diff --git a/.gitattributes b/.gitattributes index 801e5994f7ae8df64ab62c9ceb348723b1aa3a38..d1ea9be3f21382b8bebb75cf0148f4d90567ace0 100644 --- a/.gitattributes +++ b/.gitattributes @@ -570,3 +570,259 @@ raw/aaer/2023/AAER-4419.pdf filter=lfs diff=lfs merge=lfs -text raw/aaer/2023/AAER-4442.pdf filter=lfs diff=lfs merge=lfs -text raw/aaer/2023/AAER-4386.pdf filter=lfs diff=lfs merge=lfs -text raw/aaer/2023/AAER-4438.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4449.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4385.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4466.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4458.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4443.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4396.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4425.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4427.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4400.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4388.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4451.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4467.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4453.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4377.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4407.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4468.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4475.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4401.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4420.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4445.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4431.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4376.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4418.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4415.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4463.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4394.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4373.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4424.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4395.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4441.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4389.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4423.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4405.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4448.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4455.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4382.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4413.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4378.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4411.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4433.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4452.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4397.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4444.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4408.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2023/AAER-4371.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4344.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4287.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4289.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4368.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4330.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4345.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4362.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4318.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4316.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4312.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4359.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4321.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4301.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4279.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4347.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4297.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4291.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4365.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4323.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4349.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4314.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4346.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4313.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4353.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4338.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4324.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4357.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4354.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4334.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4367.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4336.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4364.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4285.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4302.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4310.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4299.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4283.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4343.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4340.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4282.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4329.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4327.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4290.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4358.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4360.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4320.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4350.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4306.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4294.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4311.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4280.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4348.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4315.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4332.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4284.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4342.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4300.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4363.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4326.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4308.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4335.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4339.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4295.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4303.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4309.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4333.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4307.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4288.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4292.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4366.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4337.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4355.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4356.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4304.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4305.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2022/AAER-4325.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4510.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4521.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4518.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4547.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4487.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4537.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4553.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4512.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4524.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4519.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4502.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4481.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4541.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4554.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4532.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4503.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4492.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4542.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4514.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4549.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4522.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4488.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4517.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4538.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4544.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4490.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4491.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4539.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4500.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4515.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4511.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4550.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4505.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4533.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4498.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4545.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4540.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4497.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4482.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4548.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4483.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4534.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4506.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2024/AAER-4551.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3635.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3715.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3685.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3729.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3649.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3693.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3660.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3648.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3624.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3663.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3620.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3632.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3654.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3668.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3676.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3634.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3701.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3640.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3725.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3627.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3697.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3645.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3651.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3659.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3647.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3714.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3680.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3708.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3682.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3619.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3707.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3636.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3679.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3637.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3694.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3719.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3721.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3706.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3626.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3678.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3622.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3650.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3713.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3683.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3722.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3686.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3677.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3727.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3684.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3711.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3705.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3690.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3718.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3724.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3695.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3698.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3726.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3656.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3710.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3655.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3665.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3625.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3673.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3644.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3689.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3642.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3670.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3699.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3700.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3687.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3638.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3675.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3621.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3658.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3691.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3662.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3692.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3674.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3669.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3702.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3681.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3723.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2015/AAER-3717.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2021/AAER-4273.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2021/AAER-4270.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2021/AAER-4250.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2021/AAER-4225.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2021/AAER-4210.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2021/AAER-4244.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2021/AAER-4258.pdf filter=lfs diff=lfs merge=lfs -text +raw/aaer/2021/AAER-4252.pdf filter=lfs diff=lfs merge=lfs -text diff --git a/raw/aaer/2015/AAER-3619.pdf b/raw/aaer/2015/AAER-3619.pdf new file mode 100644 index 0000000000000000000000000000000000000000..98e5bc7905d3718e92be0790dabd49490be1a411 --- /dev/null +++ b/raw/aaer/2015/AAER-3619.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:bcf417214838080cabe1e90efce50d1cbc6730cbf1313444d732e3ddb07f2c2a +size 152269 diff --git a/raw/aaer/2015/AAER-3620.pdf b/raw/aaer/2015/AAER-3620.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f5af1347e37bd54e9a8ef3a18769708ceb894008 --- /dev/null +++ b/raw/aaer/2015/AAER-3620.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:164194d97f79b7a81a76244e20e3b438a976430056a8180949d3ab79345d9107 +size 179424 diff --git a/raw/aaer/2015/AAER-3621.pdf b/raw/aaer/2015/AAER-3621.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f2f7322d15d31274484046dfc23048d92da2fb4f --- /dev/null +++ b/raw/aaer/2015/AAER-3621.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:48b2cfbf951fe7a158214d4c0751ca4bb9eae8bc8ee380bc3a77adf59d818789 +size 172001 diff --git a/raw/aaer/2015/AAER-3621.txt b/raw/aaer/2015/AAER-3621.txt new file mode 100644 index 0000000000000000000000000000000000000000..13e0e1c6dee2a55e8634e102c585082d7ba781e7 --- /dev/null +++ b/raw/aaer/2015/AAER-3621.txt @@ -0,0 +1,1151 @@ + +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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3622.pdf b/raw/aaer/2015/AAER-3622.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b790f295a5b900aab78de4951cfc7b16870863c8 --- /dev/null +++ b/raw/aaer/2015/AAER-3622.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:796d3caf6ddbebbe5d3fe471d7b8bdd8f645492dee4d17c1af3740054ed74081 +size 196428 diff --git a/raw/aaer/2015/AAER-3624.pdf b/raw/aaer/2015/AAER-3624.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ef59659a638a177946a9356e24937795be0248f0 --- /dev/null +++ b/raw/aaer/2015/AAER-3624.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8903d98d079ddbb5ff9a5088adb7f8089cacf95048bcd57027b933cb649ad843 +size 201292 diff --git a/raw/aaer/2015/AAER-3624.txt b/raw/aaer/2015/AAER-3624.txt new file mode 100644 index 0000000000000000000000000000000000000000..faf757bcd143f3685d62aae37d88687b0efef9cd --- /dev/null +++ b/raw/aaer/2015/AAER-3624.txt @@ -0,0 +1,508 @@ +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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3625.pdf b/raw/aaer/2015/AAER-3625.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e22ff26ed55c175b09ca3ec70dc0ed8cab00d94f --- /dev/null +++ b/raw/aaer/2015/AAER-3625.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:598f8a3c3c51a4b2f9adb2aaeb9a66023d8b11a3efb5f680968eb6cc0a4528b8 +size 185344 diff --git a/raw/aaer/2015/AAER-3625.txt b/raw/aaer/2015/AAER-3625.txt new file mode 100644 index 0000000000000000000000000000000000000000..48d2070dbc91bcc452cfa396e4266b3a3bc1201c --- /dev/null +++ b/raw/aaer/2015/AAER-3625.txt @@ -0,0 +1,376 @@ + 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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3626.pdf b/raw/aaer/2015/AAER-3626.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4f9918dfe0deb482c2a1498113ae5110bd1f4299 --- /dev/null +++ b/raw/aaer/2015/AAER-3626.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:375012549a72f5a45f207053f84a5aae905579dc5d2584d715f58c6c7da29e20 +size 147859 diff --git a/raw/aaer/2015/AAER-3627.pdf b/raw/aaer/2015/AAER-3627.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b897e21c25e43178494a454aedf772dab575c349 --- /dev/null +++ b/raw/aaer/2015/AAER-3627.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9d331d2ebb1ab607597c603e079bfc674527b0091ce10454f28f66a6c9d9c9f0 +size 409055 diff --git a/raw/aaer/2015/AAER-3627.txt b/raw/aaer/2015/AAER-3627.txt new file mode 100644 index 0000000000000000000000000000000000000000..b9d8d2d87c45e1976e2ddb2a5e64fb3c6b8e182a --- /dev/null +++ b/raw/aaer/2015/AAER-3627.txt @@ -0,0 +1,1943 @@ + + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74217 / February 6, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3627 / February 6, 2015 + +ADMINISTRATIVE PROCEEDING +File Nos. 3-14872, 3-15116 + + + + +In the Matter of + +BDO China Dahua CPA Co., Ltd.; +Deloitte Touche Tohmatsu Certified +Public Accountants Ltd.; +Ernst & Young Hua Ming LLP; +KPMG Huazhen (Special General +Partnership); +PricewaterhouseCoopers Zhong Tian +CPAs Limited + +Respondents. + + + + +CORRECTED ORDER ON THE +BASIS OF OFFERS OF +SETTLEMENT OF CERTAIN + RESPONDENTS IMPLEMENTING +SETTLEMENT + +I. + + The Securities and Exchange Commission ( “SEC” or “Commission”) instituted public +administrative proceedings pursuant to Rule 102(e)(1)(iii) of the Commission’s Rules of Practice +against Deloitte Touche Tohmatsu Certified Public Accountants Ltd. (“DTTC”) on May 9, 2012.1 + +1 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 in any way to any person + +2 + +The Commission also instituted public administrative proceedings pursuant to Rule 102(e)(1)(iii) +against BDO China Dahua CPA Co., Ltd. (“Dahua”); DTTC; Ernst & Young Hua Ming LLP +(“EYHM”); KPMG Huazhe n (Special General Partner ship) (“KPMG Huazhen”); and +PricewaterhouseCoopers Zhong Tian CPAs Limited Company (“PwC Shanghai”) on December 3, +2012. The two proceedings were consolidated on December 20, 2012, pursuant to Commission +Rule 201(a), and constitute the current proceeding (“Current Proceeding”). On May 9, 2014, we +granted the respective petitions for review of four of the five respondents, DTTC, EYHM, KPMG +Huazhen, and PwC Shanghai (collectively the “Settling Respondents”) , and the Divis ion of +Enforcement (“Division”) of the initial decision of the Administrative Law Judge (“ALJ”) issued +on January 22, 2014 (“Initial Decision”).2 + +II. + +The Settling Respondents have submitted Offers of Settlement (the “Offers”), which the +Commission has determined to accept. The Settling Respondents admit only the facts set forth in +Annex A attached hereto; and admit the Commission’s jurisdiction over them in, and over the +subject matter of, the Current Proceeding, any proceeding to enforce or that seeks to challenge this +Order, and any proceeding contemplated by Section III.J.3 or III.J.4 of this Order. In addition, +without admitting or denying the findings herein the Settling Respondents consent to the entry of +this Order on the Basis of Offers of Sett lement of Certain Respondents Implementing Settlement +(“Order”) containing the following findings, undertakings to make payments as part of the Offers, +procedures and undertakings as to future requests and possible additional proceedings and +remedies, as set forth below, and a stay of the Current Proceeding as to the Settling Respondents +(defined herein). + +III. + + On the basis of this Order and the Settling Respondents’ Offers, and the facts contained in +Annex A, the Commission finds3 that: + +A. SUMMARY + +1. The Se ttling Respondents are foreign public accounting firms, as defined by +Section 106 of the Sarbanes -Oxley Act of 2002 (“Sarbanes -Oxley” or “the Act”), 15 U.S.C. § +7216(b), all based in the People’s Republic of China (“China” or “PRC”). They registered with the +Public Company Accounting Oversight Board (“PCAOB” or “Board”) in 2004. Each Settling +Respondent performed audit work for one or more clients identified in these proceedings with the + +who is found . . . [t]o have willfully violated . . . any provision of the Federal securities laws or the rules +and regulations thereunder.” 17 C.F.R. § 201.102(e)(1)(iii). +2 The remaining respondent, Dahua, did not file a petition for review. +3 The findings herein are made pursuant to the Settling Respondents’ Offers and are not binding on any +other person or entity in this or any other proceeding. + +3 + +letter designations DTTC Client A and Client B through I. The Division opened accounting fraud +investigations related to each of these nine clients. +2. Pursuant to Section 106 of Sarbanes -Oxley, as amended by Section 929J of the +Dodd-Frank Wall Street Ref orm and Consumer Protection Act (“Dodd -Frank”) (“Section 106”), +the Division served requests for audit workpapers and related documents pertaining to the nine +clients on the Settling Respondents, through their designated agents, at various times between +March 11, 2011, and April 26, 2012. The Settling Respondents responded t o these requests, +stating that PRC laws prevented them from producing responsive documents directly to the +Division. The Settling Respondents have not produced any responsive audit workpapers and +related documents directly to the Division, nor did the Div ision receive any of the requested +workpapers and related documents through any other channel before commencement of the +Current Proceeding. Because of the lack of direct production, the Commission issued the above- +referenced orders instituting proceedings under Commission Rule of Practice 102(e) against the +Settling Respondents based on willful violations of Section 106 (the “OIPs”). The Administrative +Law Judge issued the Initial Decision in the Current Proceeding finding that DTTC, EYHM, +KPMG Huazhen, and PwC Shanghai each willfully violated Sarbanes -Oxley Section 106 by +willfully refusing to comply with at least one SEC request under that provision. +3. As set forth below, this Order (i) finds, for purposes of this Order, that the Settling +Respondents willfully violated Section 106, (ii) censures the Settling Respondents, and (iii) +memorializes certain undertakings by them, including a payment by each of them in the amount of +$500,000 to the United States Treasury. Th is Order also stays the Current Proceeding as to the +Settling Respondents for a period of four years. During this time, the Settling Respondents will +perform specified undertakings in response to any future requests for documents covered by +Section 106 of Sarbanes-Oxley. Moreover, this Order provides at least three additional forms of +relief in the event the Division is unsatisfied by the productions of documents that it receives in +response to future requests. + First, if a Settling Respondent fails to attest that it has produced documents as +required by the undertakings, that Settling Respondent is subject to automatic +issuance of a Commission order that partially denies that Settling Respondent the +privilege of appearing or practicing before it for a period of six months (an +“Automatic Bar”). + Second, if the Division believes that a production from a Settling Respondent is +deficient in certain ways as set forth in the undertakings, the Commission, on the +basis of the Division’s allegations , may institute a se parate, expedited +administrative proceeding against that Settling Respondent (a “Summary +Proceeding”). + Third, if two or more productions from the Settling Respondents are substantially +delayed, are deficient in certain ways, or lack substantial volumes of requested +documents (or portions of documents) in violation of, or without justification under, + +4 + +U.S. law, including, but not limited to, Section 106 of Sarbanes-Oxley, the Division +may request that the Commission terminate the stay and resume the Current +Proceeding (“Restart”). +Under the Restart scenario, the Commission may resolve all issues as to liability and remedies +raised by the OIPs, including all defenses previously raised by the Settling Respondents, consistent +with the Commission’s May 9, 2014 order granting the parties’ petitions for review in the Current +Proceeding.4 Absent a Restart within the four -year undertaking period, this Current Proceeding +will be deemed dismissed. However, such dismissal will not affect any admissions, findings, or +remedies ordered in th is Order, which are, and will be, deemed final upon the dismissal of the +Current Proceeding. +B. SETTLING RESPONDENTS +4. DTTC (or “Deloitte”) is a special general partnership providing audit a nd +professional services in the PRC. DTTC is located in Shanghai, China, and is a member firm of +Deloitte Touche Tohmatsu Limited (“DTT Global”), a UK private company limited by guarantee. +DTTC is a foreign public accounting firm as defined by Section 106 of Sarbanes-Oxley. +5. EYHM (or “Ernst”) is a special general partnership providing audit and +professional services in the PRC. EYHM is headquartered in Beijing, China, and is a member firm +of Ernst & Young Global Limited (“EY Global”), a UK private company limited by guarantee. +EYHM is a foreign public accounting firm as defined by Section 106 of Sarbanes-Oxley. +6. KPMG Huazhen (or “KPMG”) is a special general partnership providing audit and +professional services in the PRC. KPMG Huazhen is located in Beijing, China, and is a member +firm of KPMG Int ernational Cooperative (“KPMG International”), a Swiss entity. KPMG +Huazhen is a foreign public accounting firm as defined by Section 106 of Sarbanes-Oxley. +7. PwC Shanghai (or “Pricewaterhouse”) is a special general partnership providing +audit and professional services in the PRC. PwC Shanghai is headquartered in Shanghai, China, +and is a member firm of PricewaterhouseCoopers International Limited (“PwCIL”), a UK private +company limited by guarantee. PwC Shanghai is a foreign public accounting firm as defi ned by +Section 106 of Sarbanes-Oxley. + + +4 In the event of a Restart, as set forth more fully in Section III.I of this Order, this Order and the findings +herein shall be without prejudice to any claims, arguments, or defenses that a Settling Respondent or the +Division may assert in connection with the petitions for review or in any other proceeding that does not +arise under paragraph 3 or paragraph 4 of Section III.J of this Order, except that the facts set forth in +Annex A shall remain admitted by the Settling Respondents for all purposes. In the event of a Restart, the +findings in Sections III.F and III.G of this Order shall be vacated as to any Settling Respondent for whom +the Current Proceeding is restarted. In no event, however, may any Settling Respondent recover any +payment made under Section III.H of this Order. + +5 + +C. OTHER RELEVANT ENTITIES +8. DTTC Client A (“DTTC Client A”) is a public company the securities of which are +registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934 (“Exchange +Act”) and listed on NASDAQ. DTTC Client A is incorporated in the Province of Ontario, Canada +and has its principal operations and principal place of business in the PRC. DTTC Client A +designs and manufactures solar products. +9. EYHM Client B (“Client B”) is a Delaware corporation with its principal +operations and principal place of business in the PRC. Client B’s securities were previously +registered with the SEC under Section 12(g) of the Exchange Act and listed on NASDAQ. Client +B purports to be a leading developer, manufacturer and distributor of organic compound fertilizers +in China. +10. EYHM Client C (“Client C”) is a Cayman Islands corporation with its primary +operations in Beijing, PRC. Client C’s securities were previously registered with the SEC pursuant +to Section 12(g) of the Exchange Act and listed on NASDAQ . Client C purports to provide +enhanced recovery services for oil and gas exploration. +11. KPMG Huazhen Client D (“Client D”) is a Delaware corporation with its primary +operations in Xi’an, PRC. Client D’s securities were previously registered with the SEC pursuant +to Section 12(g) of the Exchange Act and listed on NASDAQ. Client D purports to engage in the +wholesale distribution of finished oil and heavy oil products, the production and sale of biodiesel, +and the operation of retail gas stations. +12. KPMG Huazhen Client E (“Client E”) is a Nevada corporation with its primary +operations in Ningbo, PRC. Client E’s securities are registered with the SEC pursuant to Section +12(g) of the Exchange Act and were previously listed on NASDAQ . Client E purports to +manufacture and supply various petrochemical products in China. +13. KPMG Huazhen Client F (“Client F”) is a Nevada corporation, with its primary +operations in Shanghai, PRC. Client F’s securities were previously registered with the SEC +pursuant to Section 12(b) of the Exchange Act and listed on NASDAQ . Client F purports to +manufacture chemical additives used in the production of consumer and industrial products. +14. DTTC Client G (“Client G”) is a Wyoming corporation with its primary operations +in Beijing, PRC. Client G’s securities were previously registered with the SEC pursuant to Section +12(g) of the Exchange Act and listed on NYSE. Client G purports to design, manufacture, and sell +offset printing equipment. +15. PwC Shanghai Client H (“Client H”) is a Cayman Islands corporation with its +principal operations in the PRC. Client H’s securities are registered with the SEC under Section +12(g) of the Exchange Act and were previously listed on NASDAQ. Client H purports to own and +operate a commercial vehicle financing and service centers network. + +6 + +16. PwC Shanghai Client I (“Client I”) is a Nevada corporation with its primary +operations in Beijing, PRC. Client I’s securities were previously registered with the SEC under +Section 12(g) of the Exchange Act and listed on NASDAQ . Client I purports to manufacture +automotive electrical parts in China. +D. FACTS CONCERNING COMMMISSION REQUESTS TO THE SETTLING +RESPONDENTS UNDER SARBANES-OXLEY +1. Regulatory Background +17. Section 106 of the Sarbanes-Oxley Act of 2002, before it was amended by Dodd - +Frank in 2010, stated, in relevant part, that “If a foreign public accounting firm issues an opinion or +otherwise performs material services upon which a registered public accounting firm relies in +issuing all or part of any audit report or any opinion contained in an audit report, that foreign public +accounting firm shall be deemed to have consented . . . to produce its audit workpapers for the +Board or the Commission in connection with any investigation by either body with respect to that +audit report . . . .” Sarbanes-Oxley Act of 2002 (Public Company Accounting Reform and Investor +Protection Act), Pub. L. No. 107-204 § 106(b). +18. In 2004, the Board posted Frequently Asked Questions to its website which stated, +in part: “A registered firm’s failure to cooperate with Board requests [for production of documents +under Sarbanes -Oxley Section 106 ] may subject the firm to disciplinary sanctions, including +substantial civil money penalties and revocation of the firm’s registration. In the staff’s view, if a +firm fails to cooperate with the Board, the fact that the firm has not obtained a client consent that +might be necessary (under non -U.S. law) to allow the firm to cooperate is not a defense to a +disciplinary action for failure to cooperate.” +19. Section 106(b)(1) of Sarbanes-Oxley, as amended by Dodd-Frank, states that: “[i]f +a foreign public accounting firm performs material services upon which a registered public +accounting firm relies in the conduct of an audit or interim review, issues an audit report, performs +audit work, or conducts interim reviews, the foreign public accounting firm shall . . . produce the +audit workpapers of the foreign public accounting firm and all other documents of the firm related +to any such audit work or interim review to the Commission or the Board, upon request of the +Commission or the Board . . . .” +2. Requests To DTTC +20. On or around April 16, 2004, DTTC 5 applied for registration with the PCAOB as +required by Sarbanes-Oxley, 15 U.S.C. § 7212. The Board confirmed DTTC’s registration as a +foreign public accounting firm in a letter dated June 4, 2004. DTTC has remained registered with +the Board since that time. + +5 On January 1, 2013, Deloitte Touche Tohmatsu Certi fied Public Accountants LLP filed with the +PCAOB a notification on Form 4 that Deloitte Touche Tohmatsu Certified Public Accountants LLP had +succeeded to the registration status of its predecessor, Deloitte Touche Tohmatsu CPA Ltd. + +7 + +21. DTTC knew when it registered with the PCAOB that the PCAOB or the SEC could +request documents under Section 106, as originally enacted as part of Sarbanes-Oxley. +22. DTTC knew when it registered with the PCAOB that there were possible conflicts +between its obligations under U.S. and Chinese law. DTTC described possible conflicts of law in +its April 16, 2004 PCAOB registration filing that included a legal opinion. +23. The Board’s June 4, 2004 letter confirming DTTC’s registration stated that, +although DTTC had not provided with its application a “Consent to Cooperate” wi th Board +inspections and requests for documents, “the Board’s approval of Deloitte’s registration . . . does +not relieve Deloitte of the obligation to cooperate in and comply with Board demands (including +for documents or testimony) and to enforce such coo peration and compliance by Deloitte +associated persons. If Deloitte prepares or issues, or plays a substantial role in preparing or +issuing, an audit report with respect to any issuer . . . U.S. law and the Board’s rules impose +cooperation and compliance requirements that apply to Deloitte despite the absence of a consent.” +24. In June 2011, pursuant to Sarbanes-Oxley Section 106(d), as amended by Dodd - +Frank, DTTC designated Deloitte & Touche LLP (“DTT US”), the United States member firm of +DTT Global, as its agent for receiving service of document requests under Section 106. In so +doing, DTTC confirmed its understanding that the PCAOB or the SEC could request documents +under Section 106. +25. DTTC knew at all relevant times that it was possible that it could not, consistent +with Chinese law, produce documents directly to the SEC in response to requests for documents +under Sarbanes-Oxley Section 106. DTTC also knew, no later than upon the enactment of Dodd- +Frank, in 2010, and at all times subsequent, that the Commission retained power to deny DTTC the +privilege of appearing or practicing before the Commission to the extent DTTC willfully refused to +comply with requests for documents under Sarbanes-Oxley Section 106. +26. In the PCAOB reporting years 2010, 2011, 2012, and 2013, DTTC issued audit +reports for thirty -two (32), forty -five (45), forty -five (45), and thirty -nine (39) U.S. issuers, +respectively. +27. DTTC audited DTTC Client A’s financial statements for the fiscal years ended +December 31, 2008, 2009, and 2010. DTTC Client A remained DTTC’s client as of April 2013. +28. Before April 9, 2010, the Division commenced an investigation into potential +accounting fraud involving DTTC Client A, which Client A disclosed in a Form 6 -K and +accompanying press release filed with the Com mission on June 1, 2010. In the press release, +DTTC Client A announced that it was postponing the release of its full financial results for the +quarter ended March 31, 2010 and its quarterly conference call, scheduled for June 2, as a result of +the commencement of an investigation by the Audit Committee of DTTC Client A’ s Board of +Directors. DTTC Client A disclosed that “ the investigation was launched after the Company +received a subpoena from the [Commission] requesting documents from [DTTC Client A] relating +to, among other things, certain sales transactions in 2009.” + +8 + +29. On March 11, 2011, the Division properly served on DTTC a Commission request +under Section 106 for the production of “[a]ll audit work papers and all other documents related to +any audit work or interim reviews performed for [ DTTC Client A] for the fiscal y ear ending +December 31, 2009” (the “Client A Request”). +30. By letter dated April 29, 2011, DTTC, through its U.S. counsel, responded to the +Client A Request. DTTC stated in the letter tha t the laws and regulations of the PRC prohibited +the firm from providing the SEC directly with the requested audit workpapers and related +documents. DTTC did not include any of the requested audit workpapers or related documents +with its response. +31. In July 2011, the Division issued to DTTC a Wells notice that the Division intended +to recommend institution of proceedings against DTTC because, in the Division’s view, DTTC had +willfully refused to comply with the Client A Request. +32. DTTC was engaged to audit the financial statements of Client G for the fiscal year +ended June 30, 2010. In the course of this engagement, DTTC performed audit work on behalf of +Client G related to the fiscal year ended June 30, 2010. DTTC did not issue any audit report with +respect to Client G. +33. In 2010, Division staff opened an investigation involving Client G, which related to +matters reported in a Form 8-K filed by Client G on September 13, 2010. Specifically, Client G +reported that: +a. Client G had terminated DTTC’s engagement as independent auditor effective +September 6, 2010; +b. During the course of DTTC’s audit of Client G for the fiscal year ended June +30, 2010, Client G had denied DTTC’s request for permission to access original +bank statements to verify the identity of certain individuals and entities; +c. Several “reportable events,” as defined in Item 304(a)(1)(v) of Regulation S-K, +occurred during DTTC’s audit of Client G; and +d. Between September 6 and September 8, 2010, Client G’s CEO, CFO, and +several directors, including the Chair of its Audit Committee, all resigned their +positions. +34. On February 14, 2012 , the Division properly served on DTTC a Commission +request under Section 106 for the production of “ [a]ll audit work papers and all other documents +related to any audit work or interim reviews performed for [Client G] for the fiscal year ended June +30, 2010” (the “Client G Request”). +35. By letter dated April 17, 2012, DTTC, through its U.S. counsel, responded to the +Client G Request. DTTC stated in the letter that the laws and regul ations of the PRC prohibited + +9 + +the firm from providing the SEC directly with the requested audit workpapers and related +documents. DTTC did not include any of the requested audit workpapers or related documents +with its response. +36. In April 2012, the Division issued to DTTC a Wells notice that the Division +intended to recommend institution of proceedings against DTTC because, in the Division’s view, +DTTC had willfully refused to comply with the Client G Request. +37. On May 9, 2012 and December 3, 2012, the Commiss ion instituted these +proceedings against DTTC under Rule 102(e) based on DTTC’s conduct with respect to the Client +A Request and the Client G Request, respectively. DTTC did not produce audit workpapers and +related documents responsive to either request to the Commission before the December 3, 2012 +OIP. +38. In 2013, DTTC provided documents related to DTTC Client A to the China +Securities Regulatory Commission (“CSRC”), in response to a request that DTTC had received +from the CSRC. In November 2013, DTTC audit workpapers concerning DTTC Client A were +provided by the CSRC to the SEC. +39. In 2013, DTTC provided documents related to Client G to the CSRC, in response to +a request that DTTC had received from the CSRC. In October 2013, DTTC audit workpapers and +related documents concerning Client G were provided by the CSRC to the SEC. +3. Requests To EYHM +40. On or around May 25, 2004, EYHM6 applied for registration with the PCAOB as +required by Sarbanes-Oxley, 15 U.S.C. § 7212. The PCAOB confirmed EYHM’s registration as a +foreign public accounting firm in a letter dated July 8, 2004. EYHM has remained registered with +the PCAOB since that time. +41. EYHM knew when it registered with the PCAOB that the PCAOB or the SEC +could request documents under Section 106, as originally enacted as part of Sarbanes-Oxley. +42. EYHM knew when it registered with the PCAOB that there were possible conflicts +between its obligations under U.S. and Chinese law. EYHM described possible conflicts of law in +its May 25, 2004 PCAOB registration filing that included a legal opinion. +43. The Board’s July 8, 2004 letter confirming EYHM’s registration stated that, +although EYHM had not provided with its application a “Consent to Cooperate” with Board +inspections and requests for documents, “the Board’s approval of Ernst’s registration . . . does not +relieve Ernst of the obligation to cooperate in and comply with Board demands (including for + +6 On September 3, 2012, Ernst & Young Hua Ming LLP filed with the Public Company Accounting +Oversight Board a notification on Form 4 that Ernst & Young Hua Ming LLP had succeeded to the +registration status of its predecessor, Ernst & Young Hua Ming Certified Public Accountants. + +10 + +documents or testimony) and to enforce such cooperation and compliance by Ernst ’s associated +persons. If Ernst prepares or issues, or plays a substantial role in preparing or issuing, an audit +report with respect to any issuer . . . U.S. law and the Board’s rules impose cooperation and +compliance requirements that apply to Ernst despite the absence of a consent.” +44. In March 2011, pursuant to Sarbanes-Oxley Section 106(d), as amended by Dodd- +Frank, EYHM designated Ernst & Young LLP (“EY US”), the United States member firm of EY +Global, as its agent for receiving service of document requ ests under Section 106. In so doing, +EYHM confirmed its understanding that the PCAOB or the SEC could request documents under +Section 106. +45. EYHM knew at all relevant times that it was possible that it could not, consistent +with Chinese law, produce documents directly to the SEC in response to requests for documents +under Sarbanes-Oxley Section 106. EYHM also knew, no later than upon the enactment of Dodd- +Frank, in 2010, and at all times subsequent, that that the Commission retained the power to deny +EYHM t he privilege of appearing or practicing before the Commission to the extent EYHM +willfully refused to comply with requests for documents under Sarbanes-Oxley Section 106. +46. In the PCAOB reporting years 2010, 2011, 2012, and 2013, EYHM issued audit +reports for eleven (11), twenty -four (24), twenty -one (21), and twenty (20) U.S. issuers, +respectively. +47. EYHM was engaged to audit the financial statements of Client B for the fiscal year +ended December 31, 2010. In the course of this engagement, EYHM performed au dit work on +behalf of Client B related to the fiscal year ended December 31, 2010. EYHM did not issue an +audit report on Client B’s financial statements for the fiscal year ended December 31, 2010. +48. In March 2011, the Division opened an investigation into Client B. The +investigation related to, among other things, public allegations of potential accounting fraud and +misleading disclosures by Client B, including overstated revenues, falsified assets and customer +relationships, and failure to disclose certain related party transactions. +49. On April 26, 2012, the Division properly served on EYHM a Commission request +under Section 106 for the production of “[a]ll audit work papers and all other documents related to +any audit work or interim reviews performed for [Client B] for the fiscal year ending December 31, +2010” (the “Client B Request”). +50. By letter dated May 25, 2012, EYHM, through its U.S. counsel, responded to the +Client B Request. EYHM stated in the letter that the laws and regulations of the PRC prohibited +the firm from providing the SEC directly with the requested audit workpapers and related +documents. EYHM did not include any of the requested audit workpapers or related documents +with its response. + +11 + +51. In June 2012, the Division issued to EYHM a Wells notice that the Division +intended to recommend institution of proceedings against EYHM because, in the Division’s view, +EYHM had willfully refused to comply with the Client B Request. +52. EYHM audited Client C’s financial statements for the fiscal year ended September +30, 2010. +53. By September 2011, Division staff opened an investigation involving potential +financial and accounting fraud at Client C. The investigation stemmed from a short seller report +regarding Client C, and from a letter that EYHM submitted to the Commission, pursuant to Section +10A of the Exchange Act, upon its resignation as Client C’s auditor in September 2011. The two +primary subjects of the investigation were possible accounting fraud related to asset valuation, and +embezzlement by Client C’s chairman. +54. On February 2, 2012 , the Division properly served on EYHM a Commission +request under Section 106 for the production of “ [a]ll audit work papers and all other documents +related to any audit work or interim reviews performed for [ Client C] for the fiscal y ear ending +September 30, 2010 and subsequent periods” (the “Client C Request”). +55. By letter dated April 4, 2012, EYHM, through its U.S. counsel, responded to the +Client C Request. EYHM stated in the letter that the laws and regulations of the PRC prohibited +the firm from providing the SEC directly with the requested audit workpap ers and related +documents. EYHM did not include any of the requested audit workpapers or related documents +with its response. +56. In April 2012, the Division issued to EYHM a Wells notice that the Division +intended to recommend institution of proceedings against EYHM because, in the Division’s view, +EYHM had willfully refused to comply with the Client C Request. +57. On December 3, 2012, the Commission instituted these proceedings against EYHM +under Rule 102(e) based on EYHM’s conduct with respect to the Client B Request and the Client +C Request. EYHM did not produce any documents responsive to either request to the Commission +before the December 3, 2012 OIP. +58. In November 2013, EYHM audit workpapers and related documents concerning +Client C were received by the Commission from the CSRC. In March 2014, EYHM audit +workpapers and related documents concerning Client B were provided to the Commission by the +CSRC. + + + + +12 + +4. Requests To KPMG Huazhen +59. On or around April 26, 2004, KPMG Huazhen7 applied for registration with the +PCAOB as required by Sarbanes -Oxley, 15 U.S.C. § 7212. The Board confirmed KPMG +Huazhen’s registration as a foreign public accounting firm in a letter dated July 13, 2004. KPMG +Huazhen has remained registered with the Board since that time. +60. KPMG Huazhen knew when it registered with the PCAOB that the PCAOB or the +SEC could request documents under Section 106, as originally enacted as part of Sarbanes-Oxley. +61. KPMG Huazhen knew when it registered with the PCAOB that there were possible +conflicts between its obligations under U.S. and Chinese law. KPMG Huazhen described possible +conflicts of law in its April 26, 2004 PCAOB registration filing that included a legal opinion. +62. The Board’s July 13, 2004 letter confirming KPMG Huazhen’s registration stated +that, although KPMG Huazhen had not provided with its application a “Consent to Cooperate” +with Board inspections and requests for documents, “the Board’s approval of KPMG’s registration +. . . does no t relieve KPMG of the obligation to cooperate in and comply with Board demands +(including for documents or testimony) and to enforce such cooperation and compliance by +KPMG’s associated persons. If KPMG prepares or issues, or plays a substantial role in preparing +or issuing, an audit report with respect to any issuer . . . U.S. law and the Board’s rules impose +cooperation and compliance requirements that apply to KPMG despite the absence of a consent.” +63. In March 2011, pursuant to Sarbanes-Oxley Section 106(d), as amended by Dodd- +Frank, KPMG Huazhen designated KPMG LLP (“KPMG US”), the United States member firm of +KPMG International, as its agent for receiving service of document requests under Section 106. In +so doing, KPMG Huazhen confirmed its understanding that the PCAOB or the SEC could request +documents under Section 106. +64. KPMG Huazhen knew at all relevant times that it was possible that it could not, +consistent with Chinese law, produce documents directly to the SEC in response to requests for +documents under Sarbanes-Oxley Section 106. KPMG Huazhen also knew, no later than upon the +enactment of Dodd-Frank, in 2010, and at all times subsequent, that the Commission retained the +power to deny KPMG Huazhen the privilege of appearing or practicing before the Commission to +the extent KPMG Huazhen willfully refused to comply with requests for documents under +Sarbanes-Oxley Section 106. +65. In the PCAOB reporting years 2010, 2011, 2012, and 2013, KPMG Huazhen +played a substantial role in the preparation or furn ishing of audit reports filed with the SEC (as + +7 On August 14, 2012, KPMG Huazhen (Special General Partnership) filed with the Public Company +Accounting Oversight Board a notification on Form 4 that KPMG Huazhen (Special General Partnership) +had succeeded to the registration status of its predecessor, KPMG Huazhen. + +13 + +defined by PCAOB Rule 1001(p)(ii)) 8 for twenty-four (24), twenty-three (23), twenty-five (25), +and twenty-one (21) U.S. issuers, respectively. +66. KPMG Huazhen was engaged as a component auditor for Client D for the fiscal +year ended December 31, 2010. In the course of this engagement, KPMG Huazhen played a +substantial role with respect to the audit of Client D related to the fiscal year ended December 31, +2010. +67. By April 2011, the Division opened an investigation into potential accounting fraud +at Client D. The investigation concerned allegations made in two short seller reports issued in +March 2011, which claimed that Client D’s financial statements reported false cash balances, +overstated revenues, and failed to disclose a material related party transaction. +68. On February 6, 2012 , the Division properly served on KPMG Huazhen a +Commission request under Section 106 for the production of “[a]ll audit work papers and all other +documents related to any audit work or interim reviews performed for [Client D] for the fiscal year +ending December 31, 2010” (the “Client D Request”). +69. KPMG Huazhen was engaged as a component auditor for Client E for the fi scal +year ended December 31, 2010. In the course of this engagement, KPMG Huazhen played a +substantial role with respect to the audit of Client E related to the fiscal year ended December 31, +2010, but did not complete the engagement. +70. By April 2011, Division staff opened an investigation into potential financial and +accounting fraud at Client E. The investigation concerned issues raised in a Form 8-K that Client +E filed in April 2011, which stated that Client E would be unable to file its Form 10 -K on tim e +because Client E’s principal auditor had identified “unexplained issues regarding certain cash +transactions and recorded sales.” +71. On February 9, 2012 , the Division properly served on KPMG Huazhen a +Commission request under Section 106 for the production of “[a]ll audit work papers and all other +documents related to any audit work or interim reviews performed for [Client E] for the fiscal year +ending December 31, 2010” (the “Client E Request”). +72. KPMG Huazhen was engaged as a component auditor for Client F fo r the fiscal +years ended December 31, 2008, and December 31, 2009. In the course of this engagement, +KPMG Huazhen played a substantial role with respect to the audit reports Client F filed with the +Commission related to the fiscal years ended December 31, 2008 and 2009. + +8 PCAOB Rule 1001(p)(ii) defines “Play a Substantial Role in the Preparation or Furnishing of an Audit +Report” to mean: “(1) to perform material services that a public accounting firm uses or relies on in +issuing all or part of its audit re port with respect to any issuer, or (2) to perform the majority of the audit +procedures with respect to a subsidiary or component of any issuer the assets or revenues of which +constitute 20% or more of the consolidated assets or revenues of such issuer nec essary for the principal +accountant to issue an audit report on the issuer.” + +14 + +73. Before February 2012, Division staff opened an investigation involving potential +financial and accounting fraud at Client F. The investigation related to issues raised in a pair of +disclosures made by Client F in early 2011: +a. In March 2011, Client F disclos ed that it was conducting an internal +investigation into “potentially serious discrepancies” in its financial statements +for the year ended December 31, 2010, and +b. In May 2011, Client F disclosed that its principal auditor had resigned afte r +identifying what they considered “potentially serious discrepancies and/or +unexplained issues relating to [Client F]’s financial records,” in response to +which Client F failed to take adequate remedial action. +74. On February 3, 2012 , the Division properly s erved on KPMG Huazhen a +Commission request under Section 106 for the production of “[a]ll audit work papers and all other +documents related to any audit reports issued, audit work performed, or interim reviews conducted +for [Client F] from January 1, 2008 to the present” (the “Client F Request”). +75. By letter dated March 27, 2012 , KPMG Huazhen , through its U.S. counsel, +responded to the Client D Request, the Client E Request, and the Client F Request. KPMG +Huazhen stated in the letter that the laws and regula tions of the PRC prohibit ed the firm from +providing the SEC directly with any of the requested audit workpapers and related documents. +KPMG Huazhen did not include any of the requested audit workpapers or related documents with +its March 27 response. +76. In M ay 2012, the Division issued to KPMG Huazhen a Wells notice that the +Division intended to recommend institution of proceedings against KPMG Huazhen because, in the +Division’s view, KPMG Huazhen had willfully refused to comply with the Client D Request, the +Client E Request, and the Client F Request. +77. On December 3, 2012, the Commission instituted these proceedings against KPMG +Huazhen under Rule 102(e) based on KPMG Huazhen’s conduct with respect to the Client D +Request, the Client E Request, and the Client F Request. KPMG Huazhen did not produce audit +workpapers or related documents responsive to any of the requests to the Commission before the +December 3, 2012 OIP. +5. Requests To PwC Shanghai +78. On or around April 26 , 2004, PwC Shanghai 9 applied for registration with the +PCAOB as required by Sarbanes -Oxley, 15 U.S.C. § 7212. The PCAOB confirmed PwC + +9 On July 8, 2013, PricewaterhouseCoopers Zhong Tian LLP filed with the Public Company Accounting +Oversight Board a notification on Form 4 that PricewaterhouseCoopers Zhong Tian LLP had succeeded +to the registration status of its predecessor, PricewaterhouseCoopers Zhong Tian CPAs Limited +Company. + +15 + +Shanghai’s registration as a foreign public accounting firm in a letter dated July 13, 2004. PwC +Shanghai has remained registered with the Board since that time. +79. PwC Shanghai knew when it registered with the PCAOB that the PCAOB or the +SEC could request documents under Section 106, as originally enacted as part of Sarbanes-Oxley. +80. PwC Shanghai knew when it registered with the PCAOB that there w ere possible +conflicts between its obligations under U.S. and Chinese law. PwC Shanghai described possible +conflicts of law in its April 26, 2004 PCAOB registration filing that included a legal opinion. +81. The Board’s July 13, 2004 letter confirming PwC Shanghai’s registration stated +that, although PwC Shanghai had not provided with its application a “Consent to Cooperate” with +Board inspections and requests for documents, “the Board’s approval of Pricewaterhouse’s +registration . . . does not relieve Pricewaterhouse of the obligation to cooperate in and comply with +Board demands (including for documents or testimony) and to enforce such cooperation and +compliance by Pricewaterhouse’s associated persons. If Pricewaterhouse prepares or issues, or +plays a substantial role in preparing or issuing, an audit report with respect to any issuer . . . U.S. +law and the Board’s rules impose cooperation and compliance requirements that apply to +Pricewaterhouse despite the absence of a consent.” +82. In March 2011, pursuant to Sarbanes-Oxley Section 106(d), as amended by Dodd- +Frank, PwC Shanghai designated PricewaterhouseCoopers LLP (“PwC US”), the United States +member firm of PwCIL, as its agent for receiving service of document requests under Section 106. +In so doing, PwC Shanghai confirmed its understanding that the PCAOB or the SEC could request +documents under Section 106. +83. PwC Shanghai knew at all relevant times it was possible that it could not, consistent +with Chinese law, produce documents directly to the SEC in response to requests for documents +under Sarbanes-Oxley Section 106. PwC Shanghai also knew, no later than upon the enactment of +Dodd-Frank, in 2010, and at all times subsequent, that the Commission retained the power to deny +PwC Shanghai the privilege of appearing or practicing before the Commission to the extent PwC +Shanghai willfully refused to comply with requests for documents under Sarbanes -Oxley Section +106. +84. In the PCAOB reporting years 2010, 2011, 2012, and 2013, PwC Shanghai issued +audit reports for se venteen (17), twenty -seven (27), thirty -one (31), and twenty -three (23) U.S. +issuers, respectively. +85. PwC Shanghai was engaged to audit the financial s tatements of Client H for the +fiscal year ended December 31, 2010. In the course of this engagement, PwC Shanghai performed +audit work on behalf of Client H related to the fiscal year ended December 31, 2010 . PwC +Shanghai did not issue any audit report with respect to Client H. +86. By March 2011, the Division opened an inv estigation into potential accounting +fraud at Client H. The investigation concerned public allegations of accounting fraud and market + +16 + +manipulation at Client H. Certain i nternet reports alleged, among other things, that Client H +overstated revenue and earnings by accounting for lease revenues upfront instead of recognizing +this revenue over the duration of the leases, and that there were discrepancies between Client H’s +cash flow and reported net income. +87. On February 8, 2012, the Division properly served on PwC Shanghai a Commission +request under Section 106 for the production of “ [a]ll audit work papers and all other documents +related to any audit work or interim reviews performed for [ Client H] for the fiscal y ear ending +December 31, 2010” (the “Client H Request”). +88. By letter dated April 12, 2012, PwC Shanghai, through its U.S. counsel, responded +to the Client H Request. PwC Shanghai stated in the letter that the laws and regulations of the PRC +prohibited the firm from providing the SEC d irectly with the requested audit workpapers and +related documents. PwC Shanghai did not include any of the requested audit workpapers or related +documents with its response. +89. In April 2012, the Division issued to PwC Shanghai a Wells notice that the Division +intended to recommend institution of proceedings against PwC Shanghai because, in the Division’s +view, PwC Shanghai had willfully refused to comply with the Client H Request. +90. PwC Shanghai was engaged to audit the financial s tatements of Client I for the +fiscal year ended December 31, 2010. In the course of this engagement, PwC Shanghai performed +audit work on behalf of Client I related to the fiscal year ended December 31, 2010 . PwC +Shanghai did not issue any audit report with respect to Client I. +91. By March 2011, Division staff opened an investigation involving potential financial +and accounting fraud at Client I. The investigation focused on potential accounting irregularities, +undisclosed related party transactions, misappropriation of corporate asset s, and market +manipulation. +92. On March 22, 2012, the Division properly served on PwC Shanghai a Commission +request under Section 106 for the production of “ [a]ll audit work papers and all other documents +related to any audit work performed for [ Client I] for the fiscal year ending December 31, 2010” +(the “Client I Request”). +93. By letter dated April 12, 2012, PwC Shanghai, through its U.S. counsel, responded +to the Client I Request. PwC Shanghai stated in the letter that the laws and regulations of the PRC +prohibited the firm from providing the SEC directly with the requested audit workpapers and +related documents. PwC Shanghai did not include any of the requested audit workpapers or related +documents with its response. +94. In April 2012, the Division issued to PwC Shanghai a Wells notice that the Division +intended to recommend institution of proceedings against PwC Shanghai because, in the Division’s +view, PwC Shanghai had willfully refused to comply with the Client I Request. + +17 + +95. On December 3, 2012, the Commission in stituted these proceedings against PwC +Shanghai under Rule 102(e) based on PwC Shanghai’s conduct with respect to the Client H +Request and the Client I Request. PwC Shanghai did not produce audit workpapers and related +documents responsive to either request to the Commission before the December 3, 2012 OIP. +96. In November 2013, PwC Shanghai produced audit workpapers and related +documents concerning Client I to the CSRC, in response to a request that PwC Shanghai had +received from the CSRC. In March 2014, PwC Shanghai audit workpapers and related documents +concerning Client I were provided by the CSRC to the SEC. +E. FACTS CONCERNING COMMISSION REQUESTS FOR ASSISTANCE UNDER +INTERNATIONAL SHARING PROTOCOLS +97. Before the December 3, 2012 OIP, in connection with Divisio n investigations, the +SEC’s Office of International Affairs sent a number of requests for assistance to the CSRC +pursuant to the International Organization of Securities Commissions (“IOSCO”) Multilateral +Memorandum of Understanding (“MMOU”), seeking DTTC’ s audit workpapers and related +documents concerning certain of the firm’s clients. The SEC did not receive any of the requested +documents before the December 3, 2012 OIP. Meanwhile, the SEC issued the nine requests under +Section 106 of Sarbanes-Oxley to the Settling Respondents, as described above in Section III.D, +among other Section 106 requests. +98. In July 2013, after the start of the hearing in this proceeding, the CSRC produced to +the SEC a set of DTTC’s audit workpapers concerning a firm client that is unrelated to Clients A +through I listed above. The SEC had requested these workpapers from the CSRC before the +December 3, 2012 OIP. The July 2013 production was the first time that the CSRC provided audit +workpapers to the SEC under any international sharing protocols.10 +99. After the July 2013 production, the SEC received productions from the CSRC for +DTTC Clients A and G, in response to requests that the SEC had made under the IOSCO MMOU +before the May 9, 2012 OIP. Also after the July 2013 production, the SEC sought and rec eived +productions from the CSRC for EYHM Clients B and C, and PwC Shanghai Client I, as described +above in Section III.D. To date, the SEC has not sought the assistance of the CSRC in obtaining +audit workpapers and related documents for KPMG Huazhen’s Client D, Client E, and Client F, or +for PwC Shanghai Client H. + + +10 The audit workpapers produced by the CSRC in July 2013, concerning DTTC client Longtop Financial +Technologies Limited (“Longtop”), were also the subject of a subpoena enforcement action brought by +the SEC against DTTC in federal district court, SEC v. DTTC , 1:11mc00512-GK (D.D.C.). That action +was dismissed without prejudice following supplemental productions of DTTC documents receiv ed by +the SEC from the CSRC in January 2014. DTTC’s non -production of the Longtop documents directly to +the SEC is not the basis of any Division claim against DTTC in this proceeding. + +18 + +F. VIOLATIONS +100. As noted, Rule 102(e)(1)(iii) of the Commission’s Rules of Practice provides that +“[t]he Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it in any way to any person who is found . . . [t]o have willfully +violated . . . any provision of the Federal securities laws or the rules and regulations thereunder.” +17 C.F.R. § 201.102(e)(1)(iii).11 Rule 102(e) “provides the Commission with a means to ensure +that the professionals on whom it relies ‘perform their tasks diligently.’” Marrie v. SEC, 374 F.3d +1196, 1200 (D.C. Cir. 2004) (quoting Touche Ross & Co. v. SEC , 609 F.2d 570, 582 (2d Cir. +1979)). The rule “is directed at protecting the integrity of the Commission’s own processes, as well +as the confidence of the investing p ublic in the integrity of the financial reporting process.” +Marrie, 374 F.3d at 1200. +101. Section 106(b) of Sarbanes -Oxley provides that a foreign public accounting firm +that “performs audit work . . . shall . . . produce the audit work papers of the foreign public +accounting firm and all other documents of the firm re lated to any such audit work . . . to the +Commission . . . upon request of the Commission.” 15 U.S.C. § 7216(b)(1). A foreign public +accounting firm that willfully violates Section 106(b) is subject to sanction under Rule 102(e).12 +102. Sarbanes-Oxley Section 106(e) identifies certain conduct that must be considered a +violation under Section 106. Specifically, Section 106(e) states that “[a] willful refusal to comply, +in whole or in part, with any request by the Commission . . . under this section, shall be deemed a +violation of this Act.” 15 U.S.C. § 7216(e). Thus, Rule 102(e)(1)(iii) and Section 106(e), +considered together, provide that the Commission may censure, or deny, temporarily or +permanently, the privilege of appearing or practicing before it in any way, a foreign public +accounting firm that is found to have willfully refused to comply with a Commission request for +documents covered by Section 106(b).13 +103. During the relevant time period, each Settling Respondent was a foreign public +accounting firm. In addition, the Commission properly served each Settling Respondent with at +least two requests under Section 106(b) pertainin g to clients or former clients as to which that +Settling Respondent had “perform[ed] audit work. ” In response to these requests, the Settling + +11 Similarly, Section 4C of the Exchange Act provides, “The Commission m ay 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 willfully violated, or willfully aided and +abetted the violation of, a ny provision of the securities laws or the rules and regulations issued +thereunder.” 