially false or misleading statements or 
+materially misleading omissions.   
+12. Also as a result of the conduct described above, Polycom violated Section 13(a) 
+of the Exchange Act and Rules 13a-1 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 reports as the Commission may require, and mandate that the reports contain such further 
+material information as may be necessary to make the required statements not misleading. 
+13. Because Polycom incorrectly recorded Miller’s personal charges as business 
+expenses, and not compensation, its books, records and accounts did not, in reasonable detail, 
+accurately and fairly reflect its dispositions of assets.  
+ 4 
+14. In addition, Polycom failed to implement adequate internal accounting controls 
+relating to its company-issued P-Cards and air travel booking that were sufficient to maintain the 
+accountability of its assets.  
+15. As a result of the conduct described above, Polycom 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.  
+16. Lastly, as a result of the conduct described above, Polycom violated Section 
+13(b)(2)(B), which requires reporting companies to devise and maintain a system of internal 
+accounting controls sufficient to provide reasonable assurances that transactions are executed in 
+accordance with management’s general or specific authorization and are recorded as necessary to 
+maintain accountability for assets, and that access to assets is permitted only in accordance with 
+management’s general or specific authorization.  
+Undertakings 
+17. Respondent undertakes to cooperate fully with the Commission in any and all 
+investigations, litigations or other proceedings relating to or arising from the matters described in 
+the Order.  In connection with such cooperation, Respondent undertakes:  
+a. To produce, without service of a notice or subpoena, any and all 
+documents and other information reasonably requested by the Commission’s staff, with a 
+custodian declaration as to their authenticity, if requested; 
+b. To use its best efforts to cause Respondent’s current and former 
+employees, officers and directors to be interviewed by the Commission's staff at such times and 
+places as the staff reasonably may direct; 
+c. To use its best efforts to cause Respondent’s current and former 
+employees, officers and directors to appear and testify truthfully and completely without service 
+of a notice or subpoena in such investigations, depositions, hearings or trials as may be 
+reasonably requested by the Commission’s staff; and 
+d. In connection with any interviews of Respondent’s current and former 
+employees, officers and directors to be conducted pursuant to this undertaking, requests for such 
+interviews may be provided by the Commission’s staff by regular or electronic mail to: Caz 
+Hashemi, Esq.; Wilson, Sonsini, Goodrich & Rosati; 650 Page Mill Road, Palo Alto, CA 94304; 
+chashemi@wsgr.com, or such other counsel that may be substituted by Respondent. 
+In determining whether to accept the Offer, the Commission has considered the 
+Undertakings.  
+ 5 
+Polycom’s Remedial Efforts 
+In determining to accept the Offer, the Commission considered remedial acts promptly 
+undertaken by Respondent and cooperation afforded the Commission staff. 
+IV. 
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondent Polycom’s Offer. 
+ Accordingly, it is hereby ORDERED that: 
+A. Pursuant to Section 21C of the Exchange Act, Respondent Polycom cease and 
+desist from committing or causing any violations and any future violations of Sections 13(a), 
+13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 14a-3 and 14a-9 
+thereunder. 
+B. Respondent 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.  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 
+  
+ 6 
+Payments by check or money order must be accompanied by a cover letter identifying 
+Polycom 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 Jina Choi, Securities and Exchange 
+Commission, 44 Montgomery Street, Suite 2800, San Francisco, CA 94104.    
+ 
+ 
+ By the Commission. 
+ 
+       Brent J. Fields 
+       Secretary 
+ 

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+                U.S. SECURITIES AND EXCHANGE COMMISSION 
+         Litigation Release No. 23225 / March 31, 2015 
+         Accounting and Auditing Enforcement Release No. AAER-3646 / March 31, 2015 
+          Securities and Exchange Commission v. Andrew M. Miller , Civil Action No. 3:15-cv-1461 
+
+
+ The Securities and Exchange Commission today charged the former CEO of Silicon Valley-based technology firm Polycom Inc. with using nearly $200,000 in corporate funds for personal perks that were not disclosed to investors. 
+
+ The SEC alleges that Andrew Miller created hundreds of false expense reports with bogus business descriptions for his personal use of company dollars to pay for meals, entertainment, and gifts.  Furthermore, he used Polycom funds to travel with his friends and girlfriend to luxurious international resorts while falsely claiming the trips were business-related site inspections in advance of company sales retreats.  Miller hid the costs by directing a travel agent to bury them in fake budget line items.  In 2012 alone, Miller charged Polycom for more than $115,000 in personal expenses despite publicly reporting that he received less than $35,000 in perks that year. 
+
+ The SEC separately charged Polycom in an administrative order finding that the company had inadequate internal controls and failed to report Miller's perks to investors.  Polycom agreed to pay $750,000 to settle the SEC's charges, without admitting or denying the SEC's findings as to the company.  The case against Miller continues in federal court.   
+
+ According to the SEC's complaint filed in the San Francisco Division of U.S. District Court for the Northern District of California, Miller's undisclosed use of company funds for personal perks was wide-ranging: 
+
+  More than $80,000 for personal travel and entertainment that Miller hid in falsified invoices or passed off as legitimate business expenses. 
+
+ More than $10,000 for clothing and accessories and more than $5,000 worth of spa gift cards that Miller falsely claimed to have given as gifts to customers and employees. 
+
+ More than $10,000 for tickets to professional baseball and football games that Miller falsely claimed to have attended with clients.  
+
+ More than $5,000 for plants and a plant-watering service at Miller's apartment that he falsely claimed were for the company's San Francisco office. 
+
+  The SEC's complaint against Miller alleges that he violated the antifraud, proxy solicitation, periodic reporting, books and records and internal controls provisions of the federal securities laws.  The complaint also alleges that he falsely certified the accuracy of Polycom's annual reports, which incorporated its proxy statements.   
+
+ The SEC's order against Polycom found that its internal controls over Miller's expenses were inadequate.   For example, Polycom allowed Miller to approve his own expenses that were charged on his assistants' credit cards, and the company allowed him to book and charge airline flights without providing any descriptions of their purpose.  As a result of Miller's misconduct, Polycom's proxy statements contained false compensation information and failed to accurately describe Miller's perks as required.   
+
+ The SEC's complaint against Miller alleges that he violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(b)(5) and 14(a) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13a-14, 13b2-1, 14a-3 and 14a-9 thereunder, and aided and abetted violations of  Sections 13(a), 13(b)(2)(A) and 14(a) of the Exchange Act, and Rules 12b-20, 13a-1, 14a-3 and 14a-9 thereunder.   
+
+ The SEC's order against Polycom found that it violated Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 14a-3 and 14a-9 thereunder.   
+
+ The SEC's investigation was conducted by David Berman and John Roscigno of the San Francisco office, and was supervised by Tracy Davis.  The SEC's litigation against Miller will be led by Susan LaMarca and David Johnson.   
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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74625 / April 1, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3648 / April 1, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16470 
+ 
+In the Matter of 
+ 
+MICHAEL HEDRICK, 
+ 
+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 Michael Hedrick (“Hedrick” or “Respondent”).   
+ 
+II. 
+ 
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
+of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings 
+herein, except as to the Commission’s jurisdiction over him and the subject matter of these 
+proceedings, which are admitted, and except as provided herein in Section V, Respondent consents 
+to the entry of this Order Instituting Cease-And-Desist Proceedings, Pursuant to Section 21C Of 
+The Securities Exchange Act of 1934, Making Findings, And Imposing A Cease-And-Desist Order 
+(“Order”), as set forth below.   
+ 
+ 2 
+III. 
+ 
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that  
+ 
+Summary 
+ 
+1. This case involves a fraudulent scheme by the owner (“the CEO”) of four private 
+telecommunications companies (collectively “TelWorx”), to inflate the value of assets that the 
+companies sold to PCTEL, Inc. (“PCTEL”), a public company, and its wholly owned subsidiary 
+PCTelWorx, Inc. (“PCTelWorx”).  The scheme had two main components:  first, to inflate the value 
+of inventory and to prematurely recognize revenue prior to the sale in order to fraudulently inflate 
+the sale price; and second, to conceal these facts from PCTEL by prematurely recognizing revenue 
+after the asset purchase.  As a result of this scheme, TelWorx provided PCTEL materially false 
+financial statements which were incorporated in a Commission filing.  Hedrick, at the CEO’s 
+direction, recklessly inflated the value of obsolete inventory before the acquisition and recorded 
+revenue prematurely both before and after the acquisition.   
+Respondent 
+ 
+2. Michael Hedrick, age 30, is a resident of Lexington, North Carolina.  From 2010 
+through July 2012, he was TelWorx’s controller.  From July 2012 until January 2013, he was 
+controller of PCTelWorx.  Hedrick does not have an accounting degree and is not a certified public 
+accountant.  Hedrick entered into a cooperation agreement with the Division of Enforcement during 
+its investigation of this matter.   
+Other Relevant Entities And Individual 
+ 
+3. PCTEL, Inc. is a Delaware corporation with its principal place of business in 
+Bloomingdale, Illinois.  The company provides products and services for wireless communication 
+networks.  Its stock is traded on the NASDAQ (ticker symbol PCTI). 
+4. PCTelWorx, Inc. was a wholly owned subsidiary of PCTEL.  PCTEL merged 
+PCTelWorx into PCTEL on June 30, 2014.   
+5. The CEO was the owner and CEO of one of the TelWorx companies.  After July 
+2012, the CEO became the general manager of PCTelWorx, whose responsibilities included its day-
+to-day operations and providing its quarterly revenue forecasts to PCTEL.   
+Background 
+ 
+6. In the first and second quarters of 2012, PCTEL and PCTelWorx negotiated with the 
+CEO to acquire the assets of TelWorx.  PCTEL and PCTelWorx relied, in part, on TelWorx’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 
+earnings before interest, taxes, depreciation, and amortization (“EBITDA”) to determine the price it 
+would pay to acquire the assets.   
+7. The CEO informed Hedrick that he would receive a bonus for assisting with the due 
+diligence related to the acquisition.  Hedrick was responsible for providing financial information to 
+PCTEL and TelWorx’s accounting firm (“the Accountants”).   
+8. In July of 2012, PCTEL and PCTelWorx acquired TelWorx’s assets for cash and an 
+earn-out payment based on PCTEL’s 2013 financial performance and payable in PCTEL’s common 
+stock.  Hedrick received a $25,000 bonus after PCTEL completed the acquisition.   
+9. Thereafter, PCTelWorx began operating similarly to TelWorx using the assets 
+PCTEL acquired.  The CEO operated and managed PCTelWorx and Hedrick served as its 
+controller.   
+10. In the third and fourth quarter of 2012, PCTEL’s publicly-filed, consolidated 
+financial statements included PCTelWorx’s financial results.   
+Before The Acquisition, False Entries In  
+TelWorx’s General Ledger Inflated Revenue and EBITDA  
+11. In April of 2012, the CEO directed Hedrick to make a false entry in TelWorx’s 
+general ledger which improperly inflated the value of certain obsolete telecommunications 
+equipment (“the Modules”) in TelWorx’s inventory and improperly inflated TelWorx’s EBITDA.  
+Hedrick made the entry as directed.   
+12. Subsequently, the CEO instructed Hedrick to send the Accountants an email that 
+falsely stated that the Modules were undervalued on TelWorx’s general ledger and that Hedrick had 
+corrected this error.  By sending the email at the CEO’s direction, Hedrick acted recklessly because 
+the Modules were not undervalued.     
+13. In May of 2012, the CEO also directed Hedrick to invoice certain customer orders 
+before those orders had shipped, but to backdate the orders to the first quarter of 2012.  By 
+generating the invoices at the CEO’s direction, Hedrick acted recklessly because the orders had not 
+yet shipped.  As a result, TelWorx recognized revenue prematurely in its books and records in the 
+first quarter of 2012.   
+14. The CEO then directed Hedrick to provide TelWorx’s income statements to the 
+Accountants, and Hedrick did so.   
+15. The CEO later directed Hedrick to reverse these orders, thus reversing the revenue 
+generated from these orders from TelWorx’s books and records.  Hedrick reversed the orders as 
+directed. 
+16. Near the end of the second quarter, PCTEL asked Hedrick to provide TelWorx’s 
+estimated second quarter revenue.  The CEO instructed Hedrick to send PCTEL an email providing 
+ 4 
+TelWorx’s actual revenue for the first two months of the second quarter and estimated revenue for 
+the final month of the second quarter.  Hedrick sent the email as directed. 
+17. The CEO then instructed Hedrick to re-invoice several of the orders the CEO had 
+previously instructed Hedrick to invoice and reverse, and Hedrick did so.  Hedrick acted recklessly 
+because those orders had not yet shipped.  As a result, TelWorx recognized revenue for these orders 
+prematurely a second time.   
+18. These false accounting entries caused material overstatements of TelWorx’s 
+EBITDA and its first and second quarter 2012 revenue.   
+19. TelWorx provided PCTEL with financial information that included these 
+overstatements.   
+20. The false accounting entries increased the purchase price which PCTEL paid for 
+TelWorx.   
+PCTelWorx Recorded Revenue From A False Transaction To Conceal  
+Pre-Acquisition Inventory Write-Up and Third Quarter Revenue Shortfall 
+21. After the acquisition, in the middle of the third quarter of 2012, PCTEL began 
+performing inventory valuation testing at PCTelWorx, which would have included testing the 
+Modules whose value Hedrick inflated at the CEO’s direction prior to the acquisition.   
+22. In order to conceal this fact from PCTEL, the CEO told Hedrick that he planned to 
+purchase the Modules himself.   
+23. Even though the CEO was the purchaser, he subsequently instructed Hedrick to 
+make an entry in PCTelWorx’s books and records showing an order for the Modules naming a 
+PCTelWorx’s vendor, a telecommunications company located in Taiwan (the “Vendor”), as the 
+purchaser.  Hedrick entered the order from the Vendor at the CEO’s direction, which caused 
+PCTelWorx to record a false order in its books and records.   
+24. The CEO also instructed Hedrick to generate an invoice for this false order.  Hedrick 
+did so at the CEO’s direction, which caused PCTelWorx to recognize revenue on the order 
+prematurely.   
+25. However, neither the invoice, nor the Modules themselves, were ever shipped to the 
+Vendor.   
+PCTelWorx Created False Documents In The  
+Fourth Quarter To Conceal The Fake Order From PCTEL 
+26. In the middle of the fourth quarter of 2012, PCTEL asked PCTelWorx to provide it 
+with all of the records concerning the Vendor’s order.  Because it was a false order, most of the 
+requested records, such as the purchase order and shipping records, did not exist.   
+ 5 
+27. In order to conceal the fact that the Vendor’s order was false, the CEO instructed 
+Hedrick to request certain records for the Vendor’s order by email from another PCTelWorx 
+employee (the “Employee”).  Hedrick knew that most of the records the CEO had him request did 
+not exist, but sent the email as the CEO instructed.  
+28. The CEO then created several false records concerning the Vendor’s order that 
+PCTEL had requested.  He provided these records to the Employee, and instructed the Employee to 
+email the records and other false information concerning the Vendor’s order to Hedrick.  Hedrick 
+provided the false information and false documents to PCTEL.   
+After The Acquisition, PCTEL Filed A Form 8-K/A That  
+Included TelWorx’s Materially Overstated Second Quarter Revenue  
+29. On September 24, 2012, PCTEL filed a Form 8-K/A which reported TelWorx’s 
+audited financial statements for 2010 and 2011, an unaudited compilation of TelWorx’s financial 
+statements as of June 30, 2012, and PCTEL’s unaudited pro forma consolidated financial 
+statements that included financial information for both PCTEL and TelWorx as if PCTEL had 
+acquired TelWorx as of January 1, 2011.  
+30. The Form 8-K/A materially overstated revenue on TelWorx’s financial statements 
+due to the false entries Hedrick made in TelWorx’s general ledger at the CEO’s direction.  
+31. Hedrick signed a representation letter to the Accountants in which he stated he had 
+no knowledge of any fraud by TelWorx’s management in connection with income statements 
+TelWorx provided to the Accountants. 
+32. PCTEL discovered the false entries in TelWorx’s books and records and the false 
+entries in PCTelWorx’s books and records.  Hedrick provided PCTEL with information about what 
+had occurred.  PCTEL issued a Form 8-K/A on March 13, 2013, disclosing these irregularities but 
+did not restate any financial information it previously reported.   
+Violations 
+33. As a result of the conduct described above, Hedrick caused violations of Section 
+10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, which prohibit fraudulent 
+conduct2 in connection with the purchase or sale of securities.   
+34. As a result of the conduct described above, Hedrick violated Section 13(b)(5) of the 
+Securities Act which prohibits the knowing falsification of any book, record, or account or 
+circumvention of internal controls. 
+35. As a result of the conduct described above, Hedrick caused PCTEL’s violations of 
+Section 13(a) of the Exchange Act and rules 13a-11 and 12b-20 promulgated thereunder, which 
+                                                 
+2  A knowing or reckless disregard of the truth is sufficient to establish the necessary scienter for 
+a violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.  Aaron v. SEC, 446 
+U.S. 680, 691 (1980).   
+ 6 
+collectively require issuers of securities registered pursuant to Section 12 of the Exchange Act to file 
+with the Commission accurate current reports on Form 8-K that contain material information 
+necessary to make the required statements made in the reports not misleading.   
+36. As a result of the conduct described above, Hedrick caused PCTEL’s violation of 
+Section 13(b)(2)(A) of the Exchange Act, which requires Section 12 registrants to make and keep 
+books, records, and accounts that accurately and fairly reflect the transactions and dispositions of 
+their assets.   
+37. As a result of the conduct described above, Hedrick violated Rule 13b2-1 of the 
+Exchange Act, which prohibits the direct or indirect falsification of any book, record or account 
+subject to Section 13(b)(2)(A) of the Exchange Act. 
+IV. 
+ 
+In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Hedrick’s Offer. 
+ 
+ Accordingly, it is hereby ORDERED that: 
+ 
+ A. Pursuant to Section 21C of the Exchange Act, Hedrick cease and desist from 
+committing or causing any violations and any future violations of Sections 10(b), 13(a), 
+13(b)(2)(A), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, and 13b2-1 
+promulgated thereunder.   
+ 
+B. Hedrick shall pay disgorgement of $25,000 and prejudgment interest of $2,072.62 
+to the Securities and Exchange Commission for transfer to the general fund of the United States 
+Treasury in accordance with Exchange Act Section 21F(g)(3).  Payment shall be made in five 
+equal installments within 10, 90, 180, 270, and 360 days of the entry of the Order.  If any payment 
+is not made by the date the payment is required by this Order, the entire outstanding balance of 
+disgorgement and prejudgment interest plus any additional interest accrued pursuant to SEC Rule 
+of Practice 600 shall be due and payable immediately, without further application.  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:  
+ 
+  
+ 7 
+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 
+Michael Hedrick 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 Paul Montoya, Assistant 
+Regional Director, Chicago Regional Office, Securities and Exchange Commission, 175 W. 
+Jackson Blvd., Suite 900, Chicago, Illinois  60604.   
+ 
+C. Respondent acknowledges that the Commission is not imposing a civil penalty 
+based upon his cooperation in a Commission investigation and his agreement to cooperate in any 
+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 he knowingly provided materially false or misleading information, but may 
+not:  (1) contest the findings in the Order; or (2) assert any defense to liability or remedy, 
+including, but not limited to, any statute of limitations defense. 
+V. 
+IT IS FURTHER ORDERED that, solely for purposes of exceptions to discharge set forth 
+in Section 523 of the Bankruptcy Code, 11 U.S.C. §523, 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. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74626 / April 1, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3649 / April 1, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16471 
+ 
+ 
+In the Matter of 
+ 
+TIMOTHY EDWIN 
+SCRONCE 
+ 
+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 Timothy Edwin Scronce (“Scronce” or 
+“Respondent”).   
+ 
+II. 
+ 
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
+of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings 
+herein, except as to the Commission’s jurisdiction over him and the subject matter of these 
+proceedings, which are admitted, and except as provided herein in Section V, Respondent consents 
+to the entry of this Order Instituting Cease-And-Desist Proceedings, Pursuant to Section 21C Of 
+The Securities Exchange Act of 1934, Making Findings, And Imposing A Cease-And-Desist Order 
+(“Order”), as set forth below.   
+ 
+ 2 
+III. 
+ 
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that  
+Summary 
+ 
+1. This case involves a fraudulent scheme directed by Respondent, the owner of four 
+private telecommunications companies (collectively, “TelWorx”) to inflate the value of assets that 
+the companies sold to PCTEL, Inc. (“PCTEL”), a public company, and its wholly owned subsidiary 
+PCTelWorx, Inc. (“PCTelWorx”).  The scheme had two main components:  first, to inflate the value 
+of inventory and to prematurely recognize revenue prior to the sale in order to fraudulently inflate 
+the sale price; and second, to conceal these facts from PCTEL by prematurely recognizing revenue 
+after the asset purchase.  As a result of this scheme, TelWorx provided PCTEL materially false 
+financial statements which were incorporated in a Commission filing.   
+ 
+Respondent 
+ 
+2. Timothy Edwin Scronce, age 49, is a resident of Winston-Salem, North Carolina.  
+He was the majority owner and CEO of TelWorx Communications, LLC and controlled the day-to-
+day operations of TowerWorx, which were two of the TelWorx entities.  After the sale of assets to 
+PCTEL, Sconce became a Vice President of PCTEL and the general manager of PCTelWorx until 
+he resigned on December 19, 2012.  Previously, Respondent was the President and Chief 
+Operating Officer of a publicly traded company. 
+Other Relevant Entities 
+ 
+3. PCTEL, Inc. is a Delaware corporation with its principal place of business in 
+Bloomingdale, Illinois.  The company provides products and services for wireless communication 
+networks.  Its stock is traded on the NASDAQ (ticker symbol PCTI). 
+4. PCTelWorx, Inc. was a wholly owned subsidiary of PCTEL.  PCTEL merged 
+PCTelWorx into PCTEL on June 30, 2014.   
+Background 
+ 
+5. In the first and second quarters of 2012, PCTEL and PCTelWorx negotiated with 
+Respondent to acquire the assets of TelWorx.  PCTEL and PCTelWorx relied, in part, on 
+TelWorx’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”) to determine 
+the price it would pay to acquire the assets.   
+                                                 
+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. Consequently, Respondent understood that artificially increasing TelWorx’s 
+earnings would benefit him by increasing TelWorx’s purchase price. 
+7. In July of 2012, PCTEL and PCTelWorx acquired TelWorx’s assets for a total of 
+$18 million, consisting of cash and an earn-out payment, based on PCTEL’s 2013 financial 
+performance and payable in PCTEL’s common stock.   
+8. After the acquisition, Respondent operated and managed PCTelWorx similarly to 
+the way he had operated and managed TelWorx. 
+9. In the third and fourth quarter of 2012, PCTEL’s publicly-filed, consolidated 
+financial statements included PCTelWorx’s financial results, and Respondent was aware of this fact.   
+Revenue Forecasts 
+ 
+10. Prior to the acquisition, Respondent provided PCTEL and PCTelWorx with 
+TelWorx’s revenue forecasts for the second quarter of 2012.   
+11. After the acquisition, PCTEL received PCTelWorx’s revenue forecasts from 
+Respondent on a quarterly basis.  Respondent knew that it was important to PCTEL’s business that 
+PCTelWorx meet or exceed the quarterly revenue forecasts he provided to PCTEL.   
+Before The Acquisition, False Entries In  
+TelWorx’s General Ledger Inflated Revenue and EBITDA 
+ 
+12. In April of 2012, Respondent directed TelWorx’s controller (the “Controller”) to 
+make a false entry in TelWorx’s general ledger which improperly inflated the value of certain 
+obsolete telecommunications equipment (“the Modules”) in TelWorx’s inventory and improperly 
+inflated TelWorx’s EBITDA.   
+13. Subsequently, Respondent instructed the Controller to send TelWorx’s accounting 
+firm (the “Accountants”) an email that falsely stated that the Modules were undervalued on 
+TelWorx’s general ledger and that the Controller had corrected this error.    
+14. In May of 2012, Respondent also directed the Controller to invoice certain customer 
+orders before those orders had shipped, but to backdate the orders to the first quarter of 2012.  The 
+Controller generated invoices for these orders, which caused TelWorx to recognize revenue 
+prematurely in its books and records in the first quarter of 2012.   
+15. Respondent then directed the Controller to provide TelWorx’s income statements to 
+the Accountants, which he did.   
+16. Respondent later directed the Controller to reverse these orders, thus reversing the 
+revenue generated from these orders from TelWorx’s books and records.   
+17. Near the end of the second quarter, PCTEL requested estimated second quarter 
+revenue from TelWorx.  Respondent instructed the Controller to send PCTEL an email providing 
+ 4 
+TelWorx’s actual revenue for the first two months of the second quarter and estimated revenue for 
+the final month of the second quarter.   
+18. Respondent then directed the Controller to re-invoice several of the orders 
+Respondent had previously instructed the Controller to invoice and reverse, causing TelWorx to 
+recognize revenue for these orders prematurely a second time.   
+19. These false accounting entries caused material overstatements of TelWorx’s 
+EBITDA and its first and second quarter 2012 revenue.   
+20. Respondent caused TelWorx to provide PCTEL with financial information that 
+included these overstatements.  These false accounting entries increased the purchase price which 
+PCTEL paid for TelWorx.   
+21. Despite these false entries, TelWorx still did not meet the second quarter revenue 
+forecast that Respondent had provided to PCTEL.   
+22. Shortly before the acquisition, PCTEL learned that TelWorx did not meet the second 
+quarter 2012 revenue forecast.  This revenue shortfall was due, in part, to a large order that a 
+customer (“Customer A”) had postponed until the third quarter of 2012.   
+PCTelWorx Recorded Revenue From Two False Transactions To Conceal  
+The Pre-Acquisition Inventory Write-Up and Third Quarter Revenue Shortfall 
+23. After the acquisition, in the middle of the third quarter of 2012, PCTEL began 
+performing inventory valuation testing at PCTelWorx, which would have included testing the 
+Modules whose value Respondent directed the Controller to inflate prior to the acquisition.   
+24. In order to conceal this fact from PCTEL, Respondent told the Controller that he 
+planned to purchase the Modules himself.   
+25. Even though Respondent was the purchaser, he subsequently instructed the 
+Controller to make an entry in PCTelWorx’s books and records showing an order for the Modules 
+naming a PCTelWorx’s vendor, a telecommunications company located in Taiwan (“Vendor A”), 
+as the purchaser.   
+26. Respondent also instructed the Controller to create an invoice for this false order.  
+The Controller carried out Respondent’s instructions, which caused PCTelWorx to record a false 
+order in its books and records and to recognize revenue on the false order prematurely.   
+27. Respondent paid PCTelWorx’s invoice to Vendor A but concealed from PCTEL the 
+fact that he had purchased the Modules himself.  PCTelWorx never shipped the Modules to Vendor 
+A.   
+28. Towards the end of the third quarter of 2012, Respondent realized that even with the 
+revenue from Vendor A’s false order, PCTelWorx still would not meet the quarterly revenue 
+forecast he had provided to PCTEL.   