15 U.S.C. § 78d-3(a)(3). +12 Furthermore, under Section 3(b) of Sarbanes -Oxley, a violation of Section 106 is to be treated as a +violation of the Exchange Act. See 15 U.S.C. § 7202(b)(1) (“A violation . . . of this Act . . . shall be +treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 . . . .”). +13 See Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965) (discussing meaning of +“willfully” under Section 15(b) of the Exchange Act); Wonsover v. SEC, 205 F.3d 408, 414-415 (D.C. +Cir. 2000). + +19 + +Respondents informed the Division in writing that they could not, consistent with Chinese law, +produce documents directly to the Division. The Di vision did not receive any of the requested +audit workpapers or related documents before this Current Proceeding was instituted. +G. FINDINGS +104. Based on the foregoing and for the purposes of th is Order, the Commission finds +that each Settling Respondent willfully refused to comply with the requests that were issued to it +under Section 106, and each Settling Respondent willfully violated Section 106 of the Sarbanes - +Oxley Act. +H. UNDERTAKINGS TO MAKE PAYMENTS +105. Pursuant to the Offers, each Settling Respondent has under taken to pay $500,000. +The Settling Respondents will make their respective payments within thirty (30) days of the +issuance of this Order. If timely payment is not made, additional interest shall accrue pursuant to +31 U.S.C. § 3717. Payment shall be made in one of the following ways: +(1) The Settling Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon request; +(2) The Settling 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) The Settling Respondent may pay by certified check, bank cashier’s check, or +United States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying the Settling +Respondent as a Respondent in this proceeding, and the file numbers of this proceeding; a copy of +the cover letter and check or money order must be sent by overnight commercial mail service to +David Mendel, Assistant Chief Litigati on Counsel, Division of Enforcement, Securities and +Exchange Commission, 100 F Street N.E., Mail Stop 5971, Washington, DC 20549 -5971. The +Commission shall remit the funds paid pursuant to this paragraph to the United States Treasury. In +determining whether to accept the Offers, the Commission has considered this undertaking by +Settling Respondents. + + +20 + + +I. STAY OF THIS PROCEEDING +106. In light of the Procedures and Undertakings as to Future Requests, And Possible +Additional Proceedings and Remedies set forth below in Section III.J of this Order, this proceeding +(the “Current Proceeding”) is stayed as follows: +a. The stay applies to the Settling Respondents’ petition seeking review of the +Initial Decision of the Administrative Law Judge, dated January 22, 2014 (the +“Initial Decision”), and to the Division’s petition for review of the Initial +Decision’s handling of remedies as to the Settling Respondents, and to any +federal court appeal from the result of either such petition for review. +b. The stay is conditioned on the Current Proceeding not being restarted pursuant +to paragraph 5 of Section III.J of this Order. +c. In the event the Current Proceeding is restarted, the Commission may resolve +all issues as to liability and remedies raised by the OIPs in this proceeding, +including all defenses previously raised by the Settling Respondents, consistent +with the Commission’s May 9, 2014 order granting the parties’ petitions for +review in the Current Proceeding. Under the Restart scenario, the Commission +may resolve, among other iss ues, whether the OIP in the Current Proceeding +was properly served on the Settling Respondents, whether the conduct of the +Settling Respondents constitutes a willful violation of Section 106, and whether +any or all of the Settling Respondents should be cen sured or denied the +privilege of appearing and practicing before the Commission pursuant to +Section 106 of Sarbanes-Oxley and Rule 102(e). Accordingly, in the event of a +Restart, this Order and the findings herein shall be without prejudice to any +claims, arguments, or defenses that a Settling Respondent or the Division may +assert in connection with the petitions for review or in any other proceeding that +does not arise under paragraph 3 or paragraph 4 of Section III.J of th is Order, +except that the facts set forth in Annex A (which are repeated in Section III, +Sub-Sections B, C, and D of th is Order) shall remain admitted by the Settling +Respondents for all purposes. Upon the Division’s filing of a notice that the +Current Proceeding is restarted in accordance with paragraph 5 of Section III.J +of this Order, the Current Proceeding will resume from its current status and the +Commission will re -set a briefing schedule for consideration of the parties’ +respective petitions for review, as appropriate. +d. Nothing in this Order, the Offers, or the undertakings shall derogate from the +Settling Respondents’ rights to appeal any decision of the Commi ssion in the +Current Proceeding to the Federal Courts, and in any proceedings before the +Commission or the Federal Courts to make all such arguments as are currently +available to them. Except for the facts that the Settling Respondents expressly + +21 + +agree to and admit in Annex A, which are repeated in Section III, Sub-Sections +B, C, and D of this Order, nothing in this Order or the discussions leading to it +may be used as an admission in the Current Proceeding in the event it is +restarted. +J. PROCEDURES AND UNDERTAKINGS AS TO FUTURE REQUESTS, AND +POSSIBLE ADDITIONAL PROCEEDINGS AND REMEDIES +1. The Settling Respondents and the Division will abide by the procedures set forth in this +Section III.J of this Order with respect to future requests for documents covered by Section +106(b) of Sarbanes -Oxley (“ Procedures”), during the four -year period prescribed by +paragraph III.J.7 of this Order. Nothing in the Procedures reflects a determination by the +Division or Commission as to the scope of obligations of any foreign public accounting firm +under Section 106 of Sarbanes -Oxley, or the steps the Division should or must take in +connection with a foreign public accounting firm’s satisfaction of its obligations under +Section 106 . Requests for documents under these Procedures are deemed “covered by +Section 106(b) of Sarbanes -Oxley” without regard to whether the relevant Settling +Respondent prepared, furnished, or issued any audit report concerning the client for which +the documents are sought, and without prejudice to any arguments a Settling Respondent +may have with respect to the application of Section 106 in a Restart of the Current +Proceeding or a ny future proceeding based on Section 106 that does not arise under +paragraph 3 or paragraph 4 of Section III.J of th is Order. All references to “paragraphs” in +Section III.J of this Order are references to the numbered paragraphs 1 through 8 that appear +in Section III.J of this Order, unless expressly indicated otherwise. +2. The following Procedures will apply to future SEC requests for production of documents +covered by Section 106(b) of Sarbanes-Oxley from the Settling Respondents: +i. The Division agrees that, on its own or through o ther SEC staff (such as the SEC’ s +Office of International Affairs), it will in the first instance issue a request for assistance +to the CSRC in respect of such documents under international sharing mechanisms +(including, to the extent available, the IOSCO MMOU). On or about the date on which +such a request for assistance is sent, the SEC or the Division will do one or both of the +following: +A. Issue a new Section 106 request (mirroring the request made to the CSRC) to +the relevant Settling Respondent through its designated U.S. agent. Unless the +Division has already provided notice that it is terminating the stay pursuant to +paragraph 5 below, the new Section 106 request shall expressly state that, +pursuant to Section 106(f), the D ivision agrees to accept production of +documents in accordance with these Procedures; and/or +B. Provide the relevant Settling R espondent with notice of the request for +assistance that was sent to the CSRC, specifying the documents sought by the +Division. + +22 + +References in Section III.J of this Order to the CSRC mean the CSRC and/or such other +Chinese authority/ies as may be charged from time to time by the Chinese government +with liaising with the SEC on matters of cross -border information -sharing and +cooperation. + +For the purpose of maximizing efficiency between the CSRC and the SEC in the +handling of any request, to the extent practicable the Division will make reasonable +efforts (1) to discuss the content of the request with outside counsel for the relevant +Settling Respondent in the United States before the request is issued in connection with +the Division’s investigation; and (2) to consolidate follow-up inquiries with the CSRC in +a minimal number of communications after the Division receives a production, and to +set forth reasonable periods for responses to such inquiries. However, nothing in this +sub-paragraph affects the Settling Respondents’ undertakings under paragraph 2(ii) +below, the potential remedies available in paragraphs 3 and 4 below, or the Divisi on’s +ability to restart the Current Proceeding under paragraph 5 below. + +ii. The Settling Respondents undertake as follows: +A. Within ninety (90) days of receipt of a request under paragraph 2(i)(A) or (B) +above, or within forty-five ( 45) days from the date the relevant Settling +Respondent receives the first corresponding request from the CSRC +(“corresponding request ”), whichever is later, the relevant Settling +Respondent will provide the Divisio n with an initial declaration (“ initial +declaration”) which states that the relevant Settling Respondent has produced +all responsive documents to the CSRC for production to the SEC, subject to the +following: +1. If the Settling Respondent has determined to withhold documents (or +portions of documents) under a claim of U.S. privilege, the declaration +must attest that the Settling R espondent has described all such +information on a privilege log in accordance with U.S. custom and +practice (“privilege log”); +2. If the Settling R espondent has determined (subject to the CSRC’ s +review) that documents (or portions of documents) should be withheld +under Chinese law governing state sensitive information or state +secrets, or for any other reason under Chinese law, including +applicable privilege(s) under Chinese law, th e declaration must attest +that the Settling Respondent has described all such inf ormation on a +withholding log (“ withholding log”). The withholding log must (to +the extent permissible under Chinese law) include the date on which +the document was created; the document’s author(s); all recipients of +the document; the document ’s general subject matter; the reason for +proposing the withholding; a description sufficient to identify where +the document is located (or would have been located) in the + +23 + +production; and a unique identifying number (i.e., a bates number) for +each page containing withheld information. +3. The Division, in its sole discretion, may authorize one or more +extensions of the 90 -day deadline (referenced in paragraph 2(ii) (A) +above) if the relevant Settling Respondent, in writing, requests and +demonstrates good cause for such an extension before the expiration of +such deadline. +4. If the relevant Settling Respondent determines not to provide the initial +declaration within the 90-day deadline because the Settling Respondent +is allowed additional time by virtue of the date on which it receives the +first corresponding request from the CSRC in accordance with +paragraph 2(ii) (A) above, the Settling R espondent will notify the +Division in writing of this determ ination before the 90 -day deadline +expires. In addition, upon such notification by the Settling +Respondent, or within five days of the Settling Respondent’s receipt of +the first corresponding request from the CSRC, whichever is later, the +Settling Respondent will inform the Division in writing of the date on +which it received the first corresponding request. +B. The Settling Respondents will inform the CSRC in writing when they have +completed preparation for production to the CSRC of all responsive documents, +privilege logs and withholding logs in response to corresponding requests. The +Settling Respondents will use all reasonable efforts to facilitate the SE C’s +receipt of all responsive documents, privilege logs, and withholding logs +(finalized in accordance with the CSRC’s directions) in as expeditious a manner +as possible. +C. Within ten (10) days of the SEC notifying the relevant Settling Respondent that +production from the CSRC to the SEC has occurred , the relevant Settling +Respondent will provide the Div ision directly with a certification that it has +provided to the CSRC all documents responsive to the CSRC ’s corresponding +request except information set forth on a privilege log, and, where applicable, +that it has proposed (subject to the CSRC’s review) that documents (or portions +of documents) set forth on the withholding log should be withheld under +Chinese law governing state sensitive information or state secrets, or for any +other reason under Chinese law (“certification of completeness”). The +certification of completeness must append all corresponding requests received +by the Settling Respondent from the CSRC, and certified English translations +thereof, and describe the Settling Respondent’s search for the documents, and +(to the extent permissible unde r Chinese law) the process by which it was +determined that information included on the withholding log, if any, should be +withheld. + +24 + +3. Remedy in the form of an Automatic B ar. If the relevant Settling Respondent does not +provide the initial declaration as required by paragraph 2(ii)(A) above or if the relevant +Settling R espondent does not provide the certification of completeness as required by +paragraph 2(ii)(C) above, the Division shall notify the relevant Settling Respondent of the +failure and give the Settling Respondent twenty (20) days to cure the failure. If, within +twenty (20) days of the request for cure by the Division, the relevant Settling Respondent +does not provide the initial declaration as required by paragraph 2(ii)(A) above or the +relevant Settling Respondent does not provide the certification of completeness as required +by paragraph 2(ii)(C) above, the Commission, in its sole discretion, and without regard to the +procedures set forth in Rule 5(c) of SEC’s Informal and Other Procedures, 17 C.F.R. § +202.5(c), may determine that the relevant Settling Respondent has not complied with its +obligations under th is Order and thereupon enter, without further notice, an order of the +Commission pursuant to Rule 102(e) in an agreed -upon form (attached as Annex B to this +Order), that partially denies the Settling Respondent the privilege of practicing or appearing +before the Commission, for a period of six (6) months, according to the terms set forth below +(collectively the “Partial Bar”).14 +i. A Partial Bar is defined as follows: +A. The Settling Respondent is prohibited from issuing an audit report, or otherwise +serving as a principal auditor, for any issuer (as defined in Section 2(a)(7) of +Sarbanes-Oxley); and +B. The Settling Respondent is prohibited from playing a 50% or greater role in the +preparation or furnishing of an audit report for any issuer, meaning the Settling +Respondent is prohibited from performing: +1. Audit work that a public accounting firm uses or relies on in issuing +all or part of its audit report with respect to any issuer, where the +engagement hours or fees for such services constitute 50% or more of +the total engagement hours or fees, respectively, provided by the +principal auditor in connection with the issuance of all or part of its +audit report with respect to any issuer; and +2. The majority of audit work with respect to a subsidiary or component +of any issuer, the assets or revenues of which constitute 50% or more +of the consolidated assets or revenues of the issuer. +ii. If two or more orders imposin g a Partial Bar are issued under this paragraph 3 for a +particular Settling R espondent (where each such remedy arises from a separate + +14 If an order in the form of Annex B is entered under this paragraph 3 of Section III.J of this Order, the +information contained in brackets (“[. . . .]”) in Annex B will be replaced by the relevant Settling +Respondent’s name and the other pertinent details indicated within those brackets. + +25 + +investigation), the Partial Bars shall be imposed so that each Partial Bar runs its full +six-month course in a non-concurrent fashion. +iii. An Order imposing the remedy of a Partial Bar shall be final. There shall be no +review by any federal court. +4. Remedy in the form of a Summary Proceeding. If the relevant Settling Respondent provides +the initial declaration under paragraph 2(i i)(A) above and/or the certification of +completeness under paragraph 2(ii)(C) above, but the Division believes that either or both of +the documents so provided is inadequate or that the production which the Settling +Respondent has made to the CSRC and in r espect of which it has given a certificate of +completeness is not materially complete (as defined below), the Division shall notify the +relevant Settling Respondent of the inadequacy or material non-completeness which it asserts +and give the Settling Respondent at least twenty (20) days to cure them or otherwise satisfy +the Division. If after twenty (20) days the relevant Settling Respondent has not resolved the +matter to the Division’s satisfaction, the Commission, upon recommendation by the Division +and without regard to the procedures set forth in Rule 5(c) of SEC’s Informal and Other +Procedures, 17 C.F.R. § 202.5(c), may issue an order instituting a summary administrative +proceeding (“Summary Proceeding”). If the Commission decides to issue an OIP, a +Summary Proceeding will commence as follows: +i. The purpose of the Summary Proceeding is to determine whether, in response to a +request under the Procedures, the privilege log, withholding log, initial declaration, +and/or certification of completeness is or are inadequate; whether U.S. privilege justifies +the withholding of any responsive information; and whether the production to the CSRC +is otherwise materially complete. These are the sole issues to be determined in a +Summary Proceeding. A finding that is adverse to the Settling Respondent on one or +more of these issues shall collectively constitute an “offense.” +ii. The Summary Proceeding will be adjudicated by an assigned ALJ, who will issue a +decision no later than either 180 days from the beginning of the proceeding or an +extended date approved by the Commission. The relevant Settling Respondent will be +afforded a reasonable opportunity to submit responses and briefs responding to any OIP +instituting a Summary Proceeding in accordance with the SEC Rules of Practice. The +Rules of Practice will govern the Summary Proceeding, except to the extent inconsistent +with the terms of this Order. +iii. A Summary Proceeding may impose, for a first offense, a Partial Bar for a period of up +to six (6) months. If, in the same Summary Proceeding or other Summary Proceedings, +there is a finding of one or more additional offenses (each arising from a different +investigation), the Summary Proceeding may impose a complete bar on appearing or +practicing before the Commission for a period up to six ( 6) months per additional +offense. Practice bars imposed for multiple offenses in a single Summary Proceeding +may run consecutively. Additionally, whether or not a practice bar is imposed, the + +26 + +Summary Proceeding may impose a censure on the relevant Settling Respondent and/or +a monetary penalty up to U.S. $750,000 per offense. +iv. The Summary Proceeding decision shall be subject to Commission review in accordance +with the SEC Rules of Practice. The Commission decision that resolves a petition for +review of the ALJ’s initial decision shall be final. There shall be no review by any +federal court. +v. A “materially complete” production is one concerning which a reasonably diligent +search has been conducted by the relevant Settling Respondent to identify responsive +documents and where all of the documents identified in such search have been collected +by the relevant Settling Respondent and provided to the CSRC, together with an index +as required by the CSRC, in accordance with Chinese law protocols. A Summary +Proceeding shall not be commenced to determine whether a production is deficient +because of documents that are described on a Withholding Log and withheld under a +claim that they contain state secrets or state sensitive information. However, neither the +definition of “materially complete” no r any limitation on the subject matter of a +Summary Proceeding, set forth herein, reflects a determination by the Division or the +Commission of the Settling Respondent’s full production obligation under Section 106 +of Sarbanes-Oxley. Additionally, the Division expressly reserves its rights to restart the +Current Proceeding under the circumstances described in paragraph 5 below, including, +but not limited to, where the Division has concerns about the nature or scope of +withholdings in response to a certain number of requests under the Procedures. +5. Restarting of the Current Proceeding. If any Settling Respondent does not comply with its +undertaking to make the payment specified in Section III.H of this Order or if the Division +in its sole discretion at any t ime decides that, with respect to two or more requests made +collectively to the Settling Respondents under the Procedures, (i) in the Division’s view, it +has not received a materially complete production and/or an adequate privilege log, +withholding log, i nitial declaration, and/or certification of completeness, as described in +paragraph 2(ii) above, and the Division has not commenced a Summary Proceeding based on +the request; (ii) in the Division’s view a substantial number of documents (or portions of +documents) have been withheld from the production in violation of, or without justification +under, U.S. law, including, but not limited to, Section 106 of Sarbanes -Oxley; or (iii) in the +Division’s view its receipt of a production has been substantially delayed (or not received at +all) under the Procedures, the Division may recommend to the Commission that the stay +referred to in Section III.I of th is Order be terminated, and, after receiving approval by the +Commission of its recommendation, provide notice to all of the Settling Respondents that the +stay has been terminated. +Before deciding that a request forms the basis (or part of the basis) for restarting the Current +Proceeding, the Division (on its own or through other SEC staff) will notify the CSRC of the +alleged inadequacy and/or make reasonable inquiry of the CSRC of the likely duration of any +delay or non-production. A production will not be deemed “substantially delayed” within the +meaning of paragraph 5(iii) above if the production is received by the SEC within 225 days + +27 + +of the date of the request made under paragraph 2(i) above (or within any period of time as +specifically agreed between the SEC and the CSRC for a particular request) and, in the +Division’s view, the production is materially complete a nd accompanied by an adequate +privilege log, withholding log, and certification of completeness as described in paragraph +2(ii) above. If a production is received by the Division more than 225 days after the date of +the request under paragraph 2(i) above, the Division, in its sole discretion, will determine +whether the production is “substantially delayed” within the meaning of paragraph 5(iii) +above. In making this determination, the Division will not automatically conclude that a +production is “substantially delayed” because it is received more than 225 days after the date +of the request, but will consider the particular circumstances of the case, including the SEC +staff’s communications with the CSRC regarding the timing of production. + +To the extent no ncompliance with Section III.H of th is Order or the matters under (i), (ii) +and/or (iii) above in this paragraph 5 relate to fewer than all of the Settling Respondents, the +Division, in its discretion, may request of the Settling Respondents that the stay be lifted only +as to the relevant Settling Respondent(s) and, if all four of the Settling Respondents agree to +lift the stay only as to the relevant Settling Respondent(s), the stay will be lifted only as to the +relevant Settling Respondent (s). If not, the stay will be lifted as to all of th e Settling +Respondents. The Current Proceeding will then resume as to all or some of the Settling +Respondents, and those parties’ rights will be determined by the Commission or the Federal +Courts (should the identified Settling Respondents appeal). The D ivision’s “notice” under +this agreement may be by any method reasonably calculated to provide such notice, +including, but not limited to, by delivering (under any method set forth in Rule 150(c) of the +SEC’s Rules of Practice) a copy of such notice to the Settling Respondents’ outside counsel +in the United States or to the respective domestic registered public accounting firms or other +United States agents that the Settling Respondents have designated for service under Section +106(d) of Sarbanes-Oxley, 15 U.S.C. § 7216(d). Except with respect to paragraph 5(i) above, +the Division’s prerogatives under this paragraph are entirely separate from any remedy it may +seek under paragraph 4 above. + +6. In the event the Commission approves the Division’s recommendation to lift the stay in the +Current Proceeding, the following terms will apply: +i. The Division may serve new Section 106 requests on the Settling Respondents, via their +designated agents, without reference to the Procedures as required under paragraph +2(i)(A) above. This means that the SEC may exercise its full statutory rights under +Section 106. +ii. With respect to requests under paragraph 2(i) above that predate the lifting of the stay +and do not form the basis for restarting the Current Proceeding under paragraph 5( i) +above, the Division may initiate or continue to prosecute a Summary Proceeding under +paragraph 4 above. +iii. The Division may not seek to sanction non -compliance by a Settling Respondent with +any Section 106 request made after the lifting of the stay (“new S ection 106 request”), + +28 + +including through an administrative proceeding under Rule 102(e) of the Commission’s +Rules of Practice, until there is a Final Commission Order in the Current Proceeding. A +“Final Commission Order” means a final order issued by the C ommission with respect +to the pending petitions for review in the Current Proceeding, without regard to whether +any Settling Respondent (or any other party or non-party) seeks federal court review of +the order or a stay in connection with such review. +iv. The SEC or Division may not seek to enforce any Section 106 request against a Settling +Respondent in federal district court under Section 106(b)(l)(B) of Sarbanes-Oxley until +there is a Final Commission Order. +v. Nothing in paragraph 5 above or this paragraph 6 p recludes the parties, in the Current +Proceeding, in accordance with the Commission’s Rules of Practice, from seeking leave +to adduce additional evidence that relates to any request made by the Division under the +Procedures or Section 106. +7. The provisions of paragraphs 2, 3, 4, 5, and 6 above will be in effect for four (4 ) years +following the date of this Order. The day after this four -year period, these same provisions +will expire, except that (i) any remedies ordered under these provisions shall run their full +course; and (ii) any Summary Proceeding already instituted under paragraph 4 above and the +Current Proceeding, if already restarted by the Division under paragraph 5 above, shall +continue until final resolution. Upon expiration of the four-year period, unless the Division +has restarted the Current Proceeding, all claims against any of the Settling Respondents in +the Current Proceeding will be deemed to be dismissed, except such dismissal will not affect +any admissions, findings, or remedies ordered in this Order, which are, and will be, deemed +final upon the dismissal of the Current Proceeding. +8. For purposes of the Commission’s consideration of any Division recommendation under +paragraph 4 or 5 above, or in connection with a remedy or potential remedy under paragraph +3 above, each of the Settling Respondents waives: (i) such provisions of the Commission’s +Rules of Practice or other requirements of law as may be construed to prevent any member +of the Commission’s staff from participating in the prep aration of, or advising the +Commission as to, any order, opinion, finding of fact, or conclusion of law to be entered in +connection with the Division’s recommendation, any resulting Summary Proceeding, or the +Current Proceeding; and (ii) any right to claim bias or prejudgment by the Commission, in +any such order, opinion, finding of fact, or conclusion of law entered in connection with the +Division’s recommendation, in any Summary Proceeding, or in the Current Proceeding. + + +29 + +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Settling Respondents’ Offers. +Accordingly, pursuant to Rules 100(c)15 and 102(e) of the Commission’s Rules of Practice, +it is hereby ORDERED that: +A. DTTC, EYHM, KPMG Huazhen, and PwC Shanghai each is censured for its +willful violations of the securities laws. +B. The Current Proceeding is hereby stayed in accordance with Section III.I of this +Order. +C. DTTC, EYHM, KPMG Huazhen, and PwC Shanghai each shall comply with the +Procedures and Undertakings as to Future Requests, and Possible Additional +Proceedings and Remedies, set forth above in Section III.J of this Order. +D. The Commission may institute additional proceedings and/or impose additional +remedies, as appropriate, in accordance with Section III.J of this Order. + + By the Commission. + + + Brent Fields + Secretary + + + +15 Rule 100(c) of the Rules of Practice states: “The Commission, upon its determination that to do so +would serve the interests of justice and not result in prejudice to the parties to the proceeding, may by +order direct, in a particular proceeding, that an alternative procedure shall apply or that compliance with +an otherwise applicable rule is unnecessary.” + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. + +ADMINISTRATIVE PROCEEDING +File Nos. 3-14872, 3-15116 + + + + +In the Matter of + +BDO China Dahua CPA Co., Ltd.; +Deloitte Touche Tohmatsu Certified +Public Accountants Ltd.; +Ernst & Young Hua Ming LLP; +KPMG Huazhen (Special General +Partnership); +PricewaterhouseCoopers Zhong Tian +CPAs Limited + +Respondents. + + + + +ANNEX A TO ORDER ON THE +BASIS OF OFFERS OF +SETTLEMENT OF CERTAIN +RESPONDENTS IMPLEMENTING +SETTLEMENT + + +ANNEX A + + Respondents Deloitte Touche Tohmatsu Certified Public Accountants Ltd. (“DTTC”), +Ernst & Young Hua Ming LLP (“EYHM”), KPMG Huazhen (Special General Partnership) +(“KPMG Huazhen”), and PricewaterhouseCoopers Zhong Tian CPAs Limited Company (“PwC +Shanghai”) (collectively the “Settling Respondents”) admit the facts set forth below (the +“Admissions”): + + + + + +2 + + +RESPONDENTS +1. DTTC (or “Deloitte”) is a special general partnership providing audit a nd +professional services in the PRC. DTTC is located in Shanghai, China, and is a member firm of +Deloitte Touche Tohmatsu Limited (“DTT Global”), a UK private company limited by guarantee. +DTTC is a foreign public accounting firm as defined by Section 106 of Sarbanes-Oxley. +2. EYHM (or “Ernst”) is a special general partnership pr oviding audit and +professional services in the PRC. EYHM is headquartered in Beijing, China, and is a member firm +of Ernst & Young Global Limited (“EY Global”), a UK private company limited by guarantee. +EYHM is a foreign public accounting firm as defined by Section 106 of Sarbanes-Oxley. +3. KPMG Huazhen (or “KPMG”) is a special general partnership providing audit and +professional services in the PRC. KPMG Huazhen is located in Beijing, China, and is a member +firm of KPMG International Cooperative (“KPMG In ternational”), a Swiss entity. KPMG +Huazhen is a foreign public accounting firm as defined by Section 106 of Sarbanes-Oxley. +4. PwC Shanghai (or “Pricewaterhouse”) is a special general partnership providing +audit and professional services in the PRC. PwC Shanghai is headquartered in Shanghai, China, +and is a member firm of PricewaterhouseCoopers International Limited (“PwCIL”), a UK private +company limited by guarantee. PwC Shanghai is a foreign public accounting firm as defined by +Section 106 of Sarbanes-Oxley. +OTHER RELEVANT ENTITIES +5. DTTC Client A (“DTTC Client A”) is a public company the securities of which are +registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934 (“Exchange +Act”) and listed on NASDAQ. DTTC Client A is incorporated in the Province of Ontario, Canada +and has its principal operations and principal place of business in the PRC. DTTC Client A +designs and manufactures solar products. +6. EYHM Client B (“Client B”) is a Delaware corporation with its principal +operations and principal place of business in the PRC. Client B’s securities were previously +registered with the SEC under Section 12(g) of the Exchange Act and listed on NASDAQ. Client +B purports to be a leading developer, manufacturer and distributor of organic compound fertilizers +in China. +7. EYHM Client C (“Client C”) is a Cayman Islands corporation with its primary +operations in Beijing, PRC. Client C’s securities were previously registered with the SEC pursuant +to Section 12(g) of the Exchange Act and listed on NASDAQ . Client C purports to provide +enhanced recovery services for oil and gas exploration. +8. KPMG Huazhen Client D (“Client D”) is a Delaware corporation with its primary +operations in Xi’an, PRC. Client D’s securities were previously registered with the SEC pursuant + +3 + +to Section 12(g) of the Exchange Act and listed on NASDAQ. Client D purports to engage in the +wholesale distribution of finished oil and heavy oil products, the production and sale of biodiesel, +and the operation of retail gas stations. +9. KPMG Huazhen Client E (“Client E”) is a Nevada corporation with its primary +operations in Ningbo, PRC. Client E’s securities are registered with the SEC pursuant to Section +12(g) of the Exchange Act and were previously listed on NASDAQ . Client E purports to +manufacture and supply various petrochemical products in China. +10. KPMG Huazhen Client F (“Client F”) is a Nevada corporation, with its primary +operations in Shanghai, PRC. Client F’s securities were previously registered with the SEC +pursuant to Section 12(b) of the Exchange Act and listed on NASDAQ . Client F purports to +manufacture chemical additives used in the production of consumer and industrial products. +11. DTTC Client G (“Client G”) is a Wyoming corporation with its primary operations +in Beijing, PRC. Client G’s securities were previously registered with the SEC pursuant to Section +12(g) of the Exchange Act and listed on NYSE. Client G purports to design, manufacture, and sell +offset printing equipment. +12. PwC Shanghai Client H (“Client H”) is a Cayman Islands corporation with its +principal operations in the PRC. Client H’s securities are registered with the SEC under Section +12(g) of the Exchange Act and were previously listed on NASDAQ. Client H purports to own and +operate a commercial vehicle financing and service centers network. +13. PwC Shanghai Client I (“Client I”) is a Nevada corporation with its primary +operations in Beijing, PRC. Client I’s securities were previously registered with the SEC under +Section 12(g) of the Exc hange Act and listed on NASDAQ . Client I purports to manufacture +automotive electrical parts in China. +FACTS CONCERNING COMMMISSION REQUESTS TO THE SETTLING +RESPONDENTS UNDER SARBANES-OXLEY +1. Regulatory Background +14. Section 106 of the Sarbanes -Oxley Act of 20 02 (“Sarbanes-Oxley” or the “Act”) , +before it was amended by the Dodd-Frank Wall Street Ref orm and Consumer Protection Act +(“Dodd-Frank”) in 2010, stated, in relevant part, that “If a foreign public accounting firm issues an +opinion or otherwise performs m aterial services upon which a registered public accounting firm +relies in issuing all or part of any audit report or any opinion contained in an audit report, that +foreign public accounting firm shall be deemed to have consented . . . to produce its audit +workpapers for the Board or the Commission in connection with any investigation by either body +with respect to that audit report . . . .” Sarbanes-Oxley Act of 2002 (Public Company Accounting +Reform and Investor Protection Act), Pub. L. No. 107-204 § 106(b). + +4 + +15. In 2004, the Board posted Frequently Asked Questions to its website which stated, +in part: “A registered firm’s failure to cooperate with Board requests [for production of documents +under Sarbanes -Oxley Section 106 ] may subject the firm to discipl inary sanctions, including +substantial civil money penalties and revocation of the firm’s registration. In the staff’s view, if a +firm fails to cooperate with the Board, the fact that the firm has not obtained a client consent that +might be necessary (unde r non -U.S. law) to allow the firm to cooperate is not a defense to a +disciplinary action for failure to cooperate.” +16. Section 106(b)(1) of Sarbanes-Oxley, as amended by Dodd-Frank, states that: “[i]f +a foreign public accounting firm performs material service s upon which a registered public +accounting firm relies in the conduct of an audit or interim review, issues an audit report, performs +audit work, or conducts interim reviews, the foreign public accounting firm shall . . . produce the +audit workpapers of the foreign public accounting firm and all other documents of the firm related +to any such audit work or interim review to the Commission or the Board, upon request of the +Commission or the Board . . . .” +2. Requests To DTTC +17. On or around April 16, 2004, DTTC 1 applied for registration with the Public +Company Accounting Oversight Board (the “PCAOB” or “Board”) as required by the Sarbanes - +Oxley Act (“Sarbanes-Oxley”), 15 U.S.C. § 7212. The Board confirmed DTTC’s registration as a +foreign public accounting firm in a letter dated June 4, 2004. DTTC has remained registered with +the Board since that time. +18. DTTC knew when it registered with the PCAOB that the PCAOB or the SEC could +request documents under Section 106, as originally enacted as part of Sarbanes-Oxley. +19. DTTC knew when it registered with the PCAOB that there were possible conflicts +between its obligations under U.S. and Chinese law. DTTC described possible conflicts of law in +its April 16, 2004 PCAOB registration filing that included a legal opinion. +20. The Bo ard’s June 4, 2004 letter confirming DTTC’s registration stated that, +although DTTC had not provided with its application a “Consent to Cooperate” with Board +inspections and requests for documents, “the Board’s approval of Deloitte’s registration . . . doe s +not relieve Deloitte of the obligation to cooperate in and comply with Board demands (including +for documents or testimony) and to enforce such cooperation and compliance by Deloitte +associated persons. If Deloitte prepares or issues, or plays a substan tial role in preparing or +issuing, an audit report with respect to any issuer . . . U.S. law and the Board’s rules impose +cooperation and compliance requirements that apply to Deloitte despite the absence of a consent.” + +1 On January 1, 2013, Deloitte Touche Tohmatsu Certified Public Accountants LLP filed with the Public +Company Accounting Oversight Board a notification on Form 4 that Deloitte Touche Tohmatsu Certified +Public Accountants LLP had succeeded to the reg istration status of its predecessor, Deloitte Touche +Tohmatsu CPA Ltd. + +5 + +21. In June 2011, pursuant to Sarbanes-Oxley Section 106(d), as amended by Dodd - +Frank, DTTC designated Deloitte & Touche LLP (“DTT US”), the United States member firm of +DTT Global, as its agent for receiving service of document requests under Section 106. In so +doing, DTTC confirmed its understanding that the PCAOB or the SEC could request documents +under Section 106. +22. DTTC knew at all relevant times that it was possible that it could not, consistent +with Chinese law, produce documents directly to the SEC in response to requests for documents +under Sarbanes-Oxley Section 106. DTTC also knew, no later than upon the enactment of Dodd- +Frank, in 2010, and at all times subsequent, that the Commission retained power to deny DTTC the +privilege of appearing or practicing before the Commission to the extent DTTC willfully refused to +comply with requests for documents under Sarbanes-Oxley Section 106. +23. In the PCAOB reporting years 2010, 2011, 2012, and 2013, DTTC issued audit +reports for thirty -two (32), forty -five (45), forty -five (45), and thirty -nine (39) U.S. issuers, +respectively. +24. DTTC audited DTTC Client A’s financial statemen ts for the fiscal years ended +December 31, 2008, 2009, and 2010. DTTC Client A remained DTTC’s client as of April 2013. +25. Before April 9, 2010, the Division commenced an investigation into potential +accounting fraud involving DTTC Client A, which Client A d isclosed in a Form 6 -K and +accompanying press release filed with the Commission on June 1, 2010. In the press release, +DTTC Client A announced that it was postponing the release of its full financial results for the +quarter ended March 31, 2010 and its quarterly conference call, scheduled for June 2, as a result of +the commencement of an investigation by the Audit Committee of DTTC Client A’ s Board of +Directors. DTTC Client A disclosed that “ the investigation was launched after the Company +received a subpoena from the [Commission] requesting documents from [DTTC Client A] relating +to, among other things, certain sales transactions in 2009.” +26. On March 11, 2011, the Division properly served on DTTC a Commission request +under Section 106 for the production of “[a]ll audit work papers and all other documents related to +any audit work or interim reviews performed for [ DTTC Client A] for the fiscal y ear ending +December 31, 2009” (the “Client A Request”). +27. By letter dated April 29, 2011, DTTC, through its U.S. couns el, responded to the +Client A Request. DTTC stated in the letter that the laws and regulations of the PRC prohibited +the firm from providing the SEC directly with the requested audit workpapers and related +documents. DTTC did not include any of the reque sted audit workpapers or related documents +with its response. +28. In July 2011, the Division issued to DTTC a Wells notice that the Division intended +to recommend institution of proceedings against DTTC because, in the Division’s view, DTTC had +willfully refused to comply with the Client A Request. + +6 + +29. DTTC was engaged to audit the financial statements of Client G for the fiscal year +ended June 30, 2010. In the course of this engagement, DTTC performed audit work on behalf of +Client G related to the fiscal year ended June 30, 2010. DTTC did not issue any audit report with +respect to Client G. +30. In 2010, Division staff opened an investigation involving Client G, which related to +matters reported in a Form 8-K filed by Client G on September 13, 2010. Specifically, Client G +reported that: +a. Client G had terminated DTTC’s engagement as independent auditor effective +September 6, 2010; +b. During the course of DTTC’s audit of Client G for the fiscal year ended June +30, 2010, Client G had denied DTTC’s request for permission to access original +bank statements to verify the identity of certain individuals and entities; +c. Several “reportable events,” as defined in Item 304(a)(1)(v) of Regulation S-K, +occurred during DTTC’s audit of Client G; and +d. Between September 6 and September 8, 2010, Client G’s CEO, CFO, and +several directors, including the Chair of its Audit Committee, all resigned their +positions. +31. On February 14, 2012 , the Division properly served on DTTC a Commission +request under Section 106 for the production of “ [a]ll audit work papers and all other documents +related to any audit work or interim reviews performed for [Client G] for the fiscal year ended June +30, 2010” (the “Client G Request”). +32. By letter dated April 17, 2012, DTTC, through its U.S. counsel, responded to the +Client G Request. DTTC stated in the letter that the laws and regulations of the PRC prohibited +the firm from providing the SEC directly with the requested audit workpapers and related +documents. DTTC did not include any of the requested audit workpapers or related documents +with its response. +33. In April 2012, the Division issued to DTTC a Wells notice that the Division +intended to recommend institution of proceedings against DTTC because, in the Division’s view, +DTTC had willfully refused to comply with the Client G Request. +34. On May 9, 2012 and December 3, 2012, the Commission instituted these +proceedings against DTTC under Rule 102(e) based on DTTC’s conduct with respect to the Client +A Request and the Client G Request, respectively. DTTC did not prod uce audit workpapers and +related documents responsive to either request to the Commission before the December 3, 2012 +OIP. + +7 + +35. In 2013, DTTC provided documents related to DTTC Client A to the China +Securities Regulatory Commission (“CSRC”), in response to a re quest that DTTC had received +from the CSRC. In November 2013, DTTC audit workpapers concerning DTTC Client A were +provided by the CSRC to the SEC. +36. In 2013, DTTC provided documents related to Client G to the CSRC, in response to +a request that DTTC had received from the CSRC. In October 2013, DTTC audit workpapers and +related documents concerning Client G were provided by the CSRC to the SEC. +3. Requests To EYHM +37. On or around May 25, 2004, EYHM2 applied for registration with the PCAOB as +required by Sarbanes-Oxley, 15 U.S.C. § 7212. The PCAOB confirmed EYHM’s registration as a +foreign public accounting firm in a letter dated July 8, 2004. EYHM has remained registered with +the PCAOB since that time. +38. EYHM knew when it registered with the PCAOB that the PCAOB or the SEC +could request documents under Section 106, as originally enacted as part of Sarbanes-Oxley. +39. EYHM knew when it registered with the PCAOB that there were possible conflicts +between its obligations under U.S. and Chinese law. EYHM described possible conflicts of law in +its May 25, 2004 PCAOB registration filing that included a legal opinion. +40. The Board’s July 8, 2004 letter confirming EYHM’s registration stated that, +although EYHM had not provided with its application a “Consent to Cooperate” with Boa rd +inspections and requests for documents, “the Board’s approval of Ernst’s registration . . . does not +relieve Ernst of the obligation to cooperate in and comply with Board demands (including for +documents or testimony) and to enforce such cooperation and compliance by Ernst’s associated +persons. If Ernst prepares or issues, or plays a substantial role in preparing or issuing, an audit +report with respect to any issuer . . . U.S. law and the Board’s rules impose cooperation and +compliance requirements that apply to Ernst despite the absence of a consent.” +41. In March 2011, pursuant to Sarbanes-Oxley Section 106(d), as amended by Dodd- +Frank, EYHM designated Ernst & Young LLP (“EY US”), the United States member firm of EY +Global, as its agent for receiving service of document requests under Section 106. In so doing, +EYHM confirmed its understanding that the PCAOB or the SEC could request documents under +Section 106. +42. EYHM knew at all relevant times that it was possible that it could not, consistent +with Chinese law, produce documents directly to the SEC in response to requests for documents +under Sarbanes-Oxley Section 106. EYHM also knew, no later than upon the enactment of Dodd- + +2 On September 3, 2012, Ernst & Young Hua Ming LLP filed with the Public Company Accounting +Oversight Board a notification on Form 4 that Ernst & Young Hua Ming LLP had succeeded to th e +registration status of its predecessor, Ernst & Young Hua Ming Certified Public Accountants. + +8 + +Frank, in 2010, and at all times subsequent, that that the Commission retained the power to deny +EYHM the privilege of appearing or practicing before the Commission to the extent EYHM +willfully refused to comply with requests for documents under Sarbanes-Oxley Section 106. +43. In the PCAOB reporting years 2010, 2011, 2012, and 2013, EYHM iss ued audit +reports for eleven (11), twenty -four (24), twenty -one (21), and twenty (20) U.S. issuers, +respectively. +44. EYHM was engaged to audit the financial statements of Client B for the fiscal year +ended December 31, 2010. In the course of this engagement, EYHM performed audit work on +behalf of Client B related to the fiscal year ended December 31, 2010. EYHM did not issue an +audit report on Client B’s financial statements for the fiscal year ended December 31, 2010. +45. In March 2011, the Division opened an investigation into Client B. The +investigation related to, among other things, public allegations of potential accounting fraud and +misleading disclosures by Client B, including overstated revenues, falsified assets a nd customer +relationships, and failure to disclose certain related party transactions. +46. On April 26, 2012, the Division properly served on EYHM a Commission request +under Section 106 for the production of “[a]ll audit work papers and all other documents related to +any audit work or interim reviews performed for [Client B] for the fiscal year ending December 31, +2010” (the “Client B Request”). +47. By letter dated May 25, 2012, EYHM, through its U.S. counsel, responded to the +Client B Request. EYHM stated in th e letter that the laws and regulations of the PRC prohibited +the firm from providing the SEC directly with the requested audit workpapers and related +documents. EYHM did not include any of the requested audit workpapers or related documents +with its response. +48. In June 2012, the Division issued to EYHM a Wells notice that the Division +intended to recommend institution of proceedings against EYHM because, in the Division’s view, +EYHM had willfully refused to comply with the Client B Request. +49. EYHM audited Client C’s financial statements for the fiscal year ended September +30, 2010. +50. By September 2011, Division staff opened an investigation involving potential +financial and accounting fraud at Client C. The investigation stemmed from a short seller report +regarding Client C, and from a letter that EYHM submitted to the Commission, pursuant to Section +10A of the Exchange Act, upon its resignation as Client C’s auditor in September 2011. The two +primary subjects of the investigation were possible accounting fraud related to asset valuation, and +embezzlement by Client C’s chairman. +51. On February 2, 2012 , the Division properly served on EYHM a Commission +request under Section 106 for the production of “ [a]ll audit work papers and all other documents + +9 + +related to an y audit work or interim reviews performed for [ Client C] for the fiscal y ear ending +September 30 , 2010 and subsequent periods” (the “Client C Request”). +52. By letter dated April 4, 2012, EYHM, through its U.S. counsel, responded to the +Client C Request. EYHM stated in the letter that the laws and regulations of the PRC prohibited +the firm from providing the SEC directly with the requested audit workpapers and related +documents. EYHM did not include any of the requested audit workpapers or related documents +with its response. +53. In April 2012, the Division issued to EYHM a Wells notice that the Division +intended to recommend institution of proceedings against EYHM because, in the Division’s view, +EYHM had willfully refused to comply with the Client C Request. +54. On December 3, 2012, the Commission instituted these proceedings against EYHM +under Rule 102(e) based on EYHM’s conduct with respect to the Client B Request and the Client +C Request. EYHM did not produce any documents responsive to either request to the Commission +before the December 3, 2012 OIP. +55. In November 2013, EYHM audit workpapers and related documents concerning +Client C were received by the Commission from the CSRC. In March 2014, EYHM audit +workpapers and related documents concerning Client B were provided to the Commission by the +CSRC. +4. Requests To KPMG Huazhen +56. On or around April 26, 2004, KPMG Huazhen3 applied for registration with the +PCAOB as required by Sarbanes -Oxley, 15 U.S.C. § 7212. The Board confirmed KPMG +Huazhen’s registration as a foreign public accounting firm in a letter dated July 13, 2004. KPMG +Huazhen has remained registered with the Board since that time. +57. KPMG Huazhen knew when it registered with the PCAOB that the PCAOB or the +SEC could request documents under Section 106, as originally enacted as part of Sarbanes-Oxley. +58. KPMG Huazhen knew when it registered with the PCAOB that there were possible +conflicts between its obligations under U.S. and Chinese law. KPMG Huazhen described possible +conflicts of law in its April 26, 2004 PCAOB registration filing that included a legal opinion. +59. The Board’s July 13, 2004 letter confirming KPMG Huazhen’s registration stated +that, although KPMG Huazhen had not provided with its application a “Consent to Cooperate” +with Board inspections and requests for documents, “the Board’s approval of KPMG’s registration +. . . does not relieve KPMG of the obligation to cooperate in and comply wit h Board demands + +3 On August 14, 2012, KPMG Huazhen (Special General Partnership) filed with the Public Company +Accounting Oversight Board a notification on Form 4 that KPMG Huazhen (Special General Partnership) +had succeeded to the registration status of its predecessor, KPMG Huazhen. + +10 + +(including for documents or testimony) and to enforce such cooperation and compliance by +KPMG’s associated persons. If KPMG prepares or issues, or plays a substantial role in preparing +or issuing, an audit report with respect to any issuer . . . U.S. law and the Board’s rules impose +cooperation and compliance requirements that apply to KPMG despite the absence of a consent.” +60. In March 2011, pursuant to Sarbanes-Oxley Section 106(d), as amended by Dodd- +Frank, KPMG Huazhen designated KPMG LLP (“KPMG US”), the United States member firm of +KPMG International, as its agent for receiving service of document requests under Section 106. In +so doing, KPMG Huazhen confirmed its understanding that the PCAOB or the SEC could request +documents under Section 106. +61. KPMG Huazhen knew at all relevant times it was possible that it could not, +consistent with Chinese law, produce documents directly to the SEC in response to requests for +documents under Sarbanes-Oxley Section 106. KPMG Huazhen also knew, no later than upon the +enactment of Dodd-Frank, in 2010, and at all times subsequent, that the Commission retained the +power to deny KPMG Huazhen the privilege of appearing or practicing before the Commission to +the extent KPMG Huazhen willfully refused to comply with requests for documents under +Sarbanes-Oxley Section 106. +62. In the PCAOB reporting years 2010, 2011, 2012, and 2013, KPMG Huazhen +played a substantial role in the preparation or furnishing of audit reports filed with the SEC (as +defined by PCAOB Rule 100 1(p)(ii))4 for twenty-four (24), twenty-three (23), twenty-five (25), +and twenty-one (21) U.S. issuers, respectively. +63. KPMG Huazhen was engaged as a component auditor for Client D for the fiscal +year ended December 31, 2010. In the course of this engagement, KPMG Huazhen played a +substantial role with respect to the audit of Client D related to the fiscal year ended December 31, +2010. +64. By April 2011, the Division opened an investigation into potential accounting fraud +at Client D. The investigation concerned allegations made in two short seller reports issued in +March 2011, which claimed that Client D’s financial statements reported false cash balances, +overstated revenues, and failed to disclose a material related party transaction. +65. On February 6, 2012 , the Division properly served on KPMG Huazhen a +Commission request under Section 106 for the production of “[a]ll audit work papers and all other +documents related to any audit work or interim reviews performed for [Client D] for the fiscal year +ending December 31, 2010” (the “Client D Request”). + +4 PCAOB Rule 1001(p)(ii) defines “Play a Substantial Role in the Preparation or Furnishing of an Audit +Report” to mean: “(1) to perform material services that a public accounting firm uses or relies on in +issuing all or part of its audit report with respe ct to any issuer, or (2) to perform the majority of the audit +procedures with respect to a subsidiary or component of any issuer the assets or revenues of which +constitute 20% or more of the consolidated assets or revenues of such issuer necessary for the principal +accountant to issue an audit report on the issuer.” + +11 + +66. KPMG Huazhen was engaged as a component auditor for Client E for the fiscal +year ended December 3 1, 2010. In the course of this engagement, KPMG Huazhen played a +substantial role with respect to the audit of Client E related to the fiscal year ended December 31, +2010, but did not complete the engagement. +67. By April 2011, Division staff opened an invest igation into potential financial and +accounting fraud at Client E. The investigation concerned issues raised in a Form 8-K that Client +E filed in April 2011, which stated that Client E would be unable to file its Form 10 -K on time +because Client E’s princ ipal auditor had identified “unexplained issues regarding certain cash +transactions and recorded sales.” +68. On February 9, 2012 , the Division properly served on KPMG Huazhen a +Commission request under Section 106 for the production of “[a]ll audit work papers and all other +documents related to any audit work or interim reviews performed for [Client E] for the fiscal year +ending December 31, 2010” (the “Client E Request”). +69. KPMG Huazhen was engaged as a component auditor for Client F for the fiscal +years ended December 31, 2008, and December 31, 2009. In the course of this engagement, +KPMG Huazhen played a substantial role with respect to the audit reports Client F filed with the +Commission related to the fiscal years ended December 31, 2008 and 2009. +70. Before February 2012, Division staff opened an investigation involving potential +financial and accounting fraud at Client F. The investigation related to issues raised in a pair of +disclosures made by Client F in early 2011: +a. In March 2011, Client F disclos ed that it was conducting an internal +investigation into “potentially serious discrepancies” in its financial statements +for the year ended December 31, 2010, and +b. In May 2011, Client F dis closed that its principal auditor had resigned after +identifying what they considered “potentially serious discrepancies and/or +unexplained issues relating to [Client F]’s financial records,” in response to +which Client F failed to take adequate remedial action. +71. On February 3, 2012 , the Division properly served on KPMG Huazhen a +Commission request under Section 106 for the production of “[a]ll audit work papers and all other +documents related to any audit reports issued, audit work performed, or interim reviews conducted +for [Client F] from January 1, 2008 to the present” (the “Client F Request”). +72. By letter dated March 27, 2012 , KPMG Huazhen , through its U.S. counsel, +responded to the Client D Request, the Client E Request, and the Client F Request. KPMG +Huazhen stated in the letter that the laws and regulations of the PRC prohibit ed the firm from +providing the SEC directly with any of the requested audit workpapers and related documents. +KPMG Huazhen did not include any of the requested audit workpapers or related documents with +its March 27 response. + +12 + +73. In May 2012, the Division issued to KPMG Huazhen a Wells notice that the +Division intended to recommend institution of proceedings against KPMG Huazhen because, in the +Division’s view, KPMG Huazhen had willfully refused to comply with the Client D Request, the +Client E Request, and the Client F Request. +74. On December 3, 2012, the Commission instituted these proceedings against KPMG +Huazhen under Rule 102(e) based on KPMG Huazhen’s conduct with respect to the C lient D +Request, the Client E Request, and the Client F Request. KPMG Huazhen did not produce audit +workpapers or related documents responsive to any of the requests to the Commission before the +December 3, 2012 OIP. +5. Requests To PwC Shanghai +75. On or around April 26 , 2004, PwC Shanghai 5 applied for registration with the +PCAOB as required by Sarbanes -Oxley, 15 U.S.C. § 7212. The PCAOB confirmed PwC +Shanghai’s registration as a foreign public accounting firm in a letter dated July 13, 2004. PwC +Shanghai has remained registered with the Board since that time. +76. PwC Shanghai knew when it registered with the PCAOB that the PCAOB or the +SEC could request documents under Section 106, as originally enacted as part of Sarbanes-Oxley. +77. PwC Shanghai knew when it registered with the PCAOB that there were possible +conflicts between its obligations under U.S. and Chinese law. PwC Shanghai described possible +conflicts of law in its April 26, 2004 PCAOB registration filing that included a legal opinion. +78. The Board’s July 13, 2004 letter confirming PwC Shanghai’s registration stated +that, although PwC Shanghai had not provided with its application a “Consent to Cooperate” with +Board inspections and requests for documents, “the Board’s approval of Pricewater house’s +registration . . . does not relieve Pricewaterhouse of the obligation to cooperate in and comply with +Board demands (including for documents or testimony) and to enforce such cooperation and +compliance by Pricewaterhouse’s associated persons. If P ricewaterhouse prepares or issues, or +plays a substantial role in preparing or issuing, an audit report with respect to any issuer . . . U.S. +law and the Board’s rules impose cooperation and compliance requirements that apply to +Pricewaterhouse despite the absence of a consent.” +79. In March 2011, pursuant to Sarbanes-Oxley Section 106(d), as amended by Dodd- +Frank, PwC Shanghai designated PricewaterhouseCoopers LLP (“PwC US”), the United States +member firm of PwCIL, as its agent for receiving service of document requests under Section 106. +In so doing, PwC Shanghai confirmed its understanding that the PCAOB or the SEC could request +documents under Section 106. + +5 On July 8, 2013, PricewaterhouseCoopers Zhong Tian LLP filed with the Public Company Accounting +Oversight Board a notification on Form 4 that PricewaterhouseCoopers Zhong Tian LLP had succeed ed +to the registration status of its predecessor, PricewaterhouseCoopers Zhong Tian CPAs Limited +Company. + +13 + +80. PwC Shanghai knew at all relevant times it was possible that it could not, consistent +with Chinese law, produce documents directly to the SEC in response to requests for documents +under Sarbanes-Oxley Section 106. PwC Shanghai also knew, no later than upon the enactment of +Dodd-Frank, in 2010, and at all times subsequent, that the Commission retained the power to deny +PwC Shanghai the privilege of appearing or practicing before the Commission to the extent PwC +Shanghai willfully refused to comply with requests for documents under Sarbanes -Oxley Section +106. +81. In the PCAOB reporting years 2010, 2011, 2012, an d 2013, PwC Shanghai issued +audit reports for seventeen (17), twenty -seven (27), thirty -one (31), and twenty -three (23) U.S. +issuers, respectively. +82. PwC Shanghai was engaged to audit the financial s tatements of Client H for the +fiscal year ended December 31, 2010. In the course of this engagement, PwC Shanghai performed +audit work on behalf of Client H related to the fiscal year ended December 31, 2010 . PwC +Shanghai did not issue any audit report with respect to Client H. +83. By March 2011, the Division opened an investigation into potential accounting +fraud at Client H. The investigation concerned public allegations of accounting fraud and market +manipulation at Client H. Certain i nternet reports alleged, among other things, that Client H +overstated revenue and earnings by accounting for lease revenues upfront instead of recognizing +this revenue over the duration of the leases, and that there were discrepancies between Client H’s +cash flow and reported net income. +84. On February 8, 2012, the Division properly served on PwC Shanghai a Commission +request under Section 106 for the production of “ [a]ll audit work papers and all other documents +related to any audit work or interim reviews performed for [ Client H] for the fiscal y ear ending +December 31, 2010” (the “Client H Request”). +85. By letter dated April 12, 2012, PwC Shanghai, through its U.S. counsel, responded +to the Client H Request. PwC Shanghai stated in the letter that the laws and regulations of the PRC +prohibited the firm from providing the SEC directly with the requested audit workpapers and +related documents. PwC Shanghai did not include any of the requested audit workpapers or related +documents with its response. +86. In April 2012, the Division issued to PwC Shanghai a Wells notice that the Division +intended to recommend institution of proceedings against PwC Shanghai because, in the Division’s +view, PwC Shanghai had willfully refused to comply with the Client H Request. +87. PwC Shanghai was engaged to audit the financial statements of Client I for the +fiscal year ended December 31, 2010. In the course of this engagement, PwC Shanghai performed +audit work on behalf of Client I related to the fiscal year ended December 31, 2010 . PwC +Shanghai did not issue any audit report with respect to Client I. + +14 + +88. By March 2011, Division staff opened an investigation involving potential financial +and accounting fraud at Client I. The investigation focused on potential accounting irregularities, +undisclosed related party transactions, misa ppropriation of corporate assets, and market +manipulation. +89. On March 22, 2012, the Division properly served on PwC Shanghai a Commission +request under Section 106 for the production of “ [a]ll audit work papers and all other documents +related to any audit work performed for [Client I] for the fiscal y ear ending December 31, 2010” +(the “Client I Request”). +90. By letter dated April 12, 2012, PwC Shanghai, through its U.S. counsel, responded +to the Client I Request. PwC Shanghai stated in the letter that the laws and regulations of the PRC +prohibited the firm from providing the SEC directly with the requested audit workpapers and +related documents. PwC Shanghai did not include any of the requested audit workpapers or related +documents with its response. +91. In April 2012, the Division issued to PwC Shanghai a Wells notice that the Division +intended to recommend institution of proceedings against PwC Shanghai because, in the Division’s +view, PwC Shanghai had willfully refused to comply with the Client I Request. +92. On December 3, 2012, the Commission instituted these proceedings against PwC +Shanghai under Rule 102(e) based on PwC Shanghai’s conduct with respect to the Client H +Request and the Client I Request. PwC Shanghai did not produce audit workpapers and related +documents responsive to either request to the Commission before the December 3, 2012 OIP. +93. In November 2013, PwC Shanghai produced audit workpapers and related +documents concerning Client I to the CSRC, in response to a request that PwC Shanghai had +received from the CSRC. In March 2014, PwC Shanghai audit workpapers and related documents +concerning Client I were provided by the CSRC to the SEC. + + + +ANNEX B + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. + +ADMINISTRATIVE PROCEEDING +File Nos. 3-14872, 3-15116 + + + + +In the Matter of + +BDO China Dahua CPA Co., Ltd.; +Deloitte Touche Tohmatsu Certified +Public Accountants Ltd.; +Ernst & Young Hua Ming LLP; +KPMG Huazhen (Special General +Partnership); +PricewaterhouseCoopers Zhong Tian +CPAs Limited + +Respondents. + + + + +ORDER MAKING FINDINGS AND +PARTIALLY DENYING [NAME OF +SETTLING RESPONDENT] THE +PRIVILEGE OF PRACTICING OR +APPEARING BEFORE THE +SECURITIES AND EXCHANGE +COMMISSION + + +I. + + The Securities and Exchange Commission (“Commission”) issues this Order Making +Findings And Partially Denying [Name of Settling Respondent] The Privilege of Practicing Or +Appearing Before The Securities and Exchange Commission (“Partial Bar Order”) pursuant to the +Offer of Settlement submitted by [Name of Settling Respondent], which was accepted by the +Commission in its Order on the Basis of Offers of Settlement of Certain Respondents +Implementing Settlement on [MONTH, DAY], 2015 (the “Settlement Order”). + +2 + + +II. + +Respondent [Name of Settling Respondent (“[Short Form of Settling Respondent’s Name – +DTTC, EYHM, KPMG Huazhen, or PwC Shanghai]” or “Respondent”)] admits the Commission’s +jurisdiction over it in, and over the subject matter of, this proceeding and any proceeding to enforce +or that seeks to challenge this Partial Bar Order or the Settlement Order. In addition, Respondent +[Short Form of Settling Respondent’s Name] consents to the entry of this Partial Bar Order, as set +forth below. + +III. + + On the basis of this Partial Bar Order, Respondent [Short Form of Settling Respondent’s +Name]’s Offer of Settlement, the Settlement Order, and Rule 102(e) of the Commission’s Rules of +Practice, the Commission finds that: + +1. [Insert one of the following paragraphs as appropriate: +As of the date of the Settlement Order, DTTC was a special general +partnership providing audit and professional services in the People’s Republic +of China (“China”). DTTC was located in Shanghai, China, and was a +member firm of Deloitte Touche Tohmatsu Limited (“DTT Global”), a UK +private company limited by guarantee. DTTC was a foreign public +accounting firm as defined by Section 106 of Sarbanes-Oxley. +As of the date of the Settlement Order, KPMG Huazhen was a special general +partnership providing audit and professional services in the People’s Republic +of China (“China”). KPMG Huazhen was located in Beijing, China, and was +a member firm of KPMG International Cooperative (“KPMG International”), +a Swiss entity. KPMG Huazhen was a foreign public accounting firm as +defined by Section 106 of Sarbanes-Oxley. +As of the date of the Settlement Order, EYHM was a special general +partnership providing audit and professional services in the People’s Republic +of China (“China”). EYHM was headquartered in Beijing, China, and was a +member firm of Ernst & Young Global Limited (“EY Global”), a UK private +company limited by guarantee. EYHM was a foreign public accounting firm +as defined by Section 106 of Sarbanes-Oxley. +As of the date of the Settlement Order, PwC Shanghai was a special general +partnership providing audit and professional services in the People’s Republic +of China (“China”). PwC Shanghai was headquartered in Shanghai, China, +and was a member firm of PricewaterhouseCoopers International Limited +(“PwCIL”), a UK private company limited by guarantee. PwC Shanghai was + +3 + +a foreign public accounting firm as defined by Section 106 of Sarbanes- +Oxley.] +2. The Settlement Order provides, inter alia, that the Commission’s Division of +Enforcement (“Division”), for a period of four years from the date of the Settlement +Order, may issue requests for assistance to the China Securities Regulatory +Commission (“CSRC”)1 under international sharing mechanisms with respect to +Respondent’s audit workpapers and related documents. The Settlement Order also +provides that, on or about the date on which such a request for assistance is sent, the +SEC or the Division will do one or both of the following: (A) issue a new request +under Section 106 of Sarbanes-Oxley, as amended by Section 929J of the Dodd- +Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) (“Section +106”), to Respondent through its designated U.S. agent, subject to certain +conditions set forth in the Settlement Order; and/or (B) provide Respondent with +notice of the request for assistance that was sent to the CSRC, specifying the +documents sought by the Division. See Settlement Order, Section III.J, Paragraph +2(i). +3. The Settlement Order further provides, inter alia, that: +i. Within ninety (90) days of receipt of such a request or within forty-five (45) +days from the date Respondent receives the first corresponding request from +the CSRC, whichever is later, Respondent will provide the Division with an +initial declaration (“initial declaration”) which states that Respondent has +produced all responsive documents, accompanied by an index describing +such documents, to the CSRC for production to the SEC, subject to specific +exceptions and conditions as set forth in the Settlement Order. See +Settlement Order, Section III.J, Paragraphs 2(ii)(A)-(B). +ii. Within ten (10) days of the SEC notifying Respondent that production from +the CSRC to the SEC has occurred, Respondent will provide the Division +directly with a certification that it has provided to the CSRC all documents +responsive to the CSRC’s corresponding request except information set +forth on a privilege log, and, where applicable, that it has proposed (subject +to the CSRC’s review) that documents (or portions of documents) set forth +on the withholding log should be withheld under Chinese law governing +state sensitive information or state secrets, or for any other reason under +Chinese law (“certification of completeness”). See Settlement Order, +Section III.J, Paragraph 2(ii)(C). + +1 References to the CSRC in the Settlement Order mean the CSRC and/or such other Chinese authority/ies +as may be charged from time to time by the Chinese government with liaising with the SEC on matters of +cross-border information-sharing and cooperation. + +4 + +iii. If Respondent does not provide the initial declaration as required by the +Settlement Order, or if Respondent does not provide the certification of +completeness as required by the Settlement Order, the Division shall notify +Respondent of the failure and give Respondent twenty (20) days to cure the +failure. If, within twenty (20) days of the request for cure by the Division, +the Respondent does not provide the initial declaration or the certification of +completeness as required by the Settlement Order, the Commission, in its +sole discretion, and without regard to the procedures set forth in Rule 5(c) of +SEC’s Informal and Other Procedures, 17 C.F.R. § 202.5(c), may determine +that the relevant Settling Respondent has not complied with its obligations +under the Settlement Order and thereupon enter, without further notice, this +Partial Bar Order. See Settlement Order, Section III.J, Paragraph 3. +4. On [date of request], the SEC or the Division issued a Section 106 request and/or +notice of a request for assistance to the CSRC for audit workpapers and related +documents of Respondent [Short Form of Settling Respondent’s Name], in +connection with a Division investigation, [investigation matter number]. +5. The Commission, in its sole discretion, has determined that Respondent failed to +provide an initial declaration required by the Settlement Order, or that Respondent +failed to provide a certification of completeness as required by the Settlement +Order, and did not cure such failure within twenty (20) days of a request for cure by +the Division. Thus, in accordance with Paragraph 3 of Section III.J of the +Settlement Order, the Commission, in its sole discretion, has determined that +Respondent has not complied with its obligations under the Settlement Order. +FINDINGS +6. Based on the foregoing, the Commission finds that Respondent has violated its +obligations under Paragraphs 2 and 3 of Paragraph III.J of the Settlement Order. + + +5 + +IV. +In view of the foregoing, the Commission deems it appropriate to impose on Respondent +[Short Form of Settling Respondent’s Name] the remedy agreed to in [Short Form of Settling +Respondent’s Name] Offer of Settlement, and required by the Settlement Order. +Accordingly, pursuant to Rule 102(e) of the Commission’s Rules of Practice, Respondent +[Short Form of Settling Respondent’s Name]’s Offer of Settlement, and the Settlement Order, it is +hereby ORDERED that Respondent [Short Form of Settling Respondent’s Name] is partially +denied the privilege of practicing or appearing before the Commission for a period of 180 days +commencing on [the date of this Partial Bar Order OR the day immediately following expiration of +the last Partial Bar Order imposed on Settling Respondent under the Settlement Order, if any], as +follows: +A. Respondent is prohibited from issuing an audit report, or otherwise serving as a +principal auditor, for any issuer (as defined in Section 2(a)(7) of Sarbanes-Oxley); +and +B. Respondent is prohibited from playing a 50% or greater role in the preparation or +furnishing of an audit report for any issuer, meaning the respondent is prohibited +from performing: +1. Audit work that a public accounting firm uses or relies on in issuing all or +part of its audit report with respect to any issuer, where the engagement +hours or fees for such services constitute 50% or more of the total +engagement hours or fees, respectively, provided by the principal auditor in +connection with the issuance of all or part of its audit report with respect to +any issuer; and +2. The majority of audit work with respect to a subsidiary or component of any +issuer, the assets or revenues of which constitute 50% or more of the +consolidated assets or revenues of the issuer. + + By the Commission. + + [name of Secretary or designated official] + [Title] + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3629.txt b/raw/aaer/2015/AAER-3629.txt new file mode 100644 index 0000000000000000000000000000000000000000..ab4dae5bde1e6066000a4db76050b9f6914c8127 --- /dev/null +++ b/raw/aaer/2015/AAER-3629.txt @@ -0,0 +1,1391 @@ + + + + + + + + + + + + + + + + SEC.gov | Joseph A. Kostelecky + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/516481","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"field_group":{"html_element":{"mode":"default","context":"view","settings":{"classes":"rightrail-list","show_empty_fields":false,"id":"","element":"div","show_label":true,"label_element":"h2","label_element_classes":"","attributes":"","effect":"none","speed":"fast"}}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Joseph A. Kostelecky + + + + + + + + + + + + Joseph A. Kostelecky + + + + + + + + + + + + + + + + + + + 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. + # # # + + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3631.pdf b/raw/aaer/2015/AAER-3631.