+ 5 
+29. Respondent also knew that PCTelWorx still had not received the large order from 
+Customer A that he had forecast for the third quarter.  So Respondent decided to improperly use an 
+intermediate purchaser for Customer A’s anticipated order to conceal the revenue forecast shortfall.   
+30. Respondent proposed that the intermediate purchaser eventually would resell the 
+products to Customer A at a profit.  Respondent planned to offer the intermediate purchaser 
+extended payment terms so that it could collect the full purchase price from Customer A before 
+having to pay PCTelWorx’s invoice.   
+31. Respondent identified a vendor that provided services to – but that had not 
+previously purchased a large order from – PCTelWorx (“Vendor B”) as a potential intermediate 
+purchaser. 
+32. Respondent instructed PCTelWorx’s Vice President of Sales and Tech Services (the 
+“Vice President”) to ask Vendor B if it would act as the intermediate purchaser for this order.   
+33. The Vice President followed Respondent’s direction and obtained a purchase order 
+from Vendor B with the same terms as the order that PCTelWorx expected eventually to receive 
+from Customer A.   
+34. Using the purchase order obtained by the Vice President, Respondent instructed a 
+PCTelWorx employee (“Employee A”) to record Vendor B’s order in PCTelWorx’s books and 
+records and to indicate that the order had been shipped to Vendor B and that Vendor B had been 
+invoiced.  These actions resulted in improper, premature revenue recognition in PCTelWorx’s 
+books and records during the third quarter.   
+35. PCTelWorx never shipped the products listed on the false order to Vendor B, nor did 
+it send Vendor B the invoice for the false order.   
+PCTelWorx Created False Documents In The  
+Fourth Quarter To Conceal The Fake Orders From PCTEL 
+36. In the middle of the fourth quarter of 2012, PCTEL asked PCTelWorx to provide it 
+with all of the records concerning Vendor A’s order.  Because it was a false order, most of the 
+requested records, such as the purchase order and shipping records, did not exist.   
+37. In order to conceal the fact that Vendor A’s order was false, Respondent instructed 
+the Controller to request certain records for Vendor A’s order by email from a PCTelWorx 
+employee (“Employee B”).  The Controller sent the email as Respondent instructed.  However, 
+Respondent knew that the records described in that email did not exist.   
+38. Respondent then created several false records concerning Vendor A’s order that 
+PCTEL had requested.  He provided these records to Employee B, and instructed Employee B to 
+email the records and other false information concerning Vendor A’s order to the Controller, who 
+then provided the false information and documents to PCTEL.   
+ 6 
+39. Midway through the fourth quarter, Customer A still had not placed the order with 
+PCTelWorx as expected by Respondent.  In addition, PCTelWorx’s books and records indicated 
+that Vendor B’s payment for the order was due and unpaid.  Respondent became concerned that 
+PCTEL would attempt to collect on the overdue invoice to Vendor B, detect the false order in its 
+books and records and determine that PCTelWorx had recognized revenue prematurely in the third 
+quarter.    
+40. Respondent decided to conceal from PCTEL the false third quarter order from 
+Vendor B by reversing it from PCTelWorx’s books and records and recording a new false 
+transaction that matched an actual purchase order from another PCTelWorx customer (“Customer 
+B”).  According to Respondent’s plan, Customer B’s order would be cancelled on PCTelWorx’s 
+books, but Customer B would pay for the order placed by Vendor B.     
+41. Respondent instructed the Vice President to obtain a revised, false purchase order 
+from Vendor B that was identical to the order that PCTelWorx had received from Customer B.   
+42. Respondent and the Vice President, at Respondent’s direction, then instructed 
+Employee A to cancel Customer B’s order and to reverse Vendor B’s false order from the third 
+quarter in PCTelWorx’s books and records.  Respondent and the Vice President, at Respondent’s 
+direction, also instructed Employee A to enter Vendor B’s revised, false purchase order into 
+PCTelWorx’s books and records.   
+43. Ultimately, the items supposedly ordered by Vendor B pursuant to the revised, false 
+purchase order were shipped to – and paid for – by Customer B.   
+After The Acquisition, PCTEL Filed A Form 8-K/A That  
+Included TelWorx’s Materially Overstated Second Quarter Revenue 
+44. PCTEL informed Respondent that it was required to file with the Commission pro-
+forma financial statements that included financial information for both PCTEL and TelWorx as if 
+PCTEL had owned TelWorx for the first two quarters of 2012 and that it had retained the 
+Accountants to prepare compilations of TelWorx’s financial statements.  Respondent agreed to 
+release TelWorx’s compiled financial statements to PCTEL for filing with the Commission.    
+45. On September 24, 2012, PCTEL filed a Form 8-K/A which reported TelWorx’s 
+audited financial statements for 2010 and 2011, an unaudited compilation of TelWorx’s financial 
+statements as of June 30, 2012, and PCTEL’s unaudited pro forma consolidated financial 
+statements that included financial information for both PCTEL and TelWorx as if PCTEL had 
+acquired TelWorx as of January 1, 2011.   
+46. The Form 8-K/A materially overstated revenue on TelWorx’s financial statements 
+due to the false accounting entries made, at Respondent’s direction.  
+47. On March 13, 2013, PCTEL issued a Form 8-K/A disclosing these irregularities.   
+ 7 
+PCTEL Confronts Scronce With The False Entries  
+in TelWorx’s And PCTelWorx’s Books and Records 
+48. Notwithstanding Respondent’s efforts to conceal from PCTEL the false entries in 
+TelWorx’s books and records and the false entries in PCTelWorx’s books and records, PCTEL 
+discovered the false entries.   
+49. PCTEL confronted Respondent about one of the false purchase orders and, shortly 
+thereafter, Respondent resigned his position with PCTelWorx.  
+50. PCTEL and Respondent subsequently entered into a settlement agreement pursuant 
+to which Respondent paid PCTEL a total of $4.75 million, $3.2 million of which represented the 
+return of a portion of the purchase price PCTEL paid for TelWorx’s assets, and gave up the right to 
+receive any stock earn-out payments.   
+Violations 
+51. As a result of the conduct described above, Respondent violated Section 10(b) of the 
+Exchange Act and Rule 10b-5 thereunder which prohibit fraudulent conduct in connection with the 
+purchase or sale of securities. 
+52. As a result of the conduct described above, Respondent acted through or by means 
+of another person to violate Section 20(b) and 10(b) of the Exchange Act, and Rule 10b-5 
+thereunder.  Section 20(b) of the Exchange Act makes it unlawful for any person, directly or 
+indirectly, to do an act or thing which it would be unlawful for such person to do under the 
+Exchange Act or any rule or regulation thereunder through or by means of any other person. 
+53. As a result of the conduct described above, Respondent violated Section 13(b)(5) of 
+the Securities Act which prohibits the knowing falsification of any book, record, or account or 
+circumvention of internal controls. 
+54. As a result of the conduct described above, Respondent caused PCTEL’s violations 
+of Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20 promulgated thereunder, which 
+collectively require issuers of securities registered pursuant to Section 12 of the Exchange Act to file 
+with the Commission accurate current reports on Form 8-K that contain material information 
+necessary to make the required statements made in the reports not misleading.   
+55. As a result of the conduct described above, Respondent caused PCTEL’s violation 
+of Section 13(b)(2)(A) of the Exchange Act, which requires Section 12 registrants to make and keep 
+books, records, and accounts that accurately and fairly reflect the transactions and dispositions of 
+their assets.   
+56. As a result of the conduct described above, Respondent violated Rule 13b2-1 of the 
+Exchange Act, which prohibits the direct or indirect falsification of any book, record or account 
+subject to Section 13(b)(2)(A) of the Exchange Act. 
+ 8 
+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 Scronce cease and desist 
+from committing or causing any violations and any future violations of Section 10(b), 20(b), 13(a), 
+13(b)(2)(A), 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, and 13b2-1 
+promulgated thereunder.   
+ 
+B. Respondent Scronce be, and hereby is, prohibited, for ten years following the date of 
+the entry of this Order, from acting as an officer or director of any issuer that has a class of 
+securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports 
+pursuant to Section 15(d) of the Exchange Act.     
+ 
+C. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of 
+$376,007, prejudgment interest of $29,212.47, and a civil money penalty in the amount of 
+$140,000 to the Securities and Exchange Commission for transfer to the general fund of United 
+States Treasury in accordance with Exchange Act Section 21F(g)(3).  If timely payment is not 
+made, additional interest shall accrue pursuant to SEC Rule of Practice 600 or 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 
+Timothy Edwin Scronce 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 Paul Montoya, 
+Assistant Regional Director, Chicago Regional Office, Securities and Exchange Commission, 175 
+W. Jackson Blvd., Suite 900, Chicago, Illinois  60604.   
+ 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, 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. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 
+ 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933 
+Release No. 9744 / April 9, 2015 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74691 / April 9, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3650 / April 9, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16033 
+ 
+ 
+In the Matter of 
+ 
+AIRTOUCH COMMUNICATIONS, INC.,  
+HIDEYUKI KANAKUBO, AND 
+JEROME KAISER, CPA, 
+ 
+Respondents. 
+ 
+ 
+ 
+ 
+ORDER MAKING FINDINGS, 
+AND IMPOSING REMEDIAL 
+SANCTIONS AND A CEASE-
+AND-DESIST ORDER 
+PURSUANT TO SECTION 8A 
+OF THE SECURITIES ACT 
+OF 1933 AND SECTIONS 4C 
+AND 21C OF THE 
+SECURITIES EXCHANGE 
+ACT OF 1934 AND RULE 
+102(e) OF THE 
+COMMISSION’S RULES OF 
+PRACTICE AS TO JEROME 
+KAISER  
+ 
+ 
+  
+I. 
+ On August 22, 2014, the Securities and Exchange Commission (“Commission”) instituted 
+proceedings 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 AirTouch Communications, 
+Inc., Hideyuki Kanakubo, and Jerome Kaiser, CPA (collectively, “Respondents”), and additionally  
+ 
+ 
+ 
+ 
+ 2 
+as to Kaiser, pursuant to Section 4C1 of the Exchange Act and Rule 102(e)(1)(iii) of the 
+Commission’s Rules of Practice.2 
+II. 
+ 
+ Respondent Jerome Kaiser 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 Kaiser consents to the entry of this Order Making Findings and Imposing 
+Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 
+1933 and Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the 
+Commission’s Rules of Practice as to Jerome Kaiser (“Order”), as set forth below. 
+ 
+III. 
+ 
+ On the basis of this Order and Respondent Kaiser’s Offer, the Commission finds3 that: 
+ 
+Summary 
+ 
+1. This matter involves fraudulent financial misstatements by AirTouch, a 
+Newport Beach, California issuer, its founder and former president and CEO Kanakubo, and its 
+former CFO and corporate secretary Jerome Kaiser, CPA (“Kaiser”), in the company’s voluntarily 
+filed Form 10-Q for the third quarter of 2012, and to an investor in connection with a $2 million 
+loan made to the company in the fall of 2012.   
+                                                 
+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 . . . (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)(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 Kaiser’s Offer of Settlement and are not 
+binding on any other person or entity in this or any other proceeding.  
+ 
+ 3 
+2. In the third quarter of 2012, AirTouch improperly recognized net revenues 
+of $1.031 million based on $1.24 million of inventory shipped to a Florida entity.  This revenue 
+recognition was improper because, as Kanakubo and Kaiser knew, or were reckless in not 
+knowing, a fulfillment and logistics agreement executed contemporaneously with the Florida 
+entity’s purchase order—and upon which the purchase order was conditioned—relieved that entity 
+of any obligation to pay AirTouch unless and until an AirTouch customer purchased the inventory.  
+Kanakubo and Kaiser also knowingly, recklessly or negligently made false representations and 
+omissions about this revenue to an AirTouch investor and lender.  This conduct in inflating the 
+revenues and obtaining financing was also deceptive and constituted a scheme to defraud.  
+3. In early 2013, AirTouch filed a Form 8-K disclosing its intention to restate 
+net revenues for the third quarter of 2012, based on erroneous revenue recognition.   
+Respondents 
+ 
+4. AirTouch Communications, Inc. is a Delaware corporation with its 
+principal place of business in Newport Beach, California.  AirTouch’s common stock is quoted on 
+the OTC Pinks under the symbol “ATCH.”   AirTouch develops and sells telecommunications 
+equipment designed to integrate mobile telephones into landline telephone systems within a 
+consumer’s home.   
+5.  Hideyuki Kanakubo resides in Irvine, California.  He is AirTouch’s 
+founder and former president, CEO, and director.  At all relevant times, Kanakubo was responsible 
+for the management of AirTouch’s business.  As of May 31, 2014, Kanakubo beneficially owned 
+or controlled 1,858,143 shares of AirTouch common stock, or 9% of the company’s total 
+outstanding shares.  Kanakubo resigned as president and CEO in March 2013.   
+6. Jerome Kaiser, CPA resides in Santa Barbara, California.  Kaiser is a 
+licensed Certified Public Accountant in California and an active member in the AICPA and 
+California Society of Public Accountants.  Kaiser holds a BS in Accounting and an MS in Business 
+Taxation.  He is AirTouch’s former CFO and corporate secretary.  At all relevant times, Kaiser was 
+responsible for the management of AirTouch’s business.  As of May 31, 2014, Kaiser owned 
+options to acquire 520,096 shares of AirTouch common stock at a strike price of $2 per share.   He 
+resigned from AirTouch in April 2013. 
+Background 
+ 
+7. In or around early 2012, AirTouch developed a new product, the “U250 
+SmartLinx”, designed for sale to Mexico’s largest provider of landline telephone services (the 
+“Mexican Entity”).     
+8. On July 30, 2012, AirTouch contacted a Florida provider of logistics and 
+fulfillment services (the “Florida Entity”) about the possibility of warehousing AirTouch’s U250 
+SmartLinx product for possible sale to the Mexican Entity.  AirTouch had never done business 
+with the Florida Entity prior to July 30, 2012. 
+ 4 
+9. During contract negotiations related to this potential warehousing 
+arrangement, the Florida Entity’s CEO told Kanakubo that the Florida Entity was not buying any 
+product from AirTouch, but rather would only warehouse the U250 SmartLinx inventory for 
+eventual delivery to the Mexican Entity or other customers of AirTouch.  AirTouch’s salesperson 
+relayed the same information to Kaiser.   
+10. On July 30, 2012, Kaiser sent Kanakubo a Fulfillment and Logistics 
+Agreement between AirTouch and the Florida Entity (the “Agreement”), asking him to 
+immediately review and sign it, which Kanakubo did.  The Agreement included, among other 
+terms, the following provisions:    
+a) “Section 3 (Orders and Acceptance):  [The Florida Entity]’s purchase orders are 
+subject to purchase orders by [the Mexican Entity] and/or any other customer that 
+may be assigned from time to time by AirTouch.  In the event [the Mexican Entity] 
+or any of the customers does not fulfill the purchase orders and/or cancels the 
+orders, [the Florida Entity] shall have the right to return these products to AirTouch 
+and obtain a full credit equal to the original purchase amount with no offsets or 
+deductions or any kind.”; 
+b) “Section 5 (Resale to [the Mexican Entity] and/or Assigned Customers by 
+AirTouch):  [The Florida Entity] shall store the merchandise until shipment of the 
+Products and shall invoice AirTouch for storage of the products, in/out control, 
+invoicing, stock reconciliation, at 1.5% of the invoice value for the first 30 days and 
+an additional 1% for each additional 30 days.”; and 
+c) “Section 6 (Payment):  [The Florida Entity] shall pay for Products in 90 days in 
+accordance with the payment terms invoiced by AirTouch.  However, [the Florida 
+Entity] shall not be obligated to pay AirTouch until the Products have been received 
+by [the Mexican Entity] and [the Florida Entity] has received full payment therefor, 
+at which time then [the Florida Entity] shall pay AirTouch for the Products within 
+10 days thereafter.” 
+11. The same day, the Florida Entity issued a $1.74 million “purchase order” 
+for 20,000 U250 SmartLinx (the “Purchase Order”).  The Purchase Order stated a payment term of 
+“Net 90” but also stated that its payment terms were “according to term sheet.”   The Agreement 
+was the “term sheet.”  Kaiser received emails where representatives of the Florida Entity described 
+the Purchase Order as “conditional” upon AirTouch’s execution of the Agreement.  Kanakubo was 
+also made aware that the Florida Entity would not issue the Purchase Order unless AirTouch first 
+executed the Agreement. 
+12. On July 31, 2012, the Florida Entity sent Kaiser the counter-signed 
+Agreement and the Purchase Order in a single email.   Before forwarding this email to AirTouch’s 
+controller, he deleted the Agreement as an attachment, and forwarded only the Purchase Order. 
+13. AirTouch shipped approximately $1.24 million of inventory to the Florida 
+Entity during the third quarter of 2012, pursuant to the Agreement and the Purchase Order.  
+ 5 
+AirTouch recognized revenue on all $1.24 million of inventory shipped to the Florida Entity during 
+the quarter. 
+14. In October 2012, in connection with AirTouch’s quarterly review, 
+AirTouch’s controller provided its outside auditor with a copy of the Purchase Order, but not the 
+Agreement.  The outside auditor did not receive the Agreement since Kaiser had never provided 
+AirTouch’s controller with the agreement. 
+15. When discussing the purported receivable AirTouch booked from the 
+Florida Entity at board meetings, Kanakubo and Kaiser did not inform AirTouch’s outside 
+directors, including the chairman of the audit committee, that shipments to the Florida Entity were 
+controlled by the Agreement.  
+16. AirTouch did not receive any payment from the Florida Entity during the 
+third quarter of 2012, and likewise received no commitment from the Mexican Entity that it would 
+buy product shipped to the Florida Entity, or otherwise.  
+1.   AirTouch’s Form 10-Q for the Third Quarter 2012  
+17. On November 14, 2012, AirTouch filed its Form 10-Q for the third quarter 
+of 2012, reporting net revenues of $1,031,747.  Without the revenue recognized on the inventory 
+shipped to the Florida Entity, AirTouch would not have had any positive revenue for the quarter.   
+18. Under Generally Accepted Accounting Principles (“GAAP”), revenue 
+cannot be recognized unless it is “realized or realizable” and “earned.”   
+19. AirTouch’s recognition of revenues for the inventory shipped to the Florida 
+Entity did not comply with GAAP.  Because AirTouch did not sell any product to the Florida 
+Entity—the Purchase Order and the Agreement merely documented, for tracking purposes, the 
+transfer of AirTouch inventory to the Florida Entity in contemplation of future sales—the revenue 
+associated with shipments to the Florida Entity was not realized, realizable or earned.   
+20. AirTouch’s revenue recognition policy, which was disclosed in the 10-Q 
+and was consistent with the requirements of GAAP, permitted the recognition of revenue only 
+where:  “(1) persuasive evidence of an arrangement exists in the form of an accepted purchase 
+order or equivalent documentation; (2) delivery has occurred, based on shipping terms, or services 
+have been provided; (3) the company’s price to the buyer is fixed or determinable, as documented 
+on the accepted purchase order or similar documentation; and (4) collectability is reasonably 
+assured.” 
+21. Given the terms of the Purchase Order and the Agreement, AirTouch had no 
+reasonable assurance of collectability from the Florida Entity because AirTouch did not have a 
+valid receivable to collect from the Florida Entity.     
+22. Kanakubo and Kaiser signed certifications intended to be made pursuant to 
+the Sarbanes-Oxley Act of 2002, stating that the Form 10-Q fairly presented AirTouch’s financial 
+condition and results.     
+ 6 
+23. Kanakubo and Kaiser knew, or were reckless in not knowing, that 
+AirTouch’s Form 10-Q contained materially false or misleading statements concerning reported 
+net revenues and compliance with GAAP or AirTouch’s revenue recognition policy.   
+24. The false and misleading statements in AirTouch’s Form 10-Q occurred in 
+connection with the purchase or sale of securities. 
+25. The false and misleading statements in AirTouch’s Form 10-Q were 
+material.  These statements would have been viewed by a reasonable investor as significantly 
+altering the total mix of available information, given that AirTouch would not have had any 
+positive revenues for the quarter if it did not recognize the revenue from the Florida Entity.  The 
+Form 10-Q also reflected AirTouch’s largest revenues ever reported for a quarter.   
+26. Kanakubo and Kaiser each knew about the Agreement but did not provide it 
+to others involved in AirTouch’s financial reporting process, including the controller, the chairman 
+of the audit committee, and the company’s outside auditor.  This and other deceptive conduct 
+contributed to a revenue recognition scheme and operated as a fraud.  
+27. Because of Kanakubo’s and Kaiser’s positions as AirTouch’s senior 
+management, their scienter is attributable to AirTouch. 
+28. At all relevant times, Kanakubo and Kaiser were the company’s principal 
+officers; they were the members of management in charge of AirTouch’s day-to-day management, 
+policies, and operations; and they were responsible for preparing and signing AirTouch’s SEC 
+filings.   
+2.  Misstatements and Omissions Made to an Investor  
+29. In or around 2012, Kanakubo and Kaiser solicited a short term bridge loan 
+from an existing AirTouch investor (“Investor A”), in exchange for a promissory note and a 
+warrant to purchase 100,000 shares of AirTouch common stock.  Investor A recommended the 
+loan and warrant acquisition opportunity to a related entity, for which he served as the authorized 
+agent during the due diligence process.   
+30. On October 3, 2012, Kanakubo falsely told Investor A by email that the 
+inventory to be shipped by AirTouch to the Florida Entity—which he mischaracterized as an 
+“authorized fulfillment house” for the Mexican Entity—pertained to an existing purchase order 
+from the Mexican Entity.    
+31. Around the same time, Kaiser provided Investor A’s representatives with 
+the Purchase Order, but did not provide them with or disclose the existence of the Agreement. 
+32. On October 17, 2012, AirTouch received the loan of $2 million from 
+Investor A in exchange for a warrant to purchase its common stock.   
+33. On October 19, 2012, Kanakubo approved a $15,000 bonus payment to 
+Kaiser for his work on raising capital.  The same day, Kanakubo authorized a $15,000 payment to 
+himself in connection with unused vacation time.    
+ 7 
+34. Kanakubo and Kaiser knew, or were reckless in not knowing, that their 
+statements to Investor A concerning revenues from the Florida Entity were materially false and 
+misleading.   
+35. Kanakubo and Kaiser also failed to act with reasonable care because   
+they did not ensure that Investor A was provided with all material information necessary to make 
+their statements to him concerning the inventory shipped to the Florida Entity not misleading. 
+36. The false and misleading statements and omissions to Investor A occurred 
+in the offer or sale of, and in connection with the purchase or sale of, securities. 
+37. Kanakubo’s and Kaiser’s false and misleading statements to Investor A, and 
+their failure to disclose the terms of the Agreement, were material.  Kanakubo’s and Kaiser’s 
+statements to Investor A, and the terms of the Agreement, would have been viewed by a reasonable 
+investor as significantly altering the total mix of available information because, among other 
+reasons, AirTouch had not sold any of the inventory warehoused with the Florida Entity to the 
+Mexican Entity, and thus had no basis to represent that it expected to collect revenue from the 
+Florida Entity.   
+38. Kanakubo and Kaiser persuaded Investor A over several months into 
+loaning AirTouch $2 million based on a distorted view of AirTouch’s financial relationships with 
+the Mexican Entity and the Florida Entity.  They led Investor A to believe that AirTouch would 
+receive a substantial financial commitment from the Mexican Entity, which would then provide 
+AirTouch with sufficient cash flow for AirTouch to service and repay the loan.  These inducements 
+by Kanakubo and Kaiser, along with other deceptive conduct, contributed to an offering fraud 
+scheme and a fraudulent transaction.   
+39. Because of Kanakubo’s and Kaiser’s positions as AirTouch’s senior 
+management, their scienter and their negligence are attributable to AirTouch. 
+40. At all relevant times, Kanakubo and Kaiser were the company’s principal 
+officers; there were the members of management in charge of AirTouch’s day-to-day management, 
+policies, and operations; and they were responsible for negotiating with Investor A, providing 
+Investor A with due diligence materials, and for preparing and signing AirTouch’s SEC filings.   
+3.  AirTouch’s Restatement 
+41. In January 2013, AirTouch’s board of directors commenced an internal 
+investigation concerning the net revenues reported in the Form 10-Q for the third quarter of 2012.    
+42. AirTouch’s board of directors and its outside auditor subsequently received 
+the Agreement, and determined to restate reported revenues for the third quarter of 2012. 
+43. AirTouch filed a Form 8-K on February 7, 2013, announcing errors in 
+revenue recognition and the intention to file an amended Form 10-Q.  No amended Form 10-Q has 
+been filed. 
+ 8 
+Violations 
+44. As a result of the conduct described above, Respondent Kaiser willfully 
+violated 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 and sale of securities and in connection 
+with the purchase or sale of securities.   
+IV. 
+In view of the foregoing, the Commission deems it appropriate, in the public interest to 
+impose the sanctions agreed to in Respondent Kaiser’s Offer. 
+ 
+ Accordingly, it is hereby ORDERED that: 
+ 
+A. Respondent Kaiser shall 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) of the Exchange 
+Act and Rule 10b-5 thereunder.   
+ 
+B. Respondent Kaiser is prohibited, pursuant to Section 8A(f) of the Securities Act and 
+Section 21C(f) of the Exchange Act, for ten years following the date of entry of this Order, from 
+acting as an officer or director of any issuer that has a class of securities registered pursuant to 
+Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the 
+Exchange Act.  
+ 
+C. Respondent Kaiser is denied the privilege of appearing or practicing before the 
+Commission as an accountant. 
+ 
+ D. After ten years from the date of this Order, Respondent Kaiser 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 Kaiser’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: 
+ 
+ (a) Respondent Kaiser, 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 Kaiser, or the registered public accounting firm with  
+ 9 
+which he is associated, has been inspected by the Board and that 
+inspection did not identify any criticisms of or potential defects in 
+his or the firm’s quality control system that would indicate that he 
+will not receive appropriate supervision; 
+ 
+ (c) Respondent Kaiser 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 Kaiser acknowledges his responsibility, as long as he  
+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. 
+ 
+E. The Commission will consider an application by Respondent Kaiser 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 Respondent Kaiser’s 
+character, integrity, professional conduct, or qualifications to appear or practice before the 
+Commission. 
+ 
+F. Respondent Kaiser shall, within 365 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 United States Treasury in accordance with Section 21F(g)(3) of the 
+Exchange Act.  If timely payment is not made, 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, without further application.  Payment must be made in one of the following ways:   
+ 
+(1) Respondent Kaiser may transmit payment electronically to the Commission, 
+which will provide detailed ACH transfer/Fedwire instructions upon 
+request;  
+ 
+(2) Respondent Kaiser 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 Kaiser 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:  
+ 
+ 10 
+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 
+Kaiser 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 Diana Tani, Assistant Regional Director, 
+Enforcement, Securities and Exchange Commission, Los Angeles Regional Office, 444 South 
+Flower St., Suite 900, Los Angeles, CA  90071. 