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d74eda2bcf3ea0428bd1b090226470696fbbef33 Binary files /dev/null and b/raw/aaer/2015/AAER-3631.pdf differ diff --git a/raw/aaer/2015/AAER-3631.txt b/raw/aaer/2015/AAER-3631.txt new file mode 100644 index 0000000000000000000000000000000000000000..619c3a0dfb4d7c6c38873689bb21e1f2811b5d37 --- /dev/null +++ b/raw/aaer/2015/AAER-3631.txt @@ -0,0 +1,97 @@ +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). + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3632.pdf b/raw/aaer/2015/AAER-3632.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ed512ee42a1af92b5072bcc1b0544082d14dc006 --- /dev/null +++ b/raw/aaer/2015/AAER-3632.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:987207a40226ad6f11594f7bcd4ed414a0b50defe69ce9506626b9d1882955a8 +size 156293 diff --git a/raw/aaer/2015/AAER-3633.txt b/raw/aaer/2015/AAER-3633.txt new file mode 100644 index 0000000000000000000000000000000000000000..58af91111170f8665865c79e847269c50ea136da --- /dev/null +++ b/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 + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3634.pdf b/raw/aaer/2015/AAER-3634.pdf new file mode 100644 index 0000000000000000000000000000000000000000..fed9a817b8a23d0759bf0addb9c7725ff6fec909 --- /dev/null +++ b/raw/aaer/2015/AAER-3634.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f8b96956c71fad65ad36887389faa5b48f2d76f63db7f999ae7fc6b8655df48e +size 155671 diff --git a/raw/aaer/2015/AAER-3634.txt b/raw/aaer/2015/AAER-3634.txt new file mode 100644 index 0000000000000000000000000000000000000000..afc82727d8bcb45486028cd07ae3d96633570731 --- /dev/null +++ b/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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3635.pdf b/raw/aaer/2015/AAER-3635.pdf new file mode 100644 index 0000000000000000000000000000000000000000..526b82192599c71f064f1b38d63d71aca866de39 --- /dev/null +++ b/raw/aaer/2015/AAER-3635.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8a200d9074e25580664e21da727c212c47759dbe5f6cdb2db1ef14f673bc5f52 +size 155136 diff --git a/raw/aaer/2015/AAER-3635.txt b/raw/aaer/2015/AAER-3635.txt new file mode 100644 index 0000000000000000000000000000000000000000..749a2eb5121a5877d3f284071f6cd233776e5f24 --- /dev/null +++ b/raw/aaer/2015/AAER-3635.txt @@ -0,0 +1,98 @@ +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). + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3636.pdf b/raw/aaer/2015/AAER-3636.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0c694c7d8c7446f2ce098fa1d584292155294819 --- /dev/null +++ b/raw/aaer/2015/AAER-3636.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9fb7e5679a2cf6d860ca53bb4a0f22bfcac7755426dbcb870178bbf58315e269 +size 106647 diff --git a/raw/aaer/2015/AAER-3636.txt b/raw/aaer/2015/AAER-3636.txt new file mode 100644 index 0000000000000000000000000000000000000000..90905539829dcb43550d184bdb7716bca0a94a31 --- /dev/null +++ b/raw/aaer/2015/AAER-3636.txt @@ -0,0 +1,269 @@ + + + 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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3637.pdf b/raw/aaer/2015/AAER-3637.pdf new file mode 100644 index 0000000000000000000000000000000000000000..49ec8382808bab12a322b8d4f09eea39fa8299d3 --- /dev/null +++ b/raw/aaer/2015/AAER-3637.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:3eebc34712ab61b157477504d309666cfd926be37430634c2d7e523a1349f030 +size 285531 diff --git a/raw/aaer/2015/AAER-3637.txt b/raw/aaer/2015/AAER-3637.txt new file mode 100644 index 0000000000000000000000000000000000000000..0908fa0f1f51720514c50a107ecd4c5648b53fda --- /dev/null +++ b/raw/aaer/2015/AAER-3637.txt @@ -0,0 +1,732 @@ + 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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3638.pdf b/raw/aaer/2015/AAER-3638.pdf new file mode 100644 index 0000000000000000000000000000000000000000..946aefac06f6721d10ac353097e60613fbde8ed4 --- /dev/null +++ b/raw/aaer/2015/AAER-3638.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:5c9c2aac4f8173392cf149d1f6bce074e9090153f3665b8a71644f17e4e5a081 +size 227847 diff --git a/raw/aaer/2015/AAER-3638.txt b/raw/aaer/2015/AAER-3638.txt new file mode 100644 index 0000000000000000000000000000000000000000..84485ef6bc2de325d7869f143bc3d30044605a3a --- /dev/null +++ b/raw/aaer/2015/AAER-3638.txt @@ -0,0 +1,288 @@ + 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 + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3639.pdf b/raw/aaer/2015/AAER-3639.pdf new file mode 100644 index 0000000000000000000000000000000000000000..acb7c6ffbdbe30c2d59fbee0c7cdc823bb48533a Binary files /dev/null and b/raw/aaer/2015/AAER-3639.pdf differ diff --git a/raw/aaer/2015/AAER-3640.pdf b/raw/aaer/2015/AAER-3640.pdf new file mode 100644 index 0000000000000000000000000000000000000000..36af0008b05980f35196ac597a2ef1329db5ade2 --- /dev/null +++ b/raw/aaer/2015/AAER-3640.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:04f79a123e9594c1dc0a2ce18e63c17459a9dc373aa7bbc87d25f07465261641 +size 256345 diff --git a/raw/aaer/2015/AAER-3641.pdf b/raw/aaer/2015/AAER-3641.pdf new file mode 100644 index 0000000000000000000000000000000000000000..edd82ad5026b2b5ceda71979321bb627dd843d4e Binary files /dev/null and b/raw/aaer/2015/AAER-3641.pdf differ diff --git a/raw/aaer/2015/AAER-3642.pdf b/raw/aaer/2015/AAER-3642.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8b000ab2b6917a7396318ba7039d764840d7f955 --- /dev/null +++ b/raw/aaer/2015/AAER-3642.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:dd0118ccdb6adf8926a01625e3be7b23cd27edfdb45f5f36dcfc77c586c1b594 +size 152817 diff --git a/raw/aaer/2015/AAER-3642.txt b/raw/aaer/2015/AAER-3642.txt new file mode 100644 index 0000000000000000000000000000000000000000..3203324fd85c5970e556d066ea13ccdb1a5208e2 --- /dev/null +++ b/raw/aaer/2015/AAER-3642.txt @@ -0,0 +1,148 @@ +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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3643.pdf b/raw/aaer/2015/AAER-3643.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8814eb8daa4b05c9923b95c04a7a150ecab4b8d8 Binary files /dev/null and b/raw/aaer/2015/AAER-3643.pdf differ diff --git a/raw/aaer/2015/AAER-3644.pdf b/raw/aaer/2015/AAER-3644.pdf new file mode 100644 index 0000000000000000000000000000000000000000..70fe9ecb987cbfc0ab4576008b2e2efbd2c160d3 --- /dev/null +++ b/raw/aaer/2015/AAER-3644.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:273f8c461d103cc945c48b930b2f6c621e86ddbbf7849655c64664532993a448 +size 204085 diff --git a/raw/aaer/2015/AAER-3644.txt b/raw/aaer/2015/AAER-3644.txt new file mode 100644 index 0000000000000000000000000000000000000000..5624d8212987974ab32dfe2bf6516decc91b90c9 --- /dev/null +++ b/raw/aaer/2015/AAER-3644.txt @@ -0,0 +1,633 @@ + + + + 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 + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3645.pdf b/raw/aaer/2015/AAER-3645.pdf new file mode 100644 index 0000000000000000000000000000000000000000..dbdb8e86a9abe52a4dbde0ced02c7bc0047a401d --- /dev/null +++ b/raw/aaer/2015/AAER-3645.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:84970276b13f771d670506d18d8f273e8c079725b572fbd5de86bbfe62807cef +size 240554 diff --git a/raw/aaer/2015/AAER-3645.txt b/raw/aaer/2015/AAER-3645.txt new file mode 100644 index 0000000000000000000000000000000000000000..33d582e0a1a0f644741ae7016567e5a812799f35 --- /dev/null +++ b/raw/aaer/2015/AAER-3645.txt @@ -0,0 +1,195 @@ + + + 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 + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3646.txt b/raw/aaer/2015/AAER-3646.txt new file mode 100644 index 0000000000000000000000000000000000000000..dec8276bc3bacf478aa9f232540d0622174265f9 --- /dev/null +++ b/raw/aaer/2015/AAER-3646.txt @@ -0,0 +1,1407 @@ + + + + + + + + + + + + + + + + SEC.gov | Andrew M. Miller + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/516651","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"field_group":{"html_element":{"mode":"default","context":"view","settings":{"classes":"rightrail-list","show_empty_fields":false,"id":"","element":"div","show_label":true,"label_element":"h2","label_element_classes":"","attributes":"","effect":"none","speed":"fast"}}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Andrew M. Miller + + + + + + + + + + + + Andrew M. Miller + + + + + + + + + + + + + + + + + + + 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. + + + + + + + + SEC Complaint + SEC Order +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3647.pdf b/raw/aaer/2015/AAER-3647.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bf179cd73900e3e039e7f987b48ec2272ad6fee9 --- /dev/null +++ b/raw/aaer/2015/AAER-3647.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4c5ec47642fc8db8b855394fb1a534a24d08c49b49a2cc6ea772517f36a4176a +size 103593 diff --git a/raw/aaer/2015/AAER-3648.pdf b/raw/aaer/2015/AAER-3648.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5c82c4e19a3b0f0664f086303cf04d6191ea07df --- /dev/null +++ b/raw/aaer/2015/AAER-3648.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8cf36378ae6db4ce3846145c76b1c804c5f85ff1d7b7fc53012e6ed10980cca3 +size 243132 diff --git a/raw/aaer/2015/AAER-3648.txt b/raw/aaer/2015/AAER-3648.txt new file mode 100644 index 0000000000000000000000000000000000000000..f74e33e9773f7a36e8602e602ae804fac9ad1d9a --- /dev/null +++ b/raw/aaer/2015/AAER-3648.txt @@ -0,0 +1,278 @@ + 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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3649.pdf b/raw/aaer/2015/AAER-3649.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f679811ef1a7a15ef38695da768a64fd96b071eb --- /dev/null +++ b/raw/aaer/2015/AAER-3649.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c57a611b3c4b31a1c7df2442f65e28f66499e32d64ce67aa6c6902537b4ef5c2 +size 252826 diff --git a/raw/aaer/2015/AAER-3649.txt b/raw/aaer/2015/AAER-3649.txt new file mode 100644 index 0000000000000000000000000000000000000000..63073efb91b29b21c50e87a14adc9f327110c786 --- /dev/null +++ b/raw/aaer/2015/AAER-3649.txt @@ -0,0 +1,336 @@ + 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 + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3650.pdf b/raw/aaer/2015/AAER-3650.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d03d4614ef3c1a4c2827a75ea5ed2b1df37f9408 --- /dev/null +++ b/raw/aaer/2015/AAER-3650.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b88add81fc859838497359abdebe99709ed7692b35bca9bc0bdd8fe29320e542 +size 192493 diff --git a/raw/aaer/2015/AAER-3650.txt b/raw/aaer/2015/AAER-3650.txt new file mode 100644 index 0000000000000000000000000000000000000000..6d2a92eabf085229d9aeb838cb81d82feb9101cf --- /dev/null +++ b/raw/aaer/2015/AAER-3650.txt @@ -0,0 +1,444 @@ + 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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3651.pdf b/raw/aaer/2015/AAER-3651.pdf new file mode 100644 index 0000000000000000000000000000000000000000..1588f4c315bb1d75e59f09f29f11dcbb762c6ceb --- /dev/null +++ b/raw/aaer/2015/AAER-3651.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8bd1d5e3d4fce52570ddf113537d5bdc1e68c53206d75155cec5991ac48b88cd +size 146697 diff --git a/raw/aaer/2015/AAER-3652.txt b/raw/aaer/2015/AAER-3652.txt new file mode 100644 index 0000000000000000000000000000000000000000..61730f275cd12b0db9ea08da256b545cbc0bccb2 --- /dev/null +++ b/raw/aaer/2015/AAER-3652.txt @@ -0,0 +1,493 @@ + + 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 + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3654.pdf b/raw/aaer/2015/AAER-3654.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0d0e173d36633ab36a0fb4aca80300a7d5c75815 --- /dev/null +++ b/raw/aaer/2015/AAER-3654.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:595fe003cbc3674d778a6fb7e994d9e9382a7277358101ab2e0253aa5a20bc9b +size 206096 diff --git a/raw/aaer/2015/AAER-3654.txt b/raw/aaer/2015/AAER-3654.txt new file mode 100644 index 0000000000000000000000000000000000000000..edc9d5611d4d06e2e591f2ece1ba32fbd44db041 --- /dev/null +++ b/raw/aaer/2015/AAER-3654.txt @@ -0,0 +1,561 @@ + + +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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3655.pdf b/raw/aaer/2015/AAER-3655.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f9d0803379ba397c1561fde766326bfdfa728488 --- /dev/null +++ b/raw/aaer/2015/AAER-3655.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:95a462be42d5be2137f26a523f97b503c668a20005f16220ac3965eac01a30c6 +size 158445 diff --git a/raw/aaer/2015/AAER-3655.txt b/raw/aaer/2015/AAER-3655.txt new file mode 100644 index 0000000000000000000000000000000000000000..0c5d7c882780dc72faa1b4316d68e856dd50fe35 --- /dev/null +++ b/raw/aaer/2015/AAER-3655.txt @@ -0,0 +1,158 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74904 / May 7, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3655 / May 7, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16527 + +In the Matter of +GRUBER & COMPANY LLC and +EDWARD RANDALL GRUBER (CPA), + Respondents. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Gruber +& Company LLC (“Gruber & Co.”) and Edward Randall Gruber, CPA (“Gruber”) (collectively +“Respondents”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of Practice. 1 + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (“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 + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + + 2 +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over each of them and the subject matter of these proceedings, +and the findings contained in Section III.4. below, which are admitted, Respondents consent to the +entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions (“Order”), +as set forth below. + +III. + +On the basis of this Order and the Respondents’ Offer, the Commission finds that: + +1. Gruber & Company LLC, located during the pertinent period in Lake Saint Louis, +Missouri, is a Missouri limited liability company and public accounting firm licensed by the +Missouri State Board of Accountancy, and formerly registered with the Public Company +Accounting Oversight Board (“PCAOB”). Gruber & Co. acted as the independent auditor for Gold +Standard Mining Corporation (“Gold Standard”) from February 14, 2008 to February 4, 2011. +Gruber & Co. performed public company audits of, and issued an audit report on June 21, 2010 +containing an unqualified opinion on, the consolidated financial statements of Gold Standard for +the fiscal years ending December 31, 2009, 2008 and 2007. Gold Standard filed Gruber & Co.’s +audit report in its amended Form 8-K with the Commission on October 5, 2010. In addition, +Gruber & Co. performed a review of the consolidated financial statements contained in Gold +Standard’s September 30, 2010 Form 10-Q, which was filed with the Commission on November +22, 2010. Gruber & Co. resigned as Gold Standard’s independent auditor on February 4, 2011. +Gruber & Co. ceased to perform public company audits as of June 27, 2013, when its registration +with the PCAOB was permanently revoked. See PCAOB Release No. 105-2013-005 (June 27, +2013). + +2. Edward Randall Gruber, age 63, is a Certified Public Accountant (“CPA”) licensed +to practice in Missouri. During the pertinent period, Gruber was a resident of Lake Saint Louis, +Missouri. Gruber is the sole managing member and owner of Gruber & Co. Gruber served as the +engagement partner for Gruber & Co.’s audits of Gold Standard’s consolidated financial +statements for the fiscal years ending December 31, 2009, 2008 and 2007, and review of Gold +Standard’s September 30, 2010 financial statements. As the engagement partner on the audits of +Gold Standard’s financial statements, Gruber was responsible for supervising the engagements and +causing Gruber & Co. to issue the audit reports for Gruber & Co. On June 27, 2013, Gruber was +permanently barred from being an associated person of a registered public accounting firm, as that +term is defined in Section 2(a)(9) of the Sarbanes-Oxley Act of 2002, as amended. See PCAOB +Release No. 105-2013-005 (June 27, 2013). + +3. Gold Standard was a Nevada corporation whose principal office was located in +Beverly Hills, California during the pertinent period. At times relevant to this Order, Gold +Standard’s securities were registered with the Commission pursuant to Section 12(g) of the +Securities Exchange Act of 1934 (“Exchange Act”) and quoted on the over-the-counter bulletin +board under the symbol “GSTP”. + + 3 +4. On February 4 and 12, 2015, final judgments were entered against Gruber and +Gruber & Co. respectively permanently enjoining them from future violations of Sections 10(b) +and 10A(a) of the Exchange Act and Rule 10b-5 adopted thereunder; and from aiding and abetting +violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11, and 13a-13 adopted +thereunder, in the civil action entitled SEC v. Gold Standard Mining Corp., et al., Civil Action +Number 2:12-cv-5662-JCB-CW in the United States District Court for the Central District of +California. + +5. The Commission’s complaint alleged, among other things, that during 2009 Gold +Standard reported that it had acquired a Russian gold mining company, and filed unaudited, +consolidated financial statements which increased its assets to more than $1.3 billion, but failed to +disclose material information that the acquisition had not been completed because the change in +ownership was not registered with, or approved by Russian regulatory authorities. The complaint +alleged that Gruber & Co. violated, and Gruber aided and abetted violations of, Section 10(b) of +the Exchange Act and Rule 10b-5 when Gruber & Co. made false and misleading statements in its +audit report filed with Gold Standard’s amended Form 8-K on October 5, 2010. Gruber, the +engagement partner on the audit, caused Gruber & Co. to issue the false and misleading audit +report that stated: Gruber & Co. had conducted the audit of Gold Standard’s consolidated financial +statements in accordance with PCAOB standards, when in fact it did not; and the consolidated +financial statements fairly presented the financial position of Gold Standard and its subsidiaries, +when they did not. The complaint alleged that during the audit Gruber raised questions about +whether Gold Standard had consummated its purchase of the Russian gold mining company by +properly registering the acquisition with Russian regulatory authorities, but failed to obtain +sufficient competent evidential matter to determine whether the registration ever occurred. In +addition, the complaint alleged that Gruber & Co. and Gruber failed to design audit procedures to +provide reasonable assurance of detecting illegal acts that would have a direct and material effect +on the determination of financial statement amounts in violation of Section 10A(a) of the +Exchange Act. Furthermore, the complaint alleged that Gruber & Co. and Gruber aided and +abetted Gold Standard’s violations of the reporting requirements of Section 13(a) of the Exchange +Act and Rules 12b-20, 13a-11, and 13a-13 by submitting the false and misleading audit report for +inclusion in Gold Standard’s amended Form 8-K filed on October 5, 2010, and performing a +deficient review of the financial statements in the September 30, 2010 Form 10-Q, which +contained estimated financial statements not prepared in conformance with generally accepted +accounting principles. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondents’ Offer. + + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Gruber & Company LLC is suspended from appearing or practicing before the +Commission as an accountant; and + 4 + +B. Gruber is suspended from appearing or practicing before the Commission as an +accountant. + + By the Commission. + + + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3656.pdf b/raw/aaer/2015/AAER-3656.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9f8bbde1f9407926eb36e5a8629d69c5814ec945 --- /dev/null +++ b/raw/aaer/2015/AAER-3656.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:2244a607dd7655991b61ea7b0e78409b13b8bf4c88134d9599c7fd5a94cf0fb9 +size 102819 diff --git a/raw/aaer/2015/AAER-3657.pdf b/raw/aaer/2015/AAER-3657.pdf new file mode 100644 index 0000000000000000000000000000000000000000..68044531db82fd4c0e2234f41bf5484ec2162e52 Binary files /dev/null and b/raw/aaer/2015/AAER-3657.pdf differ diff --git a/raw/aaer/2015/AAER-3658.pdf b/raw/aaer/2015/AAER-3658.pdf new file mode 100644 index 0000000000000000000000000000000000000000..25114d5188219da173e19ba2995f574c7cbc513d --- /dev/null +++ b/raw/aaer/2015/AAER-3658.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:3e61d7cb11296d8c65d61472dbf8d1cddc96aaea43beac25a81fc1d64120e68e +size 196458 diff --git a/raw/aaer/2015/AAER-3658.txt b/raw/aaer/2015/AAER-3658.txt new file mode 100644 index 0000000000000000000000000000000000000000..912f18e1b5dd0d79a8b3806c5bdda6ad6212e230 --- /dev/null +++ b/raw/aaer/2015/AAER-3658.txt @@ -0,0 +1,523 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75028 / May 21, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3658 / May 21, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16171 + + +In the Matter of + +MAYER HOFFMAN McCANN, +P.C. + +Respondent. + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS, +CENSURE, AND A CEASE-AND-DESIST +ORDER PURSUANT TO SECTIONS 4C +AND 21C OF THE EXCHANGE ACT AND +RULE 102(e)(1)(ii) OF THE +COMMISSION’S RULES OF PRACTICE + + + +I. + +On September 25, 2014, the Securities and Exchange Commission (“Commission”) issued +the Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections +4C1 and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules +of Practice2 and Notice of Hearing against Mayer Hoffman McCann P.C. (“MHM” or + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. +2 + +“Respondent”). Respondent has submitted an Offer of Settlement (“Offer”) which the +Commission has determined to accept. +II. +Solely for the purpose of these proceedings and any other proceedings brought by or on +behalf of the Commission, or in which the Commission is a party, and without admitting or denying +the findings contained in the Order, except as to the Commission’s jurisdiction over it and the +subject matter of these proceedings, which are admitted, Respondent consents to the entry of this +Order Making Findings and Imposing Remedial Sanctions, Censure, and a Cease-and-Desist Order +Pursuant to Sections 4C and 21C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice (“Order”) as set forth below. +III. +On the basis of this Order and the Offer of MHM, the Commission finds3 that: + +SUMMARY + +Mayer Hoffman McCann P.C. (“MHM”) is a public accounting firm associated with CBIZ, +Inc. (“CBIZ”), a publicly traded company, through a business model referred to as an alternative +practice structure (“APS”). CBIZ’s APS model with MHM utilizes an administrative service +agreement (“ASA”) under which MHM leases from CBIZ virtually all of the human capital, +equipment and overhead MHM requires to perform its attest work, in exchange for a majority of +MHM’s revenue. + +CBIZ is an associated entity of MHM, and CBIZ and MHM are viewed as a single entity +for Commission auditor independence purposes. + +MHM has numerous attest clients that file reports with the Commission. One of those +clients was Tradebot Systems, Inc. “(Tradebot”), a privately-owned registered broker-dealer with +no customers. Pursuant to Rule 17a-5 promulgated under Section 17(a) of the Exchange Act, +Tradebot is required to file annual reports with the Commission containing financial statements +audited by an independent public accountant (“Annual Reports”). + +MHM audited Tradebot’s Annual Reports from 2004 through 2012. From 2008 to at least +2013, Tradebot periodically invested in CBIZ stock (using an alogorithmic computerized trading +program), thereby impairing MHM’s independence with respect to its audits of Tradebot’s 2008 +through 2012 financial statements. As a result, Tradebot’s Annual Reports did not comply with +Rule 17a-5 for those periods. + +In addition to MHM’s independence violations related to the Tradebot audits, MHM’s +procedures were deficient to prevent such independence violations for all of its broker-dealer and +investment fund audit clients. + +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 + + +MHM lacked an appropriate system of quality controls to detect transactions in CBIZ stock +by its attest clients in order to ensure that those engagements complied with the firm’s legal and +ethical requirements. MHM’s quality control and audit procedures failed to meet adequate +professional standards with respect to its audits of Tradebot. + +During the audit of its 2012 year, Tradebot was made aware that trading in CBIZ stock +would impair MHM’s independence. Tradebot continued to trade in CBIZ stock. + +A. RESPONDENT + +1. Mayer Hoffman McCann P.C., is a Missouri professional corporation +headquartered in Leawood, Kansas, with offices throughout the U.S. MHM’s Commission-related +attest practice includes registered broker-dealers, investment funds and publicly traded companies. + +B. RELATED ENTITIES + +2. CBIZ, Inc., is a Delaware corporation headquartered in Cleveland, Ohio, that +provides products and services to businesses throughout the U.S. CBIZ associates with several +U.S. public accounting firms through its APS model, with MHM being the largest. CBIZ’s stock +is traded on the New York Stock Exchange. + +3. Tradebot Systems, Inc., is a broker dealer registered with the Commission, and is +located in Kansas City, Missouri. + +C. FACTS +4. In about 1996, CBIZ began using the APS model to expand its revenue base by +acquiring the non-attest practices of public accounting firms and forming relationships with those +public accounting firms by means of ASAs. + +5. From about 1998 to present, CBIZ entered into periodic ASAs with MHM which +provide, among other things, that virtually all of MHM’s shareholders are salaried employees of +CBIZ and are leased to MHM along with other CBIZ professional and non-professional staff, +office space, equipment, and marketing and other services, to enable MHM to perform its attest +practice, in exchange for approximately 85% of MHM’s revenues. + +6. On November 2, 1998, the Commission’s Office of Chief Accountant (“OCA”) +became aware of CBIZ’s use of the APS model and its acquisition of non-attest practices of +accounting firms. OCA notified CBIZ of the application of the Commission’s independence rules: + +[Y]our affiliation with certain accounting firms … may subject you to the +application of the independence rules set forth in Rule 2-01 of Regulation S-X. + +. . . [A]ny accounting firm and the acquirer (“acquirer”) of that accounting firm +that employs any accountants that work on SEC clients of the accounting firm +should continue to fully comply with the SEC’s independence requirements. +4 + + +In determining whether an accountant may in fact not be independent with +respect to a particular person, the Commission will give appropriate consideration +to all relevant circumstances, including evidence bearing on all relationships +between the accountant and that person or any affiliate thereof and will not +confine itself to the relationships existing in connection with the filing of reports +with the Commission. + +7. On August 13, 1999, OCA sent guidance to CBIZ related to independence +disclosures provided in a CBIZ Form S-4 filing then under review. In that letter, OCA stated: + +[T]he Commission and the staff are concerned about the significant public policy +issues that are raised in situations where audits of public companies are +performed by auditors under an alternative business structure. . . . [CBIZ] has +acquired the non-attest businesses of several accounting firms (“the Attest +Firms”) that have audited clients required to file financial statements with the +[Commission]. . . . + +. . . [I]n the application of the independence rules, the SEC staff will view [CBIZ] +and all Attest Firms as a single entity. As a result, [CBIZ] must abide by all of +the independence rules that the Attest Firm must follow in order for the Attest +Firm to be independent of an SEC audit client. . . . + +The revised disclosure should also state that an Attest Firm would not be +independent from entities involved in the [CBIZ] offering process and in making +a market for or otherwise facilitating the trading of [CBIZ] shares in the +secondary market. Accordingly, the revised document should indicate that an +Attest Firm’s independence would be impaired with respect to all members of the +syndicate underwriting the [CBIZ] offering and to broker-dealer firms that +exercise discretionary buy and sell authority over customer accounts holding +significant positions in [CBIZ] or employ securities analysts who follow [CBIZ]. + +Further, the disclosure should indicate that because [CBIZ] and its officers, +directors and affiliates, and the Attest Firm are viewed as one entity for purposes +of the independence rules, [CBIZ] or its officers, directors or affiliates would +impair the independence of the Attest Firms if they held any financial interest in +or entered into any business relationships with or sold any services to an SEC +audit client of an Attest Firm that the Attest Firm itself would be precluded from +under the SEC independence rules. + +On this same date, CBIZ sent correspondence to OCA stating that CBIZ and the CPA +firms with which it had a relationship through an ASA believed that the CPA firms could +perform audits on SEC reporting clients holding 5% or less of CBIZ stock. + +8. In 2000, the Commission promulgated an extensive revision of its auditor +independence requirements under Rule 2-01 of Regulation S-X. 17 C.F.R. § 210.2-01. The +revised rule was adopted in response to “an increasingly complex web of business and financial +5 + +relationships” of public accounting firms. Included in the revision was subsection 2- +01(c)(1)(iv)(A). It provides: + +(iv) Audit clients' financial relationships. An accountant is not independent when: + +(A) Investments by the audit client in the accounting firm. An audit client has, or +has agreed to acquire, any direct investment in the accounting firm, such as +stocks, bonds, notes, options, or other securities, or the audit client's officers or +directors are record or beneficial owners of more than 5% of the equity securities +of the accounting firm. + +9. Rule 2-01(f)(2) of Regulation S-X defines “accounting firm” as “an organization . . +. that is engaged in the practice of public accounting . . . and all of the organization’s . . . associated +entities . . . .” Rule 2-01 did not define the term “associated entities.” + +10. CBIZ is an associated entity of MHM by virtue of its APS relationship and ASA +with MHM. + +11. Pursuant to Rule 17a-5(d) of the Exchange Act, Tradebot is required to file an +annual report (“Annual Report”) which contains its audited financial statements. Rules 17a-5(d), +(e) and (f) specifically require that the Annual Report be audited by an “independent public +accountant” and a “public accountant who shall be in fact independent” as defined by Rule 2-01(b) +and (c). From 2004 through 2012, Tradebot engaged MHM to audit its financial statements +included in the Annual Report. + +12. Commencing in 2008, unbeknownst to MHM, Tradebot began to regularly trade in +CBIZ stock and continued to trade in that stock through 2013. + +13. Prior to 2012, Tradebot was unaware of any prohibition against it acquiring any +interest in the securities of CBIZ. Prior to the 2012 audit period, MHM never inquired whether +Tradebot traded in CBIZ stock. + +14. In about mid-2012, MHM’s engagement shareholder learned from Tradebot’s CFO +that Tradebot had traded in CBIZ stock and discussed with Tradebot’s CFO the possibility that +such trades may impact MHM’s independence. + +15. In response, MHM’s engagement shareholder contacted MHM’s Director of +Quality Control and asked “whether or not that was something we need to be concerned about +from an independence issue.” MHM’s Director of Quality Control forwarded the question to +MHM’s national director of professional standards, MHM’s president, and members of MHM’s +executive committee. + +16. On September 4, 2012, Tradebot’s CFO emailed MHM’s engagement shareholder +seeking further guidance on the impact of Tradebot’s trading in CBIZ, asking: “Can you send me +the link pointing to the independence issue related to trading public stock.” + +6 + +17. On September 6, 2012, MHM’s engagement shareholder responded to Tradebot’s +CFO’s email, stating: “I do not have anything specific to this situation to send (as it does not exist). +It is basically an interpretation of the SEC rules. Our New York office had inquired of a similar +situation in which the entity holds CBIZ stock and it was determined to be an issue…. +Unfortunately our chief independence officer is on a long vacation and I am trying to get a hold of +him for thoughts.” + +18. On October 3, 2012, before resolving whether MHM was independent, Tradebot +engaged MHM for the 2012 audit. In connection with that engagement, MHM did not discuss with +Tradebot the unresolved independence issue and proceeded to sign the engagement letter. + +19. MHM’s potential independence conflict should have been resolved prior to signing +the engagement letter. + +20. On October 28, 2012, MHM’s director of quality control contacted MHM’s +national director of professional standards and MHM’s president regarding the Tradebot +independence issue. On October 30, 2012, MHM’s national director of professional standards +provided guidance to MHM’s director of quality control and MHM’s engagement shareholder, +citing Rule 2-01(c)(1)(iv)(A) and instructing them that he thought MHM would have to resign if +Tradebot would be able to acquire more than 5% of the equity securities of CBIZ. + +21. MHM’s national director of professional standards’ guidance to MHM’s director of +quality control and MHM’s engagement shareholder did not comply with Rule 2-01(c)(1)(iv)(A). + +22. In October 2012, MHM requested a meeting with the Commission staff (“Staff”) to +discuss matters relevant to the investigation, including a response to a request by the Staff to know +whether MHM monitored the holdings of its broker-dealer clients for CBIZ stock, and whether +there were instances of a broker-dealer client taking a position in CBIZ stock. + +23. The Staff met with MHM on December 4, 2012; MHM’s president attended the +meeting with MHM’s counsel. At that meeting the Staff conveyed to MHM that an audit client +holding even one share of CBIZ would impair MHM’s independence. + +24. On December 5, 2012, MHM’s engagement shareholder emailed Tradebot +concerning MHM’s conclusion regarding the independence question posed in September 2012, +stating: + +Following up on the independence issues we discussed earlier this year, below is +the SEC rule. I am assuming Tradebot has not become the beneficial owner of +more than 5% of the CBIZ stock at one time, however, I would like to propose +perhaps you put a limit on the number of shares to be acquired at any one time. Is +that possible?? + +Reg. SX §210.2-01(c)(1)(iv)(A)- + +An accountant is not independent when: +7 + +(A) Investments by the audit client in the accounting firm. An audit client +has, or has agreed to acquire, any direct investment in the accounting firm, such +as stocks, bonds, notes, options, or other securities, or the audit client’s officers +or directors are record or beneficial owners of more than 5% of the equity +securities of the accounting firm. + +25. MHM’s engagement shareholder’s instruction to Tradebot was erroneous because +the 5% threshold referenced in the rule does not apply to Tradebot; rather, it only applies to +Tradebot’s officers and directors. + +26. Tradebot responded to MHM’s engagement shareholder’s email by indicating it +would place a 10,000 share limit on trades in CBIZ, an amount that was below 5% of CBIZ’s +outstanding shares. + +27. Tradebot continued to trade in CBIZ stock through 2013. + +28. Until 2013, MHM did not have any quality control or audit procedures to ensure +clients did not trade in CBIZ stock or to otherwise comply with Rule 2-01(c)(1)(iv)(A). Until +2013, MHM provided no guidance to any audit client, including Tradebot, regarding trading +prohibitions in CBIZ stock by the audit client. Further, MHM did not implement any audit +procedures during its audits of Tradebot, or any other broker-dealer clients, to review the securities +they were trading to ensure compliance with Rule 2-01(c)(1)(iv)(A). + +29. MHM performed audits of Tradebot’s financial statements for the periods 2008 +through 2012 in connection with Tradebot’s Annual Reports filed with the Commission. MHM +provided audit opinions for those audits which indicated, among other things, that MHM was +independent of Tradebot for those audits, when in fact, MHM was not independent. + +D. VIOLATIONS +MHM’s IMPROPER PROFESSIONAL CONDUCT + +30. Section 4C(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice allow the Commission to censure, or deny temporarily or permanently, an +accounting firm’s privilege of practicing before it if the firm is found to have “engaged . . . in +improper professional conduct.” + +31. Pursuant to Section 4C(2) and Rule 102(e)(1)(ii), improper professional conduct +involves a violation of applicable professional standards through intentional, knowing or reckless +conduct, and two types of negligent conduct: a single instance of highly unreasonable conduct for +which heightened scrutiny is warranted; or repeated instances of unreasonable conduct that indicate +a lack of competence to practice before the Commission. + +32. “Because of the importance of an acco untant’s independence to the integrity of +the financial reporting system, the Commission has concluded that circumstances that raise +questions about an accountant’s independence always merit heightened scrutiny.” Amendment +8 + +to Rule 102(e) of the Commission’ s Rules of Practice, Release No. 33 -7593 (Oct. 19, 1998), 63 +Fed. Reg. 57168. + +1. Relevant Audit Standards + +33. The term “applicable professional standards” primarily refers to generally accepted +accounting principles (“GAAP”), generally accepted auditing standards (“GAAS”), the AICPA +Code of Professional Conduct, and Commission regulations, but is broad enough to accommodate +changes in the body of professional guidance routinely used by accountants. + +34. For auditors of registered broker-dealers, such as Tradebot, the applicable +professional standards related to GAAS are those that have been issued by the AICPA.4 + +35. Both Rule 2-01 and GAAS require auditors to maintain strict independence from +their audit clients. AICPA Auditing Standards AU Section 150.02 requires that the auditor +“maintain independence . . . in all matters relating to the audit.” AICPA Auditing Standards AU +Section 220.03 states “[i]t is of utmost importance to the profession that the general public +maintain confidence in the independence of auditors.” + +36. GAAS requires that an auditor have policies and procedures designed to prevent +independence impairment, and client acceptance and continuance procedures that ensure +compliance with legal requirements, discussed below. + +37. MHM was negligent in its failure to comply with those professional standards. + +2. MHM’S Independence Was Impaired When It Audited Tradebot’s 2008 – +2012 Financial Statements + +a. Rule 17a-5 + +38. Rule 17a-5 of the Exchange Act requires registered broker dealers to file periodic +reports with the Commission including, pursuant to Rule 17a-5(d)(1)(i), an annual report “which +shall be audited by an independent public accountant.” Rule 17a-5(e)(1)(i) further states: “An +audit shall be conducted by a public accountant who shall be in fact independent as defined in +paragraph (f)(3) of this section herein, and shall give an opinion covering the statements filed +pursuant to paragraph (d)…” + +39. Rule 17a-5(f)(3) defines independence as “in accordance with the provisions of § +210.2-01(b) and (c) of this chapter.” + +b. Rule 2-01(b) and (c) + +40. The general standard of auditor independence is described in Rule 2-01(b). + +4 The AICPA auditing standards are applicable for the audits of broker-dealers, Commission +Guidance Regarding Auditing, Attestation, and Related Practice Standards Related to Brokers +and Dealers, Release No. 34-62991, Sept. 24, 2010. +9 + + +41. Additionally, Rule 2-01(c)’s subsections set forth “a non-exclusive specification of +circumstances inconsistent with” Rule 2-01(b)’s general requirement. The Commission stated: +“As to circumstances specifically set forth in our rule, we have set forth a bright-line test: an +auditor is not independent if he or she maintains the relationships, acquires the interests, or engages +in the transactions specified in the rule.” Revision of the Commission’s Auditor Independence +Requirements, Release No. 33-7919, 65 Fed. Reg. 76008 at 76030. + +42. When MHM audited Tradebot’s financial statements during the audit periods in +which Tradebot had acquired direct investments in CBIZ stock, namely 2008 through 2012, +MHM’s independence was impaired as to those audits. + +3. MHM Violated Other Applicable Professional Standards + +43. MHM violated professional standards that require an accounting firm to establish +policies and procedures designed to assure independence, and client engagement procedures that +ensure compliance with legal requirements and risks associated with the engagement. + +a. MHM Failed to Design Policies and Procedures That Assured +Independence +44. AICPA quality control standards are professional standards under GAAS. Pursuant +to AICPA QC Section 10 Paragraph 22, an auditor is required to have policies and procedures +“designed to provide with reasonable assurance that the firm … maintain independence . . . .” + +45. In about 2012, MHM had well over a hundred broker dealer and investment fund +clients, including Tradebot, which regularly trade in the securities of thousands of public +companies. Despite the risks of audit clients trading in CBIZ securities, until 2013 MHM did not +have any written policies or procedures to address the independence issues established by Rule 2- +01(c)(1)(iv)(A) of audit clients trading in CBIZ securities. + +46. Further, until 2013 MHM did not have any written procedures to inform audit +clients of the transactional proscriptions of trading in CBIZ securities or any written procedures to +follow if audit clients traded in CBIZ securities in violation of Rule 2-01(c)(1)(iv)(A). + +47. Until 2013, MHM’s audit clients were unaware of restrictions on the trading of +CBIZ securities. + +b. MHM Failed To Follow Proper Client Engagement Procedures +48. Pursuant to AICPA QC Section 10 Paragraph 27, an auditor is required to have +adequate policies and procedures for client continuance that are “designed to provide the firm with +reasonable assurance that it will … continue … engagements only when the firm can comply with +legal and relevant ethical requirements.” + +49. After learning in 2012 of Tradebot’s CBIZ transactions, MHM failed to perform +adequate client acceptance procedures to ensure it was independent when being engaged and +10 + +beginning substantive field work. Shortly after internal consultation over the independence +question was initiated but before MHM’s national director of professional standards had provided +any guidance to the engagement shareholder, MHM proceeded with the engagement. By doing so, +MHM entered into an engagement without determining whether it could continue with the audit. + +4. MHM Violated AICPA Professional Standards +50. Through the conduct described above, MHM violated GAAS provisions AU +Sections 150.02 and 220.03, AICPA QC Section 10 Paragraphs 22 and 27 and thereby negligently +engaged in improper professional conduct. + +51. Through its repeated instances of unreasonable conduct resulting in violations of +applicable professional standards, MHM demonstrated a lack of competence to practice before the +Commission. + +5. MHM CAUSED TRADEBOT’S VIOLATION OF SECTION 17(a) +AND RULE 17a-5 +52. Under Section 21C of the Exchange Act, a person is a “cause” of another's +primary violation if the person knew or should have known that its act or omission would +contribute to the primary violation. Negligence is sufficient to establish “causing” liability +under Section 21C when a person is alleged to have caused a primary violation that does not +require scienter. + +53. MHM caused Tradebot’s violations of Section 17(a) and Rule 17a-5 by +certifying, as independent public accountants, Tradebot’s financial statements contained in its +Annual Reports, when, in fact, MHM was not independent of Tradebot. + +54. Further, MHM lacked an adequate system of controls to maintain independence +and failed to inform Tradebot of the proscription against trading in CBIZ stock. Those failures +impaired MHM’s independence and thereby caused Tradebot to file Annual Reports that did not +contain audits by an independent accountant. + +55. MHM was negligent in certifying it was independent of Tradebot and having an +inadequate system of controls and by failing to notify Tradebot of the proscription against +trading in CBIZ stock. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. MHM shall cease and desist from committing or causing any violations and +any future violations of Section 17(a) of the Exchange Act and Rule 17a-5 thereunder; + +11 + +B. Pursuant to Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, MHM is hereby censured; + +C. MHM shall, within 14 days of entry of the Order, pay disgorgement of $65,245, +which represents profits gained as a result of the conduct described herein, prejudgment interest of +$9,755, and civil penalties of $675,000 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. +Payment must be made in one of the following ways: + + (1) 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 +Mayer Hoffman McCann P.C. 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 Karen Martinez, +Regional Director, Salt Lake Regional Office, Securities and Exchange Commission, 351 South +West Temple, Suite 6.100, Salt Lake City, Utah 84101. + + +By the Commission. + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3659.pdf b/raw/aaer/2015/AAER-3659.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c9f9aeb73dd3897711c6e91d57331b9a9860bb11 --- /dev/null +++ b/raw/aaer/2015/AAER-3659.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:0d2d6515b5776e6e5d296e60ca0c77acd7423bde0c42b7095dd13495dc97f665 +size 104920 diff --git a/raw/aaer/2015/AAER-3660.pdf b/raw/aaer/2015/AAER-3660.pdf new file mode 100644 index 0000000000000000000000000000000000000000..fa9906d046dd7c5888954fedddc7bf4ea7bdf3c2 --- /dev/null +++ b/raw/aaer/2015/AAER-3660.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:2a95f6bc70f707f992f710440d523db9ae21933ec61724468148dc494c56a3ea +size 384158 diff --git a/raw/aaer/2015/AAER-3661.txt b/raw/aaer/2015/AAER-3661.txt new file mode 100644 index 0000000000000000000000000000000000000000..f1a42a32042f456fe875dee13c7128e5e1f701dd --- /dev/null +++ b/raw/aaer/2015/AAER-3661.txt @@ -0,0 +1,1373 @@ + + + + + + + + + + + + + + + + SEC.gov | David Rivard + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/516911","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + David Rivard + + + + + + + + + + + + David Rivard + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 23277 / June 4, 2015 + Accounting and Auditing Enforcement Release No. AAER-3661 / June 4, 2015 + + Securities and Exchange Commission v. David Rivard , 15 Misc. 0221 (E.D.N.Y. filed February 5, 2015) + + Securities and Exchange Commission v. David Rivard , Civil Action No. 15 Misc. 0221 (E.D.N.Y. filed February 5, 2015), No. 04 Civ. 1464 (E.D.N.Y. filed Apr. 8, 2004) + + Court Directs Accountant, On Consent, to Comply with Commission Suspension Order and Pay Disgorgement, and Holds Him in Contempt of Prior Final Judgment for Failing to Pay Monies Owed + + The Commission today announced that, on June 3, 2015, the Honorable I. Leo Glasser of the United States District Court for the Eastern District of New York entered an Order on consent in two cases against David Rivard, a former certified public accountant. In the first case, the Order enforces a prior Commission order suspending Rivard from practicing accounting before the Commission, and requires Rivard to pay disgorgement in an amount to be determined at a later time. Securities and Exchange Commission v. David Rivard, 15 Misc. 0221 (E.D.N.Y. Feb. 5, 2015). The Order also requires Rivard to submit a detailed accounting identifying, among other things, all transfers and payments of funds to him or on his behalf since April 2009, the disposition of those funds, and all assets held by him or on his behalf. In the second case, the Order holds Rivard in contempt of a money judgment previously entered against him in SEC v. Rivard, No. 04 Civ. 1464 (E.D.N.Y. Apr. 8, 2004), which he may purge within 90 days. The Order incorporates a stipulation entered into by Rivard to execute a mortgage deed on a residential property in favor of the Commission to secure the amounts owed under the money judgment. Rivard is a resident of East Setauket, New York, and had previously been licensed as a certified public accountant by the State of New York from February 1992, until he surrendered his license, effective March 2008. + +See prior litigation releases: LR-23190 , LR-18954 , LR-18665 . + + + + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3662.pdf b/raw/aaer/2015/AAER-3662.pdf new file mode 100644 index 0000000000000000000000000000000000000000..438e270b0f5d113f1ebe1cd8dd1d43c1148edc2b --- /dev/null +++ b/raw/aaer/2015/AAER-3662.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:bc2c16443c50b487e13372f7ad2ae66f3453598f30a5577244c13bea434a1bee +size 390396 diff --git a/raw/aaer/2015/AAER-3662.txt b/raw/aaer/2015/AAER-3662.txt new file mode 100644 index 0000000000000000000000000000000000000000..54e5c0323d25ea4cc474c9be0da64c6e93f44e56 --- /dev/null +++ b/raw/aaer/2015/AAER-3662.txt @@ -0,0 +1,1492 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9804 / June 5, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75110 / June 5, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3662 / June 5, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16575 + + +In the Matter of + +COMPUTER SCIENCES +CORPORATION, MICHAEL +LAPHEN, MICHAEL +MANCUSO, WAYNE BANKS, +CLAUS ZILMER, AND PAUL +WAKEFIELD + +Respondents. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF +1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER (“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 Claus Zilmer and pursuant to Section 8A of the +Securities Act of 1933 (“Securities Act”) and Section 21C of the Exchange Act against Computer +Sciences Corporation (“CSC”), Michael Laphen, Michael Mancuso, Wayne Banks, and Paul +Wakefield (collectively with Zilmer, “Respondents”); and that public administrative proceedings +be, and hereby are, instituted against Laphen, Banks, and Wakefield pursuant to Exchange Act +Section 4C and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + + +2 +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) that the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, Respondents consent to the entry of this Order, as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1: +SUMMARY + +1. From 2009 to 2011, CSC engaged in a wide-ranging accounting and disclosure +fraud that materially overstated its earnings and concealed from investors significant problems +with its largest contract. Former CEO Michael Laphen approved CSC’s use of improper +accounting models for the company’s multi-billion dollar contract with the United Kingdom’s +National Health Service (“NHS”). Laphen and former CFO Michael Mancuso also failed to +make required disclosures and made misleading statements to investors about the NHS contract. +And in one quarter, CSC’s former Finance Director for the NHS account prepared a fraudulent +accounting model in which he included made-up assumptions to avoid a negative hit to CSC’s +earnings. As this was occurring in the United States and the United Kingdom, senior CSC +finance personnel in Australia fraudulently overstated the company’s earnings using “cookie jar” +reserves and by failing to record expenses as required. Separately, CSC finance personnel in +Denmark engaged in a variety of fraudulent accounting manipulations that also overstated the +company’s earnings. Throughout this period, CSC’s most senior executives and various finance +personnel repeatedly failed to comply with straightforward accounting standards and disclosure +rules. +2. CSC’s2 contract with the NHS was a significant source of concern for the +company. It was the company’s largest, and most high profile contract, and CSC experienced +substantial difficulties performing as required, even after the contract was amended in 2009 to +give CSC additional time to meet deadlines it had missed. CSC’s failure to meet its deadlines +would have significantly reduced the profit the company could make from the project. Under the + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. +2 The NHS awarded the contract to a CSC affiliate in the UK, CSC Computer Sciences Ltd., which +performed the NHS contract. Throughout this document “CSC” may refer to CSC, the issuer, or its foreign +subsidiaries or affiliates. + + +3 +relevant accounting standards, every time CSC forecasted that it would earn a lower profit +margin than it had previously expected, it was required to report a reduction in its earnings. +3. In September 2009, CSC finance personnel responsible for the NHS contract +prepared an initial accounting model that reflected the NHS contract was no longer profitable. +This was a significant change from prior models, which had forecast a 16% profit margin. In +response, Robert Sutcliffe, the Finance Director on the NHS account, led a fraudulent “gap +closing” exercise in which his team simply contrived assumptions about additional revenue CSC +would earn on the contract. These assumptions had no basis in reality. The accounting model +they prepared artificially restored the forecasted profit margin to its previous level, thereby +avoiding the material reduction in operating income that GAAP required CSC to record. +4. With delays continuing, the NHS account team warned Laphen and Mancuso that +CSC would need a “major contract reset” and would need to “re-cast” its accounting models in +the future. In late 2009, Laphen and Mancuso were aware that CSC began using proposed +contract amendments that CSC was negotiating with the NHS, and that Laphen and Mancuso +hoped the UK government would agree to implement, as the basis for CSC’s accounting models +rather than the enforceable contract with the NHS. They did so even though the assumptions in +the company’s accounting models bore scant relation to the actual contract. Most significantly, +notwithstanding CSC’s delays and the UK government’s criticism of CSC’s performance, these +accounting models assumed the UK government would agree to pay substantially higher prices +than required by the contract for less work so that CSC could maintain its expected profit +margin. +5. As CSC’s delays continued and its profit margin under the enforceable contract +declined, and with CSC and the NHS unable to reach agreement on potential amendments, the +account team avoided recording material reductions in CSC’s earnings by adjusting the models +to assume the UK government would agree to pay progressively higher prices. CSC included +these assumptions in its models for a two-year period despite the NHS’s repeated rejections of +CSC’s proposed amendments, even though NHS personnel and UK government officials stated +frequently they were unhappy with CSC’s performance, and even after the Chair of the UK’s +Public Accounts Committee was quoted publicly as saying CSC’s proposed contract +amendments were “unspeakably unacceptable” and “[t]here is no way these guys ought to be +working for the government.” This was a clear violation of GAAP. CSC also failed to comply +with GAAP by failing to impair the value of its contract assets when it ceased to be probable that +the company would recover its investment in the program. +6. CSC also made misleading statements to investors and failed to make required +disclosures regarding the NHS contract. On two occasions in 2009, Laphen told investors that +CSC had met, and expected to continue meeting, its deadlines. These disclosures were +misleading because they failed to inform investors that CSC was not achieving the milestones set + + +4 +forth in the contract; that Laphen was referring to informally revised deadlines3; that CSC was +engaged in an ongoing dispute with the NHS about which milestones applied; that CSC’s +deployment projections were falling far short of expectations; and that the NHS had sent letters +asserting that CSC was in default and demanding that CSC pay penalties. +7. In violation of multiple disclosure requirements, Laphen and Mancuso repeatedly +failed to inform investors of these issues. They also failed to disclose that CSC was calculating +its profit margin for the NHS contract using its proposed contract amendments — instead of the +binding contract between the parties — and that CSC would have to record a material decrease in +its earnings unless the NHS and various other UK government bodies agreed to amend the contract +to require them to pay CSC significantly higher prices. +8. In addition, CSC made misleading statements and failed to make required +disclosures to investors about the relationship between the NHS contract and one of CSC’s most +important financial metrics, free cash flow.4 The NHS had agreed to provide CSC cash advances +to help offset the company’s costs. Although GAAP allowed CSC to record these advances as +operating cash flow, rather than financing cash flow, they were effectively loans. CSC +effectively paid the NHS a 5% interest rate for the advances and refunded the portions of the +advances that CSC was unable to earn in revenue. CSC’s former Treasurer had recommended to +Mancuso that CSC lower the amounts of the advances because the high costs of the arrangement +resulted in an economic loss for CSC. However, Mancuso rejected this recommendation. He +directed that the advances continue because they allowed CSC to meet its cash flow targets. The +amounts of these advances as a percentage of CSC’s free cash flow, and the amounts CSC +returned to the NHS as its delays continued, increased substantially — peaking at 63% of CSC’s +free cash flow in Q4FY2011, with the company subsequently returning 93% of that advance +when the NHS finally ended the arrangement in FY2012. +9. In violation of SEC disclosure rules, Mancuso repeatedly failed to disclose that +these unusual advances from the NHS comprised significant proportions of its free cash flow +results. Moreover, on two occasions, Mancuso made misleading statements to investors about +the advances. During CSC’s year-end earnings calls for FY2009, a financial analyst asked +Mancuso whether CSC had received “any large prepayments” from NHS or other clients during +the fourth quarter of FY2009. Even though he knew that CSC had indeed received a large +prepayment from the NHS in that period, Mancuso replied that the company had not. And during +CSC’s year-end earnings call for FY2010, Mancuso led investors to believe CSC had not +received a large advance from the NHS, telling investors that CSC had achieved its free cash +flow results “the old fashioned hard way.” Mancuso attributed CSC’s cash flow results, which he + +3 The NHS agreed to a new set of deadlines it identified as “highest priorities (and bare minimum[s])” but +noted that these were not “in any way a waiver of CSC’s obligations to deliver its contracted requirements.” + +4 Although free cash flow is a non-GAAP metric, many CSC analysts consider it to be an important +performance metric because it reflects how much cash the company is generating. + + +5 +described as “a glowing achievement” and “not unnatural,” to improvements in working capital +and receivables. +10. In addition to the accounting and disclosure violations involving the NHS contract, +two of CSC’s international businesses ignored basic accounting standards to increase their reported +profits. In Australia, CSC’s two most senior finance executives in the country, regional CFO +Wayne Banks and Controller Edward Parker, fraudulently manipulated the company’s earnings +through excess accruals they maintained in “cookie jar” reserves and by failing to record expenses +as required. This fraud alone overstated CSC’s consolidated pretax income by over 5% in +Q1FY2009, and allowed CSC to meet analysts’ earnings targets in that period. +11. And during FY2010, CSC’s Nordic region engaged in a variety of accounting +manipulations to fraudulently inflate its operating results. These included improperly accounting +for client disputes, overstating assets, and capitalizing expenses. The fraudulent conduct involved +Finance Director of the Nordic region Paul Wakefield and other employees in Denmark. CSC’s +Nordic region engaged in this misconduct to improve operating income in a region that was +struggling to achieve budgets set by CSC management in the U.S. During FY2010, the accounting +fraud in Denmark overstated CSC’s consolidated pre-tax income by 5% in Q1FY2010, 3% in +Q2FY2010, 4% in Q3FY2010, and 7% in Q4FY2010. + +RESPONDENTS + +12. Computer Sciences Corporation sells information technology services. It is a +Nevada corporation headquartered in Falls Church, VA. CSC’s common stock is currently +registered with the Commission pursuant to Exchange Act Section 12(b) and trades on the New +York Stock Exchange. +13. Michael Laphen, 64, was CEO and Chairman of CSC from 2007 until his +retirement in March 2012, after 35 years with the company. Laphen holds a bachelor’s degree in +Accounting from Pennsylvania State University and an MBA from the University of +Pennsylvania. Laphen was licensed as a certified public accountant in Pennsylvania from 1975 to +1990, when his license became inactive. +14. Michael Mancuso, 72, was CFO of CSC from December 2008 until his retirement +in May 2012. Previously, Mancuso was the CFO of General Dynamics Corp. Mancuso holds a +bachelor’s degree in Business Administration from Villanova University and an MBA from +Eastern College. +15. Wayne Banks, 47, a citizen and resident of Australia, was CSC Australia’s CFO +from 2006 until he resigned in July 2011. Banks has a bachelor’s degree in Business and is a +Chartered Accountant in Australia. + +16. Paul Wakefield, 42, a citizen and resident of the UK, was the Finance Director of +the Nordic region from April 2008 to April 2010. Wakefield resigned from CSC in April 2010. + + +6 +Wakefield is an associate of the Chartered Institute of Management Accountants in the UK. +Wakefield entered into a cooperation agreement with the Division of Enforcement pursuant to +which he has agreed to cooperate fully in the SEC’s investigation; in any related enforcement +litigation or proceedings to which the SEC is a party; and, when directed by SEC Enforcement +Division staff, in an official investigation or proceeding by any federal, state, or self-regulatory +organization. + +17. Claus Zilmer, 48, a citizen and resident of Denmark, was a Finance Manager for +CSC’s Nordic region from April 2008 until June 2010. Zilmer left CSC in September 2010. +Zilmer holds a degree in Economics and Business Administration from Odense University, now +known as the University of Southern Denmark. + +OTHER RELEVANT PERSONS + +18. Robert Sutcliffe, 51, a citizen and resident of the UK, was CSC’s Finance Director +for the NHS account from April 2004 until May 2012. CSC suspended Sutcliffe in May 2012 and +terminated his employment in 2013. Sutcliffe studied accounting and business finance at +Manchester University. He is a fellow of the Chartered Institute of Management Accountants +(CIMA) in the UK. The Commission has charged Sutcliffe for his role in the misconduct +described in its Order. +19. Edward Parker, 42, a citizen and resident of Australia, was CSC Australia’s +financial controller from 2007 until the company suspended him in August 2011. He left the +company in October 2012. Parker has been a licensed Chartered Accountant in Australia since +1994. The Commission has charged Parker for his role in the misconduct described in its Order. + +20. Chris Edwards, 32, a citizen and resident of the UK, was the Finance Manager of +the Nordic region Global Outsourcing Services Pools from December 2008 to June 2010. +Edwards left CSC in October 2010. Edwards is a Chartered Accountant in the UK. The +Commission has charged Edwards for his role in the misconduct described in its Order. + +FACTS + +Background of CSC’s Contract with the NHS + +21. Having launched a plan in 2003 to electronically integrate patient medical records +across the United Kingdom, the NHS awarded long-term contracts to CSC Computer Sciences, Ltd +and three other IT contractors to build and deploy an electronic patient records system by 2013. +The project experienced technical problems and delays almost from the start. As other contractors +abandoned the project, the NHS encouraged and approved of CSC expanding its role. By 2007, +CSC had assumed responsibility for the project throughout most of the UK. +22. CSC had the potential to earn $5.4 billion in revenue if it were able to satisfy the +terms of the NHS contract. CSC earned revenue under the contract only to the extent that it + + +7 +delivered products and services to the NHS under the timeframes and volumes set forth in the +contract’s deployment plan. To incentivize CSC to meet the contract’s deployment targets, the +contract penalized CSC up to $160,000 per day for missed deadlines.5 +23. CSC experienced substantial difficulty developing the software required to run the +patient medical records system. Because of its delays in performing as required under the contract, +and the UK government’s expansion of CSC’s role in the project, CSC sought contract +amendments in 2008 to reset the deployment plan and to waive the penalties CSC was