+ 
+ G. Respondent Kaiser shall, within 365 days of the entry of this Order, pay 
+disgorgement of $15,000, which represents profits gained as a result of the conduct described 
+herein, to the Securities and Exchange Commission for transfer to the general fund of the United 
+States Treasury in accordance with Section 21F(g)(3) of the Exchange Act.  If timely payment is 
+not made, any interest accrued pursuant to SEC Rule of Practice 600, shall be due and payable 
+immediately, without further application.  Payment must be made in one of the following ways:   
+ 
+(1) Respondent Kaiser may transmit payment electronically to the Commission, 
+which will provide detailed ACH transfer/Fedwire instructions upon 
+request;  
+ 
+(2) Respondent Kaiser 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 Kaiser 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 
+Kaiser 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 Diana Tani, Assistant Regional Director, 
+Enforcement, Securities and Exchange Commission, Los Angeles Regional Office, 444 South 
+Flower St., Suite 900, Los Angeles, CA 90071. 
+ 
+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 
+ 11 
+Respondent Kaiser, and further, any debt for disgorgement, prejudgment interest, civil penalty or 
+other amounts due by Respondent Kaiser 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 Kaiser 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 

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+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74816 / April 27, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT ACT  
+Release No. 3652 / April 27, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16513 
+ 
+ 
+In the Matter of 
+ 
+Donald J. Torbert, CPA,  
+and  
+Nicole S. Stokes, CPA,  
+ 
+Respondents. 
+ 
+ 
+ 
+ 
+ORDER INSTITUTING CEASE-AND-DESIST 
+PROCEEDINGS, PURSUANT TO 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 21C of the Securities 
+Exchange Act of 1934 (“Exchange Act”), against Donald J. Torbert and Nicole S. Stokes  
+(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 Remedial Sanctions and a 
+Cease-and-Desist Order (“Order”), as set forth below.  
+ 2 
+ 
+ 
+ 
+III. 
+ 
+ On the basis of this Order and Respondents’ Offers, the Commission finds that: 
+ 
+Summary 
+ 
+1. This matter involves the role of Donald J. Torbert (“Torbert”) and Nicole S. Stokes 
+(“Stokes”) in violations of the reporting, books and records, internal controls and certification 
+provisions relating to The Park Avenue Bank (the “Bank”), the wholly-owned subsidiary of PAB 
+Bankshares, Inc. (“PAB” or the “Company”), during the period ended June 30, 2009.  The 
+violations resulted from the Bank understating its loan losses for three large loans that quarter, 
+and as a result reporting positive net income of $342,000, despite reporting quarterly losses since 
+September 30, 2008.  Had PAB properly recognized loan losses for any of the three loans, it 
+would have continued to report losses.  
+ 
+2. As a result of this conduct, PAB violated the reporting, books and records and 
+internal control provisions of the Exchange Act.  Torbert, the Bank’s former Chief Executive 
+Officer, and Stokes, the former Chief Financial Officer, each caused these violations and in 
+addition, Torbert and Stokes violated the Exchange Act’s certification requirements relating to 
+PAB’s Form 10-Q for the second quarter 2009.  
+ 
+Respondents 
+ 
+3. Donald J. (“Jay”) Torbert, Jr., age 42, is a resident of St. Simons Island, 
+Georgia.  During the relevant period, he was President and Chief Executive Officer of PAB and 
+the Bank, a position he held from April 2009 until the Bank was closed in April 2011.  He 
+previously served as Executive Vice President, Chief Financial Officer and Treasurer of the 
+Company and the Bank from August 2001 to April 2009.  Torbert is a certified public accountant 
+licensed in Georgia. 
+ 
+4. Nicole S. Stokes, age 40, is a resident of Valdosta, Georgia.  During the relevant 
+period, Stokes was PAB and the Bank’s Senior Vice President and Controller from December 
+2005 to April 2009 and PAB and the Bank’s Senior Vice President and Chief Financial Officer 
+from April 2009 to October 2010.  From October 2009 to December 2010, Stokes served as 
+Executive Vice President and Chief Financial Officer.  Stokes is a certified public accountant 
+licensed in Georgia. 
+ 
+Relevant Entity 
+ 
+ 
+5. PAB Bankshares, Inc., was a bank holding company, organized and incorporated 
+in 1982 under the laws of the State of Georgia as the bank holding company for The Park 
+Avenue Bank, headquartered in Valdosta, Georgia.  Prior to its ceasing operations, PAB operated 
+thirteen branches located in seven counties in South Georgia; four branches and one loan 
+production office located in four counties in North Georgia; and one branch and one loan 
+production office located in two counties in Florida.  The bank holding company’s stock was 
+ 3 
+registered with the Commission pursuant to Section 12(b) of the Exchange Act and its shares 
+traded on the NASDAQ Global Select Market.  
+ 
+FACTS 
+ 
+A. Background 
+ 
+6. Until April 2011, when it was closed by the FDIC, the Bank, which was the 
+wholly-owned subsidiary of PAB, a publicly held bank holding company, had operations 
+centered in Georgia and Florida.  In PAB’s Form 10-Q for the quarter ended September 30, 2010 
+(the Bank’s last periodic filing that included financial statements), PAB reported total assets of 
+approximately $1.0 billion.  
+ 
+7. In 2000, PAB began to expand its loans for the construction and development of 
+real estate.  Between December 2004 and December 2007, construction and development loans 
+increased from 26% of the Bank’s loan portfolio to 38%.  When the financial crisis occurred in 
+2008, this area of the real estate market was hit particularly hard, and PAB’s non-performing 
+construction and development loans began to rise steadily.  By late 2008, PAB was reporting 
+quarterly net losses, a trend that continued through the quarter ended September 30, 2010, except 
+for the quarter ended June 30, 2009, when it reported a net income of $342,000.    
+ 
+For the quarter-ended:  (in thousands of dollars, except for earnings per share amounts) 
+ 6/30/08 9/30/08 12/31/08 3/31/09 6/30/09 9/30/09 12/31/09 
+Net income/ 
+(loss) 
+$1,463 ($2,860) ($5,811) ($295) $342 (19,956) (31,262) 
+EPS $0.15 ($.32) ($0.60) ($0.03) $0.04 ($1.93) ($2.27) 
+ 
+8. In early 2009, PAB commenced a private placement of its common stock and 
+disclosed that it would use the capital raise to bolster capital to absorb future non-performance 
+and to increase its capital position.  The private placement closed in the third quarter of 2009 and 
+raised $13,412,000 from Bank officers and directors and their families and one institutional 
+investor.  The additional capital generated by the private placement subsequently offset 
+reductions in PAB’s capital levels caused primarily by the increase in PAB’s loan loss allowance 
+for that quarter. 
+ 
+9. PAB’s loan portfolio continued to deteriorate throughout 2010, and on April 29, 
+2011, PAB’s bank regulators closed the Bank.   
+ 
+B. PAB Reports Earnings in the Second Quarter 2009 
+ 
+10. During the second quarter 2009, PAB was continuing to grapple with a loan 
+portfolio in quick decline.  Many of the Bank’s construction and development loans were 
+collateral dependent, so as a borrower began to experience problems paying the loan, the 
+collateral underlying the loan often had lost value as well, leading the loans in many cases to 
+become impaired.  A loan is impaired when, based on current information and events, it is 
+probable that a creditor will be unable to collect all amounts due according to the contractual 
+terms of the loan agreement.  
+ 
+11. When a loan becomes impaired, the amount of impairment is measured and 
+recorded as an allowance for estimated losses on the loan.  Statement of Financial Accounting 
+Standards No. 114, Accounting by Creditors for Impairment of a Loan, allows impairment to be 
+ 4 
+measured based on the fair value of underlying collateral if a loan is collateral dependent; and 
+when the creditor determines that foreclosure is probable, it is required that measurement for 
+impairment be based on the fair value of the collateral.  Statement of Financial Accounting 
+Standards No. 157, Fair Value Measurements, requires that the assumptions used to determine 
+the collateral’s fair value be based on those that would be used by a market participant to 
+determine the price to be paid in an orderly transaction at the measurement date.   
+ 
+12. Thus, when PAB determined a loan was impaired, its policy was to assess the fair 
+value of the collateral to calculate the appropriate amount of the loan loss allowance.  
+Additionally, PAB assessed whether loan losses included in the allowance should be charged off.   
+As reflected in its disclosures, the Bank typically measured fair value by independent appraisals 
+of the collateral. 
+ 
+13. In certain cases where the Bank determined the borrower was unable to continue 
+with any amount of payment, it would foreclose on the loan and the collateral would become the 
+Bank’s own real estate, known as Other Real Estate Owned (“OREO”).  When loans are 
+foreclosed upon, the collateral received is recognized based on its fair value and any difference 
+between the recorded amount of the loan and the collateral recognized is charged off.  Prior to 
+foreclosure, Generally Accepted Accounting Principles (“GAAP”) required PAB to charge off 
+the loan in the period in which the loan was deemed uncollectible.   
+ 
+14. PAB employed an in-house appraiser, whose role was to review independent third 
+party appraisals received by the Bank for reasonableness, and in other circumstances, to provide 
+his own valuation of collateral properties associated with impaired loans.  PAB occasionally 
+received appraisals from third parties where it disagreed with the valuation, and thus requested 
+the in-house appraiser to recalculate valuations based on his own discounted cash flow analysis.  
+ 
+15. In the second quarter of 2009, the Bank acted unreasonably in determining the 
+amount by which it was required to recognize estimated losses for one large loan that had been 
+foreclosed upon and two large impaired collateral dependent loans.  In each of these instances, 
+the Bank substituted its own valuation analysis for that of an independent third party, and in 
+doing so, did not reasonably estimate the market participant view of the fair value of the 
+collateral.  Because each of these instances resulted in PAB measuring impairment based on a 
+value for the loan’s underlying collateral that was greater than a fair value estimate consistent 
+with GAAP, PAB recognized a lower loss on each of these assets in the second quarter of 2009.  
+Had the Bank properly accounted for the assets, additional charges would have resulted in a net 
+loss for the quarter instead of the positive recorded net income.  In addition, any one of these 
+over-valuations were individually material to PAB’s financial statements for that quarter. 
+ 
+C. PAB Failed to Charge Off the Proper Amount for the Grove Village Loan 
+ 
+16. In 2005, PAB made a loan to Grove Village LLC for construction and 
+development of 250 single-family residential lots.  As of mid-2008, the outstanding principal on 
+the loan was $9 million, and the loan had several pieces of collateral by which it was secured, 
+including the undeveloped lots.   
+ 
+17. By April 2009, the borrower was no longer able to make payments on the loan, 
+leading it to become impaired.  The loan was considered collateral dependent because there were 
+no other sources of available cash flows.  An independent appraisal received by PAB in April 
+2009 valued the lots at $4.2 million, using a discount rate of 14% and an absorption rate of seven 
+years.  In June 2009, the bank foreclosed on the development.  After receiving the April 
+appraisal, a bank employee sent an email to the Bank’s Chief Credit Officer (“CCO”) and to 
+ 5 
+Stokes, in which the loan officer estimated an additional charge-off of $1.1 million on the loan 
+and asked whether this new appraisal value should be used. 
+ 
+18. The CCO responded, copying Torbert, that Torbert was concerned about the 
+charge off.  Further in the email discussion, Torbert wrote that he was not comfortable taking a 
+loss of this size based on one appraisal and that the property should be valued from an 
+investment hold perspective rather than a liquidation perspective.  
+ 
+19. Torbert then asked PAB’s in-house appraiser for his opinion on the discount and 
+absorption rates used by the independent appraiser.  The in-house appraiser responded that the 
+current market was saturated, making discount and absorption rates high. 
+ 
+20. Torbert replied that he did not agree with these rates, “It may be the market, but I 
+think a 14% discount rate is a bit steep . . . . We have to look at it as a long-term investor, but I 
+think we would be fine to accept a much lower discount rate than a 3rd party investor.”  Torbert 
+asked the in-house appraiser to re-run the numbers with a 4-5 year absorption rate and a discount 
+rate of 9-10%.  The appraiser complied and prepared a discounted cash flow analysis using a 9% 
+discount rate and a 5-year absorption rate.  The resulting new fair value of $5.4 million was 
+adopted by PAB as the current value of the collateral when the lots were booked into OREO in 
+June 2009.   
+ 
+21. PAB acted unreasonably in substituting management’s valuation of the collateral 
+for that of a current market participant view, as reflected in the independent third party appraisal.  
+PAB was valuing the property based on its own expectations of the property’s value as a long 
+term investment, not with reference to the current market or market participant assumptions, as 
+GAAP requires.    
+ 
+22. Had PAB used the independently appraised value for the 250 lots available as of 
+April 2009, the loss recognized on this loan would have increased by $1.2 million in the second 
+quarter 2009.  The OREO was ultimately charged off down to the independent appraisal value of 
+$4.2 million in December 2010. 
+ 
+23. Torbert directed the in-house appraiser to substitute the discount and absorption 
+rates on this loan.  Stokes was copied on the email exchange between Torbert and PAB’s in-
+house appraiser about this loan.  Thus, both Torbert and Stokes knew or should have known that 
+the collateral was not being valued in accordance with GAAP.  
+ 
+D. PAB Failed to Adequately Reserve for the Mitchell Building Loan 
+ 
+24. In 2005, PAB made a $3.5 million loan to Mitchell Building LLC to develop 74 
+single-family residential subdivision lots.  The development was originally appraised at $4.8 
+million in 2005.  In December 2007, the borrower informed PAB that it could no longer make 
+payments on the loan.  In February 2008, PAB entered into the first of four successive 90-day 
+forbearance agreements to provide the borrower with more time to complete the project. 
+ 
+25. From inception, the development was plagued with zoning issues.  The number of 
+lots available for development continued to decrease, from the initial 74 lots, to 64 lots by the 
+end of the first quarter 2009, to 60 lots by the end of the second quarter 2009.  During the first 
+quarter 2009, a local developer made a verbal offer for the purchase of 10 lots at $32,000 each, 
+with future lot purchases to be negotiated at a later date.   
+ 
+ 6 
+26. By the second quarter 2009, the borrower was no longer involved in the project 
+and PAB had assumed responsibility for completing the subdivision with the Bank’s own funds.1  
+At this point, although still in negotiations, no definitive agreement had been reached between 
+the Bank and the local developer, in part due to the ongoing zoning issues.2 
+ 
+27. In early May 2009, a new appraisal was completed on this subdivision, which 
+appraised the now-60 lots at $1.3 million “as is.”  The appraisal was dated May 10, 2009 and the 
+invoice provided to PAB was dated May 18, 2009.   
+ 
+28. In early June, an addendum to the appraisal was prepared, taking into 
+consideration the proposed sale of 10 lots for a contract price of $32,000 per lot, and using a 13% 
+discount rate and a 3.75 year absorption rate.  The appraisal addendum increased the value of the 
+collateral to $1,350,000.
+  
+ 
+29. PAB’s in-house appraiser reviewed the May 2009 appraisal and addendum on 
+July 8, 2009.  On July 9, 2009, he prepared his own discounted cash flow of the collateral 
+valuation, using a 9% discount rate and a 3.75 year absorption rate based on the same $32,000 
+per lot sale price for an estimated value of $1,890,000.   
+ 
+30. In calculating the allowance for this impaired loan at June 30, 2009, however, 
+PAB gave no consideration to the May 2009 appraisal, the June 2009 addendum or its own in-
+house appraiser’s July 9, 2009 discounted cash flow.  In part, due to lax internal controls, as 
+discussed below, this was because PAB personnel preparing the allowance calculations were not 
+aware of the May/June appraisals or the in-house appraiser’s assessment.  Instead, using the 
+original 2005 appraisal, discounted by 15% for the deteriorating market and 6% for estimated 
+selling costs, PAB valued the collateral at June 30, 2009 at $3.1 million.   
+ 
+31. Because this appraisal was over four years old, and PAB had current appraisals 
+available to it at the time with more current assessments of market value, it was unreasonable to 
+rely on the 2005 appraisal in determining allowance amounts for this loan.  
+ 
+32. In addition, in determining the allowance amount, PAB personnel relied on 
+documentation provided by the credit department, including a Criticized/Classified Loan Status 
+Report (“Criticized/Classified Report”) dated March 31, 2009 and prepared on April 22, 2009 by 
+the PAB loan officer responsible for the loan.  In that report, the loan officer noted that the Bank 
+was waiting on a new appraisal of the collateral.   
+ 
+33. At the time, it was the Bank’s practice to rely on Criticized/Classified Reports 
+from the prior quarter-end to calculate the current quarter-end loan loss allowance.  Due to the 
+rapid pace at which economic conditions were deteriorating in this market at the time, this 
+reliance on untimely information was unreasonable.   
+ 
+34. Had PAB used the May 2009 appraisals, or its own in-house discounted cash flow 
+analysis, the specific reserve for the Mitchell Building loan would have increased by at least $1.2 
+                                                 
+1  Had PAB determined to charge off this loan in the second quarter instead of continuing to reserve for it, 
+the impact on the balance sheet and the income statement effectively would have been the same, as either 
+application required the loan be reduced or reserved for as an amount reflecting the fair value of the 
+collateral, and any difference between the current fair value and the existing book balance less existing 
+allowances would be recognized as a charge to earnings. 
+2  The local developer ultimately walked away from the project, and it was not completed by the time the 
+Bank was closed. 
+ 7 
+million and as much as $1.9 million in the second quarter 2009.  During the following quarter, 
+the Bank determined the allowance amount on this loan by using the in-house appraiser’s 
+discounted cash flow prepared in July 2009, resulting in an addition of $1.2 million to its loan 
+loss allowance.  In December 2009, PAB charged off the loan down to the $1.3 million based on 
+the May 2009 appraisal. 
+ 
+35. Stokes prepared and Torbert signed the June 2009 allowance amounts for this 
+loan, and in doing so, they reviewed or should have reviewed the March 31, 2009 
+Criticized/Classified Report, which noted in capital letters that a new appraisal was pending.  In 
+fact, the new appraisal had been completed by the end of the second quarter 2009, and had been 
+reviewed by at least one Bank employee. 
+ 
+36. Stokes and Torbert also knew or should have known that the Criticized/Classified 
+Report was based on information from the previous quarter, and that it was unreasonable to 
+continue to base a valuation on a 2005 appraisal when an updated appraisal had been received.   
+ 
+E. PAB Failed to Adequately Reserve for the  
+R&B Construction of Northwest Florida Loan 
+ 
+37. R&B Construction was a starter-home builder in the south metro markets of 
+Atlanta that had expanded into northwestern Florida with plans to build homes in that market for 
+Eglin Air Force base.   
+ 
+38.   In October 2008, with a loan balance of $6.1 million, PAB received an 
+independent appraisal that valued the Florida property at $3.3 million.  In determining a value for 
+the collateral, the appraiser considered the impact of a potential increase in Air Force personnel 
+in the area.  But at year-end 2008, PAB recorded a loan charge-off of $1.6 million to reduce the 
+loan to $4.5 million.  This valuation of the collateral was determined by the in-house appraiser 
+and based on his own predictions of future increases in property values due to the proposed 
+upcoming transfer of military personnel. 
+ 
+39. In April 2009, a third-party loan review firm, which had been retained to conduct 
+a special review of loans as part of the capital raise efforts, reviewed this loan and disagreed with 
+the in-house valuation.  Instead, the third-party reviewer recommended use of the October 2008 
+appraisal to determine the loan loss allowance, stating that it was reflective of the current market 
+value, and that the in-house assessment based in part on an assumed large increase in housing 
+demand due to upcoming transfer of military personnel was not consistent with a market 
+participant view.  Both Torbert and Stokes received the third party loan review firm’s 
+recommendation. 
+ 
+40. In late June 2009, an internal email circulated noting that the foreclosure hearing 
+on the property would be held in July.  Torbert and Stokes were both copied on the email and 
+thus were aware that foreclosure on this loan was probable.  In subsequent emails that did not 
+copy Torbert and Stokes, the  loan officer  responsible for this loan and the Chief Credit Officer  
+discussed  whether the amount for which the Bank would be willing to sell the property should 
+be slightly below the October  2008 $3.3 million appraisal value and related charge-offs.  The 
+Chief Credit Officer said they should check with Torbert and Stokes.  At this point both Torbert 
+and Stokes knew or should have known that the October  appraised value was being considered 
+as an estimate of the fair value of the property.      
+ 
+41. Stokes was also aware by July 21 that the foreclosure had been finalized at a court 
+hearing and as a result on July 20, 2009, the PAB loan officer responsible for the loan prepared 
+ 8 
+the paperwork to transfer this loan into OREO and recorded the OREO at a fair value of  $3.3 
+million.   PAB filed its Form 10-Q for the quarter on August 10, 2009.  Torbert learned of these 
+facts on August 17, 2009. 
+ 
+42. When evaluating this loan for the quarter-ended June 30, 2009 financial 
+statements, however, PAB did not appropriately account for the loan loss allowance using the 
+October 2008 appraised value of $3.3 million, which reflected a fair value estimate based on 
+market participant assumptions.  Instead, the Bank continued to take an allowance on the loan 
+based on its previous in-house valuation of $4.5 million, which was based on stale assumptions 
+that were inconsistent with market participant assumptions at the measurement date. 
+ 
+43. Had PAB used the October 2008 appraisal valuation and recognized the resulting 
+additional loan loss for this loan at the end of the second quarter 2009, an additional loss of $1.1 
+million would have been recorded.  The loan amount was ultimately foreclosed on in the third 
+quarter 2009 and the fair value of the OREO property was recognized at $3.3 million.   
+Stokes prepared and Torbert approved the allowance calculations for this loan for the quarter 
+ending June 2009.  In doing so, they were or should have been aware that this collateral had a fair 
+value of $3.3 million and should have recognized a loan loss allowance based on the $3.3 million 
+fair value. 
+44. As CEO and CFO, Torbert and Stokes both signed and certified the Form 10-Q 
+filed with the Commission for the quarter ended June 30, 2009. 
+ 
+Violations 
+ 
+45. Section 13(a) of the Exchange Act and Exchange Act Rule 13a-13 require issuers 
+of securities registered pursuant to Section 12 of the Exchange Act to file with the Commission 
+accurate periodic reports, including quarterly reports on Form 10-Q.  Rule 12b-20 further 
+requires that the required reports must contain any material information necessary to make the 
+required statements made in the reports not misleading.  As a result of the conduct described 
+above, PAB violated and Torbert and Stokes caused violations of these provisions by PAB. 
+ 
+46. Section 13(b)(2)(A) of the Exchange Act 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, 
+PAB violated and Torbert and Stokes caused violations of these provisions by PAB. 
+ 
+47. Section 13(b)(2)(B) requires issuers of securities registered pursuant to Section 12 
+of the Exchange Act to devise and maintain a system of internal accounting controls sufficient to 
+provide reasonable assurances that transactions are recorded as necessary to permit preparation 
+of financial statements in accordance with GAAP.  As a result of the conduct described above, 
+PAB violated and Torbert and Stokes caused violations of Section 13(b)(2)(B) of the Exchange 
+Act by PAB.  
+ 
+48. As a result of the conduct described above, Torbert and Stokes violated Rule 13a-
+14 under the Exchange Act, which sets forth the requirements for certain reports filed under 
+Section 13(a) of the Exchange Act to include specified certifications by each principal executive 
+and principal financial officer of the issuer. 
+ 
+ 9 
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondent Torbert’s and Stokes’s Offers. 
+ 
+ Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: 
+ 
+ A. Respondents Torbert and Stokes cease and desist from committing or causing any 
+violations and any future violations of Section 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange 
+Act and Rules 12b-20, 13a-13 and 13a-14 thereunder. 
+ 
+ B. Respondent Torbert shall pay a civil penalty of $40,000, and Respondent Stokes 
+shall pay a civil penalty of $20,000, to the Securities and Exchange Commission.  Payment shall be 
+made in the following installments:  Torbert shall pay $10,000 within 30 days of the entry of this 
+Order, and the remaining $30,000 within 364 days of the entry of this Order.  Stokes shall pay 
+$5,000 within 30 days of the entry of this Order, and the remaining $15,000 within 364 days of the 
+entry of this Order.  Payment shall be made to the Securities and Exchange Commission for 
+transfer to the general fund of the United States Treasury in accordance with Exchange Act Section 
+21F(g)(3).  If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. 
+Section 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 
+Torbert and Stokes 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 Laura B. Josephs, 
+Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 
+20549.   
+ 
+ C.   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, 
+ 10 
+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. 
+It is further Ordered that, 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. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 
+ 

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+ 
+ 
+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 74827 / April 29, 2015 
+ 
+INVESTMENT ADVISERS ACT OF 1940 
+Release No. 4072 / April 29, 2015 
+ 
+INVESTMENT COMPANY ACT OF 1940 
+Release No. 31585 / April 29, 2015 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No.  3654 / April 29, 2015 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16519 
+____________________________________  
+      : 
+      :           ORDER INSTITUTING PUBLIC 
+In the Matter of    : ADMINISTRATIVE AND CEASE-AND- 
+      : DESIST PROCEEDINGS PURSUANT 
+ SIMON LESSER, CPA, CA  :           TO SECTION 4C OF THE  
+      :           SECURITIES EXCHANGE ACT OF 
+Respondent.     :           1934, SECTION 203(k) OF THE  
+      :           INVESTMENT ADVISERS ACT OF                                                     
+                              : 1940, SECTION 9(b) OF THE 
+       : INVESTMENT COMPANY ACT, 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 pursuant to pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange 
+                                                 
+1  Section 4C provides, in relevant part, that: 
+ 
+ 
+2 
+ 
+Act”), Sections 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), Section 9(b) of 
+the Investment Company Act of 1940 (“Investment Company Act”), and Rule 102(e) of the 
+Commission’s Rules of Practice2 against Simon Lesser (“Lesser” 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 Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 4C 
+of the Securities Exchange Act of 1934, Section 203(k) of the Investment Advisers Act of 1940, 
+Section 9(b) of the Investment Company Act of 1940, 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. Over a period of four years, Simon Lesser, an audit partner at McGladrey LLP 
+(“McGladrey”), approved McGladrey’s issuance of audit reports containing unqualified opinions 
+that financial statements for several private funds were presented fairly in conformity with 
+Generally Accepted Accounting Principles (“GAAP”) even though the financial statements did not 
+adequately disclose related party relationships or material related party transactions.  In particular, 
+the investment adviser to the private funds used fund assets to pay its own adviser-related operating 
+expenses, transferring $3,452,353 from the funds over the course of four years.  These material 
+related party transactions involved related party relationships that GAAP requires be disclosed in 
+financial statements.  Despite that requirement, the relationships and transactions were not disclosed 
+in the private funds’ financial statements.  Lesser knew about the related party relationships and 
+transactions, but nevertheless gave his final approval for McGladrey to issue audit reports 
+                                                                                                                                                             
+The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege of 
+appearing or practicing before the Commission in any way, if that person is found . . . to have engaged in … 
+improper professional conduct. 
+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 … improper professional conduct. 
+3  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any 
+other person or entity in this or any other proceeding. 