required to +pay. According to the UK Department of Health’s Director General for Informatics at the time, the +NHS agreed to these amendments primarily to gain what it believed to be certainty on deployment +dates. In March 2008, the NHS entered into a binding Memorandum of Understanding with CSC +that reset the deadlines. +24. The NHS did not, however, have the authority to amend the contract without +authorization from various levels of the UK government. In addition to the NHS, the UK’s +Department of Health, Treasury, and Cabinet Office all had to approve the amendments. After +obtaining these authorizations, CSC and the NHS entered into an amended contract, which the +parties called “SARPA,” in April 2009. +CSC Fails to Disclose Its Need to Renegotiate the NHS Contract and Paints a Misleadingly +Optimistic View of the Company’s Performance +25. As CSC awaited authorization from the various levels of the UK government to +enter into SARPA, the parties experienced difficulty in performing as required. During this period, +CSC management, including former CEO Laphen, was aware that CSC would not be able to meet +its obligations in SARPA’s deployment plan. +26. Because of how the parties structured the contract, CSC’s inability to comply with +SARPA created a significant risk to the company. According to a former CSC executive, it was +“self-evident” to anyone familiar with the contract that if CSC failed to successfully renegotiate +SARPA there was “a lot of revenue that would be reduced from this contract that would flow +straight to [CSC]’s bottom line….”6 Though CSC’s management knew the company could not + +5 Currency amounts are stated in U.S. dollars throughout this Order. Any necessary conversions from British +pounds to U.S. dollars reflect a dollar-to-pound ratio of 1.6 to 1. + +6 CSC earned two types of revenue under the contract: deployment revenue and service revenue. CSC +earned deployment revenue when it deployed the software products to the NHS. CSC then earned service revenue +by running and maintaining those products until the contract expired. Because the contract ha d a fixed term, product +delays could cause CSC to run out of time in which to complete all of the deployments contemplated in the contract, +triggering a loss in potential deployment revenue. Further, product delays compressed CSC’s run -and-maintain +period, leading to a loss in potential service revenue. Finally, product delays (and the bad press associated with +them) could lead to reduced demand for CSC’s products among NHS constituents, triggering further losses in +potential deployment and service revenue. Such a loss in revenue created a significant risk to CSC’s expected profit +margin on the contract. Absent cost savings sufficient to offset the lost revenue, which were uncertain given that the + + + +8 +meet its commitments under the new contract, and believed the NHS would not be able to meet its +commitments, CSC signed SARPA in April 2009. +27. Given that CSC’s management did not believe the company would be able to +satisfy the requirements of the amended contract, SEC disclosure rules and GAAP required CSC to +disclose in its public filings that it would likely experience material adverse financial consequences +if the UK government declined to amend the contract another time.7 However, the only +substantive disclosures CSC made in its Form 10-K for FY2009, which the company filed on May +29, 2009, and which Laphen and Mancuso signed, were that the NHS contract was profitable and +that CSC expected to recover the amounts it had invested in the contract, which were then over $1 +billion. +28. One week after filing its FY2009 Form 10-K, CSC missed the first of many key +deployment milestones mandated in SARPA. Several days later, the NHS sent CSC an “event of +default” letter. Over the next two and a half years, CSC and the NHS would exchange hundreds of +dispute letters as they tried and repeatedly failed to agree on terms amid continuing deployment +delays and an increasingly politically charged atmosphere. +29. By mid-July 2009, Laphen was personally aware of the dispute with NHS over the +missed milestone. The President of CSC International informed Laphen that CSC had a “serious +disconnect” with the NHS regarding the missed milestone. Laphen subsequently received +numerous updates concerning the unresolved milestone dispute with the NHS. In late July 2009, +account executives told Laphen that deployments were “not happening at the rate anticipated in the +budget,” and that negotiations with NHS were “required in a number of areas,” including with +regard to late penalties, product volumes, and deployment timeframes. +30. During CSC’s earnings call for Q1FY2010 one week later, however, Laphen +painted a misleadingly optimistic picture of the NHS contract. Though none of the issues +discussed above had been resolved, Laphen reported to investors that CSC had “completed the +activities scheduled within the quarter” and was “on pace to achieve [its] next key milestone.” +Laphen knew or should have known these disclosures were misleading because they failed to +inform investors that CSC was not achieving the milestones set forth in the contract; that it had +received numerous “event of default” letters from the NHS; that it was engaged in an ongoing + +substantial majority of CSC’s costs on the contract were to develop and deploy the software, CSC’s expected profits +would decline. +7 These disclosures were mandated by Regulation S-K Items 301, 303(a), and 303(b); FASB Accounting +Standards Codification Topic 275 (Risks and Uncertainties); and AICPA Statement of Position 81-1 (Accounting for +Performance of Construction-Type and Certain Production-Type Contracts) (“SOP 81-1”), Paragraph .84, referencing +SFAS 154 (Accounting for Changes and Error Corrections), Paragraph 22. For all financial statement periods +ending prior to September 15, 2009, SOP 81-1 was the authoritative accounting literature. Subsequently, the applicable +guidance became ASC 605-35 (Construction-Type and Production-Type Contracts). FASB codification of this issue +did not materially change the relevant accounting standards. + + + +9 +dispute with the NHS about which milestones applied; that its deployment projections were falling +far short of expectations; and that CSC required the NHS and various other UK government bodies +to agree to contract amendments for the company to avoid a reduction in its earnings. +CSC’s Use of Improper Accounting Models and +Further Disclosure Violations Relating to the NHS Contract +A. Background of CSC’s Use of Percentage of Completion Accounting +31. From the start of the project in 2003, CSC reported its financial results for the NHS +contract using the percentage of completion (“POC”) method of accounting.8 So long as a +company’s estimates are reasonably dependable, POC accounting allows the company to derive a +profit margin on a contract based on its estimates of total costs and revenues over the life of a long- +term contract. GAAP requires companies using POC accounting to revise their estimates of +expected costs and revenues continually as the work progresses.9 These estimates are prepared in +the form of accounting models. CSC’s practice was to update its accounting models for the NHS +contract in March and September of each year. +32. Under POC accounting, if a company’s accounting model reflects that its profit +margin on a contract will be different than previously forecasted, it must make an “inception-to- +date” adjustment in the current period to reflect the change in the estimated amount of total gross +profit earned to date.10 And if a company’s accounting model reflects that a contract will result in a +loss to the company, GAAP requires the company to record the entire anticipated loss on the +contract in the current period. +33. Further, companies often invest heavily on long-term projects before earning +significant revenue. Under the POC accounting standards, a contractor typically records this +spending as a “work-in-process” (“WIP”) asset on its balance sheet. Then, as milestones are +achieved and the contractor earns revenue, the contractor releases WIP to the income statement in +proportion to the revenue earned during the current period.11 If a contract becomes unprofitable + +8 See generally ASC 605-35. +9 Id. at Paragraph .27. +10 For example, assume a company has previously recorded $10,000,000 in operating income using a 10% +profit margin. If the company’s accounting models reflect the margin is likely to be only 9%, the company must +include a negative $1,000,000 offset in current period operating income to adjust for the impact of the lower margin +on prior periods. +11 For example, assume a contractor has a $10,000,000 WIP balance and is estimating a 10% profit margin on +the contract. If the contractor achieves a revenue milestone valued at $1,000,000, it records revenue of $1,000,000 +and costs of $900,000 in its income statement, resulting in a remaining WIP balance of $9,100,000. + + +10 +(due to cost overruns, inability to achieve revenue milestones, etc.), the WIP asset may be rendered +wholly or partially unrecoverable, triggering a write-down in the value of the asset. +B. CSC’s Fraudulent September 2009 Accounting Model +34. In June 2009, CSC’s UK account team for the NHS contract held a two-day +meeting to discuss the status of the contract. Based on revised deployment estimates, Robert +Sutcliffe, the Finance Director for the NHS account, reported to his colleagues (but not to Laphen +or Mancuso) that CSC would fall over $1 billion short of the original $5.4 billion revenue target for +the contract. He reported further that the account had “no basis” for holding its operating income +and revenue forecasts, and its accounting model was “non-sustainable.” Similarly, one of the +operational leads on the account reported that deployment volumes for that fiscal year were “much +lower than anticipated,” and that there was “real concern about our ability to complete the +contract.” +35. In September 2009, Sutcliffe and his team updated the accounting model for the +NHS contract, using current deployment estimates. This was CSC’s first updated model since +executing SARPA. Whereas pre-SARPA models had forecasted CSC would earn a 16% profit +margin on the NHS contract, the initial September 2009 calculation showed the contract would +generate a significant loss. +36. Sutcliffe then led a fraudulent “gap closing” exercise to drive the profit margin back +to its previous level. He and personnel working at his direction inserted into the accounting model +hundreds of millions of dollars of revenue associated with products CSC had stopped developing +and that the NHS had indicated it no longer intended to purchase. When these steps failed to fully +restore the profit margin to 16%, Sutcliffe closed the remaining gap by assuming in the model that +the NHS would agree to future price increases sufficient to maintain CSC’s profit margin. This +was a clear violation of GAAP, as there was no factual support of any kind for the assumed price +increases. They were simply an artificial means of restoring the profit margin to the target level. +37. As a result of the fraudulent “gap closing” exercise, CSC continued to record a 16% +profit margin on the NHS contract when it reported its financial results for Q2FY2010, thereby +avoiding a material adverse charge to its operating income.12 +C. Laphen’s Statements During CSC’s November 2009 Investors Conference + +12 This fraud also affected CSC’s financial results in subsequent periods. As discussed below, in Q3FY2010, +CSC began to base its accounting model on CSC’s proposed contract amendments, which were designed to maintain +a 16% profit margin. CSC’s independent auditors endorsed the new accounting model on the belief that it did not +result in any change in the existing margin. Had Sutcliffe not engaged in the fraudulent gap closing exercise, neither +CSC nor its auditors could have employed that rationale to maintain the 16% profit margin. + + + +11 +38. In early November 2009, the President of CSC International warned Laphen about +the team’s unsatisfactory progress on an important contract milestone. Laphen also knew at that +point about the ongoing milestone dispute with the NHS and the broader contractual risks. + +39. Two weeks later, however, when CSC held an investor’s conference on November +18, 2009, Laphen again painted a misleadingly optimistic picture of the NHS contract, telling +investors, “there was skepticism around our NHS contract and CSC’s ability to succeed where +other prominent companies had failed. We went on to accomplish the key development milestones +last year, and we are on track again this year.” As with the Q1FY2009 earnings call, Laphen knew +or should have known these disclosures were misleading because they failed to inform investors +that CSC was not achieving the milestones set forth in the contract; that it had received numerous +“event of default” letters from the NHS; that it was engaged in an ongoing dispute with the NHS +about which milestones applied; that its deployment projections were falling far short of +expectations; and that additional negotiations with the NHS were required. + +D. CSC’s Improper Change in Accounting Model for the NHS Contract +40. In November 2009, CSC entered into negotiations with the NHS to potentially +amend SARPA. CSC offered to reduce the total price the NHS would pay by about 10% in +exchange for reducing the scope and volume of the products and services CSC was required to +provide by approximately 30%. This lopsided proposal was driven by Laphen’s instruction that +any offers CSC made to the NHS had to preserve CSC’s 16% profit margin. For this to happen, +any reductions in deployment volume had to be offset by price increases on the remaining +volumes. Put simply, to preserve its profit margin, CSC had to persuade the NHS and the UK +government to agree to pay more for less.13 +41. The NHS rejected CSC’s offer. Though it expressed a willingness to engage in +further discussions over potential contract amendments, the NHS cautioned that CSC “should not +assume that there is any agreement at this stage to any element of scope or volume reduction….” +The parties then entered into negotiations that would continue intermittently for the next two years. +Throughout this period, CSC continued to work on the project and the NHS continued to pay CSC +for work according to negotiated amended deployment dates. However, the NHS repeatedly +advised CSC both orally and in writing that SARPA (which CSC recognized was enforceable) +remained the operative contract, and that CSC should not assume the parties would ever agree on +revised terms. +42. Nonetheless, in December 2009, CSC implemented a significant change to its +accounting model for the NHS contract. It began to base the model on contract amendments CSC +had proposed rather than the existing terms of the contract. In doing so, CSC incorporated in its + +13 CSC’s internal models reflected an assumption that deployment unit prices would roughly double, and +service unit prices would increase as much as fivefold. + + +12 +models significantly higher prices than what the parties had agreed to in SARPA and were +currently using. This resulted in CSC continuing to recognize a 16% profit margin on the contract +despite ongoing deployment delays and lower projected deployments. On multiple occasions +during the relevant period, Laphen and Mancuso received information indicating that CSC’s use of +the new accounting model was allowing the company to achieve materially better financial results +in comparison to the previous, SARPA-based model +43. The accounting standards provide expressly that a contractor may not recognize +profit based on unapproved changes to a contract’s price and scope.14 Laphen knew or should have +known that CSC’s shift to an accounting model based on its offering terms (rather than SARPA) +violated GAAP. As a result of the improper accounting models used on the NHS contract, CSC +materially overstated its financial results during the period Q3FY2010 to Q2FY2012. +44. In violation of various disclosure rules, CSC, Laphen, and Mancuso failed to inform +investors that CSC was basing its accounting models on its proposed contract amendments, rather +than the terms of the enforceable contract, and that without the contract amendments, CSC’s +operating income would fall significantly.15 This risk was heightened by the need for various +levels of the UK government to approve the contract amendments CSC was seeking. Laphen, who +characterized the NHS contract as a “political football,” understood that the political environment +in the UK posed an additional obstacle to securing the contract amendments CSC was seeking. In +May 2010, a conservative party that had been highly critical of the NHS’s IT program was elected. +A month before the election, Laphen wrote to CSC’s Board of Directors that the NHS “is under +tremendous political pressure as the [Conservative] party highlights the program.... We run a risk +that the upcoming election … and a potential change in government could complicate [the +negotiations].” +E. CSC’s Improper Accounting and Disclosures in Q3FY2011 +45. After fifteen months of intermittent negotiations — during which the NHS +consistently refused to agree to terms that would allow CSC to maintain its 16% profit margin — +Laphen finally ended his insistence that all offers to the NHS maintain that level of profitability. + +14 For accounting purposes, CSC treated its proposals as “change orders.” However, the accounting standards +provide that “[i]f change orders are in dispute or are unapproved in regard to both scope and price, they should be +evaluated as claims.” See SOP 81-1 at Paragraph .63 (emphasis added). CSC’s proposals were unapproved as to +both scope and price, and therefore should have been evaluated as “claims.” CSC never evaluated its proposals as +such. Those proposals could not have met the strict requirements of “claim” accounting (see SOP 81-1, at +Paragraphs .65-.67). Further, even if CSC’s proposals had met those requirements, the accounting standards +prohibit a contractor from recording any profit on a claim. See SOP 81-1 at Paragraph .65 (“If the foregoing +requirements [for claim accounting] are met, revenue from a claim should be recorded only to the extent that +contract costs relating to the claim have been incurred [i.e., no profit].”). Indeed, as stated in CSC’s own POC +accounting training materials, it is “never appropriate to recognize [profit] margin on a claim.” +15 These disclosures were mandated by Regulation S-K Items 301, 303(a), and 303(b); ASC 275; and SOP +81-1, Paragraph .84. + + +13 +On February 7 or 8, 2011, Laphen approved a new offer to the NHS which would have resulted in +CSC earning only a 12.7% profit margin. CSC submitted this proposal to the NHS on February 9, +2011. +46. Later that day, CSC filed its Form 10-Q for Q3FY2011. As discussed above, +CSC’s use of the proposed contract amendments as the basis for its accounting models violated +GAAP. Had CSC continued to follow its improper approach of basing its accounting models on +the most recent offer it had made to the NHS, the company would have recorded a $52 million +negative adjustment to operating income in Q3FY2011.16 +47. But CSC did not do so. Rather than preparing a new accounting model at that time +reflecting its most recent offer (that, if accepted, would have resulted in a 12.7% profit), CSC +instead prepared its financial statements for Q3FY2011 using the prior accounting model that had +forecasted CSC would continue to earn a 16% profit. +48. CSC failed to inform investors that it was basing its accounting models on offering +terms rather than the enforceable contract. CSC further failed to inform investors that it was basing +its financial statements on an offer that had not only been rejected by the NHS, but that had been +superseded by a revised offer that would generate a significantly lower profit margin to the +company and would require a large inception-to-date adjustment that would reduce CSC’s +earnings. +49. In addition to its improper accounting and its failure to make required disclosures, +CSC affirmatively misled investors about the contract. CSC stated in its Form 10-Q for +Q3FY2011 that “[t]otal contract value, based on proposals submitted to the NHS, is currently +estimated to be reduced between $800 and $950 million.” In fact, the revised offer CSC had +submitted to the NHS proposed an approximately $1.2 billion reduction in total contract value. +50. CSC also held its Q3FY2011 earnings call on February 9, 2011. During the +question-and-answer portion of the call, an analyst asked Laphen whether “there will be some kind +of a write-down or some kind of cost and hit to the P&L” in connection with the contract +amendments CSC was seeking. In his answer, Laphen stated (among other things), “I can’t tell +you there is no chance for some sort of a P&L hit. We don’t have that at this point in time.” +(emphasis added). In fact, CSC’s new offer reflected the company expected a significant “P&L +hit” at that point in time. +51. On the same day that CSC made its revised proposal to the NHS and filed its Form +10-Q, Laphen signed a management representation letter to CSC’s independent auditors. Among +other things, the representations falsely stated, “[c]ontract estimates have been prepared on the +basis of the most current and best available information and the underlying assumptions used in +those estimates are reflective of our intentions,” and “the Company’s [accounting model] on the + +16 As noted above, GAAP requires companies to reflect the impact of a decrease in the profit margin on a +contract such as this by recording an inception-to-date adjustment. + + +14 +NHS contract used to prepare the third quarter 2011 financial statements represents the best +estimate of the probable contract value, costs at completion, margin and margin rate based upon all +known facts and contractual risks.” +52. Laphen knew or should have known that CSC’s financial statements in Q3FY2011 +were based on the wrong accounting model, and that his disclosures regarding the NHS contract to +investors and to CSC’s independent auditors were false. Laphen knew the offer he authorized on +February 7 or 8, 2011 would result in a lower profit margin for CSC than the company had been +maintaining. Laphen also knew or should have known that CSC’s updated offer to the NHS would +negatively impact the company’s earnings. +F. CSC’s Continued Improper Accounting From Q4FY2011 Through Q2FY2012 +53. One day after CSC made its revised offer on February 9, 2011, the NHS rejected +CSC’s proposal and made a counteroffer that would have resulted in CSC earning a negative profit +margin. The parties then engaged in several additional months of negotiation. +54. On May 2, 2011, CSC issued a press release in which it announced that it expected +to sign a non-binding Memorandum of Understanding (“MOU”) with the NHS “in the next few +weeks pending final NHS and other government reviews and approvals.”17 It was only then that +CSC updated its accounting model to reflect the current status of the negotiations. +55. The NHS could not amend SARPA without the approval of the UK government. +Though NHS personnel indicated at that time that they supported the contract amendments +envisioned in the draft non-binding MOU, they gave CSC no assurance that the required approvals +would be forthcoming. Indeed, by the time CSC filed its FY2011 Form 10-K on June 15, 2011, +there had been significant developments that made the UK government’s required approval of the +proposed amendments unlikely. +56. In May 2010, the Conservative party, which had been highly critical of the NHS’s +IT program, won the UK general election. By May 2011, the UK National Audit Office (“NAO”), +the House of Commons Public Accounts Committee (“PAC”), and the Major Projects Authority +(“MPA”) had all begun reviews of the program. On May 11, 2011, while taking questions in the +House of Commons, UK Prime Minister David Cameron reported, “We are very concerned that +the NHS IT projects that we inherited were of poor value for money, an issue we raised repeatedly +in opposition.” With regard to CSC’s contract, the Prime Minister said, “we are absolutely +determined to achieve better value for money…. [T]here are no plans to sign any new contract +with Computer Sciences Corporation until the [NAO] report has been reviewed, and until the +[PAC] meetings and [MPA] reviews have taken place.” The Prime Minister further stated, “The +Department of Health and Cabinet Office will examine all available options under the current +contract, including the option of terminating some of, or indeed all of, the contract.” + +17 The uncertainty about the contract amendments was underscored by the NHS’s unwillingness to sign even +a non-binding MOU with CSC. This was in contrast to the binding MOU the NHS signed in 2008. + + +15 +57. One week later, the NAO issued a report finding “the [$4.3] billion spent on care +records systems so far does not represent value for money, and we do not find grounds for +confidence that the remaining planned spend of [$6.9] billion will be different.” The report was +critical of the performance of CSC and other IT contractors involved in the project. +58. On May 23, 2011, the PAC held a public hearing concerning (among other things) +the proposed contract amendments. Consistent with the Prime Minister’s comments, NHS +representatives stated that “all options” were under consideration, including termination of CSC’s +contract. +59. Two days later, the Financial Times published an article reporting the findings of a +leaked UK Cabinet Office memorandum. As quoted in the article, the Cabinet Office +memorandum “condemned” the proposed contract amendments as “unattractive,” in that the +proposed savings to the NHS were disproportionately small in comparison to the proposed +reductions in product scope and volume to be delivered by CSC. As further quoted in the article, +when asked to comment on the leaked memorandum, the PAC Chair stated, “It would be +unspeakably unacceptable to think that in return for a one-third reduction in the cost, CSC would +do two-thirds less work. If this is an opening gambit from the company, it should be given short +shrift. There is no way these guys ought to be working for the government.”18 +60. Indeed, when CSC provided the NHS a proposed disclosure it intended to make in +its FY2011 Form 10-K that described the MOU as “substantially agreed,” the NHS refused to +agree to that characterization. The NHS representative advised CSC’s General Counsel, “The +MOU remains unsigned and, at present, unagreed and in draft. As you know, I’m afraid that there +is no guarantee that it will be signed in its current draft format or at all…. I cannot accept/agree if +asked that the draft MOU is substantially agreed.” +61. As a consequence of these developments, CSC and Laphen knew or should have +known that approval of its proposed contract amendments by the UK government was not +probable. Nevertheless, when CSC filed its FY2011 Form 10-K on June 15, 2011, it continued to +base its accounting model on the assumption that the UK government would approve the contract +amendments and failed to write down the value of its contract-related assets as required. +Moreover, notwithstanding the NHS’s refusal to agree that the non-binding MOU was +“substantially agreed,” CSC provided CSC’s independent auditors a June 14, 2011 letter stating +(among other things) that “the parties had reached substantial agreement on the terms of the +MOU.” +62. On August 3, 2011, the PAC released a report with findings critical of CSC’s +performance. The Committee recommended that the UK government consider whether to continue + +18 The Financial Times article was circulated among CSC executives (including Laphen) on the date of its +publication. + + +16 +the IT program. The Committee also advised the government should “give[] serious consideration +to whether CSC has proved itself fit to tender for other Government work.” +63. Eight days later, CSC filed its Form 10-Q for Q1FY2012. In violation of GAAP, +CSC continued to base its accounting model on the proposed MOU and to carry its contract-related +assets at their full value (approximately $1.4 billion). +64. On September 6, 2011, Laphen discussed the status of the MOU proposal with the +account team. The account team provided Laphen with an assessment of NHS’s options and listed +seven possible options: “Do Nothing, Enforce SARPA, Negotiate TARPA, Whole Termination, +Partial Termination, Negotiate Whole Exit, or Negotiate Partial Exit.” They informed him that the +MOU proposal was “probably best for the parties but politically not tenable.” On September 7, +2011, NHS agreed to engage in further negotiations. On September 22, 2011, however, the MPA +issued a report recommending several options, one of which included that the NHS’s IT program +should be “dismembered” and “reconstituted” under new management and organizational +structures. +65. On November 4, 2011, the NHS provided CSC written comments on a draft +earnings call script for Q2FY2012. Those comments included the following: “[CSC] make[s] a +number of revenue and profit estimations based on your view of how the contract will operate if +the draft, without prejudice MOU were to be signed. Whilst this is a matter for CSC, in view of +your obvious historic and on-going stated doubt as to whether the draft, without prejudice MOU +would be signed and our recent discussions on the subject, we question whether financial +projections on that basis are appropriate.” +66. On the morning of November 9, 2011, NHS provided CSC with further written +comments on the proposed statement. Those comments included the following: “[W]e have a +concern that the tone of the proposed Q2 comments gives a misleadingly upbeat impression of a +project that is many years behind both its original schedule and the current contracted +schedule. We are of the opinion that the comments could give the impression that the project is +‘on track’ with its delivery (which is clearly not the case). They could also give the optimistic +impression that the outcome of the discussions we are about to enter will be the acceptance of +CSC’s ‘economic proposals.’ Again, it is for CSC to conclude how it must brief its shareholders +on the possible or likely outcomes of the project and our discussion, but it would be remiss of us +not to draw our concern to your attention, once more. Whilst we adopt our usual stance of not +commenting on CSC’s affairs or disclosure, if asked, we will have to explain our (contrary) view +of the current state of affairs.” +67. Nevertheless, when CSC filed its Form 10-Q for Q2FY2012, the company +continued to base its accounting model on the MOU proposal, and still failed to write-down the +value of its contract-related assets in violation of GAAP. +68. On December 21, 2011, the NHS sent CSC a letter stating, “As you know, +consistent with previous concerns expressed by the PAC and the MPA, we have clearly rejected + + +17 +the MoU on the grounds that it does not represent value for money.” The NHS further informed +CSC that recent proposals under discussion were also unacceptable.19 On December 27, 2011, the +company filed a Form 8-K announcing that neither the MOU proposal nor recent proposed +amendments under discussion with the NHS would be approved. CSC reported that, consequently, +the company “will be required to recognize a material impairment of its net investment in the +contract in the third quarter of fiscal year 2012.” On the day of the announcement, CSC’s common +stock declined by 9%. On February 8, 2012, CSC filed its Form 10-Q for Q3FY2012. For this +filing, CSC finally ceased basing its accounting models on its proposed contract amendments, and +returned to using the enforceable contract as the basis for its models. CSC also wrote down +approximately $1.5 billion in NHS contract assets from its balance sheet. +Additional Disclosure Violations Relating to the NHS Contract +69. In addition to the misconduct described above, Mancuso also made misleading +statements to investors about the degree to which CSC had grown dependent on refundable cash +advances from the NHS to drive its fourth quarter and annual free cash flow results and failed to +make required disclosures about these advances. +A. The Cash Advance Arrangement + +70. At the close of each fiscal year, CSC received cash advances from the NHS based +on an estimate of anticipated charges in the next fiscal year. The sizes of these advances, which +were negotiated in the closing days of each fiscal year, were based on the total charges CSC +expected to bill under the contract in the following year. The NHS had a contractual right to +suspend the advances if CSC committed an event of default. Thus, amid ongoing project delays +and an unresolved contractual dispute, the arrangement became increasingly uncertain. +71. The cash advance arrangement between the NHS and CSC operated like a secured +loan. CSC effectively paid the NHS 5% interest for the advances.20 CSC secured the advances by +providing the NHS bank-issued standby letters of credit. CSC repaid the advances at the end of +each year to the extent they had not been fully offset by CSC’s actual charges (“the true-up”). +Unlike traditional loans, though, which companies record as cash flows from financing activities, +GAAP allowed CSC to record these advances as cash flows from operating activities. This + +19 During the period December 8 to 19, 2011, CSC made further proposals to the NHS that, had they been +accepted, would have limited CSC’s write-down to approximately $700 million. + +20 At the NHS’s option, CSC could either provide the NHS a service credit valued at 5% of the advance +payment or an equivalent cash payment at the end of the contract. The NHS told CSC it did not intend to use any of +the service credits, favoring the cash payment. + + + +18 +provided a significant boost to the company’s fourth quarter and annual free cash flow results — a +metric that was important to investors.21 +72. The cash advance arrangement resulted in an economic loss to CSC. In addition to +paying the 5% charge to the NHS, CSC had to pay an additional 1 to 1.25% charge to banks for the +standby letters of credit. In October 2010, CSC’s Treasurer recommended to Mancuso and CSC’s +Vice President International Finance that CSC “should [not] push the cash advances higher but +rather attempt to lower them” because the arrangement “results in an economic loss to CSC.” +CSC’s Vice-President International Finance replied, “You’re right – it is an expensive drug we’re +on!” Subsequently, however, Mancuso instructed that CSC should continue seeking the cash +advances. +73. The cash advances grew increasingly large over time, peaking in CSC’s fiscal year +2010, when the Company received a $580 million advance from NHS in the closing days of the +fiscal year. The portions of the cash advances that CSC had to return to the NHS also grew larger +over time as CSC continued to fall short of its deployment goals. CSC repaid approximately 22%, +72%, and 93% of its cash advances for fiscal years 2010, 2011, and 2012, respectively. In other +words, CSC paid over 6% on hundreds of millions of dollars that it later returned to the NHS at a +time when the company could have borrowed from traditional lenders for considerably less. +74. Although CSC lost money from the cash advance arrangement, it was a boon to +senior executive compensation in fiscal year 2010. That fiscal year, CSC replaced another metric +with free cash flow as one of four key performance measures in its Annual Management Incentive +Plan. CSC’s free cash flow results exceeded the fiscal year 2010 plan target, resulting in +significant payouts to Laphen, Mancuso, and others.22 Absent the $580 million NHS cash advance, +CSC’s free cash flow results would have fallen hundreds of millions of dollars short of the bonus +plan target, resulting in no payout to the executives. +75. SEC disclosure rules required CSC to disclose the impacts of this unusual cash +advance arrangement on the company’s financial results.23 However, neither Laphen nor Mancuso +took any steps to ensure disclosure, and investors were kept in the dark about how CSC met its +cash flow targets. +76. Indeed, when the highest rated sell-side securities analyst covering CSC repeatedly +asked CSC executives about how the NHS contract was impacting the company’s results, and +expressed skepticism about the reliability of CSC’s reported free cash flow, Laphen and Mancuso + +21 Financing cash flows were not a component of CSC’s free cash flow; operating cash flows were. + +22 Laphen received a $630,000 bonus award for exceeding the FY2010 free cash flow target. Mancuso +received a $175,500 award. +23 Regulation S-K Item 303(a) mandated these disclosures. + + +19 +directed the company’s head of Investor Relations not to allow that analyst to ask any questions +during CSC’s earnings call question-and-answer period. +77. Moreover, on two occasions, Mancuso made public statements about the NHS +advances that he knew or should have known were false and misleading. +B. Mancuso’s Statements During CSC’s Q4FY2009 Earnings Call + +78. On the last day of CSC’s FY2009, CSC negotiated a cash advance from the NHS of +approximately $135 million. Mancuso knew about this advance: he wrote a “thank you” letter to a +regional executive who helped to secure the advance, specifically noting his significant +contribution to CSC’s year-end “Cash Project.” This advance comprised over 15% of the +company’s fourth quarter free cash flow. +79. However, when a financial analyst asked Mancuso during CSC’s fourth quarter and +fiscal year-end 2009 earnings call in May 2009 whether CSC had received “any large +prepayments” from NHS or other clients during the fourth quarter of FY2009, Mancuso replied +that the company had not. +C. Mancuso’s Statements During CSC’s Q4 FY2010 Earnings Call + +80. At the end of FY2010, CSC worked hard to negotiate a large cash advance from the +NHS. Because CSC had missed a key deployment deadline in March 2010, the NHS’s willingness +to give CSC a large cash advance was in doubt. Public reports of the missed deadline led to +speculation that CSC would fall short of its cash flow guidance. +81. Mancuso understood this was important to investors. On March 27, 2010, Mancuso +wrote to Laphen that CSC was “getting an endless string of questions from buyside and sellside +analysts reacting to the british press clips [reporting on the missed NHS milestone].” Mancuso told +Laphen he was “having a continuing dialogue with [CSC’s Vice-President International Finance] +keeping me abreast by the hour” regarding negotiations with NHS over the cash advance. +Mancuso advised Laphen that the “cash is key to us being able to spin this story.” +82. On the morning of April 1, 2010, Mancuso informed Laphen that CSC had received +a $580 million cash advance from the NHS. Hours later, CSC reaffirmed its fiscal year-end cash +flow guidance. That afternoon, Mancuso sent his subordinates an email in which he referred to +CSC having “dodged a bullet.” Shortly afterwards, CSC’s Vice President International Finance +told the NHS account team that CSC would not have been able to reaffirm its guidance “without +the NHS cash and [other] work on the Q4 items….” He closed by noting, “Mike Mancuso +specifically asked me to pass on this thanks to the team.” +83. On May 20, 2010, during CSC’s fourth quarter earnings call, Mancuso boasted to +investors about the company’s cash flow results, claiming “Cash is the big story.” Mancuso +specifically highlighted CSC’s fourth quarter free cash flow of $951 million. During the earnings + + +20 +call question-and-answer period, an analyst asked Mancuso to “help us understand how you hit that +free cash flow number” assuming CSC “didn’t hit” its NHS milestone and “didn’t get a cash flow +payment” from NHS. Mancuso did not disclose to the analyst that approximately 62% of CSC’s +fourth quarter free cash flow was attributable to the $580 million cash advance received from NHS +at the close of the fiscal year, for which the company was paying over 6%, and which the company +would need to repay to the NHS if it were not able to begin meeting its deployment goals. Instead, +Mancuso replied that CSC had generated its free cash flow results “the old-fashioned hard way, +frankly,” attributing it to earnings, improvements in working capital, and “receivables.” He further +described the result as “a glowing achievement” and “not unnatural.” +84. In addition to the accounting and disclosure fraud involving the NHS contract, two +of CSC’s international businesses engaged in accounting frauds as well. CSC’s Australia +subsidiary and its Nordic region violated fundamental GAAP principles in a variety of ways to +manipulate their financial results. + +CSC’s Accounting Fraud in Australia + +85. CSC Australia’s two most senior finance executives, the subsidiary’s CFO Wayne +Banks and Controller Edward Parker, manipulated the company’s Q1FY2009 earnings through +excess accruals they maintained in “cookie jar” reserves and by failing to record expenses as +required. This fraud materially overstated CSC’s consolidated pretax income by over 5%. +Banks’s fraud resulted in at least a 4.3% overstatement in Q1FY2009. Parker’s fraud encompassed +all of Banks’s fraud and went further, resulting in an overstatement of CSC’s consolidated pretax +income by 5.4% for that period. But for their misconduct, CSC would have missed analysts’ +earnings targets in Q1FY2009. + +A. CSC Australia’s “Cookie Jar” Reserves + +86. To offset future shortfalls in budgeted operating performance, Banks and Parker +maintained excess, unsupportable balances in reserve accounts. Banks and Parker built up these +reserve balances primarily during CSC Australia’s successful FY 2008. For example, at the close +of FY2008, Banks and Parker intentionally over-accrued for “gift cards” CSC Australia was giving +its employees in recognition of their efforts in meeting annual budget targets. Parker informed +Banks, “while it’s likely we’ll pay [AUD] $150 per employee, we have booked an accrual +equivalent to [AUD] $350 per employee, largely as a mechanism to carry forward a provision into +FY09.” This resulted in an excess reserve balance of approximately AUD $1 million, which +Banks and Parker subsequently released to boost CSC Australia’s Q1FY2009 earnings when it +appeared the subsidiary was falling short of targets.24 + +24 GAAP prohibits companies from maintaining excess accruals or “general reserves.” Under the applicable +accounting standards, a loss contingency should be recorded only if the loss is probable and reasonably estimable. +See ASC 450-20-25-2. + + + +21 + +87. As with the gift cards account, Banks and Parker fraudulently built up +approximately AUD $2.25 million in excess reserve balances in FY2008 in accounts related to +employee bonuses and a restructuring. In violation of GAAP, they accrued AUD $590,000 for +bonuses when CSC Australia had no obligation or intention to pay the bonuses and AUD $1.65 +million for restructuring costs despite not having a formal management restructuring plan and not +having notified the affected employees.25 Banks and Parker released most of the bonus and +restructuring accruals in Q1FY2009, which boosted the subsidiary’s earnings. + +88. Banks and Parker also created excess accruals in CSC Australia’s labor accounts in +each quarter in FY2008. CSC Australia estimated labor costs each month and accrued for those +expected costs. Though they knew CSC Australia’s actual labor costs were significantly lower +than the subsidiary had estimated, Banks and Parker maintained those excess amounts in the labor +account for future use. Banks and Parker created additional excess accruals in CSC Australia’s +labor accounts by reserving for fictitious training costs. These improper labor accruals totaled +AUD $5.4 million by year-end FY2008. Banks and Parker released AUD $3.5 million of these +accruals — and Parker released the remaining AUD $1.9 million in Q1FY2009 to improve CSC +Australia’s reported results. + +B. CSC Australia’s Failure to Record Expenses as Required + +89. Banks and Parker further misstated CSC’s Q1FY2009 earnings by failing to record +costs as required. GAAP permitted CSC Australia to capitalize “contract acquisition costs” – i.e. +expenses the company incurred in attempting to win business.26 However, if CSC Australia were +unable to win this business, GAAP required the company to expense these costs in that period.27 In +Q1FY2009, Banks and Parker knew CSC Australia had failed to win a contract with a potential +customer on a project that had AUD $1.5 million in contract acquisition costs. Nevertheless, CSC +Australia did not expense the AUD $1.5 million as GAAP required. +CSC’s Accounting Fraud in the Nordic Region +90. During FY2010, finance personnel in CSC’s Nordics region fraudulently overstated +the region’s operating results. Former Nordics Finance Director Paul Wakefield, and Nordics +Finance Managers Chris Edwards and Claus Zilmer improperly accounted for client disputes; +overstated assets; and failed to record expenses as required. This fraud overstated CSC’s + +25 GAAP requires management to commit to a plan of termination in order to record a termination reserve. +See ASC 420-10-25-4. + +26 See ASC 605-20-25-4 and ASC 310-20-35-2; see also SAB Topic 13.A.3(f). + +27 Id. + + + +22 +consolidated operating income by 5% in Q1FY2010, 3% in Q2FY2010, 4% in Q3FY2010, and 7% +in Q4FY2010. + +A. CSC’s Improper Accounting for Client Disputes + +91. By improperly accounting for a settlement with a Danish client, CSC overstated its +operating income by $9 million in Q4FY2010. The client had agreed to forgo legal action against +CSC if the company gave it $165,000 in cash and $9 million in service credits. In February 2010, +the Director of CSC Nordics’ Denmark Public Sector and the client signed three agreements: a +settlement agreement reflecting the cash payment and two side agreements reflecting the much +larger service credits. + +92. GAAP required CSC to record the entire $9,165,000 as an expense in Q4FY2010.28 +However, CSC did not do so because the Director concealed the connection between the three +agreements. The Director told local in-house counsel that the settlement agreement and two side +agreements were unrelated. When an early version of the settlement agreement referenced the +price credits, he directed the attorney to remove that reference. As a consequence of this +misrepresentation, CSC expensed only the $165,000 portion of the settlement, thereby overstating +its operating income by $9 million. + +93. CSC also overstated its unbilled receivables in Q3FY2010 and Q4FY2010 in +connection with another client dispute. In June 2009, a client terminated CSC Nordics’ work on a +project that CSC had forecast would generate $900,000 in revenue. CSC Nordics asserted that the +client was liable for the $900,000. Though the client had not agreed to pay this amount, Zilmer +recorded $900,000 as an unbilled receivable relating to this claim in November 2009. This +violated GAAP requirements for gain contingencies and improperly increased CSC’s operating +income by $900,000 in Q3FY2010.29 + +94. In Q4FY2010, CSC Nordics agreed to accept only $90,000 from the client to +resolve this claim. Zilmer, who was responsible for the accounting for this transaction, received a +copy of the settlement agreement during that period. However, Zilmer waited to write-off the +$810,000 in uncollectable revenue until after CSC had closed its books for FY2010, thereby +overstating the company’s results. + +B. CSC Nordics Manipulates its Earnings by Overstating the Value of an Asset + + +28 GAAP provides that a loss contingency is recorded if the loss is probable and reasonably estimable. Both +of these conditions were clearly met with the signed side agreements. See ASC 450-20-25-2. + +29 GAAP generally prohibits recording gain contingencies in financial statements. See ASC 450-30-25-1 + + + +23 +95. In Q3FY2010, CSC overstated its income by over $4 million by failing to write- +down the value of an asset as required by GAAP. In October 2009, CSC Nordics contracted with a +vendor to exchange one of the company’s mainframe computers. At that time, CSC Nordics +valued the old mainframe at its net book value (cost minus accumulated depreciation) of $5.2 +million though its fair market value was only a fraction of that amount. When CSC Nordics +disposed of this mainframe in the exchange transaction, GAAP required the company to record a +$4.5 million write-down.30 + +96. To avoid this result, CSC Nordics and the vendor entered into a sham arrangement +that instead resulted in a gain from the transaction. Rather than issue an invoice to CSC Nordics +for the true value of the new mainframe, the vendor significantly over-charged CSC Nordics, then +gave the company a credit note for the difference. CSC Nordics personnel then used the credit +note (which was for $5.6 million) to offset the $5.2 million write-down of the old mainframe. This +resulted in the company improperly recording a $400,000 gain from the deal, rather than a $4.5 +million loss as required by GAAP. + +C. The Improper Capitalization of Expenses + +97. Throughout FY2010, CSC Nordics improperly overstated its income by failing to +record expenses associated with certain labor costs. These costs involved compensation the +company paid to employees who were not working on any company projects (“bench labor”). +Consistent with GAAP, CSC Nordics originally expensed the compensation it paid to these +employees. To improve its operating results, however, CSC Nordics later reversed these expenses. +With Wakefield’s approval, Zilmer improperly capitalized bench labor costs totaling $8.2 million,31 +significantly reducing CSC Nordics’ FY2010 expenses and artificially improving CSC’s operating +income. + +98. In addition, Wakefield, Zilmer, and Edwards improperly capitalized various other +expenses using “prepaid” asset accounts.32 For example, Wakefield manipulated CSC Nordics’ +results in Q3FY2010 by directing that $1.4 million in office moving and capitalized server costs, +which GAAP required the company to expense, be moved to a prepaid asset account to be +amortized over time.33 In Q4FY2010, Zilmer improperly overstated CSC Nordics’ income simply + +30 GAAP provides that the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is +the fair value of the asset surrendered to obtain it. See ASC 845-10-30-1. + +31 In violation of GAAP, Zilmer did this by improperly recording bench labor costs as “transition and +transformation costs.” Under CSC policy, legitimate transition and transformation costs were capitalizable. + +32 By the end of FY2010, CSC Nordics had over $30 million in prepaid assets that were unsupported. + +33 GAAP prohibits recording current period expenses as prepaid expenses. See ASC 340-10-5-4, “Other +Assets and Deferred Costs” (defining prepaid expenses as a category of assets that are paid in advance of their use or +consumption and providing that prepaid expenses should be deferred and expensed over time in the period in which +they are utilized). + + + +24 +by reversing a journal entry that had properly expensed $1.4 million in contract costs, and re- +recording these costs as prepaid assets on the company’s balance sheet. Edwards also improperly +recorded current period costs in prepaid accounts, and mislabeled journal entries to make it appear +as though those costs were prepaid assets that CSC could amortize over multiple periods.34 + +Laphen’s and Mancuso’s Bonuses and Incentive-Based Compensation + +99. The misconduct described above resulted in material misstatements to CSC’s +financial statements in FY2010, FY2011, and FY2012. CSC was required to restate its financial +statements in those periods. During the 12-month periods that followed the filing of these periodic +reports, Laphen and Mancuso received bonuses and incentive-based compensation. Neither +Laphen nor Mancuso has reimbursed those amounts to CSC. + +VIOLATIONS +100. Securities Act Section 17(a)(1), Exchange Act Section 10(b) and Rule 10b-5 +thereunder prohibit fraudulent conduct in the offer or sale of securities and in connection with the +purchase or sale of securities. + +101. Securities Act Section 17(a)(2) prohibits any person from obtaining money or +property in the offer or sale of securities by means of any untrue statement of a material fact or any +omission to state a material fact necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading. + +102. Securities Act Section 17(a)(3) prohibits any person from engaging in any +transaction, practice, or course of business which operates or would operate as a fraud or deceit +upon the purchaser in the offer or sale of securities. + +103. Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder require that +every issuer of a security registered pursuant to Exchange Act Section 12 file with the +Commission, among other things, annual and quarterly reports as the Commission may require, +and, pursuant to Rule 13a-14, mandate, among other things, that an issuer’s principal executive +and principal financial officers certify each periodic report. + +104. Rule 12b-20 under the Exchange Act requires that, in addition to the information +expressly required to be included in a statement or report filed with the Commission, there shall be +added such further material information, if any, as may be necessary to make the required +statements, in light of the circumstances under which they are made not misleading. + + + +34 Id. + + + +25 +105. Exchange Act Section 13(b)(2)(A) 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. + +106. Exchange Act Section 13(b)(2)(B) requires all reporting companies to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with GAAP. + +107. Exchange Act Section 13(b)(5) prohibits any person from knowingly circumventing +or knowingly failing to implement a system of internal accounting controls or knowingly +falsifying any book, record, or account described in Section 13(b)(2). + +108. Rule 13b2-1 under the Exchange Act prohibits any person from, directly or +indirectly, falsifying or causing to be falsified, any book, record, or account subject to Exchange +Act Section 13(b)(2)(A). + +109. Section 304 of the Sarbanes-Oxley Act of 2002 requires the chief executive officer +and chief financial officer of an issuer that is required to prepare an accounting restatement due to +its material noncompliance, as a result of misconduct, with any financial reporting requirement +under the securities laws to reimburse the issuer for any bonus or other incentive-based or equity- +based compensation the chief executive officer or chief financial officer received during the 12- +month period following the first public issuance or filing of the financial document embodying +such financial reporting requirement, and any profits realized from the sale of the issuer’s securities +during that 12-month period. + +110. As a result of the conduct described above, CSC violated Securities Act Section +17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 10b-5, 12b- +20, 13a-1, and 13a-13. + +111. As a result of the conduct described above, Laphen willfully35 violated Securities +Act Sections 17(a)(2) and (a)(3), Exchange Act Rules 13a-14 and 13b2-1, and Sarbanes-Oxley Act +Section 304, and caused CSC’s violations of Exchange Act Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13 thereunder. + +112. As a result of the conduct described above, Mancuso violated Securities Act +Sections 17(a)(2) and (a)(3) and Exchange Act Rule 13a-14, and Sarbanes-Oxley Act Section 304, + +35 This use of the word “willfully” does not reflect a finding that Laphen acted with the intention to violate the +law or knowledge that he was doing so. As used in the governing provisions of law, “willfully” means only that the +actor “intentionally committed the act which constitutes the violation.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); +see also Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000). “There is no requirement that the actor also be +aware that he is violating one of the Rules or Acts . . . .” Tager, 344 F.2d at 8. + + +26 +and caused CSC’s violations of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, and 13a-13 +thereunder. + +113. As a result of the conduct described above, Banks willfully violated Securities Act +Section 17(a), Exchange Act Sections 10(b) and 13(b)(5), and Rules 10b-5(a) and (c) and 13b2-1 +thereunder, and willfully aided and abetted and caused CSC’s violations of Securities Act Section +17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 10b-5, 13a-1, +and 13a-13 thereunder. + +114. As a result of the conduct described above, Zilmer violated Exchange Act Rule +13b2-1 and caused CSC’s violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) +and Rules 13a-1 and 13a-13 thereunder. + +115. As a result of the conduct described above, Wakefield willfully violated Securities +Act Section 17(a), Exchange Act Sections 10(b) and 13(b)(5), and Rules 10b-5(a) and (c) and +13b2-1 thereunder, and willfully aided and abetted and caused CSC’s violations of Securities Act +Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 10b-5, +13a-1, and 13a-13 thereunder. + +CSC’S REMEDIAL EFFORTS +In determining to accept CSC’s Offer, the Commission considered remedial acts +undertaken by CSC and cooperation afforded the Commission staff in connection with the +misconduct in the Nordic region and Australia. +IV. + +Respondent CSC has undertaken to: + +A. Retain, at CSC’s expense within 30 days of issuance of this Order, qualified +independent ethics and compliance consultant (the “Consultant”) with extensive experience in +developing, implementing and overseeing organizational compliance and ethics programs, not +unacceptable to the staff, to conduct an ethics and compliance program assessment focused on +the components of the program delineated in (1)-(3) below. The Consultant shall also have +expertise in, or retain someone with expertise in, internal accounting controls and public +company financial reporting as well as percentage of completion accounting. Taking into +account the Company’s remedial actions to date, CSC shall cause the Consultant to analyze +whether the components of CSC’s ethics and compliance program as they relate to the areas +described in (1)-(3) below have been implemented successfully and are having the desired +effects. The Consultant will determine whether the culture is supportive of ethical and compliant +conduct, including strong, explicit, and visible support and commitment by the Board and senior +management. In discharging this undertaking, the Consultant shall: + + +27 +1. evaluate and assess the effectiveness of the internal accounting controls +and financial reporting policies and procedures, including but not limited to: +a. whether CSC’s internal accounting controls are sufficient to +provide reasonable assurances that the company is maintaining fair and accurate books, records +and accounts, with particular emphasis on whether they are designed to address the integrity of +its revenue accounting and ensure consistent accuracy and integrity given the global nature of +CSC’s business; +b. whether CSC has specific accounting and financial reporting +controls and procedures sufficient to ensure that all accounting models comply with applicable +accounting rules and policies, and updated revenue accounting models are prepared as required. +2. evaluate and assess whether CSC has disclosure controls and procedures +designed to ensure that all material information necessary to understand CSC’s financial +condition and operating results, including material operational risks, uncertainties, and trends, +are appropriately disclosed on a timely basis. The review shall include, but not be limited to, +a. whether the work of CSC’s delivery assurance group receives +appropriate visibility and consideration for disclosure purposes; +b. whether CSC’s disclosure committee is sufficiently independent to +ensure broad and robust consideration of all potentially material operational risks and +uncertainties; and +c. whether CSC’s corporate culture has any impact (positive or +negative) on the company’s ability to comply fully with its disclosure obligations. +3. evaluate, for purposes of analyzing the areas addressed above in (1) and +(2), whether there are proper resources, oversight and independence of the compliance and ethics +function, including seniority of corporate executives responsible for implementation and +oversight, reporting lines, autonomy and independence, compensation and rewards, consistent +discipline, resources, and access to information and personnel. The review shall include +sufficiency of training and guidance, including regarding anti-retaliation and whistleblowing. +B. Provide the Consultant with complete access and resources to review key +documents (e.g., business principles, Code of Conduct, policies and procedures, risk +assessments, performance evaluation forms, relevant internal training materials and internal +communications). In reviewing the creation, administration and implementation of the +compliance and ethics program as it relates to the areas addressed in ¶ A, the Consultant shall +conduct an assessment survey and interview relevant personnel. The assessment need not be a +comprehensive review of all business lines, activities and markets but can use a risk-based +approach. The Consultant shall consider, however, the breakdown of internal controls in +multiple markets and continents during the relevant time period of this action; + + +28 +C. Provide a report to the Commission staff and CSC’s General Counsel and Chief +Ethics and Compliance Officer, as described below, regarding the Consultant’s findings and +recommendations; +D. Provide a copy of the engagement letter detailing the Consultant’s responsibilities +to Stephen L. Cohen, Associate Director, Division of Enforcement, U.S. Securities and Exchange +Commission, 100 F Street, N.E., Washington, D.C. 20549; +E. Cooperate fully with the Consultant, including providing the Consultant with +access to its files, books, records and personnel as reasonably requested for the above-described +review except to the extent such files, books, or records are protected from disclosure by any +applicable protection or privilege such as the attorney-client privilege or the attorney work +product doctrine. To the extent that the Consultant believes that documents are being withheld +unreasonably, CSC shall work cooperatively with the Consultant to resolve the matter, and if +they are unable to reach agreement, the Consultant shall promptly notify the Commission staff. +To ensure the independence of the Consultant, CSC shall not have the authority to terminate the +Consultant without prior written approval of the Commission’s staff and shall compensate the +Consultant and persons engaged to assist the Consultant for services rendered pursuant to this +Order at their reasonable and customary rates; +F. Require the Consultant to report to the Commission staff on his/her activities as +the staff shall request; +G. Permit the Consultant to engage such assistance, clerical, legal or expert, as +necessary and at reasonable cost, to carry out his/her activities, and the cost, if any, of such +assistance shall be borne exclusively by CSC; +H. Require, within 120 days of the issuance of this Order unless otherwise extended +by the Commission staff for good cause, the Consultant to complete the review and report to the +Commission staff and CSC’s General Counsel and Chief Ethics and Compliance Officer +concerning: +1. the scope and methodologies used by the Consultant in order to complete +the review; +2. CSC’s compliance with the review; +3. the adequacy of CSC’s existing policies, practices and procedures +regarding the matters assessed; and +4. the Consultant’s recommendations, if necessary, regarding modification or +supplementation of CSC’s policies, practices and procedures related to the matters assessed (the +“Recommendations”). + + +29 +I. Adopt and implement, within 120 days of CSC’s receipt of the +Recommendations, all of the Recommendations; provided, however, that as to any +Recommendation that CSC considers to be, in whole or in part, unduly burdensome or +impractical, CSC may submit in writing to the Consultant and the Commission staff (at the +address set forth above), within 60 days of receiving the Recommendations, an alternative +policy, practice or procedure designed to achieve the same objective or purpose. CSC and the +Consultant shall then attempt in good faith to reach an agreement relating to each +Recommendation that CSC considers to be unduly burdensome or impractical and the Consultant +shall reasonably evaluate any alternative policy, practice or procedure proposed by CSC. Such +discussion and evaluation shall conclude within 90 days after CSC’s receipt of the +Recommendations, whether or not CSC and the Consultant have reached an agreement. Within +14 days after the conclusion of the discussion and evaluation by CSC and the Consultant, CSC +shall require that the Consultant inform CSC and the staff (at the address set forth above) of +his/her final determination concerning any Recommendation that CSC considers to be unduly +burdensome or impractical. CSC shall abide by the determinations of the Consultant and, within +60 days after final agreement between CSC and the Consultant or final determination by the +Consultant, whichever occurs first, CSC shall adopt and implement all of the Recommendations +that the Consultant deems appropriate; +J. Within 14 days of CSC’s adoption of all of the Recommendations that the +Consultant deems appropriate, CSC’s General Counsel and Chief Ethics and Compliance Officer +shall certify in writing to the staff (at the address set forth above) that CSC has adopted and +implemented all of the Consultant’s Recommendations and that CSC has established policies, +practices and procedures that are consistent with the findings of this Order; +K. Require the Consultant to enter into an agreement that provides that, for the +period of engagement and for a period of two years from completion of the engagement, the +Consultant shall not enter into any employment, consultant, attorney-client, auditing or other +professional relationship with CSC or any of their present or former affiliates, directors, officers, +employees or agents acting in their capacity as such. The agreement will also provide that the +Consultant will require that any firm with which he/she is affiliated or of which he/she is a +member, and any person engaged to assist the Consultant in the performance of his/her duties +under this Order shall not, without the prior written consent of the Commission staff, enter into +any employment, consultant, attorney-client, auditing or other professional relationship with +CSC, or any of their present or former affiliates, directors, officers, employees or agents acting in +their capacity as such, for the period of the engagement and for a period of two years after the +engagement; +L. Certify in writing to the Commission staff (at the address set forth above), in the +second year following the issuance of this Order, that CSC has established and continues to +maintain policies, practices and procedures consistent with the findings of this Order; + + +30 +CSC may apply to the Commission staff for an extension of the deadlines described above before +their expiration, and upon a showing of good cause by CSC, the Commission staff may, in its +sole discretion, grant such extensions for whatever time period it deems appropriate; + +V. + + In connection with this action and any related judicial or administrative proceeding or +investigation commenced by the Commission or to which the Commission is a party, +Respondents Laphen, Mancuso, and Wakefield (i) agree to appear and be interviewed by +Commission staff at such times and places as the staff requests upon reasonable notice; (ii) will +accept service by mail or facsimile transmission of notices or subpoenas issued by the +Commission for documents or testimony at depositions, hearings, or trials, or in connection with +any related investigation by Commission staff; (iii) appoint Respondents’ undersigned attorneys +as agents to receive service of such notices and subpoenas; (iv) with respect to such notices and +subpoenas, waive the territorial limits on service contained in Rule 45 of the Federal Rules of +Civil Procedure and any applicable local rules, provided that the party requesting the interview or +testimony reimburses Respondents’ travel, lodging, and subsistence expenses at the then-prevailing +U.S. Government per diem rates; and (v) consent to personal jurisdiction over Respondents in any +United States District Court for purposes of enforcing any such subpoena. + + In determining whether to accept Laphen’s, Mancuso’s, and Wakefield’s Offers, the +Commission has considered these undertakings. + +VI. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, pursuant to Section 8A of the Securities Act, Sections 4C and 21C of the +Exchange Act, and Rule 102(e) of the Commission’s Rules of Practice, it is hereby ORDERED, +effective immediately, that: + +A. CSC cease and desist from committing or causing any violations and any future +violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), and +13(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder. +B. Laphen cease and desist from committing or causing any violations and any future +violations of Securities Act Sections 17(a)(2) and (a)(3), Exchange Act Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B), Rules 12b-20, 13a-1, 13a-13, 13a-14, and 13b2-1 thereunder, and +Sarbanes-Oxley Act Section 304. +C. Laphen is denied the privilege of appearing or practicing before the Commission as +an accountant. + + +31 +D. After three years from the date of this Order, Laphen 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 Laphen’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) Laphen, 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) Laphen, 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 respondent’s or the firm’s quality control system that would indicate that +the respondent will not receive appropriate supervision; +(c) Laphen 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) Laphen 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 Laphen 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 Laphen’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. +F. Mancuso cease and desist from committing or causing any violations and any future +violations of Securities Act Sections 17(a)(2) and (a)(3), Exchange Act Section 13(a) and Rules +12b-20, 13a-1, 13a-13, and 13a-14 thereunder, and Sarbanes-Oxley Act Section 304. + + +32 +G. Zilmer cease and desist from committing or causing any violations and any future +violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 13a-1, 13a-13, +and 13b2-1 thereunder. +H. Banks cease and desist from committing or causing any violations and any future +violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), +13(b)(2)(B), and 13(b)(5), and Rules 10b-5, 13a-1, 13a-13, and 13b2-1 thereunder. +I. Banks be, and hereby is, prohibited for four years from the date of this Order from +acting as an officer or director of any issuer that has a class of securities registered pursuant to +Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the +Exchange Act. +J. Banks is denied the privilege of appearing or practicing before the Commission as +an accountant. +K. After four years from the date of this Order, Banks 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 Banks’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) Banks, 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) Banks, 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 respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; +(c) Banks 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 + + + +33 +(d) Banks 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. + +L. The Commission will consider an application by Banks to resume appearing or +practicing before the Commission provided that his practicing certificate is current, and he has +resolved all other disciplinary issues with Chartered Accountants Australia and New Zealand. +However, if 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 Banks’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. +M. Wakefield cease and desist from committing or causing any violations and any +future violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), +13(b)(2)(B), and 13(b)(5), and Rules 10b-5, 13a-1, 13a-13, and 13b2-1 thereunder. +N. Wakefield be, and hereby is, prohibited for three years from the date of this Order +from acting as an officer or director of any issuer that has a class of securities registered pursuant to +Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the +Exchange Act. +O. Wakefield is denied the privilege of appearing or practicing before the Commission +as an accountant. +P. After three years from the date of this Order, Wakefield 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 Wakefield’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) Wakefield, 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; + + + +34 +(b) Wakefield, 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 respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; +(c) Wakefield 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) Wakefield 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. + +Q. The Commission will consider an application by Wakefield to resume appearing +or practicing before the Commission provided that his practicing certificate is current, and he has +resolved all other disciplinary issues with the Institute of Chartered Accountants in England and +Wales. However, if 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 Wakefield’s character, integrity, professional conduct, or qualifications to appear or practice +before the Commission. +R. Within 7 days of the entry of this Order, CSC shall pay a civil money penalty of +$190,000,000; Laphen shall pay a civil money penalty of $750,000; Mancuso shall pay a civil +money penalty of $175,000; and Banks shall pay disgorgement of $10,990, which represents +profits gained as a result of the conduct described herein, and prejudgment interest of $2,400, to the +Securities and Exchange Commission. If timely payment is not made, additional interest shall +accrue pursuant to SEC Rule of Practice 600 or 31 U.S.C. § 3717. +S. Payments must be made in one of the following ways: +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center + + +35 +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +T. Payments by check or money order must be accompanied by a cover letter +identifying the Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Stephen L. Cohen, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. +U. Within 7 days of entry of this Order, Laphen shall pay CSC $3,771,000 and +Mancuso shall pay CSC $369,100 pursuant to Sarbanes-Oxley Act Section 304. Laphen and +Mancuso shall deliver proof of satisfying payment to Stephen L. Cohen, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. +V. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the civil money penalties referenced in paragraph R above. Regardless of +whether any such Fair Fund distribution is made, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, each +Respondent agrees that in any Related Investor Action, Respondent shall not argue that it/he is +entitled to, nor shall it/he benefit by, offset or reduction of any award of compensatory damages by +the amount of any part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). +If the court in any Related Investor Action grants such a Penalty Offset, each Respondent agrees +that it/he shall, within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission’s counsel in this action and pay the amount of the Penalty Offset to the Securities and +Exchange Commission. Such a payment shall not be deemed an additional civil penalty and shall +not be deemed to change the amount of the civil penalty imposed in this proceeding. For purposes +of this paragraph, a “Related Investor Action” means a private damages action brought against any +Respondent by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. + + + +36 +W. Respondent CSC shall comply with the undertakings enumerated above in Section +IV. + + +By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3663.pdf b/raw/aaer/2015/AAER-3663.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8f036b323a06083cf8ccb47acc0faddf3de12d2c --- /dev/null +++ b/raw/aaer/2015/AAER-3663.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:94781f5190f7a043685d90e2d4b0dc982a212e0fceba5a923e94819f9358fecd +size 147083 diff --git a/raw/aaer/2015/AAER-3663.txt b/raw/aaer/2015/AAER-3663.txt new file mode 100644 index 0000000000000000000000000000000000000000..a13c9f5583d861b6225f7bd09924ded185da6188 --- /dev/null +++ b/raw/aaer/2015/AAER-3663.txt @@ -0,0 +1,144 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75171 / June 15, 2015 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4113 / June 15, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3663 / June 15, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16587 + + + + +In the Matter of + +Keith E. Rode, CPA, + +Respondent. + + + + + + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 203(f) OF THE +INVESTMENT ADVISERS ACT OF 1940 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Section 203(f) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 102(e)(3)(i) of +the Commission’s Rules of Practice1 against Keith E. Rode, CPA (“Rode” or “Respondent”). + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting + + 2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings, and the findings contained in +Sections III.2. and III.4. below, and consents to the entry of this Order Instituting Administrative +Proceedings Pursuant to Section 203(f) of the Investment Advisers Act of 1940 and Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Rode, 47 years old, resides in Franklin, Wisconsin and is a certified public +accountant licensed to practice in Wisconsin since 2007 and in California from 1994 to February +2015. From 2003 to the present, Rode has been a managing member of GLR Capital Management, +LLC (“GLR Capital”), the general partner of, and unregistered investment adviser to, the GLR +Growth Fund, L.P. (the “Fund”), a private investment fund organized as a California limited +partnership and based in Scotts Valley, California. + +2. On June 10, 2015, a final judgment was entered by consent against Rode, +permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933, +Sections 10(b) and 26 of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and +Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, in the civil action entitled +Securities and Exchange Commission v. GLR Capital Management, LLC, et al., Civil Action +Number 12-CV-2663-EJD, in the United States District Court for the Northern District of +California. + +3. The Commission’s amended complaint alleged that since at least 2005, +Rode’s business partner, John A. Geringer (“Geringer”), raised in excess of $60 million from +investors by misrepresenting the Fund’s performance and strategy. The amended complaint further +alleged that beginning in or around April 2009, Rode became aware of Geringer’s +misrepresentations and thereafter, Rode induced investors to rollover their investments and add to +their investments by preparing and mailing false account statements to investors. The amended +complaint also alleged that the account statements Rode sent to investors falsely claimed that the +Fund investments were “SEC Approved.” + + +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + + 3 +4. On December 15, 2014, Rode pleaded guilty to one count of mail fraud in +violation of Title 18 United States Code, Section 1341 before the United States District Court for +the Northern District of California, in United States v. Keith Rode, Criminal Action Number CR- +12-0888-EJD. + +5. The count of the criminal indictment to which Rode pleaded guilty alleged +that Rode engaged in a scheme to defraud Fund investors by sending through the United States +Postal Service a misleading investor interest statement to a Fund investor. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Rode’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Pursuant to Section 203(f) of the Advisers Act, that Respondent Rode is barred from +association with any investment adviser, broker, dealer, municipal securities dealer, +municipal advisor, transfer agent, or nationally recognized statistical rating organization. + +Any reapplication for association by the Respondent will be subject to the applicable laws +and regulations governing the reentry process, and reentry may be conditioned upon a number of +factors, including, but not limited to, the satisfaction of any or all of the following: (a) any +disgorgement ordered against the Respondent, whether or not the Commission has fully or partially +waived payment of such disgorgement; (b) any arbitration award related to the conduct that served +as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a +customer, whether or not related to the conduct that served as the basis for the Commission order; +and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct +that served as the basis for the Commission order. + +B. Pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of Practice, Respondent Rode is +suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3665.pdf b/raw/aaer/2015/AAER-3665.pdf new file mode 100644 index 0000000000000000000000000000000000000000..48bdc14fdb1c91cf6021330ba8011449249017da --- /dev/null +++ b/raw/aaer/2015/AAER-3665.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:33464847c6c8333535b0fc56b9d38824c04e32ab14fd9cb9a9f840904c04b986 +size 265252 diff --git a/raw/aaer/2015/AAER-3666.pdf b/raw/aaer/2015/AAER-3666.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ece9b8301c062a92d49e3371988706520e466414 Binary files /dev/null and b/raw/aaer/2015/AAER-3666.pdf differ diff --git a/raw/aaer/2015/AAER-3666.txt b/raw/aaer/2015/AAER-3666.txt new file mode 100644 index 0000000000000000000000000000000000000000..5a03f53484c5e1e910d8a78bc7ab4bf3ab731663 --- /dev/null +++ b/raw/aaer/2015/AAER-3666.txt @@ -0,0 +1,145 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4134 / June 30, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3666 / June 30, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16668 + + +In the Matter of + +JONATHAN D. DAVEY, CPA + +Respondent. + + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 203(f) OF THE +INVESTMENT ADVISERS ACT OF 1940, +AND NOTICE OF HEARING + + +I. + + The Securities and Exchange Commission (the "Commission") deems it appropriate and in +the public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Section 203(f) of the Investment Advisers Act of 1940 ("Advisers Act"), against Jonathan D. +Davey ("Respondent" or "Davey"). + +II. + +After an investigation, the Division of Enforcement alleges that: + +A. RESPONDENT + +1. From at least 2001 through May 2009, Davey was the President, Secretary, +Treasurer, Director, controlling shareholder, and an associated person of Trustar Capital +Management Inc., later known as Safe Harbor Wealth Investments, Inc. ("Safe Harbor"), an Ohio- +registered investment adviser. On or about May 28, 2009, Divine Stewardship, LLC ("Divine +Stewardship") assumed all of Safe Harbor's assets, policies, and management and continued as +successor to Safe Harbor's business as an Ohio-registered investment adviser. Davey served as +Divine Stewardship's Manager and he owned and controlled Divine Stewardship. + +2. From on or about May 15, 2000 until on or about December 31, 2010, +Davey maintained an active certified public accountant license from the state of Ohio. + +2 +3. Davey is 51 years old and is currently incarcerated at the Elkton Federal +Correctional Institution in Lisbon, Ohio. + +B. ENTRY OF RESPONDENT'S CRIMINAL CONVICTION + +4. On February 22, 2012, Davey and three other persons were charged with +violations of 18 U.S.C. § 371, 18 U.S.C. § 1349, and 18 U.S.C. § 1956(h), pursuant to a Bill of +Indictment (the "Indictment") alleging a securities fraud conspiracy, wire fraud conspiracy, and +money laundering conspiracy, which Indictment was filed in the United States District Court for +the Western District of North Carolina, Charlotte Division, in the case of United States of America +v. Jonathan D. Davey, et al., U.S. District Court for the Western District of North Carolina, +Charlotte Division, Docket No. 3:12-cr-68-RJC. The Indictment also charged Davey with tax +evasion, in violation of 26 U.S.C. § 7201. + +5. The Indictment alleged, among other things, that: (a) from approximately +October 2007 through April 2010, Davey and other persons carried out an investment fraud +conspiracy by convincing investors in Mecklenburg County, North Carolina and elsewhere to +invest with the defendants' supposed hedge funds; (b) victims nationwide were defrauded of over +$40 million; (c) Davey served the conspiracy as an "administrator" for his co-conspirators and as a +hedge fund manager, and he also lured his own investor victims; (d) Davey used investment +adviser Safe Harbor and other affiliated entities to collect victim money; and, (e) Davey conspired +to falsely represent to investor victims that the conspirators had conducted due diligence on +investments and operated legitimate hedge funds with significant safeguards. The Indictment +further alleged that, between August 2008 and February 2011, Davey undertook a number of +actions to evade the income taxes properly due and owing on the money that Davey stole from +victims to build his personal mansion. + +6. On February 8, 2013, after a trial, a jury found Davey guilty of: (a) +conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371; (b) conspiracy to commit +wire fraud, in violation of 18 U.S.C. § 1349; (c) conspiracy to commit money laundering, in +violation of 18 U.S.C. § 1956(h); and, (d) tax evasion, in violation of 26 U.S.C. § 7201. + +7. On January 15, 2015, the U.S. District Judge in the criminal case sentenced +Davey to 252 months in prison, followed by three years of supervised release, and ordered Davey +to pay over $21.8 million in restitution to defrauded victims and to the Internal Revenue Service. +On February 4, 2015, the U.S. District Judge signed a Judgment in a Criminal Case against Davey +(the "Conviction"), ordering the sentence imposed at the hearing. + + +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 proceedings be instituted +to determine: + + +3 +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondent an opportunity to establish any defenses to such allegations; and, + +B. What, if any, remedial action is appropriate in the public interest against Respondent +pursuant to Section 203(f) of the Advisers Act. + +IV. + +IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions +set forth in Section III hereof shall be convened at a time and place to be fixed, and before an +Administrative Law Judge to be designated by further order as provided by Rule 110 of the +Commission's Rules of Practice, 17 C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 +of the Commission's Rules of Practice, 17 C.F.R. § 201.220. + +If Respondent fails to file the directed answer, or fails to appear at a hearing after being duly +notified, the Respondent may be deemed in default and the proceedings may be determined against +him upon consideration of this Order, the allegations of which may be deemed to be true as +provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's Rules of Practice, 17 C.F.R. +§§ 201.155(a), 201.220(f), 201.221(f) and 201.310. + +This Order shall be served forthwith upon Respondent as provided for in the Commission’s +Rules of Practice. + +IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial +decision no later than 210 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 + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3667.pdf b/raw/aaer/2015/AAER-3667.pdf new file mode 100644 index 0000000000000000000000000000000000000000..58d5832916b9e72f4ffdb95d494e4f370f2d2b96 Binary files /dev/null and b/raw/aaer/2015/AAER-3667.pdf differ diff --git a/raw/aaer/2015/AAER-3667.txt b/raw/aaer/2015/AAER-3667.txt new file mode 100644 index 0000000000000000000000000000000000000000..e8c205e8d79302f6635577e5f9f02efae20d6d8a --- /dev/null +++ b/raw/aaer/2015/AAER-3667.txt @@ -0,0 +1,79 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75337 / June 30, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3667 / June 30, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16669 + + +In the Matter of + +JONATHAN D. DAVEY, CPA + +Respondent. + + + +ORDER OF SUSPENSION PURSUANT +TO RULE 102(e)(2) OF THE +COMMISSION'S RULES OF PRACTICE + + + +I. + + The Securities and Exchange Commission (the "Commission") deems it appropriate to +issue an order of forthwith suspension of Jonathan D. Davey ("Respondent" or "Davey") pursuant +to Rule 102(e)(2) of the Commission's Rules of Practice [17 C.F.R. § 201.102(e)(2)].1 + +II. + +The Commission finds that: + +1. From on or about May 15, 2000 until on or about December 31, 2010, +Davey maintained an active certified public accountant license from the state of Ohio. + +2. On February 4, 2015, a Judgment in a Criminal Case was signed and +entered against Davey, in the matter of United States of America v. Jonathan D. Davey, U.S. +District Court for the Western District of North Carolina, Charlotte Division, Case No. 3:12-cr-68- +RJC, confirming that Davey was adjudicated as being guilty of: (a) conspiracy to commit +securities fraud, in violation of 18 U.S.C. § 371; (b) conspiracy to commit wire fraud, in violation + +1 Rule 102(e)(2) provides in pertinent part: "Any . . . person who has been convicted of a felony or +a misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing +before the Commission." + +2 +of 18 U.S.C. § 1349; (c) conspiracy to commit money laundering, in violation of 18 U.S.C. +§ 1956(h); and, (d) tax evasion and aiding and abetting same, in violation of 26 U.S.C. § 7201. + +3. As a result of this conviction, Davey was sentenced to 252 months in +prison, followed by three years of supervised release, and ordered to pay over $21.8 million in +restitution to defrauded victims and to the Internal Revenue Service. + +III. + +In view of the foregoing, the Commission finds that Davey has been convicted of a felony +within the meaning of Rule 102(e)(2) of the Commission's Rules of Practice. + +Accordingly, it is ORDERED, that Davey is forthwith suspended from appearing or +practicing before the Commission pursuant to Rule 102(e)(2) of the Commission's Rules of +Practice. + + By the Commission. + + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3668.pdf b/raw/aaer/2015/AAER-3668.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d88cab2d7090bc5f15a22932eb3beeeb84e51bac --- /dev/null +++ b/raw/aaer/2015/AAER-3668.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:02898a410c390ba32e40eeb0eb21f96fcb0c7e7a798497bb94be9734e22845b4 +size 244379 diff --git a/raw/aaer/2015/AAER-3668.txt b/raw/aaer/2015/AAER-3668.txt new file mode 100644 index 0000000000000000000000000000000000000000..88d6bdbe43528c5f1c06f82d566ac632b83b9feb --- /dev/null +++ b/raw/aaer/2015/AAER-3668.txt @@ -0,0 +1,422 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75343 / July 1, 2015 +INVESTMENT COMPANY ACT OF 1940 +Release No. 31703 / July 1, 2015 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3668 / July 1, 2015 +ADMINISTRATIVE PROCEEDING +File No. 3-16672 + +In the Matter of +DELOITTE & TOUCHE LLP, ALPS FUND +SERVICES, INC., and ANDREW C. +BOYNTON, +Respondents. +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND +CEASE-AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C +OF THE SECURITIES EXCHANGE ACT +OF 1934, SECTION 9(f) 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 +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), Section 9(f) of +the Investment Company Act of 1940 (“Investment Company Act”) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice,2 against Deloitte & Touche LLP (“D&T”), and pursuant to + +1 Section 4C provides, in relevant part, that: + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(2) . . . to have engaged in . . . improper professional conduct . . . . +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + +2 + +Section 9(f) of the Investment Company Act as to ALPS Fund Services, Inc. (“ALPS”) and +Andrew C. Boynton (“Boynton”) (collectively, “Respondents”). +II. +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offers”), which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, Respondents consent to the entry of this Order Instituting Public Administrative and +Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of +1934, Section 9(f) 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 Respondents’ Offers, the Commission finds3 that: +A. Overview +This matter arises from an independence-impairing business relationship between D&T’s +affiliate, Deloitte Consulting LLP (“DC”), and Andrew C. Boynton, while Boynton was serving on +the boards of trustees and the audit committees of three D&T SEC-registrant audit clients. At all +relevant times, both D&T and DC were subsidiaries of Deloitte LLP (“Deloitte”), and “associated +entities” for purposes of Rule 2-01 of Regulation S-X.4 The DC/Boynton Relationship involved +DC’s acquiring from Boynton and others, and then collaborating with Boynton in implementing, a +proprietary brainstorming business methodology to serve both internal and external firm clients. +The relationship spanned approximately five years—from 2006 until as late as 2011—during the +entirety of which Boynton served as a member of the board of trustees and of the audit committee +of Fund A, Fund B and Fund C, each of which was, during the entire period, both a D&T audit +client and a registered investment company. As detailed below, Respondent D&T engaged in +improper professional conduct, violated Rule 2-02(b) of Regulation S-X, and caused certain +reporting violations by the Funds; Respondent Boynton was a cause of the same reporting +violations; and Respondent ALPS caused certain violations by the Funds of Investment Company +Act Rule 38a-1. + + The Commission may censure any person, or 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 Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. +4 See Rule 2-01(f)(2) of Regulation S-X, defining “accounting firm” to include associated entities of the firm. D&T +and its associated entities, including DC, are hereinafter referred to as the “firm.” + +3 + +B. Respondents + +Deloitte & Touche LLP is organized as a limited liability partnership under the laws of +the State of Delaware that is headquartered in New York, New York, and is a subsidiary of +Deloitte. Since 2003, D&T has been registered, pursuant to the Sarbanes Oxley Act of 2002, with +the Public Company Accounting Oversight Board (“PCAOB”), to prepare and issue audit reports +of issuers and other SEC registrants. D&T served as the auditor to each of Funds A, B and C +(defined below) until March of 2012. +ALPS Fund Services, Inc. is a Colorado corporation headquartered in Denver, Colorado. +At all relevant times, it has provided various services to the investment management industry, +including fund administrative services to registered investment companies. At all relevant times, +ALPS served as the administrator to each of Funds A, B and C, and provided ALPS employees to +serve as each Fund’s Chief Compliance Officer, among other positions. +Andrew C. Boynton, age 59 and a resident of Concord, Massachusetts, served on the +board of trustees and the audit committee of Fund A and Fund B beginning in March 2005, and +served in the same capacities for Fund C beginning in March 2006, continuing in all the foregoing +roles until September 2012. At all relevant times, Boynton worked in academia and business +consulting. +C. Relevant Registrants +Fund A, Fund B and Fund C are closed-end management investment companies +registered with the Commission pursuant to the Investment Company Act. Launched in 2004, +2005 and 2006, respectively, each Fund is a Delaware corporation that has, at all relevant times, +been headquartered in Denver, Colorado. Also at all relevant times, each Fund’s common shares +have been listed on the NYSE MKT LLC. +D. Other Relevant Entity +Deloitte is organized as a limited liability partnership under the laws of the State of +Delaware. It is the U.S. member firm of Deloitte Touche Tohmatsu Limited, a U.K. private +company limited by guarantee. Client services are performed primarily by Deloitte’s subsidiaries +— D&T, DC, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP — which provide +audit and enterprise risk services, consulting, tax, and financial advisory services, respectively. +E. FACTS +1. Establishment and Operation of the Relationship +On May 15, 2006, at a time when Boynton was serving on the boards and audit committees +of three D&T registered investment company audit clients (Fund A, Fund B and Fund C), D&T’s +affiliate entered into the business relationship with Boynton that is the subject of this proceeding. +The relationship entailed DC’s purchase from Boynton and his business partners of intellectual +property rights to a brainstorming business methodology, as well as the simultaneous agreement, +integral to the purchase, for Boynton to serve as a consultant to DC for a three-year period to train + +4 + +firm personnel in the use of the methodology and assist the firm in serving both internal and +external clients using that methodology. DC engaged Boynton infrequently following the +conclusion of the initial three-year term of the consulting agreement. The last client facing +engagement Boynton participated in was in February 2011. During its course, the DC/Boynton +Relationship yielded remuneration to Boynton exceeding 10% of both his total earnings and his +net worth. +Although Deloitte’s policies required an independence consultation prior to entering into a +new business relationship with a consultant, an independence consultation was not performed +before DC entered into the business relationship with Boynton in 2006. Nor did Deloitte discover +that the required initial independence consultation had not been performed until nearly five years +after the DC/Boynton relationship had been established. Nor did the firm perform the initial +independence consultation’s steps at any subsequent point during the relationship, whether in +connection with work on individual projects, or otherwise. +In the course of the DC/Boynton Relationship, Boynton provided both internally and +externally focused consulting services. Within the firm, Boynton participated in trainings and +workshops to educate firm personnel — including, on at least one occasion, D&T personnel— on +the use and implementation of the methodology. The firm encouraged its partners to find ways to +use the methodology in serving external clients, including audit clients, and they in turn did so. In +addition, partners at other member firms of Deloitte Touche Tohmatsu also used the methodology +with clients on occasion. With respect to externally focused consulting services, Boynton directly +participated with DC personnel in several external client workshops utilizing the methodology. +DC paid over $300,000 in consulting fees to Boynton for such external client work. +2. D&T Claimed Independence From Fund A, Fund B and Fund C +For the duration of the DC/Boynton Relationship, Boynton simultaneously served on the +boards of all three Funds while D&T served as the Funds’ outside auditor, thereby impairing +D&T’s independence. Despite the DC/Boynton Relationship coinciding with either (a) periods +covered by its audits, or (b) periods during which the work on those audits was performed — or +both — D&T represented it was independent in its audit reports for all three Funds for fiscal years +2007 through 2011.5 With D&T’s knowledge and consent, those audit reports, and information +about the “independent” auditors, respectively, were, in turn, included in their clients’ annual +reports on Form N-CSR and proxy statements, both of which were filed with the Commission +throughout the relevant period. In addition, D&T expressly confirmed to Funds A, B and C at the +end of each affected fiscal year that it was “independent” and therefore able to serve as each +client’s external auditor. These written confirmations—required by PCAOB Rule 3526—did not, +at any time during the relevant period, disclose the DC/Boynton Relationship. +3. The Funds’ Inadequate Policies and Procedures +For its part, ALPS contractually agreed to assist the Funds in discharging their +responsibilities under Rule 38a-1, which requires each Fund, with board approval, to “adopt and + +5 D&T’s fees from its audits of Funds A, B and C over these five fiscal years totaled $497,438. + +5 + +implement written policies and procedures reasonably designed to prevent violation of the Federal +Securities Laws by the Fund[.]” See Rule 38a-1 of the Investment Company Act. D&T’s audit +engagement letters with each of the Funds also provided that ALPS, serving as “management” to +each Fund, was responsible for “assist[ing] D&T in maintaining independence.” As part of their +policies and procedures, each Fund’s Audit Committee Charter required its audit committee to, +among other things, recommend the selection, retention, or termination of the auditors and to +evaluate the independence of the auditors in accordance with the Commission’s rules and +regulations. None of the Funds, however, adopted sufficient additional written policies and +procedures reasonably designed to prevent auditor independence violations, whether aimed at +preventing or detecting independence-impairing business relationships or otherwise. ALPS did, +during the relevant period, circulate trustee and officer (“T&O”) questionnaires that, in part, were +designed to identify conflicts of interest that could bear on auditor independence (though primarily +directed at determining whether the trustees were “interested persons” as that term is defined under +Section 2(a)(19) of the Investment Company Act). In particular, throughout the relevant period, +these questionnaires asked each T&O to identify his “principal occupation(s) and other positions.” +Beginning in 2009, they also asked each T&O to identify any “direct or material indirect business +relationship” he had with the Funds’ auditor, D&T. Despite their significance to determining +whether the auditor was independent, however, business relationships with the auditor’s affiliates +were neither expressly covered by these questionnaires nor by any other policy or procedure. +Furthermore, the Funds did not have sufficient written policies and procedures reasonably +designed to prevent violations of the broader auditor independence requirements beyond +prohibited business relationships between the auditor and T&Os. Finally, the Funds did not +provide sufficient training to assist the Funds’ board members in the discharge of their +responsibilities as to auditor independence. +4. The Funds’ Independence Inquiries +For his part, as a member of the three Funds’ boards and audit committees, Boynton was +required to complete the annual T&O questionnaires described above. During each of the relevant +years, Boynton’s responses to the question calling for identification of his “principal occupation(s) +and other positions” did not identify the DC/Boynton Relationship. Nor, relying on his personal +understanding that DC was a separate legal entity from D&T, did Boynton identify the +DC/Boynton Relationship in his responses to the question, appearing in the T&O questionnaires +from 2009 onward, whether he had any “direct or material indirect business relationship” with +D&T. Nor, on the same ground, did Boynton’s participation in any of the annual audit committee +votes to retain D&T as each Fund’s auditor occasion any disclosure by Boynton of his business +relationship with DC. Boynton never inquired, however, whether DC’s and D&T’s relationship to +one another carried auditor independence or other conflict-of-interest implications, despite, among +other things, his having worked directly with D&T personnel (not assigned to the Funds’ audits) +on brainstorming methodology projects. +5. Deloitte Discovers the Independence Impairing Relationship +On November 11, 2011, as a result of monitoring procedures Deloitte implemented as part +of its efforts to enhance its independence quality controls, Deloitte’s national independence office +identified a payment to Boynton and discovered that independence clearance of Boynton had not +been obtained, and notified the DC director responsible for the payment. This step led to an + +6 + +inquiry which led to the identification of the fact that Boynton was both a trustee of the Funds and +an individual with whom DC had a business relationship. Boynton and D&T contemporaneously +alerted ALPS and/or Fund counsel, and, at the conclusion of its inquiry, D&T reported its results +first to the Funds’ Audit Committee, and then, on March 2, 2012, to the Commission’s Office of +the Chief Accountant. Two weeks later, D&T’s audit relationship with the Funds ended. +F. LEGAL ANALYSIS +1. Independence Principles Governing the DC/Boynton Relationship +The basic elements of an auditor independence violation in the business-relationship +context are (1) an independence-impairing relationship; (2) existing during all or part of the period +covered by the audit, or the period of the audit work, or both; followed by (3) issuance of an audit +report asserting the auditor’s independence from the client. See Rule 2-01(c)(3) of Regulation +S-X.6 Business relationships with persons associated with the audit client in a decision-making +capacity, such as audit client directors, officers and substantial stockholders are embraced by this +prohibition. See Rule 2-01(c)(3). Section 6.02.02.e of the Commission’s Codification of +Financial Reporting Policies (“Codification”) (available at 7 Fed. Sec. L. Rep. (CCH) ¶ 73,272) +provides, among other things, that: +In addition to the relationships specifically prohibited by Rule 2-01, joint +business ventures, limited partnership agreements, investments in supplier or +customer companies, leasing interests, (except for immaterial +landlord-tenant relationships) and sales by the accountant of items other than +professional services are examples of other connections which are also +included within this classification. +The DC/Boynton Relationship falls within Regulation S-X’s prohibition. Boynton served +as a D&T audit-client board member while simultaneously serving as a subcontractor and paid +consultant to DC in a direct business relationship. Although Rule 2-01(c)(3) provides an exception +for “consumer in the ordinary course of business” relationships, that exception has no application +to consulting relationships that, like the instant one, included Boynton being a subcontractor in the +provision of services to third parties.7 + +6 Rule 2-01(c)(3) provides: +An accountant is not independent if, at any point during the audit and professional engagement period, the +accounting firm or any covered person in the firm has any direct or material indirec t business relationship +with an audit client, or with persons associated with the audit client in a decision-making capacity, such as an +audit client’s officers, directors, or substantial stockholders. The relationships described in this paragraph do +not include a relationship in which the accounting firm or covered person in the firm provides professional +services to an audit client or is a consumer in the ordinary course of business. +7 See Ernst & Young LLP, Initial Decision Rel. No. 249, Admin. Proc. File No. 3-10933 (April 16, 2004) at 48-49, +59 (rejecting consumer exception where auditor and its client jointly developed and marketed software), finality +order, Securities Act Rel. No. 8413, Exchange Act Rel. No. 49615, Accounting and Auditing Enforcemen t Rel. +No. 1991 (Apr. 26, 2004); accord Ernst & Young LLP, Admin. Proc. File No. 3-13114 (Aug. 5, 2008) (settled +case) (same, where auditor and audit-client director jointly pursued marketing campaign); Deloitte & Touche + + +7 + +2. Violation of Rule 2-02(b) of Regulation S-X +Each time D&T signed an audit report for Fund A, Fund B and Fund C, where either the +period covered by the audit or the period of the audit work (or both) overlapped with the +DC/Boynton Relationship, D&T directly violated Rule 2-02(b) of Regulation S-X. See Rule +2-02(b) (requiring accountant’s report to “state whether the audit was made in accordance with +generally accepted auditing standards” [“GAAS”] which, in turn, require auditors to maintain +independence — both in fact and appearance — from their audit clients.8). Thus, the D&T +year-end audit reports for Funds A, B and C’s 2007 through 2011 fiscal years incorrectly stated +that they were performed in accordance with GAAS. +3. Improper Professional Conduct + +D&T’s failure to meet the requirements of Rule 2-01 of Regulation S-X described above +also constitutes improper professional conduct under Exchange Act § 4C and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice, which provides, in pertinent part, that the Commission may +“censure a person or deny, temporarily or permanently, the privilege of appearing or practicing +before it... to any person who is found... to have engaged in... improper professional conduct.” +Such conduct can be established by, inter alia, negligence in the form of either “a single instance +of highly unreasonable conduct … in circumstances [warranting] heightened scrutiny”9 or of +“repeated instances of unreasonable conduct...” See Rule 102(e)(1)(iv)(B)(1) and (2). +4. The Funds’ Annual Report and Proxy Violations +Each time non-independent audit reports were filed with or incorporated in Fund A’s, Fund +B’s and Fund C’s annual reports, or other information concerning the “independent” auditors was +provided in the proxy statements, the Funds violated federal securities statutes and rules requiring +those Commission filings to disclose certain information concerning the independent auditors and +audits. See Investment Company Act §§ 30(a) and 20(a) and Rule 20a-1 thereunder.10 D&T and + +(South Africa), Admin. Proc. File No. 3-15129 (Dec. 13, 2012) (settled case) (same, where auditor’s consulting +affiliate and audit client director pursued cooperative services arrangement). +8 Securities Act Release No. 33-8422 (May 24, 2004) states that reference to GAAS are to mean PCAOB standards. +Pursuant to PCAOB Professional Standards Rule 3200T, the PCAOB adopted certain preexisting generally +accepted auditing standards, as described in AICPA SAS No. 95. Those standards include AU 161 and 220. +PCAOB Rule 3600T also explicitly requires compliance with the independence standards described in AICPA’s +Code of Professional Conduct Rule 101 as in existence on April 15, 2003, to the extent not superseded or +amended by the PCAOB. +9 Auditor independence is always an area warranting heightened scrutiny. See Adopting Release for Rule 102(e) +[Rel. Nos. 33-7593, 34-40567, 1998 SEC LEXIS 2256 (Oct. 19, 1998)] (“Because of the importance of an +accountant’s independence to the integrity of the financial reporting system, the Commission has conclud ed that +circumstances that raise questions about an accountant’s independence always merit heightened scrutiny.”) +10 Investment Company Act §30(a) requires investment companies to file annual reports in conformity with Section +13(a) of the Exchange Act, which in turn requires the annual reports to contain financial statements audited by +“independent public accountants.” Investment Company Act § 20(a) and Rule 20a -1 thereunder require +investment companies’ proxy statements to satisfy Exchange Act Regulation 14A and corresponding Rules, + + +8 + +Boynton each caused these reporting violations because each should have known the DC/Boynton +Relationship would cause all three Funds to violate the provisions listed above. +5. The Funds’ Lack of Adequate Compliance Procedures +As noted above, ALPS contractually agreed to assist the Funds in discharging their +responsibilities under Rule 38a-1. To that end, ALPS furnished a Chief Compliance officer to +each of the Funds who was, consistent with Rule 38a-1, responsible for administering the Funds’ +“written policies and procedures reasonably designed to prevent violation of the Federal Securities +Laws by the Fund[.]” See Investment Company Act Rule 38a-1. Moreover, ALPS drafted, for +approval and implementation by each of the three Funds’ boards, Rule 38a-1 compliance policies +and procedures. As drafted by ALPS and approved by the Funds’ boards, the Funds’ written +policies and procedures governing auditor independence and, more generally, the selection, +retention, and engagement of the auditor were, at all relevant times, inadequate. The Funds +therefore each violated Rule 38a-1 of the Investment Company Act and ALPS should have known +its conduct would cause this violation. +IV. +Findings +Based on the foregoing, the Commission finds that Respondent D&T (a) engaged in +improper professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice; (b) violated Rule 2-02(b) of Regulation S-X; and (c) +caused Fund A, Fund B and Fund C to violate Sections 20(a) and 30(a) of the Investment Company +Act, and Rule 20a-1 thereunder. + + Based on the foregoing, the Commission further finds that Respondent ALPS caused Fund +A, Fund B and Fund C to violate Rule 38a-1 of the Investment Company Act, and that Respondent +Boynton caused Fund A, Fund B and Fund C to violate Investment Company Act Sections 20(a) +and 30(a), and Rule 20a-1 thereunder. +V. +In determining to accept Respondent D&T’s Offer, the Commission considered the steps +taken by the firm, both before and after the firm’s detection of the independence impairing +relationship with Boynton, to enhance its independence quality control system. Since the conduct +discussed in this Order, the firm has continued to improve its independence policies and +procedures regarding business relationships. The firm has, among other things, established a +database of audit client board members, officers and significant shareholders for use in +independence-clearance processes throughout the firm; enhanced independence training +throughout the firm; and increased the number and frequency of its procedures for prevention and + +which, among other things, require disclosures concerning the registrant’s “Independent Public Accountants” +(Item 9); and closed-end investment companies like Funds A, B and C also must disclose their communications +with auditors concerning independence (Item 22(b)( 16)(i), incorporating Reg S-K, Item 407(d)(3). + +9 + +detection of independence-impairing business relationships as well as its monitoring to ensure the +firm’s independence controls are working effectively. +The Commission has also considered, in determining to accept Respondent ALPS’s Offer, +the remedial steps undertaken by ALPS in circumstances where ALPS furnishes a Chief +Compliance Officer to a fund client. Since the conduct discussed in this Order, ALPS has, among +other things, commenced working with such clients’ boards and their counsel to enhance auditor +independence policies and procedures. It has also commenced working with such clients’ counsel +to implement training concerning, inter alia, the business-relationship independence prohibitions; +to enhance such clients’ T&O questionnaires to ensure that business relationships with audit firm +affiliates are inquired into; and has commenced working with counsel to such clients or their +boards to enhance training of board members and officers concerning the discharge of their +responsibilities as to auditor independence. +VI. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Respondent D&T be, and hereby is, censured. +B. Pursuant to Exchange Act Section 21C, Respondent D&T shall cease and +desist from committing or causing any violations and any future violations of Rule 2-02 of +Regulation S-X. +C. Pursuant to Investment Company Act Section 9(f), Respondents D&T and +Boynton shall cease and desist from causing any violations and any future violations of +Sections 20(a) and 30(a) of the Investment Company Act, and Rule 20a-1 thereunder, and +Respondent ALPS shall cease and desist from causing any violations and any future +violations of Rule 38a-1 of the Investment Company Act. +D. Respondent D&T shall, within ten (10) days of the entry of this Order, pay +(i) disgorgement of $497,438, plus prejudgment interest of $116,478, for a total of +$613,916, and (ii) a civil money penalty in the amount of $500,000, to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, +subject to Exchange Act Section 21F(g)(3). If timely payment of disgorgement is not +made, additional interest shall accrue pursuant to SEC Rule of Practice 600. If payment of +a civil penalty is not timely made, additional interest shall accrue pursuant to 31 U.S.C. § +3717. +E. Respondent ALPS shall, within ten (10) days of the entry of this Order, pay +a civil money penalty in the amount of $45,000, to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). If payment is not timely made, additional interest shall +accrue pursuant to 31 U.S.C. § 3717. + +10 + +F. Respondent Boynton shall, within ten (10) days of the entry of this Order, +pay (i) disgorgement of $30,000, plus prejudgment interest of $5,328.71, for a total of +$35,328.71, and (ii) a civil money penalty in the amount of $25,000, to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, +subject to Exchange Act Section 21F(g)(3). If timely payment of disgorgement is not +made, additional interest shall accrue pursuant to SEC Rule of Practice 600. If payment of +a civil penalty is not timely made, additional interest shall accrue pursuant to 31 U.S.C. § +3717. +G. All payments required by this Order must be made in one of the following +ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission +and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter +identifying Respondent as a Respondent in these proceedings, and the file number of +these proceedings. A copy of the cover letter and check or money order, or +documentation of whatever other form of payment is used, must be simultaneously +sent to Stephen L. Cohen, Associate Director, Division of Enforcement, Securities +and Exchange Commission, 100 F St., N.E., Washington, DC 20549. +By the Commission. +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3669.pdf b/raw/aaer/2015/AAER-3669.pdf new file mode 100644 index 0000000000000000000000000000000000000000..560625ba8e245f078b71b34fcc9e2699d98d294f --- /dev/null +++ b/raw/aaer/2015/AAER-3669.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:75236e53feefd1738edfb77ed7db5ce6ce235bfa546712c8c1d7fd0e2b274aba +size 144366 diff --git a/raw/aaer/2015/AAER-3670.pdf b/raw/aaer/2015/AAER-3670.pdf new file mode 100644 index 0000000000000000000000000000000000000000..40f6bd6fd7afa6ed48d00824116b7b635fe47224 --- /dev/null +++ b/raw/aaer/2015/AAER-3670.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c8c8b1daba19de82f65c9fb6f24e617dcbcfc24db0a056e749638f11be21e710 +size 246593 diff --git a/raw/aaer/2015/AAER-3671.txt b/raw/aaer/2015/AAER-3671.txt new file mode 100644 index 0000000000000000000000000000000000000000..1a4a0dfd927c7873db9d0032215bb0ae855194a8 --- /dev/null +++ b/raw/aaer/2015/AAER-3671.txt @@ -0,0 +1,1372 @@ + + + + + + + + + + + + + + + + SEC.gov | Thomas S. Wu and Thomas T. Yu + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/517071","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Thomas S. Wu and Thomas T. Yu + + + + + + + + + + + + Thomas S. Wu and Thomas T. Yu + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 23309 / July 21, 2015 + Accounting and Auditing Enforcement Release No. AAER-3671 / July 21, 2015 + Securities and Exchange Commission v. Thomas S. Wu and Thomas T. Yu , Civil Action No. 11-cv-4988 JSW (N.D. Cal. Filed Oct. 11, 2011) + + SEC Settles Civil Action Against Former Senior Vice President Arising from His Role in Understating Bank Losses During Financial Crisis + + + The Securities and Exchange Commission announced today that on July 10, 2015 the United States District Court for the Northern District of California entered a final judgment against Thomas Yu, a former Senior Vice President at United Commercial Bank, a wholly owned banking subsidiary of UCBH Holdings, Inc., a publicly-traded holding company. The Commission's complaint alleges that Yu and other defendants concealed losses on loans and other assets from the bank's auditors and delayed the proper reporting of those losses. The Commission's complaint further alleges that Yu committed securities fraud by causing UCBH to materially understate losses in connection with its 2008 annual report and misleading the bank's independent auditors, among other allegations. + + Yu consented to the entry of a final judgment that permanently enjoins him from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and Section 17(a) of the Securities Act of 1933, 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, and 13a-11 thereunder. The judgment also bars Yu from acting as an officer or director of a public company. + + In a parallel criminal proceeding, Yu pleaded guilty on October 7, 2014 to one count of conspiracy to commit false bank entries, reports and transactions. + + For additional information, see Litigation Release Nos. 22121 (Oct. 11, 2011) and 22786 (Aug. 22, 2013). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3672.pdf b/raw/aaer/2015/AAER-3672.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9f29bbea9ddafbaf20fb964b815d102d5159e85b Binary files /dev/null and b/raw/aaer/2015/AAER-3672.pdf differ diff --git a/raw/aaer/2015/AAER-3673.pdf b/raw/aaer/2015/AAER-3673.pdf new file mode 100644 index 0000000000000000000000000000000000000000..deccfd99f8f12c20339f442e7154bfba231d5141 --- /dev/null +++ b/raw/aaer/2015/AAER-3673.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f98226e799515882f5c3bba066a5ef9e45507a9d68f89589bea0d878c4aad570 +size 295202 diff --git a/raw/aaer/2015/AAER-3673.txt b/raw/aaer/2015/AAER-3673.txt new file mode 100644 index 0000000000000000000000000000000000000000..9b1e1939c88ab7b1ed1f12b8ec3814c2f5e05cc8 --- /dev/null +++ b/raw/aaer/2015/AAER-3673.txt @@ -0,0 +1,771 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9881 / August 6, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75622 / August 6, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3673 / August 6, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16729 + + + + +In the Matter of + +MILLER ENERGY +RESOURCES, INC., PAUL W. +BOYD, CPA, DAVID M. HALL, +AND CARLTON W. VOGT, III, +CPA + +Respondents. + + + + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF +1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the +Securities Act of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of +1934 (“Exchange Act”) against Miller Energy Resources, Inc. (f/k/a Miller Petroleum, Inc.) +(“Miller Energy”), Paul W. Boyd (“Boyd”), and David M. Hall (“Hall”) (collectively, the “Miller +Respondents”); and that public administrative proceedings be, and hereby are, instituted against +Boyd and Carlton W. Vogt, III (“Vogt”), pursuant to Exchange Act Section 4C and 21C, and +Rule 102(e)(1)(ii) as to Vogt and Rule 102(e)(1)(iii) as to Boyd of the Commission’s Rules of +Practice.1 + +1 Section 4C provides, in relevant part, that: + 2 +II. + + After an investigation, the Division of Enforcement alleges: + +SUMMARY +1. This case involves financial accounting and reporting fraud, as well as audit +failures, related to the valuation of certain oil and gas assets acquired by Miller Energy, an oil and +gas company headquartered in Knoxville, Tennessee. Miller Energy purchased these assets, which +are located in Alaska, for $2.25 million in cash – along with the assumption of certain liabilities it +valued at approximately $2 million – during a competitive bid in a bankruptcy proceeding in +December 2009. +2. The Company subsequently reported those assets at an overstated value of $480 +million, and recognized a one-time “bargain purchase” gain of $277 million for its fiscal third +quarter ended January 2010 and fiscal year ended April 2010. +3. The Alaska acquisition was the single most important event in Miller Energy’s +nearly forty year history, transforming it from a company long mired in the penny-stock arena to +one traded on a national exchange. For the week preceding the acquisition, Miller Energy’s stock +closed at an average price of $0.66 per share. Since the acquisition, Miller Energy has raised tens of +millions of dollars in debt and equity, listed its stock on the New York Stock Exchange (the +“NYSE”), had its stock traded at nearly $9 per share, and achieved in 2013 a market capitalization +of $393 million. +4. Miller Energy’s CFO at the time, Boyd, failed to account for the acquisition in +accordance with generally accepted accounting principles (“GAAP”). Accounting Standards +Codification (“ASC”) 805, Business Combinations, required Miller Energy to record the value of its +acquired Alaska assets at “fair value.” However, contrary to authoritative accounting guidance, +Boyd used as fair value a reserve report that was prepared by a petroleum engineer firm using the +rules for supplemental oil and gas disclosures. As set forth in GAAP, the numbers used in these + +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. +Rule 102(e)(1)(ii) provides, in pertinent part, that: +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing befo re +it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. +Rule 102(e)(1)(iii) provides, in pertinent part, that: +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or prac ticing 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 +supplemental disclosures do not reflect fair value, and the reserve report used by Boyd expressly +disclaimed that the numbers therein represented the engineer firm’s opinion of fair value. The +reserve report Boyd used also contained expense numbers that were knowingly understated by +David M. Hall (“Hall”), the CEO of Miller Energy’s Alaska operations. In addition, Boyd double +counted $110 million of certain fixed assets that were already included in the reserve report. +5. Miller Energy’s financial statements for fiscal 2010, the first annual period in which +the Company reported the fair value of the acquired assets, was audited by Sherb & Co. LLP +(“Sherb & Co.”), a now defunct CPA firm that was suspended by the Commission in 2013 for +improper professional conduct unrelated to this matter. The lead engagement partner on the Miller +Energy audit, Vogt, failed to comply with the Public Company Accounting Oversight Board (the +“PCAOB”) rules and standards in auditing Miller Energy’s financial statements that included its +accounting for its Alaska acquisition. Vogt failed to exercise due professional care and skepticism +by not adequately assessing whether the Company’s accounting treatment for the acquisition +complied with GAAP. Vogt also failed to obtain sufficient competent evidential matter for +management’s assertions regarding the fair value of the Alaska assets. +RESPONDENTS +6. Miller Energy Resources, Inc. is a Tennessee corporation with its principal place +of business in Knoxville, Tennessee. It operates and develops oil and gas wells in north and south +central Alaska. The Company operated oil and gas assets in the Appalachian region of east +Tennessee until selling them in November 2014 for $3.3 million in cash. It changed its name from +Miller Petroleum to Miller Energy Resources in April 2011. Miller Energy’s common stock is +currently registered pursuant to Exchange Act Section 12(b) and was listed on the NYSE under the +ticker symbol “MILL” until July 2015, when trading in its stock was suspended and the stock was +delisted. It previously traded on the NASDAQ Global Market from May 6, 2010 to April 11, +2011, and before then was quoted on the OTC Bulletin Board and traded on the Pink Sheets. As of +February 26, 2015, there were 46,664,223 shares of common stock outstanding. For fiscal years +2010 through 2014, Miller Energy reported annual operating losses every year totaling $79.2 +million. Between March 2010 and August 2014, Miller Energy issued shares of common and +preferred stock for proceeds of tens of millions of dollars. +7. Paul W. Boyd, CPA, resides in Knoxville, Tennessee. From 2008 until 2011, Boyd +was the CFO and Treasurer at Miller Energy. He was the director of risk management from 2011 +until 2014. He is no longer employed by Miller Energy. He has been a licensed CPA in +Tennessee since 1993. +8. David M. Hall resides in Anchorage, Alaska. Hall has degrees in Industrial and +Electrical Engineering from Rochville University. He has served as a director of the Company and +as CEO of Miller Energy’s Alaska subsidiary since December 2009, and as Miller Energy’s Chief +Operating Officer since July 2013. He has worked with the acquired Alaska assets since at least +the mid-1990s, when Miller Energy’s predecessors began compiling the assets. Prior to joining +Miller Energy, Hall served from January 2008 to December 2009 as Vice President and General +Manager of Alaska Operations for the immediate past owner of the acquired assets. In this +capacity, Hall was the most senior employee in Alaska responsible for the day-to-day operations of +the oil and gas properties. + 4 +9. Carlton W. Vogt, III, CPA, resides in Warwick, New York. From January 2005 to +October 2011, Vogt was a partner at Sherb & Co., LLP, an accounting firm based out of New +York. He has been a licensed CPA in the state of New York since 1998. +FACTS +Background +10. Miller Energy was founded in 1967 as an oil and gas exploration and production +company, and went public via a reverse merger in 1996. Between early 2002 and December 2009, +Miller Energy’s stock price regularly traded below one dollar per share, falling to a low of $0.04 +per share in December 2007. In August 2008, Miller Energy named a new CEO. Soon thereafter, +the Company began acquiring additional oil and gas properties. +Miller Energy Acquires and Overvalues the Alaska Assets +11. In the fall of 2009, Miller Energy became aware of certain oil and gas properties in +Alaska that were in the process of being “abandoned” as part of the bankruptcy proceedings of a +California-based energy company. +12. Unable to service its heavy debt and pay the significant monthly costs required to +operate the properties, the bankrupt entity unsuccessfully sought for almost a year to sell its Alaska +assets. Beginning in December 2008, months before it filed for bankruptcy, the former owner of +the assets, with the help of one of the world’s leading financial advisory and asset management +firms, marketed the same group of assets that Miller Energy ultimately bought to 40 potential +buyers. This process failed to attract any bidders, and the assets were auctioned by the bankruptcy +court in July 2009, with the winning bidder agreeing to a total purchase price of $8 million for the +assets. A second entity, who bid $7 million, was designated as the back-up purchaser. Neither +bidder closed. +13. As a result, the former owner of the assets sought in August 2009, and was granted +in September, an order from the bankruptcy court allowing it to abandon title to the assets due to a +lack of interest. +14. Due to renewed interest in the assets following their abandonment from Miller +Energy, the bankruptcy court permitted the debtor to reacquire the Alaska assets and sell them to +Miller Energy in a competitive auction for $2.25 million in cash and the assumption of certain +limited liabilities. The transaction closed on December 10, 2009. +15. On March 22, 2010, Miller Energy filed its quarterly report on Form 10-Q for its +fiscal third quarter ended January 31, 2010 and reported a value of $480 million for the Alaska +acquisition, which amount was comprised of $368 million for oil and gas properties and $110 +million for fixed assets. Miller Energy also reported an after-tax $277 million “bargain purchase +gain,” which boosted net income for the quarter to $272 million – an enormous increase over the +$556,097 loss reported for the same period the year before. +16. As detailed below, these inflated balance sheet and income statement numbers were +repeated in numerous documents subsequently filed with the Commission. + 5 +17. The newly-booked value of the Alaska acquisition, which resulted in a nearly +5,000% increase in Miller Energy’s total assets, had a significant impact on Miller Energy’s stock +price. On December 10, 2009, the date of the transaction, Miller Energy’s stock closed at $0.61 +per share. By March 31, 2010, Miller Energy’s stock closed 982% higher at $6.60 per share. +Weeks later, its stock began trading on NASDAQ and, after moving to the NYSE a year later, +reached an all-time high price on December 9, 2013 of $8.83 per share. +18. As described in detail below, Miller Energy materially overstated the value of its +Alaska assets by more than four hundred million dollars. +Under GAAP, Miller Energy Was Required + to Record the Alaska Acquisition at Fair Value +19. ASC 805, Business Combinations – formerly Statement of Financial Accounting +Standards (“SFAS”) 141(R) – became effective in December 2008. Among its principal revisions, +ASC 805 requires acquisitions that result in a “bargain purchase,” e.g., entities purchased at fire +sales prices in non-orderly transactions, to be measured at fair value, with any resulting gain +recorded on the income statement. +20. ASC 820, Fair Value Measurements (formerly SFAS 157), provides the framework +for measuring fair value. “Fair value” is defined in ASC 820 as “the price that would be received +to sell an asset or paid to transfer a liability in an orderly transaction between market participants at +the measurement date.” A reporting entity must determine an appropriate fair value using one or +more of the valuation techniques described in accounting literature. +21. ASC 820 outlines three broad approaches to measure fair value: the market +approach, income approach, and cost approach. Under the market approach, prices and other +relevant information generated by market transactions involving identical or comparable assets or +liabilities are used to measure fair value. The income approach utilizes valuation techniques to +convert future amounts to a single discounted present value amount. Finally, the cost approach is +based on the amount that currently would be required to replace the assets in service, i.e., current +replacement cost. +22. ASC 820 emphasizes that fair value is a market-based measurement, not an entity- +specific measurement, and should be determined based on the assumptions market participants +would use in pricing the asset or liability. +23. ASC 820 emphasizes that when a price for an identical asset or liability is not +observable entities should use a “valuation technique that maximizes the use of relevant observable +inputs and minimizes the use of unobservable inputs” and entities may not ignore assumptions +market participants would use.2 + +2 ASC 820 defines “unobservable inputs” as “inputs that reflect the reporting entity’s own assumptions about the +assumptions market participants would use in pricing the asset or liability developed based on the best information +available in the circumstances” and “observable inputs” as “inputs that reflect the assumptions market participants +would use in pricing the asset or liability developed based on market data obtained from sources independent of the +reporting entity.” + 6 +24. When computing their estimate of fair value, Miller Energy and Boyd failed to +consider the existence of numerous, readily apparent data points strongly indicating that the assets +were worth substantially less than the $480 million value Miller Energy recorded. In failing to do +so, Miller Energy and Boyd, materially overstated the value of the newly acquired Alaska assets. +25. As described below, Miller Energy purported to value its Alaska acquisition using +the income approach for the oil and gas reserves and the cost approach for certain fixed assets. +The Valuation of the Acquired Oil and Gas Properties +Was Based Upon a Reserve Report, Which Does Not Represent Fair Value +26. To record the value of the acquired oil and gas properties, Miller Energy and Boyd +requested and improperly used a reserve report prepared by an independent petroleum engineer +firm. +27. Reserve reports are commonly used in the oil and gas industry to estimate quantities +of oil and gas (the reserves) expected to be recovered from existing properties.3 Generally, these +reports list reserves in categories based on a minimum estimated percentage probability of eventual +recovery and production, i.e., proved, probable, and possible. Information in reserve reports that +are prepared in accordance with Commission regulations is frequently used, for among other +purposes, to satisfy supplemental accounting disclosure requirements concerning estimates of +future oil and gas production. However, the numbers used in reserve reports for this purpose are +expressly not considered “an estimate of fair market value.”4 +28. Shortly after the acquisition, Boyd asked Hall – a non-accountant with no formal +accounting training – to obtain a reserve report for the Alaska properties in order to determine the +fair value of the acquired assets to be reported on Miller Energy’s Form 10-Q for the quarter ended +January 31, 2010. +29. On January 5, 2010, Hall hired a petroleum engineer firm to prepare a reserve +report using a pretax present value of net cash flows discounted at 10% (“PV-10”), which, while + +3 Oil and gas reporting companies are subject to two principal authoritative pronouncements governing financial +accounting and reporting for oil and gas activities: Rule 4-10 of Regulation S-X (17 C.F.R. 210.4-10), Financial +Accounting and Reporting for Oil and Gas Producing Activities Pursuant to the Federal Securities Laws and the +Energy Policy and Conservation Act of 1975 (“Rule 4-10”); and ASC 932-235-50-29 through 33 (formerly SFAS +19, Financial Accounting and Reporting by Oil and Gas Producing Companies and SFAS 69, Disclosures About Oil +and Gas Producing Activities). ASC 932 establishes disclosure requirements for significant oil and gas activities, +including disclosure of the “standardized measure,” which is the future after -tax net cash flows discounted at 10%. +A non-GAAP measure known as “PV-10” is similar to the standardized measure but is typically presented on a +pretax basis. The FASB has noted that the standardized measure supplies investors with useful information, +however, they also noted their concern “that users of financial statements understand that it is neither fair market +value nor the present value of future cash flows. It is a rough surrogate for such measures, a tool to allow for a +reasonable comparison of mineral reserves and changes through the use of a standardized method that recognizes +qualitative, quantitative, geographic, and temporal characteristics.” Paragraph 83 of the Basis for Conclusions of +SFAS 69. +4 See Paragraph 77 of the Basis for Conclusion of SFAS 69 (“Although it cannot be considered an estimate of fair +market value, the standardized measure of discounted net cash flows should be responsive to some of the key variables +that affect fair market value, namely, changes in reserve quantities, selling prices, production costs, and tax rates.”). + 7 +appropriate with further adjustments for SEC supplemental disclosures, was not indicative of fair +value. +30. The petroleum engineer firm did not know Miller Energy intended to use the report +for fair value purposes and believed that the purpose of the report was for use as supplemental data +in the company’s SEC disclosures. Indeed, the two page engagement letter with the engineer firm +includes no language about “fair value,” “fair market value” or authoritative accounting literature. +31. The reserve report was finalized in February 2010 and reflected PV-10 of $368 +million. +32. Upon receiving the reserve report, Boyd, without undertaking any additional +analysis, merely recorded as the fair value of the acquired oil and gas properties the sum of the PV- +10 estimates for 100% of the proved, probable, and possible reserves, which increased the book +value of Miller Energy’s oil and gas properties on its balance sheet by $368 million. +33. The reserve report itself clearly stated that the numbers therein were not an estimate +of fair market value. Specifically, on page 3 of the report, it states that “[t]he discounted values +shown are for your information and should not be construed as our estimate of fair market value.” +Boyd never reviewed or questioned any of the reserve report’s assumptions or calculations, nor did +he communicate with the engineer firm about the reserve report. +34. The use of the PV-10 numbers as fair value conflicted with contemporaneous +representations Miller Energy made to investors. Specifically, in its fiscal 2010 Form 10-K, which +was the first annual report that included the inflated values, Miller Energy expressly told investors +that “[o]ur PV-10 measure and the standardized measure of discounted future net cash flows do not +purport to present the fair value of our natural gas and oil reserves.” Despite that disclosure, Miller +Energy had actually used its PV-10 measure in that very same report as the fair value of its +acquired properties. +35. The $368 million reserve report value did not represent fair value for several +reasons. +36. Despite showing years of net profit that market participants would expect to be +taxable, the reserve report did not make any adjustments for income taxes. +37. At Miller Energy’s request, the reserve report used a 10% discount rate that was +inappropriate under GAAP for determining fair value. In a discounted cash flow model, a discount +rate is used to account for the uncertainties associated with risk and the time value of money. A +discount rate is the required rate of return that an investor would demand – based on the risks +associated with the benefit stream under consideration – to induce the investor to make an +investment. By failing to consider the discount rate using assumptions market participants would +use, Miller Energy materially overstated the value of the acquired oil and gas properties. +38. The valuation also overstated cash flows from certain categories of reserve +estimates (e.g., “probable” and “possible” reserves) by failing to apply any risk weight to such +reserves and the