+ 
+3 
+ 
+containing unqualified opinions that the private funds’ financial statements were presented fairly in 
+conformity with GAAP.  The adviser then provided the audited financial statements to the private 
+funds’ investors in order to comply with the custody rule under the Advisers Act.  Further, in 
+conducting his audit work, Lesser failed to conduct the audits in accordance with many Generally 
+Accepted Auditing Standards (“GAAS”), including failing to have adequate professional 
+skepticism, failing to supervise the audit and failing to adequately document McGladrey’s audit 
+work.  As a result, Lesser aided and abetted and caused the adviser’s violations of the Advisers 
+Act’s custody rule and engaged in improper professional conduct within the meaning of Rule 102(e) 
+of the Commission’s Rules of Practice.   
+B. RESPONDENT 
+2. Simon Lesser, CPA, CA (“Lesser”), age 58, resides in Wilmette, Illinois.  Lesser 
+is currently a partner at McGladrey, a PCAOB-registered accounting firm, and has worked for 
+McGladrey since 2005.  He is a certified public accountant licensed in Illinois and a chartered 
+accountant in England and Wales.  At McGladrey, Lesser specializes in audits of entities within 
+the financial services industry, and the majority of his McGladrey clients are private funds.     
+C. OTHER RELEVANT ENTITIES AND INDIVIDUAL 
+3. Alpha Titans LLC (“Alpha Titans”) is a California limited liability company 
+based in Santa Barbara, California.  It has been registered with the Commission as an investment 
+adviser since 2007.  As a registered investment adviser, Alpha Titans is subject to the custody 
+rule promulgated under Section 206(4) of the Advisers Act and set forth as Rule 206(4)-2 
+thereunder.  Alpha Titans elected to comply with the custody rule by distributing to the private 
+funds’ investors annual audited financial statements prepared in accordance with GAAP, and 
+audited by an independent public accountant registered with, and subject to regular inspection 
+by, the PCAOB, within 120 days of the end of the fiscal year.  Alpha Titans did not submit to 
+surprise examinations.         
+4. Alpha Titans LP, a Delaware limited partnership, is an onshore hedge fund 
+formed by Alpha Titans’ principal in September 2007; Alpha Titans is the general partner.  
+Alpha Titans, Ltd. (collectively with Alpha Titans LP, the “Feeder Funds”), a Cayman Islands 
+exempted company, is an offshore hedge fund formed by Alpha Titans’ principal in October 
+2007 and managed by Alpha Titans.   
+5. Alpha Titans MF SPC (the “Master Fund”), a Cayman Islands segregated 
+portfolio company, is a hedge fund formed by Alpha Titans’ principal in October 2007.  Alpha 
+Titans pools together assets from the Feeder Funds to invest in the Master Fund.  Alpha Titans 
+and Alpha Titans’ principal control these funds. 
+6. Montreux Partners SPC (“Montreux”), a Cayman Islands exempted segregated 
+portfolio company, and Trading Solutions Ltd. (“Trading Solutions”), a Cayman Islands 
+exempted company, are operated by Alpha Titans’ principal as special purpose vehicles for use 
+with the Master Fund’s investments.  Alpha Titans’ principal also uses Montreux to pay Alpha 
+Titans’ adviser-related operating expenses.  Alpha Titans’ principal formed Montreux and 
+Trading Solutions in February 2008 and June 2009, respectively, and he controls both entities.     
+ 
+4 
+ 
+D. FACTS 
+Background 
+7. Alpha Titans’ principal controls Alpha Titans, the Feeder Funds, the Master Fund, 
+Trading Solutions and Montreux.  Limited partners and shareholders invested money in the 
+Feeder Funds.  That money then flowed to the Master Fund.  The Master Fund purchased equity 
+options from Trading Solutions.  Trading Solutions invested that money in Montreux.  
+Ultimately, Montreux used the Feeder Funds’ money to invest in unrelated private funds. 
+8. From August 2009 through 2012, the Master Fund and Montreux used investor 
+money to pay Alpha Titans’ operating expenses.  In particular, from August 2009 through 2012, 
+the Master Fund paid $2,004,576 of Alpha Titans’ employee salaries and health benefits.  
+Similarly, from October 2009 through 2012, Montreux paid $1,447,777 of Alpha Titans’ 
+operating expenses, including monthly office rent and parking, utility and phone bills, credit card 
+bills, employee salaries and benefits, and other adviser-related operating expenses.   
+Alpha Titans Did Not Prepare the Feeder Funds’ and the Master Fund’s Financial 
+Statements in Accordance with GAAP, Which Led Alpha Titans to Violate the Custody Rule  
+9. Alpha Titans engaged McGladrey as the Feeder Funds’ and the Master Fund’s 
+independent public accountant to audit their financial statements for the fiscal years ended 
+December 31, 2009, 2010, 2011, and 2012.  To comply with the custody rule, Alpha Titans 
+apparently intended to provide the Feeder Funds’ limited partners and shareholders with GAAP-
+compliant financial statements of the Feeder Fund and the Master Fund, pursuant to the custody 
+rule exception found in Advisers Act Rule 206(4)-2(b)(4). 
+10. GAAP provides disclosure requirements for related party relationships and 
+transactions in financial statements.  (See, generally, Financial Accounting Standards Board 
+(FASB) Accounting Standards Codification (ASC) 850-10-50)  Alpha Titans, the Feeder Funds, 
+the Master Fund, Montreux and Trading Solutions were related parties because Alpha Titans’ 
+principal had common control over each entity since Alpha Titans’ principal formed and directed 
+all investment activities and operating policies of each entity.  (ASC 850-10-20, et seq.)  This 
+common control allowed Alpha Titans’ principal to pay Alpha Titans’ adviser-related 
+operational expenses, including employee salaries and related expenses, using money held by 
+Montreux and the Master Fund.  This led to operating results of the Feeder Funds and the Master 
+Fund that could have been “significantly different” from those that would have been obtained if 
+Alpha Titans’ principal did not have the control and ability to cause these entities to pay Alpha 
+Titans’ adviser-related operating expenses.  (ASC 850-10-50-6)  The Master Fund’s and 
+Montreux’s payments of Alpha Titans’ adviser-related operating expenses were material related 
+party transactions in fiscal years 2009 through 2012. 
+11. The Feeder Funds’ and the Master Fund’s audited financial statements for fiscal 
+years 2009 through 2012 were not in compliance with GAAP.  In particular, the Feeder Funds’ 
+and the Master Fund’s audited financial statements for fiscal years 2009 through 2012 did not 
+disclose (i) the related party relationships among Alpha Titans, the Feeder Funds, the Master 
+Fund, Trading Solutions and Montreux, and Alpha Titans’ principal’s common control of these 
+ 
+5 
+ 
+entities, and (ii) the material related party transactions concerning the Master Fund’s and 
+Montreux’s payments of Alpha Titans’ adviser-related operating expenses.   
+12. Neither the Feeder Funds’ nor the Master Fund’s 2009 financial statements 
+disclosed (i) the related party relationships, (ii) that Montreux paid $208,712 of related party 
+expenses, and (iii) that $287,420 of the Master Fund’s operating expenses were related party 
+transactions.  The 2009 financial statements for the Feeder Funds included a note disclosing 
+(collectively) only $318 of related party transactions and did not make any disclosure as to the 
+related party relationships.  Further, the Master Fund financial statements included operating 
+expenses totaling $319,823, but did not disclose that $287,420 (or 90%) was attributable to 
+Alpha Titans’ employee payroll and benefits, which were related party transactions.  Rather, the 
+notes to the financial statements disclosed only $1,226 in related party transactions and did not 
+describe the related party relationships.   
+13. Neither the Feeder Funds’ nor the Master Fund’s 2010 financial statements 
+disclosed (i) the related party relationships, (ii) that Montreux paid $361,429 of related party 
+expenses, and (iii) that all of the Master Fund’s operating expenses were related party 
+transactions.  Instead, the 2010 financial statements for the Feeder Funds included a note 
+indicating there were no related party transactions.  For example, in Alpha Titans LP’s 2010 
+financial statements, the note provided “Pursuant to the terms of the Fund’s limited partnership 
+agreement, the General Partner is able to pay expenses on behalf of the Fund and subsequently 
+be reimbursed for actual overhead costs and expenses that are directly connected with the 
+management and operations of the Fund.  For the year ended December 31, 2010, there was no 
+reimbursement.”  The Master Fund’s financial statements included operating expenses totaling 
+$634,895, but did not disclose that 100% of it was attributable to Alpha Titans’ employee payroll 
+and benefits, which were related party transactions.  Rather, the notes to the financial statements 
+disclosed only $1,043 in related party transactions and did not explain the related party 
+relationships.     
+14. Neither the Feeder Funds’ nor the Master Fund’s 2011 financial statements 
+disclosed (i) the related party relationships, (ii) that Montreux paid $537,999 of related party 
+expenses, and (iii) that $614,995 of the Master Fund’s operating expenses were related party 
+transactions.  Instead, the 2011 financial statements for the Feeder Funds and the Master Fund 
+included a note indicating there were no related party transactions.  For example, in Alpha Titans 
+LP’s 2011 financial statements, the note provided “Pursuant to the terms of the Fund’s limited 
+partnership agreement, the General Partner is able to pay expenses on behalf of the Fund and 
+subsequently be reimbursed for actual overhead costs and expenses that are directly connected 
+with the management and operations of the Fund.  For the year ended December 31, 2011, there 
+was no reimbursement.”  The Master Fund’s financial statements included operating expenses 
+totaling $700,736, but did not disclose that $614,995 (or 88%) was attributable to Alpha Titans’ 
+employee payroll, benefits, and other employee payments, which were related party transactions.     
+15. Neither the Feeder Funds’ nor the Master Fund’s 2012 financial statements 
+disclosed (i) all the related party relationships, and (ii) that Montreux paid $339,639 of related 
+party expenses.  Instead, the 2012 financial statements for the Feeder Funds included a note 
+indicating there were no related party transactions.  For example, in Alpha Titans LP’s 2012 
+financial statements, the note provided “Pursuant to the terms of the Fund’s limited partnership 
+ 
+6 
+ 
+agreement, the General Partner is able to pay expenses on behalf of the Fund and subsequently 
+be reimbursed for actual overhead costs and expenses that are directly connected with the 
+management and operations of the Fund.  For the year ended December 31, 2012, there was no 
+reimbursement.”  The Master Fund’s financial statements included operating expenses totaling 
+$781,732.  Unlike previous years, the notes to the financial statements provided some additional 
+detail, explaining that “During 2012, employees of the Investment Manager did provide services 
+to the Company in the amount of $467,267 and were paid by the Company.”   
+16. Overall, from 2009 through 2012, Montreux paid a total of $1,447,777 in related 
+party transactions that were not disclosed in the Feeder Funds’ or the Master Fund’s financial 
+statements.  In addition, from 2009 through 2011, the Master Fund paid a total of $1,537,309 of 
+Alpha Titans’ employee payroll, benefits and other employee payments that were not identified 
+as related party transactions in the notes to the financial statements, but instead were listed 
+simply as “operating expenses” on the income statement for the Master Fund.   
+17. For the 2009 through 2012 fiscal year-ends, McGladrey’s audit reports stated that 
+it audited the Feeder Funds’ and the Master Fund’s financial statements in accordance with 
+GAAS, and included unqualified opinions for each entity, in each year, that the financial 
+statements were presented fairly in conformity with GAAP.   
+18. Lesser served as the lead engagement partner for the fiscal year-end 2009 through 
+2012 financial statement audits of the Feeder Funds and the Master Fund.  Lesser was 
+responsible for the audit engagement and its performance and for the audit report issued on 
+behalf of McGladrey. 
+19. Lesser knew that Alpha Titans, the Feeder Funds, the Master Fund, Trading 
+Solutions and Montreux were related parties and that the Master Fund and Montreux paid Alpha 
+Titans’ operating expenses during the Feeder Funds’ fiscal years 2009 through 2012.  Lesser also 
+knew that Alpha Titans had engaged McGladrey in order to comply with the custody rule.   
+20. Despite his knowledge of the relationship between Alpha Titans, the Feeder 
+Funds, the Master Fund, Trading Solutions, and Montreux, Lesser approved the issuance of the 
+audit reports which contained unqualified opinions on behalf of McGladrey for the Feeder 
+Funds’ and the Master Fund’s fiscal years 2009 through 2012 financial statements.   
+21. Alpha Titans distributed to investors the Feeder Funds’ and the Master Fund’s 
+audited financial statements, which were not prepared in accordance with GAAP.  Because the 
+audited financial statements were not GAAP compliant, Alpha Titans failed to meet the 
+requirements for the exception to the custody rule found in Advisers Act Rule 206(4)-2(b)(4), for 
+fiscal years 2009 through 2012.   
+Lesser Engaged in Improper Professional Conduct in Performing the Audits for the Feeder 
+Funds and the Master Fund for Fiscal Years 2009 through 2012 
+ Lesser Failed to Exercise Due Professional Care 
+22. McGladrey’s audit reports for the Feeder Funds’ and the Master Fund’s financial 
+statements state that the audits were conducted in accordance with GAAS.  Lesser’s audit work 
+ 
+7 
+ 
+was subject to American Institute of Certified Public Accountants (“AICPA”) professional 
+auditing standards.  Lesser, as the lead engagement partner, was responsible for ensuring that the 
+audit team complied with these professional standards.  Lesser also was responsible for ensuring 
+that the audit engagement team adequately documented in the work papers their findings, 
+analysis and information on which they relied when forming the audit opinions. 
+23. Under GAAS, as codified in the Statements on Auditing Standards, auditors are 
+required to exercise due professional care throughout the audit.4  (AU § 230)  Due professional 
+care requires that the auditor exercise professional skepticism.  Under this standard, 
+“[p]rofessional skepticism is an attitude that includes a questioning mind and a critical 
+assessment of audit evidence.”  (AU § 230.07)  “Since evidence is gathered and evaluated 
+throughout the audit, professional skepticism should be exercised throughout the audit process.” 