resulting cash flows. Given the high degree of uncertainty associated with cash + 8 +flows from these reserve estimate categories, they are required to be risk weighted in order to +reflect an appropriate valuation. +39. The reserve report did not include amounts for certain asset retirement obligations, +i.e., the legal obligations associated with the retirement of tangible long-lived assets. +40. Finally, the $237 million of projected operating and capital expenses in the reserve +report, which were provided by Miller Energy and Hall, were intentionally understated, resulting in +an overstated valuation. +41. In fact, one petroleum engineer firm contacted but not used by Miller Energy +thought that the expected level of expenses made a significant portion of the acquisition +unprofitable. Initially, Hall contacted the petroleum engineer firm who had previously provided +the past two owners of the properties with reserve reports, and thus had unfettered access to past +operating data, and requested a quote for “updating” a prior reserve report. That firm told Hall that +it would not assign any value to one of the largest fields acquired, the Redoubt Shoal field, because +it was uneconomical – i.e., expected future expenses exceeded expected future cash flows – and +explained that it would not put its “name on a report that implies value exists where it likely does +not.”5 +42. Boyd was aware that Miller Energy chose the new firm because the prior firm +would not assign any value to the Redoubt Shoal field. The Redoubt Shoal field – which +represented $291 million of the $368 million in fair value recorded by Miller Energy – showed +positive future cash flows in the reserve report primarily because Hall gave the new engineer firm +understated and unsubstantiated expense numbers. Boyd had previously been advised by Vogt that +the lack of any controls over Hall’s expense estimates was a “concerning void.” +43. Miller Energy and Hall provided expense projections that, in many cases, were +significantly lower than past actual experience. For example, internal documents maintained by +Hall indicate that the cost to drill a new well in the Redoubt field was roughly $13 million. +However, Hall told the engineer firm to use a cost of $4.6 million per well in its reserve report. +And instead of using recent expense data Hall gave the engineer firm nearly three year old +operating expense data, which he revised down on the pretext that Miller Energy could run a leaner +operation than former operators of the properties. By way of example, Hall told the engineer firm +that the offshore Redoubt field would cost $399,000 per month to operate when it actually cost the +seller more than $600,000 per month and when internal estimates show that Miller Energy and +Hall expected the field to cost more than $800,000 per month once fully operational. Additionally, +in some years, the report included zero expenses for operating the facilities in Redoubt and another +field. + +5 Unique among the oil and gas properties purchased by Miller Energy, Redoubt Shoal is an offshore field in Cook +Inlet, Alaska, which requires the use of an offshore platform that sits in seventy feet of water, is accessible onl y by +boat or helicopter, and drills to depths in excess of 12,000 feet. Offshore drilling presents risks and costs not +associated with onshore operations. + 9 +44. Overall, the reserve report implied operating expenses of $4 per barrel of oil +equivalent (“boe”) for all categories of reserves. That level of operating expenses was +unreasonable in light its predecessor’s actual operating expenses of $32.50/boe in 2008 and +$55.42/boe in the first half of 2009 before the wells were shut-in. +45. By understating the expense numbers, the Miller Respondents overvalued the oil +and gas properties by tens of millions of dollars. +The Fair Value of the Acquired Fixed Assets Was Double-Counted and Overstated +46. In addition to the $368 million value recorded for the oil and gas properties, Miller +Energy also erroneously recorded a separate value of $110 million for acquired fixed assets, such +as facilities and pipelines ancillary to the oil and gas reserves. +47. In a February 8, 2010 email, Boyd informed Hall that he needed an amount to use +as fair value for the fixed assets obtained as part of the Alaska acquisition. He noted that, ideally, +the value should be what a willing buyer would pay for the assets, but “[i]n the absence of that, +replacement values or something similar would probably work.” Two days later, Boyd was sent an +“asset replacement cost study” purportedly provided by an independent insurance broker, which +appeared to list the replacement cost for the assets as $110 million. The “study” was dated +September 5, 2008, but “revised” on February 9, 2010. +48. Without any additional analysis, Boyd recorded the amount in the revised insurance +study on Miller Energy’s balance sheet. +49. The recording of assets at a value of $110 million was improper for several reasons. +50. Miller Energy’s use of the values in the insurance study resulted in counting the +value of the fixed assets twice, thereby overstating the value of such assets. The reserve report +Miller Energy relied on to value the acquired oil and gas properties used a discounted cash flow +model. Valuation specialists use such models to estimate the value of an enterprise’s “operating +assets” – i.e., the assets employed to generate future cash flows – by converting future benefit +streams into a net present value. In Miller Energy’s case, the fixed assets in the insurance study +were the very same operating assets that were expected to generate the future cash flows in the +reserve report. Accordingly, they should not have been separately valued. +51. Prior to the acquisition, all of the production from the offshore Redoubt Shoal field +ran through the Osprey platform, which had no processing facilities or power generating capability +of its own. Power was sent from generators housed within the Kustatan Production Facility to the +platform via a subsea line, which was connected to an underground power grid that ran throughout +all of the acquired properties. Moreover, production from the offshore platform was sent onshore +for processing through pipes to the Kustatan Production Facility. Absent the platform, there would +have been no way to obtain oil and gas from Redoubt Shoal without incurring upfront capital +expenditures to replace the platform and its related infrastructure. Similarly, without the other +production facilities, the platform would have lacked power and somewhere to process its oil and +gas. + 10 +52. The reserve report Miller Energy used for the valuation recognized the +interconnectedness of the properties, as it expressly listed the facilities and the offshore platform as +assets used to generate the future cash flows. +53. In short, because the fixed assets were integral to the operations of the acquired +properties, their values were captured in the reserve report’s cash flows. Consequently, by +separately valuing the same operating assets, Miller Energy overstated the value of the Alaska +assets by as much as $110 million. +54. The insurance study also did not reflect fair value because the version of the +insurance study used by Boyd purported to show “asset replacement cost.” Absent further +adjustments, replacement cost new does not qualify as fair value under GAAP. +55. Miller Energy, at the direction of Boyd and Hall, also refashioned a preexisting +insurance study to make it appear that its own value of $110 million derived from a third party. +The numbers in the fixed asset study were given to the insurance broker, and its predecessor, by its +clients (i.e., Miller Energy and the previous owners of the fixed assets) as far back as 2007 and +were used as starting points for other types of estimates, such as estimates for possible losses +resulting from fire or natural disasters. The two employees at the insurance broker who were most +familiar with the original “Loss Estimates Study,” including the engineer who authored it, +confirmed that no one at the broker ever tested or in any way double-checked the values given to +them. +56. Boyd and Hall knew or knowingly disregarded the fact that the insurance study did +not reflect fair value or any analysis by the insurance broker. +57. On February 8, 2010, Hall directed Alaska personnel to contact the insurance +broker and another oil and gas consulting company to ask them for a report reflecting fair value or +replacement cost. The insurance broker responded on February 9, and told Miller Energy in an +email copied to Hall that it could not provide a report showing replacement costs. +58. Miller Energy also contacted a separate consulting firm and sent it the insurance +broker’s original 2008 insurance report. Late on February 8, the consulting firm informed Miller +Energy that the insurance study it sent was a “good reference” but the report did not state “value or +replacement cost.” The firm offered to conduct its own analysis, but advised that the estimate +would take “approximately 2-3 weeks to complete” and “cost around $15,000-$18,000.” +59. Upon hearing the news that a new report might take two to three weeks, Alaska +personnel, including Hall, called Boyd. According to one participant on this call, Boyd said he +could not wait weeks for a new report. He “needed it quickly and he needed to base it on +something . . . a professional had to sign off on it, not us, some third party. . . .” During the call, +Boyd and Hall decided to rely on numbers in the insurance report as replacement costs, despite +Hall having been told by the broker that it could not provide Miller Energy with replacement costs. +60. With the aim of making the report appear as though it reflected replacement costs, +Hall provided a subordinate with edits to the 2008 insurance report that significantly altered its +appearance, including changing its name from “Loss Estimates Study” to “Asset replacement cost + 11 +study.” The revised report, which Miller Energy gave to Sherb & Co., omitted the insurance +broker’s methodology and analysis. As a result, the only numbers reflected in the revised report +were the ones provided to the broker by Miller Energy and its predecessors. +61. As a result of the foregoing, Miller Energy overvalued the Alaska assets by more +than $400 million. +62. As a result of the fraudulent valuation, Miller Energy filed with the Commission +financial reports that materially misstated the value of its assets, as follows: Forms 10-Q for the +third quarter of fiscal year 2010 and all three quarters of fiscal years 2011 through 2015; Forms 10- +K for fiscal years ended 2010 through 2014; the Form S-1 filed on August 8, 2010; the Forms S-3 +filed on September 6, 2012 and October 5, 2012; and prospectuses filed between August 25, 2010 +through August 21, 2014 pursuant to Rule 424. The fraudulent valuation also resulted in Miller +Energy filing with the Commission financial reports that materially misstated its net income, as +follows: Forms 10-Q for the third quarter of fiscal year 2010, all three quarters of fiscal 2011, and +the first two quarter of 2012; Forms 10-K for fiscal years ended 2010 through 2012; the Form S-1 +filed on August 8, 2010; the Forms S-3 filed on September 6, 2012 and October 5, 2012; and +prospectus supplements filed between August 25, 2010 through August 21, 2014 pursuant to Rule +424. In addition, the fraudulent valuation rendered no fewer than 15 Forms 8-K filed between +March 2010 through at least December 2014 materially false and misleading. +Vogt’s Fiscal Year 2010 Audit of Miller Energy +63. In August 2008, Miller Energy hired Sherb & Co. to become the company’s +independent public accountant. Vogt led an audit team that audited Miller Energy’s financial +statements for fiscal years ended 2009 and 2010. +64. As the partner in charge of the fiscal year 2010 Miller Energy audit, Vogt failed to +perform the 2010 Miller Energy audit in accordance with PCAOB Auditing Standards. These +deficiencies included, among other items, failing properly to audit the fair value measurements, use +the work of a specialist, plan, staff and supervise the audit, obtain sufficient competent audit +evidence, exercise due care and professional skepticism, and perform required audit testing. +65. Vogt’s failures related to the auditing of the Alaska asset acquisition. Despite the +materiality of the transaction on Miller Energy’s financial statements, Vogt failed to adequately +test the valuation of the assets and the related calculation of the gain on acquisition. Instead, he +inappropriately relied on the aforementioned reserve report and the so-called asset replacement +cost study to justify Miller Energy’s $480 million valuation of the Alaska assets. +66. Vogt did not perform the necessary procedures to enable him to use the findings of +the reserve report. See AU § 336.12.6 He and his audit staff performed a limited evaluation of the +petroleum engineer firm’s work and its qualifications as a specialist (as a petroleum engineer, not +as a fair value appraiser). The reserve report, which was included in the audit workpapers, clearly +stated that the engineer firm was not engaged to – and did not in fact – perform a fair value + +6 References in this order are to the PCAOB standards in effect at the time of the relevan t conduct. + 12 +estimate for the Alaska assets. Among other significant flaws, Vogt never obtained an +understanding of the objectives and scope of the specialist’s work or the appropriateness of using +the specialist’s work for the purpose of fair valuing the assets. See AU § 336.09. Nor did he make +the appropriate tests of data provided to the specialist, including operating and capital expenses +estimated and provided by Hall. See AU § 336.12. +67. The audit of the recorded fixed assets of $110 million was similarly flawed. A +member of the audit team obtained the asset replacement cost study and placed a copy of it in the +workpapers, but Vogt failed to consider the nature of the fixed assets and whether they would be +utilized to generate the cash flow from the oil and gas properties, and, if so, what remainder value +would exist. Nor did Vogt or the audit team perform any meaningful work to consider the +expertise and experience of those persons determining the fair value measurement, the significant +management assumptions used in determining the fair value, and the documentation supporting +management’s assumptions. See AU § 328.12. +68. Vogt knew at the time of the accounting for the acquisition that Miller Energy had +insufficient accounting staff and that any accounting was suspect. In a December 22, 2009 email +to Miller Energy’s senior management, Vogt indicated that he believed the Company’s accounting +staff was deficient, and that Boyd cut too many corners on the accounting documentation. +Furthermore, Vogt stated that Hall’s modeling of cash flows and expenses was “concerning” +because there was no one taking a detailed look at his estimates. In an email dated March 17, +2011, Vogt also knew that the reserve report used suspect data and was completed on what he +described as a “rushed basis,” as Miller Energy “had very little time if none for any true due +diligence of much depth into what [it] purchased.” +69. Vogt, on behalf of Sherb & Co., issued an audit report containing an unqualified +opinion for use in Miller Energy’s 2010 Form 10-K that stated falsely that the audit had been +conducted in accordance with the PCAOB’s standards and that Miller Energy’s financial +statements were presented fairly, in all material respects, in conformity with GAAP. The specific +failures are detailed below. +Failures Auditing Fair Value Measurements and Disclosures (AU § 328) +70. AU § 328 requires auditors to obtain sufficient competent audit evidence to provide +reasonable assurance that fair value measurements and disclosures are in conformity with GAAP. +AU § 328.03. The standard provides that “[t]he auditor should test the data used to develop the fair +value measurements and disclosures and evaluate whether the fair value measurements have been +properly determined” including “whether the data on which the fair value measurements are based, +including the data used in the work of a specialist, is accurate, complete and relevant . . . .” AU § +328.39. In addition, “[t]he auditor should evaluate the sufficiency and competence of the audit +evidence obtained from auditing fair value measurements and disclosures as well as the +consistency of that evidence with other audit evidence obtained and evaluated during the audit.” +AU § 328.47. If a valuation model is utilized, the auditor reviews the model and evaluates whether +the assumptions used are reasonable. AU § 328.38. + 13 +71. Vogt failed to comply with these requirements in connection with the 2010 audit of +Miller Energy. While Vogt performed some testing on the data used to create the reserve report, +he failed to test key elements such as the discount rate utilized, the risk weighting of the probable +and possible reserves, estimated oil prices, and operating and capital expenses. Vogt also never +properly considered the relevancy of the reserve report, improperly relying exclusively on the +report since the specialist, a petroleum engineer, was not engaged to estimate a fair valuation, as +expressly indicated in the report. Nor did he consider the consistency of the evidence in light of +the other evidence, such as Miller Energy’s actual purchase price of the assets (reported at less than +$5 million), and the fact that the assets had previously been abandoned during a bankruptcy +proceeding. While Vogt and his staff reviewed some aspects of the specialist’s valuation model, +they failed to sufficiently review and evaluate the reasonableness of assumptions such as the +discount rate, risk weighting of certain reserves, future oil prices, and operating and capital +expenses. +72. Vogt also failed to obtain sufficient audit evidence to support the fair value of the +fixed assets. Vogt performed limited, if any, testing of the asset replacement cost study +purportedly supporting the fixed asset valuation. He did not assess the competency or sufficiency +of the asset replacement cost study, or understand who created the study, their qualifications, and +the data underlying their valuation. Finally, Vogt failed to consider whether some or all of the +fixed assets were being utilized in the estimated values captured in the reserve report. +Failure in Using the Work of a Specialist (AU § 336) +73. AU § 336 provides guidance to auditors when the work of a specialist is used in +performing an audit of financial statements prepared in accordance with GAAP. Among other +items, the standard requires the auditor to evaluate the specialist to ensure that the specialist +possesses the necessary skill or knowledge in the type of work under consideration and the +appropriateness of using the specialist’s work for the intended purpose. Specifically, AU § 336.08 +states that “[t]he auditor should consider the following to evaluate the professional qualifications of +the specialist in determining that the specialist possesses the necessary skill or knowledge in the +particular field: +a. The professional certification, license, or other recognition of the competence of +the specialist in his or her field, as appropriate +b. The reputation and standing of the specialist in the views of peers and others +familiar with the specialist’s capability or performance +c. The specialist's experience in the type of work under consideration.” +74. Furthermore, AU § 336.09 states “[t]he auditor should obtain an understanding of +the nature of the work performed or to be performed by the specialist. This understanding should +cover the following: +a. The objectives and scope of the specialist’s work +b. The specialist's relationship to the client +c. The methods or assumptions used + 14 +d. A comparison of the methods or assumptions used with those used in the +preceding period +e. The appropriateness of using the specialist's work for the intended purpose +f. The form and content of the specialist’s findings that will enable the auditor to +make the evaluation described in paragraph [336].12.”7 +75. Although the Standard allows an auditor to use the work of a specialist as evidential +matter in performing substantive tests to evaluate material financial statement assertions (see AU § +336.03), Vogt failed in several respects in his use of a specialist regarding the valuation of Miller +Energy’s Alaska acquisition. +76. Vogt did not properly consider the petroleum engineer’s experience in fair +valuation of assets, which was nonexistent. See AU § 336.08. Vogt also failed to obtain an +understanding of the objectives and scope and intended purpose of the petroleum engineer’s +engagement for Miller Energy, which was to produce a reserve report for reserve disclosure +purposes, not a fair valuation of acquired assets. See AU § 336.09. Indeed, the single page of the +reserve report included in Vogt’s workpapers, to support his evaluation of Miller Energy’s $368 +million valuation, clearly states that the “values shown . . . should not be construed as our estimate +of fair market value.” +77. Furthermore, Vogt failed to adequately obtain an understanding of the methods and +assumptions used by the specialist, or appropriately test data provided to the specialist. See AU § +336.12. There is no evidence that Vogt considered the appropriateness of certain key assumptions +used by the petroleum engineer, such as the discount rate, estimated price of oil and gas, and the +lack of risk weighting of probable and possible reserves. Finally, Vogt, despite alerting Boyd and +Miller Energy’s then CEO of the lack of sufficient review and inquiry, failed to adequately test the +operating and capital expense estimates provided to the specialist by Miller Energy, and took few +audit steps, other than inquiry, to assess the reasonableness of the expense estimates. +78. Vogt performed no steps to evaluate the qualifications of the authors of the asset +replacement cost study, or understand the methods or assumptions they used or the appropriateness +of using the Asset replacement cost study to support the valuation of the fixed assets at $110 +million. +Failure to Exercise Due Professional Care in the Performance of Work (AU § 230) +79. PCAOB Standards require auditors to exercise due professional care in the planning +and performance of the audit. See AU § 230.01. Due professional care requires the auditor to +exercise professional skepticism: an attitude that includes a questioning mind and a critical +assessment of audit evidence. See AU § 230.07. Moreover, gathering and objectively evaluating + +7 AU § 336.12 states that an auditor should evaluate the appropriateness and reasonableness of methods and +assumptions used, during which the auditor should: “(a) obtain an understanding of the methods and assumptions +used by the specialist, (b) make appropriate tests of data provided to the specialist, taking into account the auditor's +assessment of control risk, and (c) evaluate whether the specialist's findings support the related assertions in the +financial statements.” + 15 +audit evidence requires the auditor to consider the competency and sufficiency of the evidence. +See AU § 230.08. +80. Vogt failed to exercise due professional care regarding the audit of the Alaska +acquisition valuation during the 2010 Miller Energy audit. Miller Energy had valued the assets +purchased for a few million dollars at $480 million and had recorded a corresponding $277 million +bargain purchase gain. Given the size of the transaction, Vogt should have focused more closely +on the diligence required to gather and objectively evaluate the evidence supporting the fair value +of the oil and gas properties acquired to comply with ASC 805 and common industry practice. He +failed to adequately consider the competency and sufficiency of the reserve report as evidence of +the fair value of the acquired oil and gas properties. Vogt also performed limited procedures and +failed to sufficiently evaluate the evidentiary value of the asset replacement cost study, including +failing to understand the source of the fixed asset values therein and the competency of the report +authors. + Failure to Plan and Supervise (AU § 311) +81. AU § 311 requires an auditor to adequately plan the work and properly supervise +assistants. AU § 311.01. In planning the audit, the auditor should consider, among other matters, +the entity’s business, the entity’s accounting policies and procedures, and planned assessed level of +control risk. AU § 311.03. A written audit program is required. AU § 311.05. Supervision +involves directing the efforts of assistants who are involved in accomplishing the objectives of the +audit and determining whether those objectives were accomplished. The extent of supervision +appropriate in a given instance depends on many factors, including the complexity of the subject +matter and the qualifications of persons performing the work. AU § 311.11. +82. Vogt’s work did not meet this standard. Vogt’s audit program to test Miller +Energy’s fair value assessment of the Alaska acquisition was insufficient. The planned procedures +largely consisted of verifying the credentials of a specialist. Vogt’s audit program failed to set +forth procedures necessary to ensure the appropriateness of using the specialist’s work for the +purpose of a fair valuation. Nor did his audit program provide additional and alternate procedures +for the insufficient evidence provided by the work of the specialist. As to the fixed assets, Vogt’s +program was insufficient in that it merely required agreeing the asset balance to the Asset +replacement cost study provided by Miller Energy. +83. Vogt’s supervision of his staff was also deficient. Vogt spent little time on-site +while the field work was conducted, and he knew the staff auditors had insufficient oil and gas +industry experience. It was evident during their respective testimonies that the two staff members +assigned by Vogt to the Miller Energy audit, whose experience consisted almost entirely of +auditing microcap companies, were ill-prepared to test a transaction purportedly valued in excess +of $400 million. The most junior staff member was not a Certified Public Accountant, did not +appear to comprehend basic accounting principles, including elementary aspects of fair value +accounting, yet was charged with the testing of the oil and gas properties fair valuation. + + 16 + Failure to Properly Assess Audit Risk and Materiality in Conducting an Audit (AU § 312) +84. AU § 312 states that, when an auditor has concluded that there is a 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. 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 +85. Vogt’s knowledge of the magnitude of the Alaska acquisition, and his knowledge +of the inadequacy of Miller Energy’s accounting personnel, including Boyd, should have resulted +in increased scrutiny of Miller Energy’s valuation of the Alaska assets. Yet Vogt assigned crucial +audit procedures to staff who lacked appropriate industry and auditing experience, and did not +sufficiently supervise their work. + Failure to Obtain Sufficient Competent Evidential Matter (AU § 326) +86. 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. Since he over +relied on a reserve report and the asset replacement cost study, and took limited to no additional +audit steps to test that audit evidence, Vogt failed to obtain sufficient evidence for the fair value of +the Alaska acquisition. +Failure to Issue an Accurate Audit Report (AU § 508) +87. Under AU § 508, an auditor may only express an unqualified opinion on historical +financial statements when the auditor has formed such an opinion on the basis of an audit +performed in accordance with PCAOB standards. AU § 508.07. Based upon the audit failures +discussed above, Vogt should not have issued an audit report containing an unqualified opinion on +Miller Energy’s fiscal year 2010 financial statements. +VIOLATIONS +88. As a result of the conduct described above, Miller Energy violated Section 17(a) of +the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit +fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of +securities. Boyd willfully aided and abetted and caused, and Hall caused, Miller Energy’s +violations of Section 17(a) of the Securities Act, Sections 10(b) of the Exchange Act and Rule 10b- +5 thereunder. +89. As a result of the conduct described above, Boyd willfully violated, and Hall +violated, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 +thereunder, which prohibit fraudulent conduct in the offer or sale of securities and in connection +with the purchase or sale of securities. + 17 +90. As a result of the conduct described above, Miller Energy violated Section 13(a) of +the Exchange Act, and Rules 13a-1, 13a-11, and 13a-13 thereunder, which require that every issuer +of a security registered pursuant to Exchange Act Section 12 file with the Commission, among +other things, annual, current, and quarterly reports as the Commission may require. Boyd willfully +aided and abetted and caused, and Hall caused, Miller Energy's violations of Section 13(a) of the +Exchange Act, and Rules 13a-1, 13a-11, and 13a-13 thereunder. +91. As a result of the conduct described above, Miller Energy 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. Boyd willfully aided and abetted and caused, and Hall caused, Miller +Energy’s violations of Section 13(b)(2)(A) of the Exchange Act. +92. As a result of the conduct described above, Miller Energy violated Section +13(b)(2)(B) of the Exchange Act, which requires all reporting companies to devise and maintain a +system of internal accounting controls sufficient to provide reasonable assurances that transactions +are recorded as necessary to permit preparation of financial statements in accordance with GAAP. +Boyd willfully aided and abetted and caused, and Hall caused, Miller Energy's violations of +Section 13(b)(2)(B) of the Exchange Act. +93. As a result of the conduct described above, Boyd willfully violated, and Hall +violated, Section 13(b)(5) of the Exchange Act 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 described in Section 13(b)(2) of the Exchange +Act. +94. As a result of the conduct described above, Miller Energy violated Rule 12b-20 +under the Exchange Act which requires that, in addition to the information expressly required to be +included in a statement or report filed with the Commission, there shall be added such further +material information, if any, as may be necessary to make the required statements, in light of the +circumstances under which they are made not misleading. Boyd willfully aided and abetted and +caused, and Hall caused, Miller Energy’s violations of violated Rule 12b-20 under the Exchange +Act. +95. As a result of the conduct described above, Boyd willfully violated Rule 13a-14 of +the Exchange Act which requires that an issuer’s principal executive and principal financial +officers certify each periodic report. +96. As a result of the conduct described above, Vogt 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) of the Exchange +Act and Rule 102(e)(1)(iv) define improper professional conduct with respect to persons license to +practice as accountants as (1) a single instance of highly unreasonable conduct in circumstances for + 18 +which heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct that +indicate a lack of competence. +III. +In view of the allegations made by the Division of Enforcement, the Commission deems it +necessary and appropriate in the public interest that public administrative and cease-and-desist +proceedings be instituted to determine: +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondents an opportunity to establish any defenses to such allegations; +B. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the +Exchange Act, Miller Energy, Boyd, and Hall should be ordered to cease and desist from +committing or causing violations of and any future violations of Section 17(a) of the Securities Act, +Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, +13a-1, 13a-11, and 13a-13thereunder, whether Boyd and Hall should be ordered to cease and desist +from committing violations of and any future violations of Section 13(b)(5) of the Exchange Act +and Rule 13b2-1 thereunder, whether Boyd should be ordered to cease and desist from committing +violations of and any future violations of Rule 13a-14; whether Miller Energy, Boyd, and Hall +should be ordered to pay a civil penalty pursuant to Section 8A(g) of the Securities Act and Section +21B(a) of the Exchange Act, and whether Miller Energy, Boyd, and Hall should be ordered to pay +disgorgement pursuant to Section 8A(e) of the Securities Act and Sections 21B(e) and 21C(e) of the +Exchange Act; +C. Whether, pursuant to Section 8A(f) of the Securities Act and Section 21C(f) of the +Exchange Act, Boyd and/or Hall should be prohibited, conditionally or unconditionally, and +permanently or for such period of time as the Commission shall determine, from acting as an officer +and 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; and +D. Whether, pursuant to Section 4C of the Exchange Act and Section 102(e) of the +Commission’s Rules of Practice, Boyd and Vogt should be denied, temporarily or permanently, the +privilege of appearing or practicing before the Commission as accountants. +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 Respondents shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 +of the Commission’s Rules of Practice, 17 C.F.R. § 201.220. + 19 +If Respondents fail to file the directed answer, or fail to appear at a hearing after being +duly notified, the Respondents may be deemed in default and the proceedings may be determined +against them upon consideration of this Order, the allegations of which may be deemed to be true +as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules of Practice, 17 +C.F.R. §§ 201.155(a), 201.220(f), 201.221(f) and 201.310. +This Order shall be served forthwith upon Respondents 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 + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3674.pdf b/raw/aaer/2015/AAER-3674.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a0634bad577bf2dcce737a737f3844fec4abf668 --- /dev/null +++ b/raw/aaer/2015/AAER-3674.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c649f52602da8af07e5b3e916927b91782c5b2afaecc40b4c9d28974ec9a6eee +size 214525 diff --git a/raw/aaer/2015/AAER-3675.pdf b/raw/aaer/2015/AAER-3675.pdf new file mode 100644 index 0000000000000000000000000000000000000000..392c63556ee25595031a1e90d9d55ef3908c57b3 --- /dev/null +++ b/raw/aaer/2015/AAER-3675.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:5614380d1dafccc54ebb6124c4993782c57235d63b3bc741b644d8c1d7670101 +size 164336 diff --git a/raw/aaer/2015/AAER-3675.txt b/raw/aaer/2015/AAER-3675.txt new file mode 100644 index 0000000000000000000000000000000000000000..35a66ff01fa135e0852dc7c64ed4ff5acea89323 --- /dev/null +++ b/raw/aaer/2015/AAER-3675.txt @@ -0,0 +1,71 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75645 / August 7, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3675 / August 7, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16733 + + : +In the Matter of : + : +DAWN M. SCHLEGEL, CPA : ORDER OF SUSPENSION + : PURSUANT TO RULE 102(e)(2) + : OF THE COMMISSION’S RULES + : OF PRACTICE + Respondent. : + : + : + I. + + The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Dawn M. Schlegel (“Schlegel” or “Respondent”) pursuant to Rule +102(e)(2) of the Commission’s Rules of Practice [17 C.F.R. § 201.102(e)(2)].1 + +II. + + The Commission finds that: + + 1. Schlegel was a certified public accountant in New York State. From +approximately September 1999 through April 2006, Schlegel was Chief Financial Officer of +a publicly traded company, formerly known as DHB Industries, Inc. + + +1 Rule 102(e)(2) provides, in relevant part, that: + + “Any person whose license to practice as an accountant . . has been revoked or +suspended in any State; or any person has been convicted of a felony or a misdemeanor +involving moral turpitude shall be forthwith suspended from appearing or practicing +before the Commission. . . .” + + 2. On April 6, 2015, a judgment of conviction was entered against Schlegel in +United States v. Dawn Schlegel, et al , Crim. No. 2:36 -ct-00530-JS, in the United States +District Court for the Eastern District of New York, finding her guilty of one count of +conspiracy to commit securities fraud and one count of conspiracy to commit tax fraud. + + 3. As a result of this conviction, Schlegel was sentenced to time served and +ordered to pay restitution in the amount of $92,065,727.93. + + +III. + +In view of the foregoing, the Commission finds that Schlegel has been convicted of +a felony within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + + Accordingly, it is ORDERED, that Dawn Schlegel is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the +Commission’s Rules of Practice. + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3676.pdf b/raw/aaer/2015/AAER-3676.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0c235411e26da9b8fe30de371ee68f255cde52a5 --- /dev/null +++ b/raw/aaer/2015/AAER-3676.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:6007f090920e1e4f8d46be235afc98a109d253923b76c70541b67ed5c3032839 +size 146709 diff --git a/raw/aaer/2015/AAER-3676.txt b/raw/aaer/2015/AAER-3676.txt new file mode 100644 index 0000000000000000000000000000000000000000..9bdd697f507ab196845b04e6fd28d200e1c2a4af --- /dev/null +++ b/raw/aaer/2015/AAER-3676.txt @@ -0,0 +1,138 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75666 / August 11, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3676 / August 11, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16739 + + + + +In the Matter of + +JEFFREY L. LAMSON, CPA + +Respondent. + + + + +ORDER INSTITUTING 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 Jeffrey L. Lamson (“Respondent” or “Lamson”) pursuant to Rule +102(e)(3)(i) of the Commission’s Rules of Practice.1 + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary +hearing, may, by order, . . . suspend from appearing or practicing before it any . . . +accountant . . . who has been by name . . . permanently enjoined by any court of +competent jurisdiction, by reason of his or her misconduct in an action brought by the +Commission, from violating or aiding and abetting the violation of any provision of the +Federal securities laws or of the rules and regulations thereunder. + -2- +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an +Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely +for the purpose of these proceedings and any other proceedings brought by or on behalf of +the Commission, or to which the Commission is a party, and without admitting or denying +the findings herein, except as to the Commission’s jurisdiction over him and the subject +matter of these proceedings, and the findings contained in Section III (C) below, which are +admitted, Respondent consents to the entry of this Order Instituting Administrative +Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + A. Lamson, age 50, of El Dorado Hills, California is and has been a +certified public accountant. From no later than January 2007 through September 2012 he +was licensed to practice in the State of California. His license lapsed in September 2012. + + B. From January 2007 through January 2013, Lamson participated in a +scheme involving numerous individual participants and at least 22 undisclosed “blank +check” companies (collectively the “Blank Check Companies”) in violation of the antifraud, +recordkeeping, and reporting provisions of the federal securities laws. Lamson, along with +other individuals, recruited “sole officers” to act as sole officer, director, employee, and +majority shareholders of the Blank Check Companies. The Blank Check Companies +ultimately filed false and misleading registration statements depicting them as actively +pursuing business plans, when the only plan from the onset was to have these Companies +sold as public vehicles. As part of the scheme, Lamson recruited sole officers, acted as a +sole officer in at least one of the Blank Check Companies, and performed bookkeeping +work for the Black Check Companies, including the drafting of their financial statements. + + C. On April 16, 2015, the Commission filed a complaint against +Lamson and five other Defendants in SEC v. Jeffrey L. Lamson, et al., Case No. 9:15-cv- +80496 (S.D. Fla. 2015). On June 22, 2015, the Court entered an order permanently +enjoining Lamson, by consent, from future violations of Section 13(b)(5) and Rules 13a-14, +13a-15, 13b2-1 and 13b2-2 of the Securities Exchange Act of 1934 (“Exchange Act”), 15 +U.S.C. § 78m(b)(5), and 17 C.F.R. §§ 240.13a-14, 240.13a-15, 240.13b2-1, 240.13b2-2; +and aiding and abetting violations of Section 17(a) and Rule 302 of Regulation S-T of the +Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77q(a) and 17 C.F.R. § 232.302, and +Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 10b-5, 12b-11, 12b-20, 13a-1, +13a-13, 13a-14, 13a-15, 13b2-1 of the Exchange Act, 15 U.S.C. §§ 78j(b), 78m(a), +78m(b)(2)(A), 78m(b)(2)(B), and 17 C.F.R. §§ 240.10b-5, 240.12b-11, 240.12b-20, +240.13a-1, 240.13a-13, 240.13a-14, 240.13a-15, 240.13b2-1. The Court also imposed +permanent officer and director and penny stock bars upon Lamson. Further, Lamson was + -3- +also ordered to pay disgorgement of ill-gotten gains, prejudgment interest, and a civil +money penalty with the amounts to be determined at a later date upon the Commission’s +motion. + + D. The Commission’s complaint alleged, among other things, that +Lamson and the other Defendants participated in a scheme to manufacture at least 2 2 +undisclosed Blank Check Companies as defined in Rule 419 under the Securities Act, 17 +C.F.R. § 230.419, using other Defendants as sole officers for some of these entities. The +Defendants subsequently sold 18 of the Blank Check Companies by reverse merge r or +other change -of-control transactions for approximately $6 million. The Defendants +developed a fine-tuned assembly line rife with fraud at each stage. Each of the Defendants +recruited on behalf of a Blank Check Company a sole officer, director, empl oyee, and +majority shareholder (the “sole officer”) to act in name only. The Defendants prepared a +variety of corporate documents, including board resolutions for the invalid issuance of +shares that were then the subject of false and misl eading registration statements. These +registration statements and subsequent filings with the Commission falsely depicted the +Blank Check Companies as actively pursuing business plans, when the Defendants’ only +plan from the outset was for the companies to be sold as public vehicles. Lamson and other +Defendants were sole officers who knew that at least their respective Blank Check +Companies had no active business plan other than to be sold as public vehicles, and took a +variety of actions in furtherance of the Defendants’ scheme. In particular, Lamson +performed bookkeeping work for the Black Check Companies, including the drafting of +their financial statements. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public +interest to impose the sanction agreed to in Respondent Lamson’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + Lamson is suspended from appearing or practicing before the Commission as an +accountant. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3677.pdf b/raw/aaer/2015/AAER-3677.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8842e822c28e9c2537c1603ca69e61526ee35c5b --- /dev/null +++ b/raw/aaer/2015/AAER-3677.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:946be1e3aa8e3c8dd2d3988e1c9d44e5e3d6bb9217289256b7302d3d3417d6d6 +size 144950 diff --git a/raw/aaer/2015/AAER-3678.pdf b/raw/aaer/2015/AAER-3678.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b7e13688be525b2956e44d02bb0c820aca40376c --- /dev/null +++ b/raw/aaer/2015/AAER-3678.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e255a8b488d92770f8a3c848a93a61fe0a3696017d2842033401b7c117c5ad6f +size 275274 diff --git a/raw/aaer/2015/AAER-3678.txt b/raw/aaer/2015/AAER-3678.txt new file mode 100644 index 0000000000000000000000000000000000000000..4d502d989bcd0d1dfc732ec81b49419a618a2ef8 --- /dev/null +++ b/raw/aaer/2015/AAER-3678.txt @@ -0,0 +1,363 @@ +1 + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75684 / August 12, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3678 / August 12, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16750 + + +In the Matter of + +VICENTE E. GARCIA, + + 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 (the “Exchange Act”) against Vicente E. Garcia (“Garcia” or +“Respondent”). +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings, and consents to the entry of +this Order Instituting Cease-and-Desist Proceedings, Pursuant to Section 21C of the Securities +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (the “Order”), +as set forth below. + +III. + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +2 + +Summary +1. This matter concerns violations of the anti-bribery, books and records and internal +controls provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”) by Vicente E. Garcia +(“Garcia”), a U.S. citizen and the head of Latin American sales for SAP SE (“SAP”), a European +Union corporation headquartered in Waldorf, Germany. SAP provides technology solutions and +services in approximately 188 countries and has more than 68,000 employees. Garcia and others +offered to pay bribes to two government officials, and paid bribes of at least $145,000 to another +senior government official of the Republic of Panama in order to secure software license sales of +approximately $3.7 million to various government agencies; the sales were recorded initially in +the books and records of SAP Mexico and subsequently consolidated into the financial +statements of SAP. Garcia circumvented SAP’s internal controls by falsely justifying the +discount amount offered to its local partner. In doing so Garcia helped to facilitate the local +partner’s ability to generate excess earnings on the final, end-user sale, which earnings were then +used to create a slush fund to finance the bribes paid to government officials. +Respondent +2. Vicente E. Garcia (age 65), a U.S. citizen residing in Miami, Florida, was the +Vice-President of Global and Strategic Accounts, responsible for sales in Latin America for SAP +from February 2008 until April 2014. +Related Entities +3. SAP SE (“SAP”) is a European Union corporation headquartered in Waldorf, +Germany, that provides technology solutions and services in over 180 countries. SAP’s +American Depository Shares are registered with the Commission pursuant to Section 12(b) of the +Securities Act of 1933, and listed on the New York Stock Exchange. + +4. SAP International, Inc. (“SAPI”), a Miami, Florida-based wholly-owned +subsidiary of SAP, is engaged in selling software in the North and Latin American and +Caribbean markets. SAPI does not enter into direct or indirect software or software-related +services deals with end customers. Instead, SAPI employs some of the members of the Latin +America and Caribbean (“LAC”) regional leadership team and provides some back office +operational support for some of the LAC regional subsidiaries. Garcia was on the payroll of +SAPI, but he reported to managers of both SAPI and SAP’s Brazilian subsidiary, and his +reporting chain ultimately went up to SAP in Germany. + +5. SAP Mexico S.A. de C.V. (“SAP Mexico”) is a Mexico City, Mexico-based +wholly-owned subsidiary of SAP engaged in selling software in the Mexican and Central +American markets. SAP Mexico is authorized by SAP to distribute, sell, license, and sublicense +software directly and indirectly to end customers. SAP Mexico is also authorized to provide +customers with software-related services such as implementation, maintenance, training, and +consulting. Garcia negotiated the Panamanian contracts on behalf of SAP Mexico. SAP +Mexico’s financial statements are consolidated and reported in SAP’s financial statements. + +3 + + +Facts +6. From at least June 2009 through November 2013, Garcia, along with others, +planned and executed a scheme to offer and pay bribes to three senior government officials of the +Republic of Panama in order to obtain approximately $3.7 million worth of software sales by +SAP to the Panamanian government. Garcia, in concert with others, paid bribes to one +Panamanian government official in the amount of $145,000, and promised to pay bribes to two +other government officials, all in contravention of the Foreign Corrupt Practices Act of 1977 (the +“FCPA”). + +7. Garcia was SAP’s Vice-President of Global and Strategic Accounts, responsible +for sales in Latin America from February 2008 until April 2014, when SAP requested that he +resign for his misconduct discussed herein. Garcia was employed by SAPI and worked on large +deals all over Latin America using resources and personnel from other SAP subsidiaries +including SAP Mexico. + +8. SAP, through its 272 subsidiaries, sells software licenses and related services to +263,000 customers in 188 countries. SAP’s global business is directed and operated from its +headquarters in Waldorf, Germany and executed through its numerous subsidiaries. +Approximately 15% of SAP’s sales are directly to the customer. The remainder of SAP’s +business is conducted through a network of more than 11,500 partners worldwide that provide an +additional workforce of 380,000 individuals skilled in SAP software solutions and technology. +SAP’s sales using a partner can be either (i) a direct sale to a customer with a sales commission +paid to a partner that provides assistance, (ii) an indirect sale through a partner that purchases the +software license and resells it to a customer at an independently determined increased price, or +(iii) a direct sale to the partner, which acts as a distributor and independently resells the software +licenses to customers in the future. + +9. In June 2009, Garcia’s business associate, a Panamanian lobbyist (the +“Lobbyist”), informed Garcia about potential software sales opportunities with the government +of Panama and that he had an existing relationship with the newly elected government, including +a high ranking Government Official A, who was tasked with improving technology solutions +across multiple government agencies in Panama and had significant influence over Panama’s +software purchasing decisions. Thereafter, SAP began investigating possible software sales to +the Panamanian government. Initially this endeavor was led by local SAP sales employees in +Mexico. Garcia, however, took over the business opportunity by recommending that SAP +designate the Panama government as part of the Premier Customer Network – a group of large, +strategically important, regional customers – which Garcia headed. + +10. On February 9, 2010, Government Official A asked in an e-mail whether SAP +could send him a letter inviting him to Mexico for “some fictional meetings in order to justify a +trip there on Monday and Tuesday of Carnival.” The same day, Garcia acceded to the request +and sent an e-mail to Government Official A with an attached fictitious letter on SAP letterhead +inviting him “to Mexico City so that you can directly and personally evaluate the benefits that +the Government of Mexico has obtained by adopting our products and services.” The letter also +4 + +included a fictitious itinerary of proposed meetings that never occurred. The next day, on +February 10, Garcia sent an e-mail from his personal Yahoo! e-mail account inquiring about +possible business opportunities from Government Official A stating: “Any news . . . ? Was the +document OK for him? Can you ask him to finalize a deal for us in Feb-March, I need between +$5 and $10 million.” + +11. In late February 2010, Garcia and another SAP employee traveled from Miami, +Florida to Panama and met with Government Official A and others to discuss business +opportunities. Thereafter, in April 2010, Garcia began preparing a proposal to sell +approximately $29 million worth of software licenses to the Panamanian social security agency, +anticipating that this sale would be the first of multiple deals with various ministries and +agencies of the Panamanian government totaling over $100 million. Ultimately, some of these +additional sales never materialized and others were smaller than expected. + +12. Garcia and others were informed by the Lobbyist that in order to obtain these +contracts from the government of Panama, they needed to bribe three Panamanian government +officials that had significant influence in the Panamanian government’s award of contracts to +purchase software. + +13. In anticipation of the sales to the government of Panama, Garcia and others began +planning the details of the bribery scheme. On June 9 and 10, 2010, Garcia discussed with +others, including via e-mail, their plans to pay bribes to Government Official A (2% of the value +of the contract) and Government Official B (10%), and receive kickbacks for themselves (2%). +Also, on October 26, 2010, e-mails were exchanged with two attached spreadsheets referencing +planned payments to Government Officials A and C of approximately $100,000 and $300,000, +respectively. + +14. To facilitate payments to Government Official B, the Lobbyist proposed using a +sham contract for fictitious services to be provided by Government Official B’s brother-in-law’s +company. On June 17, 2010, Government Official A received two draft sham contracts with the +stated purpose of having these two back-to-back contracts so that “no trace remains if SAP +conducts an audit . . . . I made it as simple as possible and made it look like a real contract.” On +June 18, 2010, the Lobbyist e-mailed Garcia an unsigned corrected copy of the proposed +consulting agreement, which provided that Government Official B’s brother-in-law’s company +would receive “10% (ten percent) for performance of its Services and Consulting duties” relating +to all “business opportunities” with the Panamanian government. + +15. On October 19, 2011, the Lobbyist e-mailed a spreadsheet to Government Official +C indicating that they would share $274,000 in 2011 and $226,000 in 2012. On January 9, 2013, +another business associate of Garcia e-mailed Government Official A stating that Garcia and his +business associate had agreed to give Government Official A some of their kickback so that +Government Official A could receive a larger “commission” of $150,000. In addition, the +business associate confirmed that Government Official A already had been paid $45,000 and +acknowledged that $105,000 was still outstanding. + +5 + +16. As a result of Garcia’s conduct in the bribery scheme, SAP, with its local partner, +was able to sell software to the Panamanian government through four contracts from 2010 to +2013. These contracts generated revenues of $3.7 million to SAP. + +17. One of the four contracts was a software license sale to the Panamanian social +security agency, which was initially proposed to be a direct sale with the assistance of local +partners. In order to facilitate the bribery scheme, the existing partners were replaced with a new +local Panamanian partner. Because SAP refused to pay additional commission to this new +Panamanian company, Garcia and others began looking for other ways to advance the bribery +scheme. Finally, in the fall of 2010, Garcia finalized an indirect sale of the software license to +the agency through the local partner, which, with Garcia’s assistance, ultimately sought and +obtained an 82% discount on the sale price. Garcia caused various approval forms to be +submitted that misstated the reasons for the large discount. Garcia stated that the discounts were +necessary to compete with other software companies in establishing a relationship with the +government of Panama when, in fact, the discounts were necessary to pay bribes to government +officials. Garcia and others planned to sell SAP software to the intermediary at an 82% discount, +who in turn would sell them at significantly higher prices to the Panamanian government and use +part of the profits from the sale to pay bribes. + +18. SAP agreed to sell the software licenses for the Panamanian social security +agency to the local partner for approximately $2.1 million. In November 2010, the local partner +successfully bid $14.5 million for the contract, which was awarded by the Panamanian +government on January 31, 2011. Garcia, along with others, planned to pay bribes to +Panamanian government officials from the proceeds of the software sale to the government of +Panama. + +19. Thereafter, as noted above, between June 2012 and December 2013, the +Panamanian government awarded three additional contracts that included SAP software products +valued at approximately $13.5 million, which were also sold at deep discounts by SAP to its +local partner. For these contracts also, Garcia and others agreed to pay bribes to Panamanian +officials from the proceeds of the software sales. + +20. Between April 11, 2012 and August 13, 2013, Garcia and his business associate +paid at least $145,000 in bribes to Government Official A. Between December 27, 2011 and +October 29, 2012, another Garcia business associate paid Garcia a kickback of approximately +$85,965 in his bank account in Florida from the proceeds of the sale of SAP software licenses to +the Panamanian government. Thus, Garcia, with the assistance of others, bribed one government +official and promised to pay bribes to two other government officials to obtain contracts to sell +software to Panamanian government, all in violation of the FCPA. +Legal Standards and Violations +21. Section 30A(a) of the Exchange Act sets forth the anti-bribery provisions of the +FCPA. It prohibits an issuer any officer, director, employee or agent of such issuer or any +stockholder thereof acting on behalf of such issuer from using the “mails or any means or +instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to +pay, or authorization of the payment” of money to any person, while knowing that all or a +6 + +portion of such money “will be offered, given, or promised, directly or indirectly, to any foreign +official … for purposes of”, among other things, “inducing such foreign official … in order to +assist such issuer in obtaining or retaining business for or with, or directing business to, any +person.” + +22. By engaging in the conduct described above, Garcia, as an agent of SAP, violated +Section 30A in connection with the sale of software licenses and other related services to the +government of Panama. On behalf of SAP, Garcia participated in structuring the deal as an +indirect sale through the local partner, with the understanding that it would act as a conduit to +send corrupt payments to several government officials. Garcia, along with others, promised to +make bribe payments to two senior government officials and made bribe payments to another +government official, all in violation of the FCPA. Garcia used the mails and other means and +instrumentalities of interstate commerce to bribe government officials. Garcia used his SAP e- +mail account and his personal Yahoo! e-mail account to plan and execute the bribery scheme. In +addition, as part of the bribery scheme, Garcia flew from Miami to Panama to meet with +government officials and others, and Garcia received $85,965 in “kickbacks” into his bank +account in Florida. + +23. Section 13(b)(5) of the Exchange Act provides that no person shall knowingly +circumvent or knowingly fail to implement a system of internal accounting controls or +knowingly falsify any book, record or account of an issuer described in Section 13(b)(2) of the +Exchange Act. Exchange Act Rule 13b2-1 prohibits any person from, directly or indirectly, +falsifying or causing to be falsified any book, record, or account subject to Exchange Act Section +13(b)(2)(A). Scienter is not an element of a Rule 13b2-1 violation. See SEC v. McNulty, 137 +F.2d 732, 740-41 (2nd Cir. 1998). + +24. Garcia knowingly falsified SAP Mexico’s books and records by engaging in a +scheme to create a slush fund at the local partner, which was used to pay bribes to Panamanian +government officials. Garcia also knowingly circumvented the company’s internal controls to +change the sale of the software licenses from a direct sale to the government of Panama to an +indirect sale through intermediaries at deep discounts in order to facilitate payments to +government officials. Specifically, Garcia justified the deep discounts by falsely claiming in +approval forms that the discounts were necessary to beat competitors and obtain entry into the +Panamanian market when, in fact, the discounts were necessary to generate funds to pay bribes +to government officials. With respect to the leisure trip for Government Official A, Garcia +prepared a fictitious letter and itinerary, and even used a personal e-mail account to avoid +detection of his corrupt activities. Finally, despite signing SAP’s Code of Conduct prohibiting +bribery, he engaged in an elaborate bribery scheme. Accordingly, Garcia violated Section +13(b)(5) of the Exchange Act, and Rule 13b2-1. +Undertaking +25. Respondent hereby undertakes that he shall cooperate fully with the Commission in +any and all investigations, litigations, administrative or other proceedings commenced by the +Commission or to which the Commission is a party relating to or arising from the matters described +in this Order. In connection with such investigations, litigation, administrative or other proceedings, +the Respondent agrees to the following: (i) to produce, without service of a notice or subpoena, any +7 + +and all documents and other materials and information as requested by the Commission; (ii) to +appear and testify without service of a notice or subpoena in such investigations, interviews, +depositions, hearings and trials, at such times and places as reasonably requested by the +Commission; and (iii) to respond promptly to all inquiries from the Commission. In determining +whether to accept the Offer, the Commission has considered this undertaking. +Criminal Proceeding +26. For his conduct relating to certain of the findings in this Order, Garcia has entered +into a plea agreement with the U.S. Department of Justice agreeing to plead guilty to one count +of conspiring to violate the FCPA. +Findings +27. Based on the foregoing, the Commission finds that Garcia violated Sections 30A +and 13(b)(5) of the Exchange Act and Rule 13b2-1. +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Garcia’s Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent Garcia cease and desist +from committing or causing any violations and any future violations of Sections 30A and +13(b)(5) of the Exchange Act, and Rule 13b2-1. + +B. Respondent shall pay disgorgement of $85,965, representing the kickback Garcia +received in connection with the bribery scheme, and prejudgment interest of $6,430 to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury subject to Exchange Act Section 21F(g)(3). Payment shall be made in the following +installments: Respondent shall pay $30,798 within ten (10) days of the date of this Order, and +make two additional payments of $30,798 and $30,799 each, thirty and sixty days thereafter, +respectively. 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. + +Payments must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which shall +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 + +8 + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, 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 Garcia as +the Respondent in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Alka Patel, Assistant Regional Director, +Division of Enforcement, U.S. Securities and Exchange Commission, 444 South Flower Street, +Suite 900, Los Angeles, California 90071. + +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 +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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3679.pdf b/raw/aaer/2015/AAER-3679.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a6e99ab07ea9ce0df7fb6d439fb287966177af8c --- /dev/null +++ b/raw/aaer/2015/AAER-3679.