+(AU § 230.08)  Additionally, standards dealing directly with related party transactions require 
+that “the 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)  The 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)  Under the 2012 clarified standards, “[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)  An auditor must 
+obtain sufficient audit evidence in order to evaluate whether related party relationships and 
+transactions have been appropriately identified, accounted for, and disclosed in the financial 
+statements.  (AU-C §§ 550.09b and 550.26a)  The auditor has “responsibility to perform audit 
+procedures to identify, assess, and respond to the risks of material misstatement arising from the 
+entity’s failure to appropriately account for or disclose related party relationships, transactions, 
+or balances.”  (AU-C § 550.04) 
+24. Lesser did not exercise the requisite level of care when conducting the audit and 
+signing off on the Feeder Funds’ and the Master Fund’s audited financial statements for fiscal 
+years 2009 through 2012.  Lesser’s knowledge that Alpha Titans’ principal controlled the 
+relevant entities and that the Master Fund and Montreux used Feeder Funds’ assets to pay Alpha 
+Titans’ adviser-related operating expenses should have caused Lesser to place greater emphasis 
+on the related party relationships and transactions, and the adequacy of the related party 
+disclosures.  He did not.  The workpapers do not document the nature of the relationships 
+between all the entities, the related party transactions of the Master Fund and Montreux paying 
+Alpha Titans’ adviser-related operating expenses, or the consideration of what disclosures, if 
+any, should have been made in the financial statements and whether the financial statements 
+complied with GAAP without the related party disclosures.   
+                                                 
+4  GAAS and the professional standards are embodied in the Codification of Statements of Auditing 
+Standards, as issued by the Auditing Standards Board of the AICPA.  “AU” refers to the specific sections of the 
+codification.  The Auditing Standards Board redrafted the auditing sections in Codification of Statements on 
+Auditing Standards (contained in AICPA Professional Standards) for clarity.  These clarified standards are effective 
+for audits ending on or after December 15, 2012, and will be referenced as “AU -C” herein. 
+ 
+8 
+ 
+ Lesser Failed to Adequately Plan the Financial Statement Audits 
+25. An auditor must adequately plan the audit.  (AU § 311)  This standard requires 
+that the auditor obtain a level of knowledge of the entity’s business that will enable him to plan 
+and perform his audit in accordance with GAAS.  That level of knowledge should enable the 
+auditor to obtain an understanding of the events, transactions, and practices that, in his judgment, 
+may have a significant effect on the financial statements.  In planning the audit, among other 
+considerations, an auditor should understand the entity’s business “and its environment, 
+including its internal control.”  (AU § 311.03)  As of 2012, an auditor should develop an audit 
+plan that includes a description of: (a) the nature and extent of planned risk assessment 
+procedures; (b) the nature, timing, and extent of planned further audit procedures; and (c) other 
+planned audit procedures that are required to be carried out so that the engagement complies with 
+GAAS.  The auditor should also “update and change the overall audit strategy and audit plan, as 
+necessary, during the course of the audit.”  (AU-C §§ 300.09 and 300.10) 
+26. As the engagement partner of the Feeder Funds’ and the Master Fund’s financial 
+statement audits, Lesser failed to adequately plan the audits to address the possibility of material 
+misstatement due to omitted related party disclosures.  Although the audit team identified a risk 
+of material misstatement concerning related parties for the 2009 audit, specifically “[h]igh 
+volume of cash transfers between related parties (between the Funds),” and Lesser signed off on 
+this work paper, Lesser did not document an audit plan in place to address this risk.  In the 2010 
+and 2011 financial statement audits, the work papers did not even identify related party cash 
+transfers or transactions as a risk of material misstatement.  Further, Lesser did not plan the audit 
+to address the high risks related to related parties even though he knew of the related party 
+relationships and the related party transactions.  In 2012, Lesser identified related party 
+transactions as a significant risk, yet he still failed to properly address this risk and adequately 
+plan the financial statement audits.  While the audit work papers reflected increased procedures 
+and testing of the related party transactions, there were no additional analyses or documentation 
+concerning the continued omission of the related party disclosures from the financial statements.  
+Similar to 2009 through 2011, in 2012, Lesser did not adjust the planned audit strategy to 
+reevaluate whether related party disclosures were required by GAAP. 
+Lesser Failed to Obtain Sufficient Appropriate Audit Evidence Regarding  
+Related Party Transactions 
+27. For the 2009 through 2011 audits, GAAS provided that an auditor must obtain 
+sufficient appropriate audit evidence to afford a reasonable basis for an opinion regarding the 
+financial statements under audit.  (AU § 326.01)  With respect to related party transactions, after 
+identifying the transactions, the auditor should apply the procedures considered necessary to 
+obtain satisfaction concerning the purpose, nature, and extent of those transactions and their 
+effect on the financial statements.  This may include taking the steps necessary to obtain “an 
+understanding of the business purpose of the transaction” and examining supporting 
+documentation, such as invoices and copies of contracts. (AU § 334.09)  The auditing standards 
+in effect for 2012 provide that “[t]he 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)  
+ 
+9 
+ 
+28. Lesser did not obtain sufficient appropriate evidence to determine whether related 
+party transactions were adequately disclosed in the funds’ financial statements.  Although 
+expenses that Montreux paid were reflected in the net investment performance of the Master 
+Fund, there were no disclosures about the related party transactions themselves.  In each year, the 
+audit team looked at only one transaction in the Montreux bank account, which was unrelated to 
+related party transactions.  The audit documentation, including the “Summary of Significant 
+Audit Findings or Issues” work paper, which Lesser signed off on, did not contain any analyses 
+or conclusions on how the evidence supported the adequacy of the related party disclosures.       
+ Lesser Failed to Prepare Adequate Audit Documentation 
+29. An “auditor must prepare audit documentation in connection with each 
+engagement in sufficient detail to provide a clear understanding of the work performed 
+(including the nature, timing, extent, and results of audit procedures performed), the audit 
+evidence obtained and its source, and the conclusions reached.” (AU §339.03)  The 2012 
+auditing standards provide that “[t]he auditor should prepare audit documentation that is 
+sufficient to enable an experienced auditor, having no previous connection with the audit, to 
+understand” the nature, timing, extent, and results of the audit procedures performed, the 
+evidence obtained, and significant findings or issues, conclusions reached, and significant 
+professional judgments made in reaching those conclusions.  (AU-C § 230.08)  The auditor 
+should also document “the names of the identified related parties and the nature of the related 
+party relationships.” (AU-C § 550.28)   
+30. Lesser failed to comply with these requirements.  The audit documentation for the 
+2009 through 2012 financial statement audits, prepared and maintained by Lesser and the 
+McGladrey audit team under his supervision, is not sufficient to enable an experienced auditor to 
+understand the “nature, timing, extent and results of audit procedures performed” in a variety of 
+areas.  Although members of the audit team understood that the Feeder Funds, the Master Fund, 
+Montreux, Trading Solutions and Alpha Titans were related parties, the related party 
+relationships, transactions, analyses, and/or conclusions reached regarding the adequacy of 
+related party disclosures were not reflected in the workpapers.  In each year, the workpapers 
+supporting the financial statement audits of the Feeder Funds, the Master Fund, Trading 
+Solutions, and Montreux were all included in one audit file, but the documents did not describe 
+the related party nature of the organizational structure, the related party relationships between all 
+the funds, or the related party transactions between the Master Fund, Montreux and Alpha 
+Titans.  The workpapers also did not include any considerations, analyses or conclusions 
+explaining Lesser’s basis for believing that the financial statement disclosures were presented in 
+accordance with GAAP despite the omitted related party information.   
+  Lesser Was Responsible for the Issuance of Reports with Inaccurate Audit Opinions 
+31. GAAS requires auditors to state in the audit report whether the financial 
+statements are presented in accordance with GAAP.  (AU § 410.01)  If management omits from 
+the financial statements, including the accompanying notes, information that is required by 
+GAAP, the auditor should express a qualified or adverse opinion and provide the information, if 
+practicable.  (AU § 431.03)  Under the 2012 standards, an auditor should modify the opinion 
+when it concludes that the financial statements as a whole are materially misstated or is unable to 
+ 
+10 
+ 
+obtain sufficient appropriate evidence to conclude that they are free from material misstatement.  
+(AU-C § 705.07)  For all years, GAAP required detailed disclosures about related party 
+transactions, including disclosure of the nature of the relationships with the related parties, a 
+description of the related party transaction and the related dollar amounts.  (ASC 850-10-50-1) 
+32. As the lead engagement partner with ultimate responsibility for the Feeder Funds’ 
+and the Master Fund’s financial statement audits for fiscal years 2009 through 2012, Lesser 
+approved the issuance of audit reports containing unqualified opinions even though the related 
+party relationships and transactions were not adequately disclosed in conformity with GAAP and 
+McGladrey’s audits were not conducted in accordance with GAAS.  Because the required 
+disclosures were omitted, McGladrey should not have issued audit reports containing unqualified 
+opinions. 
+ Lesser Failed to Properly Supervise the Financial Statement Audits 
+33. GAAS requires audit supervisors to supervise the planning and conduct of an 
+audit.  (AU §311.01)  “Supervision involves directing the efforts of assistants who are involved 
+in accomplishing the objectives of the audit and determining whether those objectives were 
+accomplished.”  Elements of supervision include instructing assistants, keeping informed of 
+significant issues, and reviewing the work.  (AU § 311.28)  For the 2012 audits, the engagement 
+partner should have taken responsibility for the direction, supervision, and performance of the 
+audit engagement in compliance with professional standards.  (AU-C § 220.17)  “The 
+engagement partner should take responsibility for reviews being performed in accordance with 
+the firm’s review policies and procedures.”  (AU-C § 220.18)  Moreover, the engagement partner 
+should review the audit documentation, have discussions with the audit engagement team and 
+“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) 
+34. Lesser failed to adequately supervise the McGladrey staff auditors on the 2009 
+through 2012 financial statement audits.  While Lesser understood the relationship among all of 
+the relevant entities and that the Master Fund and Montreux paid Alpha Titans’ adviser-related 
+operating expenses using investor monies, he did not require the team to obtain sufficient 
+appropriate evidence necessary to justify the omitted related party disclosures in the audited 
+financial statements.  He also did not appropriately address the significant issue of related party 
+disclosures, direct his team to adjust the audit plan, strategy, or documentation, or properly 
+determine whether related party disclosures were adequately evaluated by the engagement team. 
+E. VIOLATIONS 
+35. As a result of the conduct described above, Lesser willfully aided and abetted and 
+caused Alpha Titans’ violations of Section 206(4) of the Advisers Act and Rule 206(4)-2, the 
+custody rule, promulgated thereunder. 
+36. Section 4C 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.  Section 4C of the Exchange Act and Rule 102(e)(1)(iv)(B)(2) of the 
+Commission’s Rules of Practice provide that improper professional conduct includes “[r]epeated 
+ 
+11 
+ 
+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 a result of the conduct described above, Lesser engaged in improper 
+professional conduct within the meaning of Section 4C of the Exchange Act and Rule 
+102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice.  Lesser engaged in repeated instances 
+of unreasonable conduct with respect to the 2009 through 2012 financial statement audits of the 
+Alpha Titans’ Feeder Funds and the Master Fund, which resulted in violations of professional 
+standards. 
+IV. 
+ In view of the foregoing, the Commission deems it appropriate and in the public interest 
+to impose the sanctions agreed to in Respondent’s Offer. 
+ 
+ Accordingly, pursuant to Section 4C of the Exchange Act, Section 203(k) of the Advisers 
+Act, Section 9(b) of the Investment Company Act, and Rule 102(e) of the Commission’s Rules 
+of Practice, it is hereby ORDERED that: 
+ 
+ A. Lesser shall cease and desist from committing or causing any violations and any 
+future violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder. 
+ 
+B. Lesser is denied the privilege of appearing or practicing before the Commission as 
+an accountant. 
+ 
+C. After three years from the date of this order, Respondent 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 their work in their practice before the 
+Commission will be reviewed either by the independent audit committee of the public company 
+for which they work or in some other acceptable manner, as long as they practice before the 
+Commission in this capacity; and/or 
+ 
+ 2.    an independent accountant.  Such an application must satisfy the 
+Commission that: 
+      
+          (a) Respondent, or the public accounting firm with which he is 
+associated, is registered with the PCAOB in accordance with the Sarbanes-Oxley Act of 2002, 
+and such registration continues to be effective; 
+ 
+  (b) Respondent, 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  the quality control system relating to the work of Lesser that would 
+indicate that Lesser will not receive appropriate supervision; 
+ 
+12 
+ 
+  (c) Respondent 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 acknowledges his responsibility, as long as he 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, engagement quality reviews, and quality control standards.   
+ 
+D. The Commission will consider an application by Respondent to resume appearing 
+or practicing before the Commission provided that his CPA license is current and he has resolved 
+all other disciplinary issues with the applicable boards of accountancy.  However, if CPA 
+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 Respondent’s character, 
+integrity, professional conduct, or qualifications to appear or practice before the Commission. 
+ 
+E. Lesser shall, within 30 days of the entry of this Order, pay civil money penalties 
+in the amount of $75,000 to the Securities and Exchange Commission.  If timely payment is not 
+made, additional interest shall accrue pursuant to 31 U.S.C. 3717. 
+ 
+F. 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 
+Lesser 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 C. Dabney O’Riordan, Division of 
+Enforcement, Securities and Exchange Commission, 444 South Flower Street, Suite 900, Los 
+Angeles, California 90071.  
+ 
+13 
+ 
+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, that the findings in this Order are true and admitted 
+by Respondent Lesser, 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. 
+ 
+ 
+ 
+ 
+ 
+      Brent J. Fields 
+      Secretary