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:27ba0e0b8922309f478cec7d69facf284c66d87b86c189397f9dc0a81b8dad08 +size 218331 diff --git a/raw/aaer/2015/AAER-3679.txt b/raw/aaer/2015/AAER-3679.txt new file mode 100644 index 0000000000000000000000000000000000000000..c72d78b19721f8a88acfea74dc8cc1d5996fb799 --- /dev/null +++ b/raw/aaer/2015/AAER-3679.txt @@ -0,0 +1,541 @@ + + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75720 / August 18, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3679 / August 18, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16762 + + +In the Matter of + +THE BANK OF NEW +YORK MELLON +CORPORATION, + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF +1934, MAKING FINDINGS, AND +IMPOSING A CEASE-AND-DESIST +ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”), against The Bank of New York Mellon +Corporation (“BNY Mellon” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, BNY Mellon 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, BNY Mellon 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 BNY Mellon’s Offer, the Commission finds1 that: + +Summary + +1. This matter concerns violations of the anti-bribery and internal accounting +controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by BNY Mellon. The +violations took place during 2010 and 2011, when employees of BNY Mellon sought to +corruptly influence foreign officials in order to retain and win business managing and +servicing the assets of a Middle Eastern sovereign wealth fund. + + 2. These officials sought, and BNY Mellon agreed to provide, valuable +internships for their family members. BNY Mellon provided the internships without +following its standard hiring procedures for interns, and the interns were not qualified for +BNY Mellon’s existing internship programs. + + 3. BNY Mellon failed to devise and maintain a system of internal accounting +controls around its hiring practices sufficient to provide reasonable assurances that its +employees were not bribing foreign officials in contravention of company policy. + +BNY Mellon + +4. BNY Mellon is a Delaware corporation with its headquarters in New York, +New York. The company’s common stock is registered under Section 12(b) of the Exchange +Act and listed on the New York Stock Exchange (ticker: BK). BNY Mellon and its various +subsidiaries provide banking and financial services in North America and elsewhere around +the globe, including in the Europe, Middle East, and Africa (“EMEA”) region. Services +provided to EMEA region clients by BNY Mellon include custody and related services +through its global asset servicing unit (“BNYM Asset Servicing”), and asset and wealth +management services through its global investment management business division (“BNYM +Asset Management”). + +Other Relevant Entities and Individuals + +5. BNY Mellon Boutique (the “Boutique”) is a wholly owned asset +management firm operating within BNYM Asset Management. Asset management services +provided by BNYM Asset Management are generally carried out in the EMEA region by +BNY Mellon’s various regional subsidiaries, including the Boutique. + +6. Middle Eastern Sovereign Wealth Fund (the “Middle Eastern Sovereign +Wealth Fund”) is a government body responsible for management and administration of +assets of a Middle Eastern country, as entrusted to it by that country’s Minister of Finance. +The Middle Eastern Sovereign Wealth Fund is wholly owned by that country and was created + +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 + +to perform the function of generating revenue for it. The Minister of Finance serves as +Chairman of the Middle Eastern Sovereign Wealth Fund’s Board of Directors and its most +senior members are political appointees. The Middle Eastern Sovereign Wealth Fund +generally hires external managers to make day-to-day investment decisions concerning its +assets. + +7. European Office (the “European Office”) is the Middle Eastern Sovereign +Wealth Fund’s office in Europe. The European Office is responsible for managing a portion +of the assets entrusted to the Middle Eastern Sovereign Wealth Fund. Unlike the Middle +Eastern Sovereign Wealth Fund, its parent, the European Office generally uses its own in- +house investment professionals to actively manage assets for which it is responsible. + +8. Officials X and Y are government officials affiliated with the Middle Eastern +Sovereign Wealth Fund. Official X was a senior official with the Middle Eastern Sovereign +Wealth Fund during the relevant time period. Official Y was a senior official at the European +Office during the relevant time period. + +9. Interns A, B and C (collectively, the “Interns”) are relatives of Officials X +and Y. Interns A and B are the son and nephew, respectively, of Official X. Intern C is the +son of Official Y. All three Interns were recent college graduates during the relevant time +period. + +BNY Mellon’s Business with the Middle Eastern Sovereign Wealth Fund + + 10. During the relevant time period, BNY Mellon’s business in the EMEA region +collected fees for services provided to the Middle Eastern Sovereign Wealth Fund. Those +fees arose from government contracts awarded to BNY Mellon through a process requiring +approval from certain foreign government officials, and also from additional assets allocated +to BNY Mellon under existing contracts at the discretion of certain foreign government +officials. + + 11. The Middle Eastern Sovereign Wealth Fund first became a client of BNYM +Asset Servicing in 2000, when the European Office awarded to BNY Mellon custody of +certain assets. Since then, BNY Mellon has earned regular fees for the safekeeping and +administration of Middle Eastern Sovereign Wealth Fund assets. According to the terms of +the custody agreement, these fees are subject to increase from time to time as the European +Office allocates additional assets to BNY Mellon. While the total amount of Middle Eastern +Sovereign Wealth Fund assets under custody by BNY Mellon has varied over time, during +the relevant time period BNY Mellon held Middle Eastern Sovereign Wealth Fund assets +totaling approximately $55 billion. + + 12. BNY Mellon entered an additional agreement with the European Office in +2003 permitting BNYM Asset Servicing to loan out certain of the Middle Eastern Sovereign +Wealth Fund assets under custody within set guidelines, which varied over time.2 This + +2 Such “securities lending” generally involves loaning a stock, derivative or other security to an individual +investor or firm. It is frequently done as part of a “short selling” strategy on the part of the borrower, who +hopes to profit by immediately selling the security and then buying it back later at a lower price. + + + + +4 + +securities lending arrangement significantly increased BNY Mellon’s revenues from its +dealings with the Middle Eastern Sovereign Wealth Fund. In 2010 and 2011, BNYM Asset +Servicing repeatedly sought to modify the lending guidelines, which had been significantly +restricted following the 2008 economic crash, in order to bring the guidelines back to pre- +2008 levels and further grow the securities lending business with the Middle Eastern +Sovereign Wealth Fund. During the relevant time period, BNYM Asset Servicing sought to +increase the amount of assets under custody from the European Office. + + 13. In 2009, the Middle Eastern Sovereign Wealth Fund became a client of +BNYM Asset Management when the fund entered into an investment management agreement +designating the Boutique to manage assets worth approximately $711 million (the “Boutique +mandate”). The bulk of the assets under the investment management agreement were funded +in November 2009, with an additional portion transferring to BNY Mellon in June 2010. +Official X was BNYM Asset Management’s principal point of contact in connection with the +Boutique mandate. According to the terms of the agreement, the amount of assets under +management was subject to change, as the Middle Eastern Sovereign Wealth Fund could +allocate additional assets to the Boutique mandate at any time. In June 2010, the Middle +Eastern Sovereign Wealth Fund transferred an additional $689,000 to BNY Mellon under the +Boutique mandate. During the relevant time period, BNY Mellon sought to increase the +amount of its Middle Eastern Sovereign Wealth Fund assets under management. + +The Internships + + 14. Officials X and Y requested that BNY Mellon provide their family members +with valuable internships. Officials X and Y made numerous follow-up requests about the +status, timing and other details of the internships for their relatives after the internships had +been offered, and delivering the internships as requested was seen by certain relevant BNY +Mellon employees as a way to influence the officials’ decisions. + + 15. In February 2010, at the conclusion of a business meeting, Official X made a +personal and discreet request that BNY Mellon provide internships to two of his relatives: +his son, Intern A, and nephew, Intern B. As a Middle Eastern Sovereign Wealth Fund +department head, Official X had authority over allocations of new assets to existing managers +such as the Boutique, and was viewed within BNY Mellon as a “key decision maker” at the +Middle Eastern Sovereign Wealth Fund. Official X later persistently inquired of BNY +Mellon employees concerning the status of his internship request, asking whether and when +BNY Mellon would deliver the internships. At one point, Official X said to his primary +contact at BNY Mellon that the request represented an “opportunity” for BNY Mellon, and +that the official could secure internships for his family members from a competitor of BNY +Mellon if it did not satisfy his personal request. The same BNY Mellon employee later wrote +to a BNY Mellon colleague that Official X had become “angry” because BNY Mellon was +experiencing delays in delivering the internships, and had openly questioned the employee’s +job performance and professionalism because of the delays. + + 16. As reflected in contemporaneous e-mails and other documents, BNY Mellon +delivered the valuable internship sought by Official X in order to assist BNY Mellon in +obtaining or retaining business. For example: + + + + +5 + + + A Boutique account manager wrote in a February 2010 e-mail concerning the +internship request for Interns A and B that BNY Mellon was “not in a position to +reject the request from a commercial point of view” even though it was a “personal +request” from Official X. The employee stated: “by not allowing the internships to +take place, we potentially jeopardize our mandate with [the Middle Eastern Sovereign +Wealth Fund].” + + In June 2010, an employee of BNY Mellon with primary responsibility for the Asset +Management relationship with the Middle Eastern Sovereign Wealth Fund wrote of +the internships for Interns A and B: “I want more money for this. I expect more for +this. . . . We’re doing [Official X] a favor.” + + In a separate e-mail to a different BNY Mellon colleague, the same employee stated +“I am working on an expensive ‘favor’ for [Official X] – an internship for his son and +cousin (don’t mention to him as this is not official).” + + The same employee advised a colleague in human resources: “[W]e have to be +careful about this. This is more of a personal request . . . [Official X] doesn’t want +[the Middle Eastern Sovereign Wealth Fund] to know about it.” The same employee +later directed his administrative assistant to refrain from sending e-mail +correspondence concerning Official X’s internship request “because it was a personal +favor.” + +After granting Official X’s request to hire Interns A and B, BNY Mellon retained the +Boutique mandate, and further assets were transferred to BNY Mellon by Official X’s +department within a few months. + + 17. In February 2010, around the same time that Official X made his initial +internship request, Official Y asked through a subordinate European Office employee that +BNY Mellon provide an internship to the official’s son, Intern C. As a senior official at the +European Office, Official Y had authority to make decisions directly impacting BNY +Mellon’s business. Internal BNY Mellon documents reflected Official Y’s importance in this +regard, stating that Official Y was “crucial to both retaining and gaining new business” for +BNY Mellon. One or more European Office employees acting on Official Y’s behalf later +inquired repeatedly about the status and details of the internship, including during discussions +of the transfer of European Office assets to BNY Mellon. At the time of Official Y’s initial +request, a number of recent client service issues had threatened to weaken the relationship +between BNY Mellon and the European Office. + + 18. The BNY Mellon employee with primary responsibility for managing the +custody relationship with the European Office viewed Official Y’s request as important to +assist BNYM Asset Servicing in obtaining or retaining business. For example: + + The BNY Mellon custody relationship manager explained to more senior officers +within BNY Mellon that granting Official Y’s request was likely to “influence any +future decisions taken within [the Middle Eastern Sovereign Wealth Fund].” + + + + +6 + + + The same BNY Mellon relationship manager expressed to colleagues his concern that +one of BNY Mellon’s competitors would agree to hire Intern C if BNY Mellon would +not, and that BNY Mellon might lose market share to the competitor as a result. + + The relationship manager wrote: “Its [sic] silly things like this that help influence +who ends up with more assets / retaining dominant position.” + + The relationship manager separately wrote that meeting Official Y’s requests was the +“only way” to increase BNY Mellon’s share of business from the European Office, +aside from obtaining assets in new countries. + +After granting Official Y’s request to hire his son, Intern C, BNY Mellon retained its existing +custody and securities lending business from the European Office, which continued to grow. + + 19. During the relevant time period, BNY Mellon had an established summer +internship program for undergraduates as well as a separate summer program for +postgraduates actively pursuing a Master of Business Administration (MBA) or similar +degree. Admission to the BNY Mellon postgraduate internship program was highly +competitive and characterized by stringent hiring standards. To recruit postgraduates, BNY +Mellon had relationships with a small number of the most highly selective schools in the +United States and the United Kingdom from which it sourced candidates. Successful +applicants had to achieve a minimum grade point average, and had to advance through +multiple rounds of interviews in addition to having relevant prior work experience and a +demonstrated affinity for and interest in financial services work. BNY Mellon also placed an +emphasis on relevant leadership experience. + + 20. The Interns did not meet these rigorous criteria and BNY Mellon did not +evaluate or hire the Interns through its established internship programs. For example, as +recent graduates not enrolled in any degree program, the Interns did not meet the basic +entrance standard for a BNY Mellon postgraduate internship. Further, contrary to BNY +Mellon’s goal of converting student interns to full-time hires, the Interns were to return to the +Middle East at the conclusion of their internship and BNY Mellon had no plan to hire them as +full-time employees. Nor did the individual Interns have the requisite academic or +professional credentials for its existing internship programs. + + 21. Though they did not meet the criteria of BNY Mellon’s existing internship +programs, BNY Mellon hired Interns A, B and C. Contrary to its standard practice, BNY +Mellon decided to hire the Interns before even meeting or interviewing them. Indeed, the +special “work experiences” sought by Officials X and Y were not regular undergraduate or +graduate summer internships at all, but customized one-of-a-kind training programs. The +internships were valuable work experience, and the requesting officials derived significant +personal value in being able to confer this benefit on their family members. As requested by +Officials X and Y, BNY Mellon designed customized work experiences for the Interns. +These bespoke internships were rotational in nature, meaning that Interns A, B and C had the +opportunity to work in a number of different BNY Mellon business units, enhancing the +value of the work experience beyond that normally provided to BNY Mellon interns. Interns + + + + +7 + +A and B were placed in Boston, Massachusetts and were employed by BNY Mellon from +August 6, 2010 through February 25, 2011. Intern C was onboarded and placed in London, +England and interned with BNY Mellon from July 4, 2010 through December 17, 2010. +These approximately six-month internships were significantly longer than the work +experiences typically afforded to BNY Mellon interns through the normal summer internship +program. + + 22. The internships were neither inexpensive nor easy for BNY Mellon to +structure. BNY Mellon determined, because Interns A and B had already graduated from +college, that Interns A and B should be paid above the normal salary scale for BNY Mellon +undergraduate interns but below the scale for postgraduate interns. Intern C was unpaid. +BNY Mellon also coordinated obtaining visas for all three of the Interns so that they could +travel from the Middle East to work in the countries in which they were placed. BNY Mellon +paid the legal fees and filing costs related to the visas. As the BNY Mellon Asset +Management employee responsible for arranging two of the three internships wrote in a +contemporaneous e-mail, the internships constituted an “expensive favor” for the requesting +foreign official. + + 23. BNY Mellon hired all three of the Interns, with the knowledge and approval +of senior BNY Mellon employees: + + According to the BNY Mellon Asset Management employee with primary +responsibility for arranging the internships for Interns A and B, he had +initially struggled to deliver the internships as requested by Official X until +the internships had the “blessing” of a senior BNY Mellon employee, after +which “it started to move.” The senior employee facilitated the internships by +contacting human resources on behalf of the Interns, forwarding their resumes +and stating that he “would like us to support.” + + The BNY Mellon relationship manager with lead responsibility for arranging +the internship for Intern C sent an e-mail to two senior BNYM Asset +Servicing officers describing Official Y’s request and seeking their “support” +for the internship. The same relationship manager later wrote to BNY Mellon +colleagues seeking assistance in arranging the internship and stating “[p]lease +know that this request has the backing of both [senior officers].” + + In October 2010, Official Y made a further request that BNY Mellon modify +the custom internship it had created for Intern C so that he could rotate +through an additional BNY Mellon business unit. This request was also +granted with the knowledge and approval of senior BNY Mellon employees. + + 24. The Interns were less than exemplary employees. On at least one occasion, +Interns A and B were confronted by a BNY Mellon human resources employee concerning +their repeated absences from work. A Boutique portfolio manager who worked with Intern C +observed that his performance was “okay” and that “he wasn’t actually as hardworking as I +would have hoped.” Despite these issues, BNY Mellon accommodated the Interns in order to +favorably influence Officials X and Y. + + + + +8 + + +BNY Mellon’s FCPA-Related Policies, Training and Internal Controls + + 25. During the relevant time period, BNY Mellon had a code of conduct, as well +as a specific FCPA policy, which prohibited BNY Mellon employees from violating the +statute. While BNY Mellon’s policies stated that “any money . . . gift . . . or anything of +value” provided to a foreign official might constitute a bribe, employees were provided with +little additional guidance that was tailored to the types of risks related to hiring faced by BNY +Mellon’s international asset servicing unit and asset management business division. + + 26. During the relevant time period, BNY Mellon provided training on +employees’ obligations under the FCPA and BNY Mellon’s policies, but did not ensure that +all employees took the training or understood BNY Mellon’s policies. + + 27. During the relevant time period, BNY Mellon had few specific controls +relating to the hiring of customers and relatives of customers, including foreign government +officials. Sales staff and client relationship managers were permitted wide discretion in +making initial hiring decisions and human resources was not trained to flag hires that were +potentially problematic. Senior managers were able to approve hires requested by foreign +officials with no mechanism to ensure that potential hiring violations were reviewed by +anyone with a legal or compliance background. BNY Mellon’s system of internal +accounting controls was insufficiently tailored to the corruption risks inherent in the hiring +of client referrals, and therefore inadequate to fully effectuate BNY Mellon’s policy against +bribery of foreign officials. + +Legal Standards and +FCPA Violations + + 28. Under Section 21C(a) of the Exchange Act, the Commission may impose a +cease-and-desist order upon any person who is violating, has violated, or is about to violate +any provision of the Exchange Act or any regulation thereunder, and upon any other person +that is, was, or would be a cause of the violation, due to an act or omission the person knew +or should have known would contribute to such violation. + + 29. Section 30A of the Exchange Act prohibits any issuer with a class of +securities registered pursuant to Section 12 of the Exchange Act, or any officer, director, +employee, or agent acting on behalf of such issuer, in order to obtain or retain business, from +corruptly giving or authorizing the giving of, anything of value to any foreign official for the +purposes of influencing the official or inducing the official to act in violation of his or her +lawful duties, or to secure any improper advantage, or to induce a foreign official to use his +influence with a foreign governmental instrumentality to influence any act or decision of +such government or instrumentality. [15 U.S.C. § 78dd-1]. + + 30. Under Section 13(b)(2)(B) of the Exchange Act issuers are required to +devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that (i) transactions are executed in accordance with management’s +general or specific authorization; (ii) transactions are recorded as necessary (I) to permit + + + + +9 + +preparation of financial statements in conformity with generally accepted accounting +principles or any other criteria applicable to such statements, and (II) to maintain +accountability for assets; (iii) access to assets is permitted only in accordance with +management’s general or specific authorization; and (iv) the recorded accountability for +assets is compared with the existing assets at reasonable intervals and appropriate action is +taken with respect to any differences. [15 U.S.C § 78m(b)(2)(B)]. + + 31. As described above, BNY Mellon violated Section 30A of the Exchange Act +by corruptly providing valuable internships to relatives of foreign officials from the Middle +Eastern Sovereign Wealth Fund in order to assist BNY Mellon in retaining and obtaining +business. BNY Mellon also violated Section 13(b)(2)(B) of the Exchange Act, by failing to +devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that its employees were not bribing foreign officials. + +Commission Consideration of BNY Mellon’s Cooperation and +Remedial Efforts + +32. In determining to accept the Offer, the Commission considered cooperation +BNY Mellon afforded to the Commission staff and the remedial acts undertaken by BNY +Mellon. Prior to the investigation by the Commission of the Interns, BNY Mellon had +begun a process of enhancing its anti -corruption compliance program including: making +changes to the Anti -Corruption Policy to explicitly address the hiring of government +officials’ relatives; requiring that every application for a full -time hire or an internsh ip +be routed through a centralized HR application process; enhancing its Code of Conduct +to require that every year each employee certifies that he or she is not responsible for +hiring through a non -centralized channel; and requiring as part of a centraliz ed +application process that each applicant indicate whether she or a close personal +associate is or has recently been a governme nt official, and, if so, additional review by +BNY Mellon’s anti -corruption office is mandated. + +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 BNY Mellon cease +and desist from committing or causing any violations and any future violations +of Sections 30A and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ +78m(b)(2)(B), and 78dd-1]. + +B. Respondent shall, within 10 days of the entry of this Order, pay +disgorgement of $8,300,000, prejudgment interest of $1,500,000 and a civil +money penalty in the amount of $5,000,000, for a total payment of +$14,800,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue + + + + +10 + +pursuant to SEC Rule of Practice 600 and 31 U.S.C. § 3717. Payment must +be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via P ay.gov +through the SEC Web site 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 BNY Mellon as the Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to +Paul G. Block, Assistant Director, Division of Enforcement, Securities and Exchange +Commission, 33 Arch Street, 23rd Floor, Boston, MA 02110. + +C. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $5,000,000 based upon its cooperation in a Commission investigation. If +at any time following the entry of the Order, the Division of Enforcement +(“Division”) obtains information indicating that 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 an additional civil penalty. Respondent may +contest by way of defense in any resulting administrative proceeding whether it +knowingly provided materially false or misleading information, but may not: (1) +contest the findings in the Order; or (2) assert any defense to liability or remedy, +including, but not limited to, any statute of limitations defense. + + +By the Commission. + + + + + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3680.pdf b/raw/aaer/2015/AAER-3680.pdf new file mode 100644 index 0000000000000000000000000000000000000000..352b7efcc7dce2bbc1a411d5a75a55a892397e5e --- /dev/null +++ b/raw/aaer/2015/AAER-3680.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:bfd2a4780eae64420141c35d9786f8dde03163faec6833eaea54df8542dc3e6c +size 105665 diff --git a/raw/aaer/2015/AAER-3681.pdf b/raw/aaer/2015/AAER-3681.pdf new file mode 100644 index 0000000000000000000000000000000000000000..19c848a25264ff809835cc6cb9ed491c9062ba3b --- /dev/null +++ b/raw/aaer/2015/AAER-3681.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:3293cd5ecd7ef0f06003a55333e823dc93c8f55ef615585058f45729ee0849bf +size 239187 diff --git a/raw/aaer/2015/AAER-3681.txt b/raw/aaer/2015/AAER-3681.txt new file mode 100644 index 0000000000000000000000000000000000000000..777d6257941f263f51489c9811724058162e1c60 --- /dev/null +++ b/raw/aaer/2015/AAER-3681.txt @@ -0,0 +1,365 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75843 / September 4, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3681 / September 4, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16783 + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e) of the +Commission’s Rules of Practice2 against Raymon Holmdahl, CPA, and Kanako Matsumoto, +CPA (collectively, “Respondents”). + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . to 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. +In the Matter of + + + RAYMON HOLMDAHL, CPA, and + + KANAKO MATSUMOTO, CPA, + +Respondents. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE +PROCEEDINGS PURSUANT TO +SECTION 4C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE +102(e) OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS + +2 + +II. + In anticipation of the institution of these proceedings, Respondents have each submitted an +Offer of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public +Administrative Proceedings Pursuant to Section 4C of the Securities Exchange Act of 1934 and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. +III. + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: +A. SUMMARY +1. These proceedings arise out of Respondents’ improper professional conduct during +Peterson Sullivan, LLP’s (“Peterson Sullivan”) audit of a private investment fund’s financial +statements for fiscal year 2013 (“FY2013”). Raymon Holmdahl and Kanako Matsumoto served as +the partner and manager, respectively, on this engagement to audit the financial statements of +Summit Stable Value Fund (“SSVF”), a private pooled investment vehicle advised by Summit +Asset Strategies Investment Management, LLC (“Investment Management”). +2. SSVF’s audited financial statements for the year ended December 31, 2013, which +Investment Management provided to SSVF’s investors, materially overstated the value of the fund’s +assets by approximately $1.69 million. Because Investment Management was entitled to receive +SSVF’s net fund profits as its compensation for advising SSVF, the overstatement allowed +Investment Management to withdraw significantly more money from SSVF than was authorized +under the terms of the fund’s private placement memorandum (“PPM”). +3. Respondents caused Peterson Sullivan to issue an audit report containing an opinion +that SSVF’s financial statements for the period ended December 31, 2013, which included the +valuations of the fund’s assets and Investment Management’s draws from the fund, were presented +fairly, in all material respects, in conformity with general accepted accounting principles (“GAAP”). +Peterson Sullivan’s audit report also stated that the audit was conducted in accordance with auditing +standards generally accepted in the United States. However, Respondents’ audit failed to comply +with numerous American Institute of Certified Public Accountants (“AICPA”) auditing standards, +the applicable professional standards for the audit of SSVF. These included failing to obtain +sufficient appropriate audit evidence about the existence of certain fund assets, failing to exercise +appropriate professional judgment and professional skepticism, and failing to properly supervise the +financial statement audit. Respondent Holmdahl also authorized the issuance of a report with an + +3 The findings herein are made pursuant to each Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. +3 + +inaccurate audit opinion. Peterson Sullivan voluntarily withdrew its audit report for SSVF’s 2013 +financial statements based on the material overstatement of SSVF’s valuation and ownership +interest in certain of its assets. Respondents’ conduct, as described below, constituted improper +professional conduct pursuant to Rule 102(e)(1)(iv)(B)(1) and (2). +B. RESPONDENTS +4. Raymon Holmdahl, CPA, 57, resides in Lake Forest Park, Washington. +Holmdahl is currently a partner at Peterson Sullivan, an accounting firm registered with the +Public Company Accounting Oversight Board (“PCAOB”), and has worked for Peterson +Sullivan since 1980. Holmdahl served as the engagement partner for Peterson Sullivan’s +FY2013 audit of SSVF and related audit work, and served as an engagement partner for audits of +public companies. Holmdahl is a certified public accountant licensed in Washington State. + +5. Kanako Matsumoto, CPA, 50, resides in Seattle, Washington. Matsumoto is +currently a senior manager at Peterson Sullivan, and initially joined the firm in 1999. +Matsumoto served as the manager for Peterson Sullivan’s FY2013 audit of SSVF and related +audit work, and has worked on audits of several broker-dealers. Matsumoto is a certified public +accountant licensed in Washington State. +C. OTHER RELEVANT ENTITIES +6. Summit Asset Strategies Investment Management, LLC (“Investment +Management”) is a Washington limited liability company based in Bellevue, Washington and +served as the investment adviser to three private investment funds, including SSVF. During the +relevant timeframe, Investment Management, through its principal/CEO, made investment +decisions on behalf of SSVF and was entitled to receive SSVF’s net fund profits as its +compensation. + +7. Summit Stable Value Fund, LLC (“SSVF”) is a Washington limited liability +company based in Bellevue, Washington. SSVF is a private pooled investment vehicle formed +by Investment Management’s principal in 2010 and was at all times advised by Investment +Management. +D. FACTS +Investment Management Materially Overstated the Value of SSVF’s Assets + +8. According to SSVF’s PPM, Investment Management was entitled to receive +SSVF’s net fund profits as compensation for its work in advising SSVF. The PPM permitted +Investment Management to withdraw estimated “net fund profits” (defined as the profit less +principal, interest payments, and fund expenses) from the fund on a monthly basis, but also +required Investment Management to “true up” any distributions to match net fund profits as +“determined in the Fund’s annual audit.” Accordingly, it was important for Investment +Management to properly value SSVF’s assets, as its compensation was specifically tied to the +unrealized gains and losses in those assets each year. + +4 + +9. Investment Management caused SSVF to materially overstate its asset values in +its FY2013 financial statements. Specifically, Investment Management falsely claimed that +SSVF had purchased 500,000 shares of an entity called Prime Pacific Bank in December 2012. +Because the Prime Pacific Bank security was purportedly illiquid, Investment Management +developed a financial model to value this asset. For FY2013, this model showed that SSVF’s +interest in Prime Pacific Bank had more than tripled in value from the shares’ purported purchase +price of $1.00 per share to $3.22 per share by the end of the fiscal year. As such, SSVF’s +FY2013 financial statements presented the value of the claimed Prime Pacific Bank security as +approximately $1.6 million. The putative increase in Prime Pacific Bank’s value enabled +Investment Management to withdraw significantly more money as net fund profits from SSVF +than it would otherwise have been entitled to under the terms of SSVF’s PPM. + +10. In reality, SSVF did not own any shares of Prime Pacific Bank. Instead, SSVF +held 250,000 shares in a different entity, Prime Pacific Financial Services, Inc. (“PPFS”), which +had a quoted trading price ranging between $0.27 per share to $0.70 per share in 2012 and 2013. +Accordingly, SSVF’s interest in PPFS had a value worth less than $175,000 at fiscal year-end +2013. As a result of these irregularities, SSVF’s financial statements for FY2013 were +materially overstated. + +Respondents’ Deficient FY2013 Audit +11. Peterson Sullivan’s audit report for SSVF’s FY2013 financial statements states +that the audit was conducted in accordance with “auditing standards generally accepted in the +United States.” These standards are codified by AICPA professional auditing standards.4 +Holmdahl, as engagement partner, was responsible for supervising the audit team and reviewing +audit work for compliance with these professional standards. Holmdahl was also responsible for +considering whether the audit team adequately documented in the working papers their findings, +analysis, and information upon which they relied, and that the working papers provided a +reasonable basis to render an audit opinion. Matsumoto, as audit manager, was principally +responsible for performing the audit procedures, supervising junior staff, and assisting Holmdahl +in his role as engagement partner. +12. During the FY2013 audit, Holmdahl approved the audit program and reviewed the +working papers with Matsumoto. At the outset, Holmdahl and Matsumoto each recognized that +the presentation of SSVF’s asset values posed “significant” risk, and could result in a material +misstatement of the fund’s financial statements. In addition, Respondents were aware that the +fund’s predecessor auditor had disagreed with Investment Management’s valuation of the +purported Prime Pacific Bank security and subsequently resigned due to its inability to “gather +adequate audit evidence to support audit opinions” regarding, among other things, the existence +and valuation of assets, during the FY2013 audit. In response to these heightened risks, + +4 GAAS and the professional standards applicable to the preparation and issuance of audit reports +are embodied in Statements on Auditing Standards, as issued by the Auditing Standards Board of the +AICPA and codified in the U.S. Auditing Standards-AICPA (clarified). Relevant auditing standards will +be referenced as “AU-C” herein. +5 + +Respondents specifically planned in their audit procedures to rely on third-party confirmation of +all investment account balances and investment income. +13. Despite knowledge of these risks, Respondents failed to perform the fund’s +FY2013 audit in accordance with AICPA standards, particularly with respect to the fund’s +investments. Among the deficiencies, Respondents failed: (i) to obtain sufficient appropriate audit +evidence about the existence of certain fund assets; (ii) to exercise appropriate professional +judgment and professional skepticism; and (iii) to properly supervise the financial statement audit. +Respondent Holmdahl, as engagement partner, also authorized the issuance of a report with an +inaccurate audit opinion. As a result of these deficiencies, Respondents caused Peterson Sullivan +to issue an unmodified opinion with respect to the fund’s materially overstated financial +statements. +Respondents Failed to Obtain Sufficient Appropriate Audit Evidence Regarding the +Fund’s Purported Investment in Prime Pacific Bank +14. AICPA Auditing Standards (“AU-C”) require the auditor to “obtain sufficient +appropriate audit evidence … on which to base the auditor’s opinion…” (AU-C § 500.04) and to +“…design and perform audit procedures that are appropriate in the circumstances for the purpose +of obtaining sufficient appropriate audit evidence.” (AU-C § 500.06). + +15. Professional standards also require the auditor (1) to “perform substantive +procedures for all relevant assertions related to each material class of transactions, account +balance, and disclosure” (AU-C § 330.18); (2) to “design and implement overall responses to +address the assessed risks of material misstatement at the financial statement level” (AU-C +330.05); (3) to “design and perform further audit procedures whose nature, timing, and extent are +based on, and are responsive to, the assessed risks of material misstatement at the relevant +assertion level” (AU-C 330.06); and (4) to “consider whether external confirmation procedures +are to be performed as substantive audit procedures” (AU-C 330.19). + +16. Respondents planned to obtain audit evidence of SSVF’s investments through +third party confirmation, but ultimately failed to send third party confirmation letters for the +fund’s purported investment in Prime Pacific Bank. Despite repeatedly recognizing in their +workpapers the need for heightened scrutiny, Respondents did not confirm the fund’s investment +in PPFS with the bank or any third party for purposes of auditing the investment balance. In +failing to follow their own audit plan, Respondents did not learn that the fund’s purported Prime +Pacific Bank investment did not exist. Had they executed on their plan to confirm the existence +of investments, Respondents would have likely learned that SSVF’s claimed investment in Prime +Pacific Bank was nonexistent, and that it should not have been included in the fund’s FY2013 +financial statements. +17. In the absence of performing the planned third party confirmations, Respondents +did not perform alternative or additional procedures to test the existence of SSVF’s purported +investment in Prime Pacific Bank. Indeed, the working papers do not reflect any audit +procedures taken by Respondents to obtain sufficient appropriate audit evidence relevant to the +existence of the Prime Pacific Bank security. +6 + +Respondents Committed Similar Failures With Respect to Other Assets Included in +SSVF’s Financial Statements +18. Respondents similarly failed to obtain sufficient appropriate audit evidence for +two other assets reported in the fund’s FY2013 financial statements: (1) SSVF’s claimed +investment in a Korean entity called Summit Asset Strategies Korea Co. Ltd. (“SASK”), which +purportedly was a management consulting services company; and (2) SSVF’s claimed $3.6 +million receivable from SASK. For instance, Respondents planned to test the existence of +SSVF’s investment in SASK through third party confirmations, but ultimately failed to do so. +The workpapers otherwise reflect that Respondents did not perform other audit procedures to test +the existence of these supposed assets or perform any alternative procedures to obtain sufficient +appropriate audit evidence regarding the existence of these assets. These assets were significant +to SSVF’s FY2013 financial statements and comprised 63% of the fund’s reported assets as of +fiscal year-end 2013. + +Respondents Failed to Exercise Appropriate Professional Judgment and Professional +Skepticism +19. Under GAAS, auditors must exercise appropriate professional judgment and +professional skepticism. (AU-C §200.08.) Professional skepticism includes demonstrating a +questioning mind and a critical assessment of audit evidence. (AU-C § 200.14). In addition, +AU-C §200.17 requires auditors to “plan and perform an audit with professional skepticism, +recognizing that circumstances may exist that cause the financial statements to be materially +misstated.” +20. Respondents did not exercise the appropriate professional judgment when +conducting the audit and issuing an opinion on SSVF’s financial statements for FY2013. +Respondents’ assessment of the risks posed by SSVF’s asset values should have caused them to +place greater emphasis on obtaining sufficient appropriate audit evidence regarding the existence +of the fund’s investments. They did not. The working papers do not document any audit +procedures taken by Respondents to address these risks. +Respondents Failed to Properly Supervise the Financial Statement Audit +21. GAAS requires the engagement partner to “take 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). + +22. Holmdahl failed to adequately supervise the FY2013 audit. Although Holmdahl +appreciated the significant risks posed by the fund’s valuations – as demonstrated by his +approval of the audit plan – he did not adequately review the audit documentation to satisfy +7 + +himself that sufficient appropriate audit evidence was obtained about the existence of the fund’s +purported investments in Prime Pacific Bank and SASK. + +23. GAAS provides that the engagement partner may use the assistance of other +members of the engagement team and delegate certain procedures. (AU-C § 220.6 and (AU-C § +220.10). Matsumoto did not adequately supervise and review the audit team’s response to the +risk of material misstatement for SSVF’s assets. Matsumoto knew that SSVF’s asset values +posed risks during the audit and planned to perform third party confirmations for SSVF’s +purported Prime Pacific Bank investment. Notwithstanding the plan, Matsumoto did not +adequately review the work of junior staff members to consider whether: (i) the nature, timing, +and extent of the work performed is appropriate and without need for revision; (ii) the work +performed supports the conclusions reached and is appropriately documented; (iii) the evidence +obtained is sufficient and appropriate to support the auditor’s report; and (iv) the objectives of +the engagement procedures have been achieved. + +Holmdahl Was Responsible For Authorizing the Issuance of a Report with an Inaccurate +Audit Opinion +24. GAAS requires an unmodified opinion to state that the financial statements are +presented fairly, in all material respects, in accordance with the applicable financial reporting +framework, which, in the case of SSVF, is US-GAAP. (AU-C §700.35). An auditor should +modify its opinion when it concludes that the financial statements as a whole are materially +misstated or is unable to obtain sufficient appropriate audit evidence to conclude that they are +free from material misstatement. (AU-C §705.07). + +25. As audit partner with ultimate responsibility for SSVF’s financial statement audit +for FY2013, Holmdahl approved the issuance of an audit report containing an unmodified +opinion. However, the fund’s financial statements materially overstated its assets and “net fund +profits,” and as such, Peterson Sullivan should not have issued an audit report containing an +unmodified opinion. Peterson Sullivan has since withdrawn its report and opinion based on the +material overstatement of SSVF’s valuation and ownership interest in its assets. +E. VIOLATIONS +26. 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) of the +Commission’s Rules of Practice provide that, with respect to persons licensed to practice as +accountants, negligent improper professional conduct includes either (1) “[a] single instance of +highly unreasonable conduct that results in a violation of applicable professional standards in +circumstances in which an accountant knows, or should know, that heightened scrutiny is +warranted,” or (2) “[r]epeated instances of unreasonable conduct, each resulting in a violation of +applicable professional standards, that indicate a lack of competence to practice before the +Commission.” +27. As a result of the conduct described above, Respondents engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule +8 + +102(e)(1)(iv)(B)(1)&(2) of the Commission’s Rules of Practice. Respondents engaged in a +single instance of highly unreasonable conduct where heightened scrutiny was warranted, or +alternatively, repeated instances of unreasonable conduct indicating a lack of competence to +practice before the Commission. +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in each Respondent’s Offer. + Accordingly, pursuant to Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, it is hereby ORDERED that: +A. Holmdahl is denied the privilege of appearing or practicing before the +Commission as an accountant. + +B. Matsumoto is denied the privilege of appearing or practicing before the Commission +as an accountant. +C. After three years from the date of this order, either Respondent may request that +the Commission consider his or 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 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 or she 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 +or she is associated, has been inspected by the PCAOB and that inspection did not identify any +criticisms of or potential defects in the quality control system relating to the work of Respondent +that will indicate that Respondent will not receive appropriate supervision; + (c) Respondent 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) Respondent acknowledges his or her responsibility, as long as he +or she appears or practices before the Commission as an independent accountant, to comply with +9 + +all requirements of the Commission and the PCAOB, 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 or her CPA license is current and he or +she 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. + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3682.pdf b/raw/aaer/2015/AAER-3682.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ff771ea866695cba4ac3398db6c96226b65847a4 --- /dev/null +++ b/raw/aaer/2015/AAER-3682.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:89a4049865e108bebac53c8acf70a621b7ed67f8e2dffd3fb763fb03d2e91a0a +size 153100 diff --git a/raw/aaer/2015/AAER-3683.pdf b/raw/aaer/2015/AAER-3683.pdf new file mode 100644 index 0000000000000000000000000000000000000000..72dacfe394159e143dceca5e77eac930fb60d5c7 --- /dev/null +++ b/raw/aaer/2015/AAER-3683.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a2698968d4538f047e86fa60623e9652cc151fd01e99c0f24b2a3269be367b61 +size 198640 diff --git a/raw/aaer/2015/AAER-3683.txt b/raw/aaer/2015/AAER-3683.txt new file mode 100644 index 0000000000000000000000000000000000000000..e477d9d70563b55043c7653e341d5cbf3da76a89 --- /dev/null +++ b/raw/aaer/2015/AAER-3683.txt @@ -0,0 +1,426 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9901 / September 8, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75849 / September 8, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3683 / September 8, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16786 + + +In the Matter of + +BANKRATE, INC., + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING +CEASE-AND-DESIST ORDER AND CIVIL +PENALTY + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against Bankrate, Inc. (“Bankrate” or “Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of +the Securities Exchange Act of 1934, Making Findings, and Imposing Cease-and-Desist Order and +Civil Penalty (“Order”) as set forth below. + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY + +This proceeding results from Bankrate, through its chief financial officer, Edward DiMaria, +vice president and director of accounting, Matthew Gamsey, and vice president of finance, Hyunjin +Lerner, intentionally manipulating its financial results for the second quarter of 2012 in order to +meet and/or exceed analyst consensus estimates for key financial metrics. As a result of this +manipulation, Bankrate materially overstated its financial results for the second quarter of 2012. + +After reviewing Bankrate’s preliminary financial results for the second quarter 2012, which +fell short of analyst estimates for certain key metrics, DiMaria arbitrarily decided to increase +Bankrate’s revenue following the end of the quarter in order to meet those metrics. As a result, +DiMaria, through Lerner, improperly directed two Bankrate divisions, the Insurance and Credit +Cards divisions, to book additional revenue of $300,000 and $500,000, respectively, without any +support or analysis. + +The Insurance division immediately booked the $300,000 of revenue directed by DiMaria +to a dormant customer account, with no intention of justifying the revenue until the company’s +outside auditor asked for additional information about it five days later. In response to the +auditor’s inquiry, the Insurance division quickly devised a purported justification for the +improperly booked revenue – a justification that changed shortly thereafter. These purported +justifications were not, however, provided to Bankrate’s auditor. Instead, Lerner sent a misleading, +generic explanation to the auditor – an explanation that was reviewed and approved by DiMaria +and Gamsey. Further, although the Insurance division’s ultimate justification was reviewed and +approved by DiMaria, Gamsey, and Lerner, the three most senior employees in Bankrate’s +accounting department, each of them knew, or was reckless in not knowing, that the purported +justification did not support the recognition of revenue under Generally Accepted Accounting +Principles (“GAAP”). + +The accountants from the Credit Cards division were only willing to record $176,000 of the +$500,000 in revenue directed by DiMaria, thereby infuriating DiMaria. Refusing to accept the +Credit Cards division’s unwillingness to record the full $500,000 of revenue he had directed, +DiMaria insisted that the approximate difference be recorded as revenue on the books of +Bankrate’s mortgage business, Bankrate Core. As a result, Bankrate recorded an additional +$305,000 of unsupported revenue to two arbitrary Bankrate Core customers. After learning of the +Commission staff’s investigation in this matter, DiMaria further attempted to conceal this fraud by +retroactively attributing this revenue to a purported contractual dispute with an Insurance division + + 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 +customer. In fact, this dispute had been resolved several months earlier. In addition, Bankrate’s +recording of both the $176,000 and the $305,000 in revenue was contrary to GAAP. +Further manipulating Bankrate’s financial results for the second quarter, DiMaria, without +any support or analysis, improperly directed a Bankrate Core accountant to reduce the accrual for +certain marketing expenses by $400,000. Bankrate, through DiMaria and with Lerner’s +knowledge, had been allowing this marketing accrual account to accrue as a “cushion” account for +more than a year, and then selectively decided to reduce the accrual in the second quarter of 2012 +in order to improve the company’s financial results. In the second quarter 2012, DiMaria +improperly reversed $400,000 of the accrual amount, thereby reducing second quarter expenses, to +help Bankrate meet analyst estimates. Finally, as part of its effort to artificially inflate its financial +results to meet or exceed analyst estimates for the second quarter 2012, Bankrate intentionally +failed to book approximately $99,000 in known accounting expenses that had been incurred in the +second quarter. +As a result of these improper accounting entries, entries that the company reversed as part +of a broader restatement on June 17, 2015, Bankrate’s second quarter 2012 earnings release and +associated Form 8-K, filed on July 31, 2012, reported adjusted earnings before interest, taxes, +depreciation, and amortization (“Adjusted EBITDA”) of $37.5 million, exceeding analyst +consensus estimates by approximately $300,000, and adjusted earnings per share (“Adjusted EPS”) +of $0.18, thereby meeting analyst consensus estimates.2 Further, due to these improper accounting +entries, Bankrate materially overstated its second quarter 2012 net income reported in its Form 10- +Q filed on August 13, 2012. During the two week period following the issuance of Bankrate’s +second quarter 2012 earnings release, DiMaria and Lerner each sold Bankrate stock, thereby +profiting from a stock price that had been artificially inflated by the company’s materially +overstated financial results. +RESPONDENT + +1. Bankrate, Inc. is a Delaware corporation based in North Palm Beach, Florida, that +owns and operates an Internet-based consumer banking and personal finance network. Bankrate’s +common stock is registered with the Commission pursuant to Exchange Act Section 12(b) and +traded on the New York Stock Exchange (ticker: RATE). Bankrate files periodic reports, +including Forms 10-K, 10-Q, and 8-K, with the Commission pursuant to Section 13(a) of the +Exchange Act and the related rules thereunder. On June 17, 2011, Bankrate filed an S-8 +registration statement for an offering relating to its equity compensation plan. This offering, which +was ongoing at the time of the misconduct described herein, incorporated future company filings +with the Commission, including the Form 8-K containing the company’s materially false second +quarter 2012 earnings release and the second quarter 2012 Form 10-Q that materially overstated +the company’s net income. + + +2 Bankrate defines Adjusted EBITDA as earnings before interest, taxes, depreciation and +amortization, excluding stock based compensation expense and IPO and deal related expenses, +and defines Adjusted EPS as earnings per fully diluted share, excluding stock based +compensation expense, amortization, IPO and deal related expenses. + 4 +FACTS + +Bankrate’s Business And Structure. + +2. Bankrate is engaged in the business of providing consumers with personal finance +information across multiple vertical categories including mortgages, deposits, insurance, credit +cards, and other categories, such as retirement, automobile loans, and taxes. Bankrate also +aggregates rate information from over 4,800 institutions on more than 300 financial products. Its +principal platform is its Bankrate.com Internet website. +3. During the relevant period, Bankrate had three primary divisions: (1) Bankrate +Core, the original mortgage information business; (2) Bankrate Insurance, comprised of numerous +insurance information companies acquired by Bankrate; and (3) Bankrate Credit Cards, comprised +of a number of credit card information companies acquired by Bankrate. +4. Bankrate generates revenue by selling consumer information (“leads”) gleaned +from users of its websites in the insurance and credit cards vertical categories. Its other sources of +revenue include display advertising, performance-based advertising, distribution arrangements, and +traditional media avenues, such as syndication of editorial content and subscriptions. Some of its +customers pay Bankrate each time that a consumer clicks through a link on Bankrate’s website to +the customer’s website. +Bankrate’s Manipulation Of Second Quarter 2012 Revenue and Expenses. +5. On July 6, 2012, after being provided with preliminary second quarter financial +results for Bankrate Core and Credit Cards (the Insurance division’s financial results had not yet +been added to the consolidated numbers), DiMaria, unwilling to accept the company’s second +quarter 2012 financial results, informed Lerner that Adjusted EBITDA needed to be $37 million +for the quarter. +6. On July 7, 2012, the first version of Bankrate’s consolidated financial results was +circulated to DiMaria, Lerner, and Gamsey, as well as others on the accounting team, reflecting +current Adjusted EBITDA for the second quarter of $36,144,000, which DiMaria knew was below +analyst consensus estimates. +7. Three days later, after realizing it had double-counted $286,000 of revenue, the +Credit Cards division submitted revised financials for consolidation. The next day, DiMaria was +informed that Bankrate’s second quarter revenue had decreased by $286,000 due to the correction +for the Credit Cards division’s double-counting of revenue, further jeopardizing the company’s +prospects of meeting its metrics. Shortly thereafter, at DiMaria’s instruction, Lerner emailed the +Insurance and Credit Cards divisions directing them to book additional revenue of $300,000 and +$500,000, respectively. Lerner’s July 11, 2012 email instructions to both Credit Cards and +Insurance, which were copied to DiMaria, did not specify a legitimate justification for the revenue, +but rather contained an ambiguous description of what the revenue purportedly related to, and did +not identify any specific customers with which it was associated. + 5 +8. Within a few minutes of sending these email instructions, Lerner forwarded the +emails (and subsequent related emails) to Gamsey. In emails between themselves using strong +expletives, Lerner and Gamsey expressed serious concerns about the validity of the revenue the +divisions had just been directed to book and commiserated about the improper accounting entries +directed by DiMaria. Their emails also stated that DiMaria’s improper accounting entries would +have to be reversed in the third quarter, thereby creating an even larger revenue shortfall and a +need to record additional improper revenue in the third quarter. +Bankrate Insurance Records $300,000 in Baseless Revenue. +9. Without any support or analysis, the Insurance division immediately recorded the +$300,000 of additional revenue directed by DiMaria, booking the revenue to a dormant customer +account. Although the Insurance division did not have any intention of justifying the $300,000 of +additional revenue, on July 16, 2012, five days after the revenue was booked, Bankrate’s auditors +asked for an explanation for the $300,000 as part of its accounts receivable variance review, +thereby prompting Bankrate to quickly create a purported explanation for this revenue. +10. Within twenty-four hours of Bankrate’s auditors asking about the $300,000 entry, +the Insurance division, with the knowledge and/or involvement of DiMaria, Lerner, Gamsey, and +others, prepared a draft chart purportedly supporting the $300,000 in revenue – a chart that was +changed shortly thereafter. Tellingly, although this second chart changed the amounts of revenue +assigned to certain categories and replaced certain initial explanations for the revenue with new +purported explanations for the revenue, the second chart still totaled the $300,000 in revenue that +DiMaria and Lerner had directed the Insurance division to book. +11. The purported explanations for the $300,000 in revenue were baseless. For +example, in the second purported explanation for the $300,000 in revenue, $179,000 related to +estimated June 2012 revenue from a brand new bonus provision with a customer of the Insurance +division. However, as DiMaria, Gamsey, and Lerner knew, at the time this revenue was +recognized, the Insurance division did not have any actual data from the customer indicating that a +June bonus had been earned. In addition, both Gamsey and Lerner knew that the Insurance +division was not performing at a level that would have triggered a bonus in the months leading up +to June 2012. Similarly, DiMaria knew, or was reckless in not knowing, that a few weeks prior to +the purported justification attributing $179,000 to this bonus, the Insurance division had estimated +only a medium probability of a $30,000 bonus by August 2012. Indeed, the Insurance division +employee who prepared the high-level, conclusory “support” for the bonus revenue advised Lerner +at the time that she was not comfortable with the Insurance division recognizing revenue on the +basis of this type of analysis in the future. When the actual data on which a potential bonus was +based were later reported to the Insurance division, the Insurance division’s performance did not +qualify for a bonus. In fact, the Insurance division missed the bonus under the two applicable +bonus formulas by approximately 50% and 200%, respectively. + 6 +12. For these reasons, among others, Bankrate’s recognition of the $300,000 in revenue +was contrary to GAAP. 3 +13. In addition, Bankrate did not share either of the purported explanations for the +$300,000 in revenue with its auditor, despite the auditor specifically asking for information about +the $300,000. Rather, at approximately the same time the initial chart attempting to explain the +$300,000 entry was being circulated internally, Lerner sent a misleading, generic explanation that +had been reviewed and approved by DiMaria and Gamsey to the auditor, implicitly affirming that +the revenue was associated with the single customer account to which it was booked. Moreover, +Bankrate did not forward either chart to its auditor, nor did Bankrate update its misleading, generic +explanation for the $300,000 in revenue. +Credit Cards Does not Fully Comply with the Directive to Book Baseless Revenue, Causing +Bankrate to Immediately and Arbitrarily Record Revenue to A Different Business Unit. +14. Unlike Insurance, the Credit Cards accountants initially refused to book the +$500,000 of unsupported revenue directed by DiMaria. Unwilling to accept, and angered by, the +Credit Cards accountants’ reaction to his improper directive, DiMaria told other Bankrate +personnel that he was “going to rip [the Credit Cards CEO’s] f[***]ing head off” and fire the +Credit Cards accountants if they “f[***] up the accounting.” +15. Credit Cards personnel eventually recorded an additional $176,000 in revenue to +the second quarter 2012, revenue that was contrary to Bankrate’s revenue recognition policy. On +July 12, 2012, upon learning that Credit Cards had only booked $176,000 of the $500,000 in +additional revenue he had directed, DiMaria informed Lerner that the difference should be booked +to Bankrate Core. Thirty-five minutes later, Lerner instructed the Bankrate Core accounting +personnel to book $305,000 in additional revenue. Conveniently using two of the Core customers +on a revenue spreadsheet that had legitimate revenue listed as $234,000 and $71,000, Bankrate +Core simply doubled the revenue attributable to these customers without any basis to arrive at the +$305,000 of additional revenue, a fact that soon became known to DiMaria, Lerner, and Gamsey. +16. By adding this improper revenue directly to the revenue spreadsheet rather than +through a manual journal entry, Bankrate avoided the questions that its auditors typically directed +toward post-quarter manual journal entries. This manner of booking the $305,000 also +circumvented Bankrate’s accounting controls, as the revenue spreadsheet had already been +approved for entry into the general ledger and did not require additional approvals. + +3 The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification +(“ASC”) Topic 605-10-25-1 provides that revenue may be properly recognized only when it is +both a) realized or realizable and b) earned. See also Staff Accounting Bulletin Topic 13, +Revenue Recognition, as codified in ASC 605-10-S99, which provides that revenue is generally +realized or realizable and earned when all of the following criteria are met: 1) persuasive +evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) +the seller’s price to the buyer is fixed or determinable; and 4) collectability is reasonably assured. + 7 +17. In approximately September 2012, after learning of the staff’s investigation in this +matter, DiMaria for the first time attributed the $305,000 revenue item to an alleged contractual +dispute with an Insurance customer. After DiMaria offered this justification, the $305,000 of +previously unexplained revenue was transferred from Bankrate Core’s books to the Insurance +division’s books. +18. Notwithstanding DiMaria’s retroactive justification of the $305,000, the alleged +contractual dispute with the Insurance customer had been resolved by June 2012. In fact, in +August 2012, Bankrate confirmed with the customer that the only outstanding money owed by the +customer was for June and July 2012 invoices. +19. For these reasons, among others, the recognition of both the $176,000 in revenue +booked with the Credit Cards division and the $305,000 in revenue booked with Bankrate Core +was contrary to GAAP. +Bankrate Makes Additional Baseless Reductions In Marketing Expense Accrual. +20. On July 13, 2012, the day after Bankrate improperly recorded $305,000 of +additional revenue on Bankrate Core’s books, a revised version of Bankrate’s consolidated +financial results for the second quarter 2012 was circulated to DiMaria, Lerner, and Gamsey that +reflected Adjusted EBITDA of $36,656,000. +21. Shortly after the circulation of the revised financial results, results that continued to +fall short of the $37 million in Adjusted EBITDA dictated by DiMaria one week earlier, DiMaria +directed a Core accountant to reduce a marketing accrual account for Search Engine Marketing +(known as “SEM”) by $400,000. Reducing the SEM accrual (a balance sheet account) led to a +corresponding reduction in the SEM expense (an income statement account), thereby artificially +increasing Bankrate’s quarterly earnings. +22. DiMaria’s email instruction to the Core accountant did not reference or contain any +support for the accounting entry. Similarly, the manual journal entry executing DiMaria’s +instruction to reduce the SEM marketing accrual by $400,000 did not have any support beyond +DiMaria’s email instruction. +23. Upon learning of this $400,000 reduction in the SEM accrual, Gamsey questioned +Lerner as to whether there was any basis for DiMaria’s reduction in the SEM accrual, or whether +DiMaria directed this entry instead of additional unsupported revenue entries. +24. In fact, Bankrate had been using the SEM accrual account as one of its “cushion” or +“cookie jar reserve” accounts (i.e., an account known to have excess accruals that could be +selectively used to boost the financial results of particular quarters) since at least early 2011. It was +inappropriate for Bankrate to use the SEM account as a “cushion” account, and to reduce the SEM +accrual without a proper basis, in order to meet the Adjusted EBITDA number being dictated by +DiMaria. + 8 +25. Following the booking of this $400,000 reduction in the SEM accrual, a revised +version of Bankrate’s second quarter 2012 financial results was circulated to DiMaria, Lerner, and +Gamsey, reflecting Adjusted EBITDA of $37,056,000. +Bankrate Fails to Book Additional Second Quarter Expenses. +26. The baseless accounting entries detailed above were not the only steps in +Bankrate’s scheme to meet analyst estimates. On July 6, 2012 – indeed, within a few hours of +being told by DiMaria that second quarter Adjusted EBITDA needed to be $37 million – Lerner +instructed Bankrate Core to reverse certain second quarter accounting fees associated with +Bankrate’s Sarbanes-Oxley compliance provider. This instruction was made without any basis. +27. After realizing that accounting fees incurred in the second quarter had not yet been +recorded, Lerner, instead of reversing these fees, decided not to record the proper amount of fees to +the second quarter, but to instead record those fees to the third quarter. As a result, Bankrate +improperly failed to book at least $99,000 in known accounting fees that were incurred during the +second quarter. +Bankrate’s Reported Financial Results Met And/Or Exceeded Analyst Consensus Estimates. +28. As a result of its improper entries as described above, Bankrate released artificially +inflated financial results on July 31, 2012, and just met analyst targets. Analyst consensus +estimates for Bankrate’s second quarter 2012 financial results were $37.2 million for Adjusted +EBITDA and $0.18 for Adjusted EPS. In its July 31, 2012 earnings release, which was +incorporated in a Form 8-K filed by Bankrate on the same date, Bankrate reported second quarter +2012 Adjusted EBITDA of $37.5 million and Adjusted EPS of $0.18. The above-described +improper entries were therefore material, as they allowed Bankrate to meet and/or exceed analyst +consensus estimates for these key financial metrics. Due to the improper entries, Bankrate also +materially misstated its reported net income in its second quarter 2012 Form 10-Q, filed on August +13, 2012. +29. The day after Bankrate’s announcement of its financial results for the second +quarter 2012 on July 31, 2012, Bankrate’s stock price rose from $15.95 to $17.57 per share. Both +DiMaria and Lerner sold Bankrate stock during the two-week period following the announcement +of Bankrate’s second quarter 2012 financial results, a period during which Bankrate’s stock price +was artificially inflated as a result of Bankrate’s scheme to inflate its financial results. +VIOLATIONS + +30. As a result of the conduct described above, Bankrate violated Section 17(a) of the +Securities Act, which prohibits fraudulent conduct in the offer or sale of securities, and 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. +31. Also as a result of the conduct described above, Bankrate violated Section 13(a) of +the Exchange Act and Rules 13a-11, 13a-13, and 12b-20 thereunder, which require that every +issuer of a security registered pursuant to Section 12 of the Exchange Act file with the + 9 +Commission, among other things, information, documents, quarterly reports, and current reports as +the Commission may require, and mandate that periodic reports contain such further material +information as may be necessary to make the required statements not misleading. +32. Because Bankrate improperly recorded its revenue, expenses, and accruals, its +books, records, and accounts did not, in reasonable detail, accurately and fairly reflect its +transactions and dispositions of assets. +33. In addition, Bankrate failed to implement internal accounting controls relating to its +revenue, expense, and accrual accounts which were sufficient to provide reasonable assurances that +these accounts were accurately stated in accordance with GAAP. +34. As a result of the conduct described above, Bankrate violated Sections 13(b)(2)(A) +and 13(b)(2)(B) of the Exchange Act, which require 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, and 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. +Bankrate’s Remedial Efforts + + In determining to accept Bankrate’s Offer, the Commission considered remedial acts +undertaken by Bankrate. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Bankrate’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent Bankrate cease and desist from committing or causing any violations and any future +violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-11, and 13a-13 thereunder. + +B. Respondent Bankrate shall, within 14 days of the entry of this Order, pay a civil +money penalty in the amount of $15,000,000 to the Securities and Exchange Commission. The +Commission may distribute civil money penalties collected in this proceeding if, in its discretion, +the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section +308(a) of the Sarbanes-Oxley Act of 2002, as amended. The Commission will hold funds paid +pursuant to this paragraph in an account at the United States Treasury pending a decision whether +the Commission, in its discretion, will seek to distribute funds or, subject to Exchange Act Section +21F(g)(3), transfer them to the general fund of the United States Treasury. If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. §3717. Payment must be made in one +of the following ways: + 10 + +(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 +Bankrate as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Ian Karpel, Assistant Regional Director, +Division of Enforcement, Securities and Exchange Commission, 1961 Stout Street, Denver, CO +80294-1961. + +C. Regardless of whether the Commission in its discretion orders the creation of a Fair +Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor +shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any +part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court in +any Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. Such +a payment shall not be deemed an additional civil penalty and shall not be deemed to change the +amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a “Related +Investor Action” means a private damages action brought against Respondent by or on behalf of +one or more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3684.pdf b/raw/aaer/2015/AAER-3684.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7beebc98aaaf10a163c1357e35304a52e1cd8221 --- /dev/null +++ b/raw/aaer/2015/AAER-3684.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:cc51374303830f56c22aa6efab40ef1a18eaf9831f34ff00a837d6d747cf15d4 +size 208788 diff --git a/raw/aaer/2015/AAER-3685.pdf b/raw/aaer/2015/AAER-3685.pdf new file mode 100644 index 0000000000000000000000000000000000000000..09a6c64fb3912187229273a2cecfa86851d1a485 --- /dev/null +++ b/raw/aaer/2015/AAER-3685.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:95b2a0d658edb680d5d8d410d6a5f53d3ce322f587d5f0a44e5feb117e41da69 +size 260408 diff --git a/raw/aaer/2015/AAER-3685.txt b/raw/aaer/2015/AAER-3685.txt new file mode 100644 index 0000000000000000000000000000000000000000..3df433fdf6e702c57976f1f5f130d66ed2aa87f5 --- /dev/null +++ b/raw/aaer/2015/AAER-3685.txt @@ -0,0 +1,395 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9905 / September 8, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75853 / September 8, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3685 / September 8, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16790 + + + +In the Matter of + +Lawrence S. Meer, CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 8A OF THE +SECURITIES ACT OF 1933, SECTIONS +4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, AND RULE +102(e) OF THE COMMISSION’S RULES +OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND- +DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against, Lawrence S. +Meer, CPA (“Respondent” or “Meer”) pursuant to Section 8A of the Securities Act of 1933 +(“Securities Act”), Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications + +2 + + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of +1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary +Meer served as the chief financial officer (“CFO”) of the MusclePharm Corporation +(“MSLP”) from July 1, 2010 through July 2, 2012. MSLP is a Denver-based sports nutrition +company that develops, manufactures, and markets sports nutrition products. When MSLP +became a public company in 2010, Meer was unprepared for the Commission’s reporting +requirements and failed to develop sufficient infrastructure to support its rapid growth. MSLP’s +revenues greatly increased each year (MSLP’s reported revenue was $3M in 2010, $17M in 2011, +and $67M in 2012). Meer lacked public company experience and failed to educate himself with +the required expertise. Meer failed to ensure sufficient internal controls were enacted and proper +books and records were kept. As a result, between 2010 and July 2012, when Meer ceased being + +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 . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. +3 + +CFO, MSLP had a series of accounting and disclosure failures that resulted in the company filing +materially false and misleading filings with the Commission. Specifically, as described further +below, MSLP failed to disclose perquisite compensation to its executive officers, failed to disclose +related party transactions, failed to disclose bankruptcies related to Meer’s companies, and +committed other financial statement, accounting, and disclosure failures. +Respondent +1. Lawrence S. Meer, CPA, age 54, was the CFO of MSLP from July 1, 2010 through +July 2, 2012. From October 2009 until July 1, 2010, Meer was the Director of Finance of MSLP. +Meer then served as treasurer of MSLP from July 2, 2012 through March 1, 2013. Meer was +licensed as a CPA in Colorado from approximately 1987 to 2002, when his license lapsed. + +Relevant Entity + +2. MSLP is a Nevada corporation, based in Denver, Colorado, that manufactures and +markets sports nutrition products. From 2010 to present, MSLP’s common stock was registered +with the Commission pursuant to Section 12(g) of the Exchange Act and was quoted on the OTC +Bulletin Board. + +MSLP’s Failure to Disclose Perquisites from 2010 through 2012 + +3. From 2010 through 2012, MSLP materially understated its disclosed perquisites by +approximately $411,000 or 96% in Forms 10-K, Forms S-1, and proxy statements filed with the +Commission. Meer reviewed, approved, and signed Forms 10-K and Forms S-1 while CFO. +MSLP understated its disclosed perquisites in (1) 2010 by approximately $37,000 or 100%; (2) in +2011 by approximately $160,000 or 100%; and (3) in 2012 by approximately $214,000 or 93%. +4. From 2010 until July 2012, Meer reviewed expense reimbursements and charges +coming through the accounting department. Meer knew or should have known that executive +compensation was required to be disclosed in Commission filings and Meer failed to educate +himself regarding the required reporting of executive compensation in Commission filings or +what were considered perquisites with respect to executive officers. Meer failed to ensure +sufficient internal controls were enacted relating to perquisites and proper books and records were +kept. Meer did not identify any potential perquisites. As a consequence, MSLP did not disclose +any perquisites in its filings with the Commission while Meer was CFO. +5. From 2010 through 2012, MSLP’s chief executive officer (“CEO”) received +approximately $198,000 of undisclosed perquisites. The perquisites included perquisites related to +meals, autos, apparel, personal professional tax and legal services, and two golf club memberships. +During this time, MSLP also paid for perquisites of other executives that were not disclosed, +including items such as the medical costs of the birth of a child, eye surgery, and personal golf club +memberships. Additionally, Meer received approximately $22,000 in perquisites from MSLP, +which Meer also failed to record as additional compensation in the form of perquisites. Meer also +made material omissions and misrepresentations to the auditors about receipt of perquisites. +4 + +6. After Meer was no longer working for MSLP, on October 31, 2014, MSLP filed +amended Forms 10-K for the years ended 2012 and 2013. In total, MSLP failed to report +perquisites totaling approximately $411,000 from 2010-2012. + +MSLP’s Failure to Disclose Related Party Transactions with a +Major Customer from 2011 through 2012 + +7. Meer knew or should have known that policies regarding identifying and disclosing +related party transactions were required and Meer failed to identify or implement sufficient policies +regarding identifying and disclosing related party transactions. As a result, from May 2011 +through July 2, 2012, while Meer was CFO, MSLP failed to disclose material related party +transactions with a major customer in Commission filings that were reviewed, approved, and +signed by Meer. + +8. In May 2011, MSLP hired a new chief marketing officer (“CMO”). The CMO was +a former executive and co-founder of a major customer of MSLP. Meer knew that the CMO’s +brother remained the CEO of the major customer. The CMO’s brother was also a greater than 10% +owner of the major customer. From May 2011 to April 2012, Meer did not identify the related +party relationship or consider if disclosure was necessary. + +9. In March 2012, MSLP’s auditor informed MSLP that transactions with the major +customer were related party transactions requiring disclosure. In April 2012, MSLP provided a +memo to its auditors concluding that transactions with the major customer did not require +disclosure under generally accepted accounting principles “GAAP.” Meer reviewed and signed the +memo. The memo misapplied GAAP, which Meer, the only accountant signing the memo, did not +correct. The memo also contained inaccurate information about the relationship between MSLP, +the CMO, and the major customer that Meer did not correct. Meer did not consider whether +transactions with the major customer needed to be disclosed as related party transactions under +Item 404 of Regulation S-K. The 2011 Form 10-K was filed three days after the memo was +reviewed, approved, and signed by Meer, without any related party disclosure regarding the major +customer. + +10. MSLP continued to fail to disclose transactions with its major customer as related +party transactions in Commission filings, until it filed its Form 10-Q for the quarter ended March +30, 2013 in May 2013. + +Meer’s Failure to Disclose the Bankruptcies of his Former Companies from 2010-2012 + +11. Two companies owned by Meer filed for bankruptcy in 2008 in the United States +District Court for the Southern District of Florida. MSLP never disclosed the bankruptcies of +Meer’s former companies in Commission filings. From April 2011 through October 2012, +MSLP’s filings also included a misstatement that “[n]one of the members of the board of directors +or other executives has been involved in any bankruptcy proceedings.” Meer did not correct the +misstatement or omissions in the Commission filings that he reviewed, approved, and signed. +Meer also omitted to inform the auditors that his companies had filed for bankruptcy. +5 + + +Other Financial Statement, Accounting, and Disclosure Failures from 2010-2012 + +12. MSLP improperly accounted for advertising and promotional related costs for +2010 and 2011. Instead of accounting for advertising and promotional related costs as a +reduction of revenue as required under GAAP, MSLP recorded these costs as advertising +expenses resulting in it overstating revenue by $845,000 or 26% in 2010 and $3.6 million or 21% +in 2011. As a result, MSLP filed an amended Form 10-K for the year ended December 31, 2011 +on July 2, 2012 restating its 2010 and 2011 financial statements. Meer did not read the applicable +GAAP and did not evaluate the accounting for the various sales incentives MSLP offered. This +issue was first raised by MSLP’s auditor in mid-2012. + +13. MSLP recorded approximately $1.5 million of loss on settlement of accounts +payable in the first quarter of 2011, when GAAP required it be disclosed in 2010. By reporting +the loss in the wrong quarter, MSLP understated its 2010 loss on settlement of accounts payable +as presented on its income statement by 78% and overstated it by 455% in the first quarter of +2011. MSLP’s net loss was understated 8% in 2010 and overstated 42% in 2011. Meer was +aware of MSLP’s past due accounts payable and the eventual settlement in early 2011 using MSLP +stock. Meer, however, failed to consider whether the settlements should have been booked in the +prior accounting period. + +14. MSLP failed to disclose continuing sponsorship commitments in its Form 10-K +for the year ended December 31, 2011 and its Forms S-1 filed during 2012 as required under +GAAP. The future sponsorship commitments required MSLP to make future payments totaling +$6.9 million through 2013. Meer failed to consider whether the scheduled future payments needed +to be disclosed. + +15. MSLP failed to disclose that it had one supplier that accounted for nearly 100% of +its product purchases in its 2011 and 2012 Commission filings as required under GAAP. Meer +did not identify that this was required to be disclosed. + +16. MSLP failed to disclose the amount of its international sales in its 2011 through +2012 Commission filings as required under GAAP. MSLP’s international sales accounted for +23% for 2011 and 30% for 2012. Meer did not identify that this was required to be disclosed. + +Books, Records, and Lack of Internal Controls + +17. Because MSLP improperly recorded and/or reported its perquisites, related parties, +revenue, losses on settlement of accounts payable, sponsorship commitments, manufacturing +concentration, and international sales, its books, records and accounts did not, in reasonable detail, +accurately and fairly reflect its transactions and dispositions of assets. + +18. In addition, MSLP failed to implement internal accounting controls relating to its +perquisites, related parties, revenue, losses on settlement, sponsorship commitments, +manufacturing concentration, and international sales, which were sufficient to provide reasonable +6 + +assurances that transactions were recorded as necessary to permit the preparation of financial +statements in conformity with GAAP and to maintain the accountability of assets. + +Violations + +19. As a result of the conduct described above, Meer willfully4 violated Sections +17(a)(2) and 17(a)(3) of the Securities Act and was a cause of MSLP’s violations of Sections +17(a)(2) and 17(a)(3) of the Securities Act, which make it unlawful for any person in the offer or +sale of any securities by the use of interstate commerce to obtain money or property by means of +any untrue statement of a material fact or any omission to state a material fact necessary in order to +make the statements made, in light of the circumstances under which they were made, not +misleading; and to engage in any transaction, practice, or course of business which operates or +would operate as a fraud or deceit upon the purchaser. + +20. As a result of the conduct described above, Meer was a cause of MSLP’s violations +of Section 14(a) of the Exchange Act and Rule 14a-9 thereunder, which prohibits solicitations by +means of a proxy statement, form of proxy, notice of meeting or other communication, written or +oral, containing a statement which, at the time and in the light of the circumstances under which it +was made, was false or misleading with respect to any material fact, or which omitted to state any +material fact necessary in order to make the statements therein not false or misleading or necessary +to correct any statement in any earlier communication with respect to the solicitation of a proxy for +the same meeting or subject matter which has become false or misleading. + +21. As a result of the conduct described above, Meer was a cause of MSLP’s violations +of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder, which +require every issuer of a security registered pursuant to Section 12 of the Exchange Act file with +the Commission information, documents, and annual and quarterly reports as the Commission +may require, and mandate that periodic reports contain such further material information as may +be necessary to make the required statements not misleading. + +22. As a result of the conduct described above, Meer was a cause of MSLP’s violations +of 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 assets. + +23. Aa result of the conduct described above, Meer was a cause of MSLP’s violations +of Section 13(b)(2)(B) of the Exchange Act and willfully violated Rule 13b2-1 thereunder, which + +4 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)). + +7 + +require all reporting companies to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurances that transactions are recorded as necessary to permit the +preparation of financial statements in conformity with GAAP and to maintain the accountability of +assets; and prohibit persons from directly or indirectly falsifying or causing to be falsified any +book, record, or account. + +24. As a result of the conduct described above, Meer willfully violated Exchange Act +Rule 13b2-2, which prohibits any director or officer of an issuer from, directly or indirectly: +(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. + +Disgorgement and Civil Penalties + + Respondent has submitted a sworn Statement of Financial Condition dated February 4, +2015 and other evidence and has asserted his inability to pay a civil penalty. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Meer’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Meer shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), +13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13b2-1, +13b2-2, and 14a-9 promulgated thereunder. + + B. Meer 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 +Respondent’s work in his practice before the Commission will be +reviewed either by the independent audit committee of the public company +8 + +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, 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, 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 +respondent’s or the firm’s quality control 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 + + (d) Respondent acknowledges his 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. + +D. The Commission will consider an application by Respondent 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’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + + E. Based upon Respondent’ s sworn representations in his Statement of Financial +Condition dated February 4, 2015 and other documents submitted to the Commission, the +Commission is not imposing a penalty against Respondent. +F. The Division of Enforcement (“Division”) may, at any time following the entry of +this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent +9 + +provided accurate and complete financial information at the time such representations were +made; and (2) seek an order directing payment of the maximum civil penalty allowable under the +law. No other issue shall be considered in connection with this petition other than whether the +financial information provided by Respondent was fraudulent, misleading, inaccurate, or +incomplete in any material respect. Respondent may not, by way of defense to any such petition: +(1) contest the findings in this Order; (2) assert that payment of a penalty should not be ordered; +(3) contest the imposition of the maximum penalty allowable under the law; or (4) assert any +defense to liability or remedy, including, but not limited to, any statute of limitations defense. + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3686.pdf b/raw/aaer/2015/AAER-3686.pdf new file mode 100644 index 0000000000000000000000000000000000000000..53194a99cb20e9bf1798ba1cee9f7148c929ff4e --- /dev/null +++ b/raw/aaer/2015/AAER-3686.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:28f82a643c94cdfebeaa52f3d4255e0d2a10ba6a11450033752ed52fad1c442b +size 258883 diff --git a/raw/aaer/2015/AAER-3687.pdf b/raw/aaer/2015/AAER-3687.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d0302e7e3d4ac49af64584d358452bf8185ee690 --- /dev/null +++ b/raw/aaer/2015/AAER-3687.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:94b15592a03603ce4c0295b900c57875cc3fdb71ab443f704b555920f005f1a2 +size 239700 diff --git a/raw/aaer/2015/AAER-3688.txt b/raw/aaer/2015/AAER-3688.txt new file mode 100644 index 0000000000000000000000000000000000000000..2abdc62731acfdefd100056dbe476a340b6b307f --- /dev/null +++ b/raw/aaer/2015/AAER-3688.txt @@ -0,0 +1,1404 @@ + + + + + + + + + + + + + + + + SEC.gov | Summit Asset Strategies Investment Management, LLC et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/517196","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"field_group":{"html_element":{"mode":"default","context":"view","settings":{"classes":"rightrail-list","show_empty_fields":false,"id":"","element":"div","show_label":true,"label_element":"h2","label_element_classes":"","attributes":"","effect":"none","speed":"fast"}}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Summit Asset Strategies Investment Management, LLC et al. + + + + + + + + + + + + Summit Asset Strategies Investment Management, LLC et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 23334 / September 4, 2015 + Accounting and Auditing Enforcement Release No. AAER-3688 / September 4, 2015 + Securities and Exchange Commission v. Summit Asset Strategies Investment Management, LLC et al. , Civil Action No. 2:15-cv-01429 (W.D. Wa.) + + SEC Charges Seattle-Area Hedge Fund Adviser with Taking Unearned Management Fees + + + Two Accountants Charged With Performing Deficient Audit of Fund + + The Securities and Exchange Commission today charged a Bellevue, Wash.-based investment advisory firm and its CEO with fraudulently inflating the values of investments in the portfolio of a private fund they advised so they could attain unearned management fees. The SEC also charged the fund's outside auditors with performing a deficient audit that enabled the firm to send misleading financial statements to investors. + + Chris Yoo and his firm Summit Asset Strategies Investment Management agreed to pay more than $1 million to settle the fraud charges arising from Summit Stable Value Fund. Yoo and another of his advisory firms, Summit Asset Strategies Wealth Management agreed to pay over $180,000 to settle fraud charges related to his failure to inform clients that Summit Asset Strategies Wealth Management received significant fees when referring them to invest in the fund. + + According to the SEC's complaint filed in U.S. District Court for the Western District of Washington: + + Yoo and Summit Asset Strategies Investment Management were entitled to withdraw as compensation Summit Stable Value Fund's net profits, which were calculated by determining realized and unrealized gains and losses. They also were required to return any excess net profits to the fund as determined in an annual audit. + + Beginning in 2011, Yoo directed the firm to withdraw purported fees that were based on fraudulently inflated investment values or were otherwise disproportionate from the fund's actual profits. + + As part of the scheme, Yoo falsely claimed that the fund owned a specific bank asset that had appreciated to approximately $2 million in value. In reality, the fund owned an entirely different asset that was worth less than $200,000. As a result of Yoo's false claim, the fund's 2013 financial statements materially overstated the fund's investment values. + + In total, Yoo and Summit Asset Strategies Investment Management withdrew nearly $900,000 in purported fees to which they were not entitled. + + Without admitting or denying the allegations, Yoo and Summit Asset Strategies Investment Management agreed to the entry of an order (1) enjoining them from violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") and Rule 206(4)-8(a) thereunder, with Yoo also agreeing to an injunction regarding violations of Section 207 of the Advisers Act; and (2) imposing disgorgement of $889,301 plus prejudgment interest of $104,632 and a penalty of $150,000, all on a joint and several basis. Without admitting or denying the allegations, Summit Asset Strategies Wealth Management agreed to the entry of an order (1) enjoining it from violations of Sections 206(1), 206(2), and 207 of the Advisers Act; and (2) imposing disgorgement of $81,729.14 plus prejudgment interest of $6,611.75 and a penalty of $100,000. Yoo also agreed to be barred from the securities industry. + + According to the SEC's order instituting a settled administrative proceeding against the Summit Stable Value Fund's external auditors Raymon Holmdahl and Kanako Matsumoto: + + They did not adhere to generally accepted auditing standards and performed a deficient audit of the fund's 2013 financial statements, which materially overstated the fund's valuation and ownership interest in certain assets. + + Although the auditors recognized that Yoo's valuations posed a significant risk to the proper presentation of the fund's financial statements, they failed to obtain sufficient appropriate audit evidence with respect to the existence of certain fund assets. Therefore, they failed to discover that the fund did not own the assets claimed by Yoo. + + Holmdahl and Matsumoto agreed to settle the charges without admitting or denying the findings by agreeing to be suspended for three years from practicing as an accountant on behalf of any publicly-traded company or other entity regulated by the SEC. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3689.pdf b/raw/aaer/2015/AAER-3689.pdf new file mode 100644 index 0000000000000000000000000000000000000000..1b3579f547f028db03c1e90117b8370bd3246a99 --- /dev/null +++ b/raw/aaer/2015/AAER-3689.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:1a8d1b97c0330052e9906a048ab62a076c58bbed99f5e65af9018d7a5963bac9 +size 468567 diff --git a/raw/aaer/2015/AAER-3690.pdf b/raw/aaer/2015/AAER-3690.pdf new file mode 100644 index 0000000000000000000000000000000000000000..01a4ac9600201b3ba1476d88f8a4cd8e82883e02 --- /dev/null +++ b/raw/aaer/2015/AAER-3690.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4a55a9022009dda26ff2f530a701cdea27959279269b5e483ed00e9095f7519b +size 290002 diff --git a/raw/aaer/2015/AAER-3690.txt b/raw/aaer/2015/AAER-3690.txt new file mode 100644 index 0000000000000000000000000000000000000000..97672b37a850640cf938683f250d054caa0aa85c --- /dev/null +++ b/raw/aaer/2015/AAER-3690.txt @@ -0,0 +1,597 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75860 / September 9, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3690 / September 9, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16798 + + +In the Matter of + +RONALD E. HEINEMAN, + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER AND CIVIL +PENALTY + +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 Ronald E. Heineman (“Heineman” 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: + +A. SUMMARY + +1. These proceedings concern materially misleading statements and omissions made +by Heineman, the chief executive officer (“CEO”) of General Employment Enterprises, Inc. +(“GEE” or the “Company”) in 2009, to the Company’s auditors after substantially all of the +Company’s cash—$2.3 million—was unaccounted for. +B. RESPONDENT + +2. Heineman, age 57 and a resident of Cincinnati, Ohio, served as the CEO of GEE +from July 1, 2009 through December 23, 2009. Heineman also served as manager of River Falls +Financial Services, LLC from as early as January 2009 through April 29, 2011. +C. RELEVANT ENTITIES AND INDIVIDUALS + +3. GEE is an Illinois corporation headquartered in Oakbrook Terrace, Illinois that +provides professional placement services and temporary staffing services in certain industries. +GEE’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act and trades on the NYSE MKT stock exchange. GEE files periodic reports, +including Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange +Act and related rules thereunder. +4. River Falls Financial Services, LLC (“River Falls Financial”), River Falls +Investments, LLC f/k/a Oxygen Unlimited II, LLC (“River Falls Investments”), River Falls +Holdings, LLC (“RFH”), Accredited Investor Resources, LLC f/k/a Oxygen Investment +Partners, LLC (“AIR”), Oxygen Unlimited, LLC (“Oxygen”), O2HR, LLC (“O2HR”), SDH +Realty, LLC (“SDH”), WTS Acquisition LLC (“WTS”), H2H Holdings, LLC (“H2H”), and +PSQ, LLC (“PSQ”) (collectively, the “Affiliated Entities”) are purported holding, investment, +employment-related, and insurance companies. River Falls Financial, AIR’s administrative +member, purportedly owned at least 99% of AIR’s common units and millions of dollars of AIR’s +preferred units. AIR was purportedly an investment company designed to make investments in +River Falls Investments and certain other of the Affiliated Entities. River Falls Investments was a +purported holding company of Oxygen, which was a purported holding company of O2HR, a +professional employer organization. RFH was the purported holding company of River Falls +Investments. PSQ was a purported holding company whose sole asset was GEE shares +representing a controlling stake in the Company acquired as of July 1, 2009. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + 3 +5. During at least 2009 and 2010, Wilbur Anthony Huff (“Huff”)2 exercised +substantial financial and management control during at least 2009 and 2010 over numerous +entities, including, among others, the Affiliated Entities and their holdings. As a convicted felon, +Huff faced legal and practical barriers to operating business entities in his own name, particularly +business in regulated industries, including employment-related, insurance, and banking companies. +Huff installed other business partners, including Heineman, to perform day-to-day operational +functions and/or serve as the listed owners, directors, or managers. From as early as May 2008 +through at least November 2009, Huff paid Heineman as much as $15,000 per month through the +Affiliated Entities, mostly through River Falls Investments. In exchange, Heineman agreed to +serve as the listed officer, director, or manager for GEE, River Falls Financial, and many of the +Affiliated Entities and also purportedly advised Huff on various matters. + +6. Park Avenue Bank (“PAB” or “the Bank”) was a New York State chartered bank +until it was closed by the New York State Banking Department on March 12, 2010, and the +Federal Deposit Insurance Corporation was named Receiver. The Affiliated Entities primarily +conducted their banking business through PAB. Charles J. Antonucci, Sr. (“Antonucci”) served +as the president and CEO of PAB from June 2004 until October 2009. In October 2010, Antonucci +pled guilty to multiple criminal charges, including securities fraud, bank bribery, embezzlement, +and providing a false confirmation to BDO of GEE’s purported CD at PAB. Separately, Park +Avenue Insurance was a private insurance company owned by Antonucci that was not affiliated +with PAB. +7. BDO USA, LLP (“BDO”), formerly known as BDO Seidman, LLP, is a Delaware +limited liability partnership and a PCAOB-registered public accounting firm with its headquarters +in Chicago, Illinois. BDO served as GEE’s independent auditor from 2004 through 2012. +8. Stephen B. Pence (“Pence”), age 60 and a resident of Louisville, Kentucky. As of +July 1, 2009, Pence became a beneficial owner of a majority of GEE’s common stock through a +holding company, PSQ, LLC (“PSQ”), with the right to appoint three directors, including himself +as chairman of the board, and to designate a CEO, a position he assigned to Heineman. Pence +served as the chairman of the board of GEE until November 17, 2010. Pence formerly served as + +2 Huff pled guilty to federal mail fraud charges for obtaining insurance premium finance loans +under false pretenses in the Western District of Kentucky in 2003. In 2008, the Commission filed +charges against Huff related to a scheme to misappropriate assets from and to record fake letters of +credit at Certified Services, Inc. (“Certified”). SEC v. Huff, 08-CV-60315 (S.D. Fla.). On October +22, 2010, the Court entered judgment for the Commission against Huff requiring him to pay more +than $13 million, among other relief. Separately, after an October 2012 indictment against him, +Huff pled guilty on December 23, 2014 to an information, which alleged, among other things, that: +(1) Huff controlled GEE, in whole or in part, by installing other individuals; (2) Huff participated +with Antonucci in a conspiracy in which they stole $2.3 million from GEE and Huff later returned +the $2.3 million to GEE from three companies he controlled; and (3) a large portion of the $2.3 +million received by GEE were funds entrusted to Oxygen by its clients for payment of the clients’ +employment tax and other obligations. U.S. v. Huff, 12-CR-750 (S.D.N.Y.). + 4 +the lieutenant governor of Kentucky from 2003 to 2007 and the United States Attorney for the +Western District of Kentucky from 2001 to 2003. +9. Salvatore J. Zizza (“Zizza”) served as CEO of GEE from December 23, 2009, the +day that Heineman resigned as CEO, through December 2012. Prior to his appointment as CEO, +Zizza received monthly payments of $20,000 from PSQ, which were funded by several of the +Affiliated Entities, for purported consulting services, and Zizza frequently attended GEE board +meetings as an “invited guest.” In 2009, businesses owned or operated by Zizza received loans in +excess of $1 million that Huff directed from certain of the Affiliated Entities. + +10. Associate-1 was another of Huff’s business partners and was listed or served at +various times as a manager of River Falls Investments, Oxygen, and O2HR, and as co-manager of +River Falls Financial with Heineman. Associate-1 was also involved in PSQ’s acquisition of a +controlling stake in GEE and attended several GEE board meetings in 2009. In addition, from July +2009 until September 2009, Associate-1 was a signatory on GEE’s bank account at PAB despite +the fact that Associate-1 was not an official employee, officer, or director of the Company. +Associate-1 also purported to be the owner of WTS (another of the Affiliated Entities), a holding +company of On-Site Services, Inc. (“On-Site”) and Ameritemps, Inc. (“Ameritemps”), which +WTS had acquired in January 2009 with funding from other Affiliated Entities. Almost +immediately after PSQ’s acquisition of a controlling stake in GEE, Heineman began presenting +proposals to GEE’s board for GEE to acquire these companies. For example, at a GEE board +meeting on August 10, 2009, attended by Pence and Zizza, the board authorized Heineman to enter +into a letter of intent with WTS to acquire On-Site, and Heineman reported that he would present +another acquisition candidate, Ameritemps, at the September board meeting. + +D. BACKGROUND +11. GEE’s May 18, 2009, definitive proxy statement disclosed that in January 2009, +GEE began discussions with representatives of River Falls Financial concerning the possibility of a +tender offer and direct cash investment in GEE. The River Falls Financial representatives included +Heineman and Pence, and Huff was present for one of the relevant meetings. The proxy statement +further disclosed that, on February 11, 2009, River Falls Financial and PSQ, a special purpose +vehicle purportedly formed by Pence, entered into a non-binding letter of intent with GEE for a +purchase and tender offer agreement to obtain a controlling stake in GEE. +12. According to GEE’s May 18, 2009, definitive proxy statement, on March 30, 2009, +after negotiations continued following the February 2009 non-binding letter of intent, Pence signed +on behalf of PSQ a definitive securities purchase and tender offer agreement (the “Purchase +Agreement”). The Purchase Agreement provided that, subject to shareholder approval, PSQ would +acquire a controlling stake in GEE by (1) purchasing 7,700,000 newly-issued shares of GEE +common stock in a private placement transaction at a purchase price of $0.25 per share for a total +purchase price of $1,925,000; (2) commencing a cash tender offer to purchase from the Company’s +shareholders up to 2,500,000 shares of common stock at a purchase price of $0.60 per share; (3) +appointing three directors to a five-member board of directors, including Pence becoming the +chairman of the board; and (4) designating Heineman GEE’s CEO. On June 22, 2009, a GEE +press released announced shareholders approved the Purchase Agreement and the closing of the + 5 +Purchase Agreement was announced on July 1, 2009. As a result, PSQ acquired more than 65% +ownership of the Company, Pence became GEE’s chairman and appointed two other directors, and +Heineman became GEE’s CEO. +13. Although Pence purported to be sole member and owner of PSQ, as Heineman +knew, PSQ was one of the Affiliated Entities over which Huff exercised substantial financial and +management control. Virtually all of the funds deposited in PSQ’s bank accounts during 2009 +were deposits made directly from several of the Affiliated Entities, including AIR, Oxygen, River +Falls Financial, and RFH, typically at the direction of Huff. Specifically, in almost every instance +in which PSQ needed to make a payment, PSQ received the necessary funds from one of the +Affiliated Entities and immediately paid the obligation with the deposited funds. For example, to +fund PSQ’s obligations under the Purchase Agreement, AIR transferred $1,925,000 to PSQ, and to +cover PSQ’s tender offer obligations, AIR transferred $850,000 and Oxygen transferred $372,000 +(a total of $1,222,000) to PSQ. In exchange, Huff required Pence to sign two purported +promissory notes to AIR in his personal capacity for these amounts ($1,925,000 and $1,222,000), +even though $372,000 had been provided by Oxygen. Although the two promissory notes required +Pence to pay annual interest of 5%, Huff did not actually require Pence to make any interest +payments to AIR and no payments were made. +14. In late June 2009, Pence arranged for Associate-1 to become a signatory on GEE’s +bank account at PAB and Associate-1 remained a signatory from July 2009 until September 2009. +In addition, Associate-1 negotiated certain employment and other agreements on behalf of GEE, +and Associate-1 attended several GEE board meetings in 2009. At the same time, Huff and +Associate-1 controlled WTS, which owned a number of companies that Huff and Associate-1 +intended to sell to GEE. Because Huff and Associate-1 controlled WTS, Pence did not appoint +Associate-1 to be an officer, director, or employee of GEE, which avoided scrutiny of this clear +conflict of interest. +15. Huff and his business partners—including Pence, Heineman, and Associate-1— +created a number of oral and written side agreements regarding ownership, profit sharing, and +management of the Affiliated Entities. For example, at the time AIR purportedly loaned Pence the +funds for PSQ’s transaction with GEE, Pence had no ability to repay the loans without fully +liquidating the GEE shares purchased by PSQ. Thus, in consideration for AIR’s purported loans to +Pence, Pence and Huff orally agreed that if GEE’s stock price increased Pence would compensate +AIR with GEE shares in addition to repaying the amounts of the promissory notes. As a result, +Huff and AIR had a beneficial ownership interest in the GEE shares held by PSQ, which was not +disclosed. +16. From March 2009 through at least April 2010, in connection with PSQ’s majority +ownership of GEE, PSQ paid Zizza $20,000 per month purportedly for consulting work. Huff +funded PSQ’s payments to Zizza through the Affiliated Entities. For example, Pence notified Huff +on January 2, 2010 that PSQ needed to pay Zizza for consulting and specifically asked Huff and +Huff’s assistant to deposit money into PSQ’s account so PSQ could pay Zizza. Huff’s assistant +sent PSQ a check from a River Falls Financial account on January 4, 2010, and Pence sent Zizza a +check from PSQ’s account for $20,000 on the same date. Zizza advised Pence and Huff on several +acquisitions that GEE was considering in 2009. Huff and Pence also promised Zizza that if GEE’s + 6 +stock price increased, they would compensate Zizza with at least 500,000 GEE shares. Zizza +became the CEO of GEE on December 23, 2009. +17. As part of his arrangement with Huff, Heineman served in various roles at several +of the Affiliated Entities and signed numerous agreements involving the Affiliated Entities, +including: + Heineman signed a December 2008 agreement on behalf of WTS in which WTS +purchased the Ohio assets of Ameritemps, Inc., which later became two companies +that GEE purchased in 2010, RFFG of Cleveland, LLC and DMCC Staffing, LLC. + At Huff’s direction, Heineman personally guaranteed a loan of $1.5 million made +by PAB to a Affiliated Entity called Aviation Solutions, LLC. + Heineman served as an authorized signer on several bank accounts that certain +Affiliated Entities had with PAB. + At Huff’s direction, Heineman signed a November 2010 agreement, as manager of +River Falls Financial and on behalf of AIR, in which AIR agreed that PSQ would +assume Pence’s $3 million promissory notes issued to AIR. +18. Huff covertly exercised influence and control over GEE operations through Pence +and Heineman as a result of his control over AIR, which financed PSQ’s investment in GEE. Huff +also sent substantial monthly payments to Pence ($25,000), Zizza ($20,000), and Heineman +($15,000) from various Affiliated Entities in an attempt to ensure his control over, and ability to +influence, GEE operations. +19. Huff exerted control over GEE by, among other things, causing GEE to acquire +several entities owned by WTS, which Huff and Associate-1 controlled. For example, at an +August 10, 2009, GEE board meeting, attended by Pence and Zizza (as Pence’s guest), Heineman +convinced the GEE board of directors to authorize him to enter into a letter of intent with WTS to +acquire its subsidiary On-Site, which was publicly announced on September 6, 2009. In June +2010, while Zizza was GEE’s CEO, GEE acquired On-Site, resulting in a financial benefit to Huff. +In November 2010, GEE acquired additional assets of WTS doing business as Ameritemps, RFFG +of Cleveland, LLC and DMCC Staffing, LLC, again resulting in a financial benefit to Huff. +During 2010, Zizza had numerous discussions with Huff concerning these acquisitions. +E. HEINEMAN KNEW OR SHOULD HAVE KNOWN THAT THE PURPORTED +$2.3 MILLION CD ASSIGNMENT WAS FRAUDULENT + +20. As part of the July 2009 closing of PSQ’s Purchase Agreement with GEE, GEE +opened a checking account at PAB into which PSQ’s escrowed $1,925,000 would be deposited +upon the closing. In June 2009, Associate-1 coordinated with GEE’s chief financial officer (the +“GEE CFO”) to have the GEE checking account opened at PAB and the authorized signatories on +the account were the GEE CFO, Pence, and Associate-1. The GEE CFO, Pence, and Associate-1 +remained the only authorized signatories on the account until September 2009, at which time + 7 +Associate-1 was removed and Heineman was added. Following the closing, Heineman directed +the GEE CFO to transfer an additional $750,000 from GEE’s accounts at other banks to the GEE +PAB checking account. The approximately $2.6 million deposited in the GEE PAB checking +account constituted substantially all of GEE’s cash and half of its assets. Heineman understood +that GEE opened the bank account with PAB because of Huff’s business relationship with +Antonucci, PAB’s president. Heineman also knew or should have known that the Affiliated +Entities primarily maintained their bank accounts at PAB and that Huff and the Affiliated Entities +had other business dealings with Antonucci. + +21. In approximately July 2009, Huff discussed with Pence the possibility of GEE +investing money in Park Avenue Insurance to achieve greater returns on GEE’s cash. Pence told +Heineman about Huff’s idea and involved Heineman in exploring the terms for GEE’s potential +investment. Heineman knew or should have known that Park Avenue Insurance was privately +owned by Antonucci and that Pence had served as Park Avenue Insurance’s president during part +of 2009. +22. On July 14, 2009, Heineman received a draft promissory note from Huff’s attorney +that proposed that GEE make a one-year loan to Park Avenue Insurance in the amount of $2.4 +million with four percent interest. Heineman responded that the promissory note should be +changed to $2.7 million. No promissory note between GEE and Park Avenue Insurance appears to +have been actually executed. +23. However, in August 2009, the GEE CFO reviewed the July 2009 PAB monthly +statement indicating that $2.3 million had been withdrawn from the GEE PAB operating account +on July 23, 2009, without his knowledge. When asked about the missing funds, Heineman claimed +that he had authorized GEE to invest $2.3 million into a certificate of deposit account at PAB. +Although the GEE CFO repeatedly requested that Heineman provide documentation concerning +the purported CD, such as a written authorization, account agreement, and account statements— +and cited the lack of documentation as a control deficiency—Heineman only provided the GEE +CFO with a one-page PDF of a typewritten “Certificate of Deposit Receipt” for $2.3 million with a +single maturity date of October 21, 2009, and interest rate of two percent. +24. GEE’s fiscal year ended on September 30, 2009. On October 19, 2009, the GEE +CFO provided to audit committee members and BDO a report of the evaluation of internal control +for fiscal year 2009, which noted the purported PAB CD as an identified control deficiency. The +report noted that“[t]he transaction was not executed by the office of the Treasurer, and no written +approval or account agreement was provided to the accounting department” and that “it did not +conform to the company’s investment guidelines” because it did not provide sufficient +diversification and PAB did not meet GEE’s size requirement. However, the report concluded that +the control deficiency did not constitute a material weakness. BDO concurred with this +assessment. In response, Heineman did not provide any additional information or documentation +to the GEE CFO. +25. In early November 2009, the GEE CFO noticed that PAB had not remitted the +proceeds of the purported CD of $2.3 million plus interest into GEE’s checking account upon the +maturity date, October 21, 2009. When the GEE CFO contacted PAB, a PAB representative stated + 8 +that the Bank had no record of the purported CD in its system. The GEE CFO then pressed both +Heineman and Pence for an explanation. On November 9, 2009, Pence asked Heineman for +information about the purported CD; Heineman responded that Huff would contact PAB on GEE’s +behalf. +26. According to the minutes of a November 23, 2009, audit committee meeting, +attended by BDO, the GEE CFO reported his concerns that GEE had little documentation +supporting the purported CD, including no written authorization from an account signatory and no +deposit agreement. According to the minutes, Heineman claimed that he authorized the purported +CD at Pence’s direction, and claimed the lack of documentation was due to “the rapid pace of the +transactions in which he had been involved, coupled with reorganization and personnel changes at +Park Avenue Bank.” Heineman next stated that he had anticipated that the CD would be +maintained on a continuing renewal basis but he had asked Pence to liquidate the purported CD +and have the funds transferred into the PAB checking account by the end of the week. The +minutes also state that the BDO engagement partner “said that the audit was substantially +completed, pending resolution of the missing funds issue, receipt of legal letters from counsel, and +the executed management representation letter” and that BDO “would be issuing an unqualified +opinion on the consolidated financial statements.” + +27. On November 24, 2009, the BDO engagement partner emailed the GEE audit +committee chairman (the “AC Chair”), stating that the GEE CFO had “indicated there was an +update on the CD and that the funds would be returned in installments. I am not sure if you can +provide any further clarity on why this would be. I wanted to check with you before I had another +discussion with [Heineman].” The AC Chair replied that he “[could] not provide any clarity” and +expressed concern that one of the audit committee members (the “AC Member”) “seems to be tied +in with this group.” The AC Member had been appointed by Pence in connection with the PSQ +transaction in July. + +28. The BDO engagement partner replied to the AC Chair the following day, +November 25, 2009, that he had spoken to Heineman that morning and Heineman indicated that +Pence and the AC Member “were taking the lead on this as they have a previous working +relationship with the bank.” BDO’s engagement partner also noted that Heineman, however, had +“disagreed with the fact that the CD would be ‘paid back in installments’” and had “indicated that +the proceeds of the CD would be in the Company’s bank account by Monday.” + +29. On November 24, 25, and 27, 2009, Huff directed and caused a total of $900,000 to +be transferred to GEE’s bank accounts in installment payments of $300,000 on each such date +from the bank accounts of two of the Affiliated Entities: SDH and Oxygen. + +30. On November 30, 2009, GEE’s CFO asked Heineman if he knew anything +concerning two $300,000 wire transfers that GEE had unexpectedly received from SDH and +Oxygen. Heineman claimed that he did not know why those transfers had occurred. Heineman’s +statement was materially misleading. + +31. Also on November 30, 2009, Pence, Zizza, and Heineman attended a GEE board of +directors meeting. Zizza, who had no formal role at GEE at this time, attended as an “invited + 9 +guest.” The board minutes indicate that the AC Chair explained that the Company’s Form 10-K +had not yet been filed because BDO’s “final” opinion was predicated on the satisfactory +accounting for the PAB CD and an explanation for where GEE’s funds had been since the CD +matured on October 21. During this November 30, 2009, board meeting, the AC Member stated he +believed that the situation occurred as a result of administrative errors on the part of the Bank, and +Pence said that the AC Member had agreed to pursue the matter with PAB. Neither Pence nor +Heineman (or anyone else) mentioned anything about GEE selling or assigning the purported CD +to a third party. + +32. On December 4, 2009, the BDO engagement partner on the GEE audit sent an +email to the AC Chair, Heineman, and Pence, among others, summarizing the open items requiring +resolution prior to the issuance of BDO’s audit report. The email begins by noting that after the +CD had matured in October 2009, when the GEE CFO had contacted the Bank, a PAB +representative informed the GEE CFO that there was no record of the purported CD and that after +some investigation by the AC Member, “in late November it was determined that the funds would +be returned to GEE in installments.” The email then notes that GEE had received the following +wire transfers: (i) November 24: $300,000 wire transfer from SDH; (ii) November 25: $300,000 +wire transfer from Oxygen; (iii) November 27: $300,000 wire transfer from SDH; and (iv) +December 1: $100,000 wire transfer from Oxygen. It then stated that the BDO engagement +partner had discussed the matter with Heineman and Pence, who both referred him to the AC +Member who was working directly with PAB on the matter, and that the AC Member left him a +voicemail “indicating the bank continues to put money against the CD they owe [GEE] and it +should be fully repaid by the close of business on Monday, Dec. 7” and that the Bank would +provide a short apology note. + +33. Shortly after receiving it, the AC Chair forwarded the December 4, 2009, email +from the BDO engagement partner to Heineman, Pence, the AC Member, the GEE CFO, and +GEE’s board, noting: “Multiple representatives of BDO have told me that they will not sign off on +the GEE Audit . . . until they have sufficient documentation of what has transpired. [BDO’s] +position is that the Liabilities associated with a sign-off far exceed any past or potential future +Audit Fees that [they] have received or will receive. The high level message is that a letter of +apology from Park Avenue Bank will not be sufficient.” The BDO engagement partner received a +copy of this email and replied to all: “To clarify, [our] primary concern is getting an understanding +of exactly what has occurred in order to allow us to complete our audit procedures. As I am sure +everyone would agree, what has transpired over the last few weeks with the funds at [PAB] has +been highly unusual. I know everyone has been working to resolve the issue. However, time +continues to pass and [GEE’s] filing deadline will be here before we know it. As such, I wanted to +clarify the importance of appropriately addressing the issue as quickly as possible to allow us to +complete the audit.” +34. Later in the day on December 4, the AC Chair sent an email to the BDO +engagement partner and concurring partner summarizing his call with the AC Member, stating that +when he spoke with the AC Member “he told me that [PAB] had reported these transaction [sic] to +the FDIC and that the money sent to the various entities that are now sending GEE the money are +sending us the banks money rather than sending it back to the bank.” The AC Chair continued: +“This makes absolutely no sense. It looks like [PAB] is on the verge of failing. The FDIC and a + 10 +bankruptcy estate are going to require [PAB] to collect every cent they can under loans or other +arrangements to settle with the creditors of the bank before they send money to third parties.” + +35. The following day, on December 5, 2009, the AC Chair emailed GEE’s board +(including Pence) and Heineman calling for a special audit committee meeting on December 9 +because of “several unanswered questions related to $2.3 million of the Company’s cash which +supposedly was invested in a Certificate of Deposit (‘CD’) at Park Avenue Bank which will need +to be answered before BDO will complete their Audit Report for the Company’s fiscal year ended +September 30, 2009.” The AC Chair’s email noted several issues, including that (i) there was no +account agreement with PAB or regular reporting on the CD; (ii) PAB did not remit the proceeds +of the CD into GEE’s operating account when it reached its maturity date on October 21, 2009; +(iii) PAB provided no explanation to the GEE CFO when he attempted to investigate; and (iv) the +AC Member who took the lead on this matter with PAB “was informed on or about November 21, +2009, that the funds would be returned to [GEE] in a series of deposits.” The email also provided a +chart of seven wire transfers totaling $1.7 million, which included the four noted in Henaghan’s +December 4 email plus a December 2, 2009, wire transfer from Oxygen for $100,000, a December +2, 2009, wire transfer from River Falls Financial of $300,000, and a December 3, 2009, wire +transfer from River Falls Financial also for $300,000. The address listed for both SDH and River +Falls Financial on each of their wire transfers in the chart was 11921 Brinley Ave, Louisville, KY. +36. On December 4 and December 9, 2009, GEE received two additional wire transfers +from River Falls Financial for $300,000 each, bringing the total amount received by GEE from +River Falls Financial to $1.2 million and the total of the nine wire transfers to $2.3 million, the +same amount that Heineman had purported to invest in a CD. Heineman knew or should have +known that Huff, in conjunction with Associate-1, directed the transfers from SDH, Oxygen, and +River Falls Financial to return the missing funds to GEE. + +37. On December 8, the AC Chair emailed the BDO engagement partner, providing +some links he suggested the BDO engagement partner review before he had a conversation with +the AC Member and any representatives of PAB, “particularly the Anthony Huff links” and +explained that he “met Anthony Huff when we went to New York” to negotiate PSQ’s acquisition. +The email included links to a press release announcing the Commission’s lawsuit against Huff, a +link to Huff’s website noting the address 11921 Brinley Avenue, Louisville, KY in the text of the +email, and a link to the website for Oxygen noting the identical address. This is the same address +that appeared in the wires sent to GEE by River Falls Financial and SDH, as noted in the AC +Chair’s December 5 email described in paragraph 36, above. Also, Huff’s website at the time +contained references to River Falls Investments, SDH, Oxygen, and O2HR. +38. Also on December 8, 2009, the day before the special audit committee meeting, the +AC Chair received an email from Heineman to the audit committee with several attachments. +Heineman’s email purported to offer a new explanation for why GEE had received $2.3 million +from the three entities rather than PAB. Heineman claimed that he had negotiated an assignment +agreement with the manager of River Falls Investments (Associate-1), who “offered to purchase” +the purported CD from GEE at face value. Heineman also attached to his email an unsigned, draft +assignment agreement and a letter from Heineman to PAB, dated July 21, 2009, that purportedly +authorized the $2.3 million CD investment. Heineman’s email also attached a July 2009 monthly + 11 +statement for GEE’s operating account at PAB, which included the description of the $2.3 million +withdrawal as a debit on July 23 with a debit memo stating in handwriting: “To: Park Avenue +Insurance, See Attachment Approval, $2,300,000.00.” Park Avenue Insurance was a private +insurance company separately owned by Antonucci that was not affiliated with PAB. +39. The AC Chair responded to Heineman’s email that day, stating: “Given the chain of +event[s] you described below, why was GEE not informed immediately when River Falls +Investments purchased the CD and why are we just now learning that a law firm has been engaged +to document the assignment of the CD? We have been asking questions about the CD now for +nearly a month.” +40. The BDO engagement partner also exchanged emails with the AC Chair later that +day, noting his agreement with the AC Chair’s questions to Heineman and that “the sale of the CD +would constitute a related party transaction which typically should be approved by the board.” The +AC Chair replied to the BDO engagement partner that he had just spoken to Heineman and +Heineman “claims that RFI (River Falls Investment) is 100% owned by [Associate-1] and is not +related to River Falls Financial [] or any of the other entities.” The BDO engagement partner +replied, “That is consistent with what [] Pence told me in my conversation with him. The common +names are a little strange though.” +41. Heineman’s aforementioned statements to BDO around December 2009 were +materially misleading because, among other things, Heineman knew or should have known that: +a. he did not negotiate an assignment agreement with Associate-1 (or anyone +else); +b. Huff controlled River Falls Investments, which was a related party; indeed, +River Falls Investments had been making substantial monthly payments to +Heineman since May 2008; +c. Huff had directed the three Affiliated Entities to transfer funds to GEE in late +November and early December to preserve the financial viability of GEE for +the benefit of Huff and PSQ; +d. his assignment agreement story had falsely explained why GEE had received +those payments from the Affiliated Entities; +e. Pence did not actually own or control River Falls Financial, Huff did; and +f. Pence, Huff, Associate-1, and Heineman had an unwritten agreement to divide +amongst themselves any financial windfalls associated with the market +performance of GEE’s stock. +42. Along with his December 8, 2009, email to the audit committee, Heineman +attached a letter, dated July 21, 2009, signed by him and addressed to the president of PAB, +stating: “Please transfer $2,300,000 from the GEE checking account to a 90-day automatic +renewal Certificate of Deposit.” Heineman had drafted this July 2009 letter in late 2009 and + 12 +presented it to GEE’s audit committee to convince everyone that he had authorized the purchase of +the purported CD in light of the increased scrutiny concerning GEE’s missing funds. +43. According to the minutes of GEE’s audit committee meeting on December 9, 2009: + + The BDO engagement partner expressed concern that BDO still did not have a clear +understanding of the purported CD transaction. + The BDO engagement partner said that BDO needed to understand the nature of the +purported administrative errors at PAB that he had been told were responsible for +the lack of proper documentation regarding the CD transaction. He also explained +that BDO required documentation validating the banking transactions, and an +explanation as to why there was no existence of an account agreement with the +Bank or no record of the CD being at the bank. + Another BDO partner, BDO’s Midwest Regional Business Line Leader, said he +believed members of GEE’s senior management appeared hesitant to provide +information related to these transactions. + The BDO engagement partner stated that the assignment agreement did not resolve +the outstanding issues as BDO still needed to know what transpired within PAB +and make a determination of whether the assignment agreement with River Falls +Investments was a related party transaction. + BDO also advised that although the assignment agreement “may reduce or +eliminate the need for going concern disclosure, it would increase the requirement +that management provide sufficient disclosure regarding any related party +conflicts.” +44. On December 14, 2009, GEE’s outside counsel sent PAB a formal letter requesting +all documentation and information concerning the purported CD. PAB’s December 16, 2009, +response provided only documents relating to GEE’s checking account and did not provide any +documents or other information about the purported CD. The checking account documentation, +however, indicated that only Associate-1, the GEE CFO, and Pence were authorized signers on +GEE’s account from July to September 2009—not Heineman—and the checking account +statements reflected a debit memo for the transfer of $2.3 million of GEE’s cash to Park Avenue +Insurance on July 23, 2009. +45. On December 22, 2009, BDO sent the AC Chair a letter stating that BDO did not +have sufficient audit evidence to formally conclude the audit and demanded an independent +investigation (“BDO’s demand letter”). BDO’s demand letter identified multiple inconsistencies +and problems in the audit evidence BDO had received regarding the purported CD, including that a +number of significant questions remained unanswered concerning both the existence of the +purported CD (e.g., why bank records provided by PAB showed a transfer of $2.3 million to Park +Avenue Insurance) and the manner in which $2.3 million had been transferred to the Company by +the Affiliated Entities (e.g., why Associate-1 would pay 100% of the face value of the purported + 13 +CD after the maturity date had expired without payment by PAB, why had River Falls Financial— +purportedly owned by Pence—transferred approximately $1 million to GEE in connection with the +alleged assignment of the purported CD to River Falls Investments, and why Heineman had made +inconsistent representations about his involvement in negotiating the alleged assignment with +Associate-1). Pence reviewed the letter and told Huff that he was very concerned. Pence also +forwarded BDO’s demand letter to Zizza and Associate-1, the purported manager of River Falls +Investments. +46. On the evening of December 22, 2009, BDO learned that the Audit Committee +meeting that was scheduled for the following day had been cancelled, Zizza, an advisor to Pence +who had attended GEE board meetings through the fall of 2009, would be taking over as CEO, and +that Pence and Associate-1 intended to prepare written responses to each of the issues identified in +the December 21 letter. On December 23, 2009, Heineman formally resigned as GEE’s CEO and +that same day Pence appointed Zizza, who had previously brought new business to BDO in the +form of several auditing clients, to be GEE’s new CEO. +F. VIOLATIONS +47. Rule 13b2-2 of the Exchange Act prohibits officers and directors from, directly or +indirectly, making or causing to be made materially false or misleading statements or omissions to +accountants in connection with an audit or preparation of reports to be filed with the Commission. + +48. As a result of the conduct described above, Heineman violated Rule 13b2-2 under +the Exchange Act. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Exchange Act Rule 13b2-2. + + B. Respondent shall pay a civil penalty of $150,000 to the 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 the following installments: (1) $40,000 within 10 days of the entry of +this Order; (2) $40,000 within 120 days of the entry of this Order; (3) $40,000 within 240 days of +the entry of this Order; and (4) $30,000 within 360 days of the entry of this Order. If any payment +is not made by the date the payment is required by this Order, the entire outstanding balance of +civil penalties, plus any additional interest accrued pursuant to 31 U.S.C. § 3717, shall be due and +payable immediately, without further application. Payment must be made in one of the following +ways: + + 14 +(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 +Heineman as a Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Timothy Casey, New York Regional +Office, Securities and Exchange Commission, 200 Vesey Street, New York, NY 10281-1022. + +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 + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3691.pdf b/raw/aaer/2015/AAER-3691.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8524fbb48b8436f5f2bce3e4dfbe36a81e0844e9 --- /dev/null +++ b/raw/aaer/2015/AAER-3691.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:fb92d0bcda49bf57a314e06926756bbba364c7f426e9644beb527d2e6ea5fc3b +size 298543 diff --git a/raw/aaer/2015/AAER-3691.txt b/raw/aaer/2015/AAER-3691.txt new file mode 100644 index 0000000000000000000000000000000000000000..baccc1de1d8f01ccba2a63b60af46cc7bd27652a --- /dev/null +++ b/raw/aaer/2015/AAER-3691.txt @@ -0,0 +1,693 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75861 / September 9, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3691 / September 9, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16799 + + +In the Matter of + +SALVATORE J. ZIZZA, + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER AND CIVIL +PENALTY + +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 Salvatore J. Zizza (“Zizza” 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: + +A. SUMMARY + +1. These proceedings concern materially misleading statements and omissions made +by Zizza, the chief executive officer (“CEO”) of General Employment Enterprises, Inc. (“GEE” or +the “Company”), to the Company’s auditors concerning the return of $2.3 million from related +parties after the money was unaccounted for. +B. RESPONDENT + +2. Zizza, age 69 and a resident of New York, New York, served as the CEO of GEE +from December 23, 2009, through December 2012. +C. RELEVANT ENTITIES AND INDIVIDUALS + +3. GEE is an Illinois corporation headquartered in Oakbrook Terrace, Illinois that +provides professional placement services and temporary staffing services in certain industries. +GEE’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act and trades on the NYSE MKT stock exchange. GEE files periodic reports, +including Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange +Act and related rules thereunder. +4. River Falls Financial Services, LLC (“River Falls Financial”), River Falls +Investments, LLC f/k/a Oxygen Unlimited II, LLC (“River Falls Investments”), River Falls +Holdings, LLC (“RFH”), Accredited Investor Resources, LLC f/k/a Oxygen Investment +Partners, LLC (“AIR”), Oxygen Unlimited, LLC (“Oxygen”), O2HR, LLC (“O2HR”), SDH +Realty, LLC (“SDH”), WTS Acquisition LLC (“WTS”), H2H Holdings, LLC (“H2H”), and +PSQ, LLC (“PSQ”) (collectively, the “Affiliated Entities”) are purported holding, investment, +employment-related, and insurance companies. River Falls Financial, AIR’s administrative +member, purportedly owned at least 99% of AIR’s common units and millions of dollars of AIR’s +preferred units. AIR was purportedly an investment company designed to make investments in +River Falls Investments and certain other of the Affiliated Entities. River Falls Investments was a +purported holding company of Oxygen, which was a purported holding company of O2HR, a +professional employer organization. RFH was the purported holding company of River Falls +Investments. PSQ was a purported holding company whose sole asset was GEE shares +representing a controlling stake in the Company acquired as of July 1, 2009. + +5. During at least 2009 and 2010, Wilbur Anthony Huff (“Huff”)2 exercised +substantial financial and management control over numerous entities, including, among others, the + +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 +Affiliated Entities and their holdings. As a convicted felon, Huff faced legal and practical barriers +to operating business entities in his own name, particularly business in regulated industries, +including employment-related, insurance, and banking companies. Huff installed other business +partners, including Pence, to perform day-to-day operational functions and/or serve as the listed +owners, directors, or managers. Zizza first met Huff and Pence in 2008 when Huff asked for +Zizza’s help raising money for Oxygen and River Falls Investments. Zizza also attended a +conference at which Huff discussed various AIR-related investments. + +6. Park Avenue Bank (“PAB” or “the Bank”) was a New York State chartered bank +until it was closed by the New York State Banking Department on March 12, 2010, and the +Federal Deposit Insurance Corporation was named Receiver. The Affiliated Entities primarily +conducted their banking business through PAB. Charles J. Antonucci, Sr. (“Antonucci”) served +as the president and CEO of PAB from June 2004 until October 2009. In October 2010, Antonucci +pled guilty to multiple criminal charges, including securities fraud, bank bribery, embezzlement, +and providing a false confirmation to BDO of GEE’s purported CD at PAB. Separately, Park +Avenue Insurance was a private insurance company owned by Antonucci that was not affiliated +with PAB. +7. BDO USA, LLP (“BDO”), formerly known as BDO Seidman, LLP, is a Delaware +limited liability partnership and a PCAOB-registered public accounting firm with its headquarters +in Chicago, Illinois. BDO served as GEE’s independent auditor from 2004 through 2012. +8. Stephen B. Pence (“Pence”) served as the chairman of the board of GEE from July +1, 2009, through November 17, 2010. Although Pence purported to be the sole member and owner +of PSQ, whose sole asset was the GEE shares representing a controlling stake in the Company as +of July 1, 2009, PSQ was one of the Affiliated Entities over which Huff exercised substantial +financial and management control. PSQ’s acquisition of GEE stake was funded by AIR and +Oxygen. Pence also represented to BDO that he was the 100% owner of River Falls Financial, +another of the Affiliated Entities. Huff directed substantial monthly payments to Pence ($25,000) +from several of the Affiliated Entities to ensure his control over, and ability to influence, GEE’s +operations. Pence formerly served as the lieutenant governor of Kentucky from 2003 to 2007 and +the United States Attorney for the Western District of Kentucky from 2001 to 2003. + +2 Huff pled guilty to federal mail fraud charges for obtaining insurance premium finance loans +under false pretenses in the Western District of Kentucky in 2003. In 2008, the Commission filed +charges against Huff related to a scheme to misappropriate assets from and to record fake letters of +credit at Certified Services, Inc. SEC v. Huff, 08-CV-60315 (S.D. Fla.). On October 22, 2010, the +Court entered judgment for the Commission against Huff requiring him to pay more than $13 +million, among other relief. Separately, after an October 2012 indictment against him, Huff pled +guilty on December 23, 2014 to an information, which alleged, among other things, that: (1) Huff +controlled GEE, in whole or in part, by installing other individuals; (2) Huff participated with +Antonucci in a conspiracy in which they stole $2.3 million from GEE and Huff later returned the +$2.3 million to GEE from three companies he controlled; and (3) a large portion of the $2.3 million +received by GEE were funds entrusted to Oxygen by its clients for payment of the clients’ +employment tax and other obligations. U.S. v. Huff, 12-CR-750 (S.D.N.Y.). + + +4 +9. Ronald E. Heineman (“Heineman”) was appointed as the CEO of GEE on July 1, +2009, in connection with PSQ’s acquisition of a controlling stake in GEE. Heineman served as +CEO until his resignation on December 23, 2009, in connection with the events described herein. +Zizza was appointed as GEE’s CEO to replace Heineman on the same day. Huff directed +substantial monthly payments to Heineman ($15,000) from the Affiliated Entities during this time +period. +10. Associate-1 was another of Huff’s business partners and was listed or served at +various times as a manager of River Falls Investments, Oxygen, and O2HR, and as co-manager of +River Falls Financial with Heineman. Associate-1 was also involved in PSQ’s acquisition of a +controlling stake in GEE and attended several GEE board meetings in 2009. In addition, from July +2009 until September 2009, Associate-1 was a signatory on GEE’s bank account at PAB despite +the fact that Associate-1 was not an official employee, officer, or director of the Company. +Associate-1 also purported to be the owner of WTS (another of the Affiliated Entities), a holding +company of On-Site Services, Inc. (“On-Site”) and Ameritemps, Inc. (“Ameritemps”), which +WTS had acquired in January 2009 with funding from other Affiliated Entities. +D. BACKGROUND + +11. Zizza became CEO of GEE on December 23, 2009, after a period of prior business +dealings with Huff, Pence, and other entities and individuals associated with them. In December +2009, shortly before and after he became GEE’s CEO, Zizza engaged in a series of conversations +with the company’s auditor, BDO, concerning the circumstances surrounding the return of $2.3 +million that GEE had purportedly invested in a CD issued by PAB. +12. GEE’s May 18, 2009, definitive proxy statement disclosed that in January 2009, +GEE began discussions with representatives of River Falls Financial concerning the possibility of a +tender offer and direct cash investment in GEE. The River Falls Financial representatives included +Heineman and Pence, and Huff was present for one of the relevant meetings. At all relevant times, +Zizza was aware that Huff was a convicted felon. The proxy statement further disclosed that, on +February 11, 2009, River Falls Financial and PSQ, a special purpose vehicle purportedly formed +by Pence, entered into a non-binding letter of intent with GEE for a purchase and tender offer +agreement to obtain a controlling stake in GEE. +13. In 2009, Zizza understood that Pence had a managerial role with certain of the +Affiliated Entities, including River Falls Financial and River Falls Investments. In the spring of +2009, Zizza signed a loan commitment term sheet on behalf of Metropolitan Paper Recycling, Inc. +(“MPR”), a company 50% owned by Zizza, in which River Falls Investments agreed to provide $3 +million in financing to MPR. Zizza signed the agreement as MPR’s chairman, and Pence signed as +River Falls Investments’s manager. While Zizza understood that Pence had a managerial role with +River Falls Investments, he also knew or should have known that Huff exercised substantial +financial and management control over River Falls Investments. Zizza also knew or should have +known that Huff exercised substantial financial and management control over River Falls Financial +because on January 4, 2010, MPR received a loan of $200,000 from River Falls Financial at Huff’s +direction. + + +5 +14. According to GEE’s May 18, 2009, definitive proxy statement, on March 30, 2009, +after negotiations continued following the February 2009 non-binding letter of intent, Pence signed +on behalf of PSQ a definitive securities purchase and tender offer agreement (the “Purchase +Agreement”). The Purchase Agreement provided that, subject to shareholder approval, PSQ would +acquire a controlling stake in GEE by (1) purchasing 7,700,000 newly-issued shares of GEE +common stock in a private placement transaction at a purchase price of $0.25 per share for a total +purchase price of $1,925,000; (2) commencing a cash tender offer to purchase from the Company’s +shareholders up to 2,500,000 shares of common stock at a purchase price of $0.60 per share; (3) +appointing three directors to a five-member board of directors, including Pence becoming the +chairman of the board; and (4) designating Heineman GEE’s CEO. On June 22, 2009, a GEE +press release announced that shareholders approved the Purchase Agreement and the closing of the +Purchase Agreement was announced on July 1, 2009. As a result, PSQ acquired more than 65% +ownership of the Company, Pence became GEE’s chairman and appointed two other directors, and +Heineman became GEE’s CEO. +15. Although Pence purported to be sole member and owner of PSQ, as Zizza knew or +should have known, PSQ was one of the Affiliated Entities over which Huff exercised substantial +financial and management control. Virtually all of the funds deposited in PSQ’s bank accounts +during 2009 were deposits made directly from several of the Affiliated Entities, including AIR, +Oxygen, River Falls Financial, and RFH, typically at the direction of Huff. Specifically, in almost +every instance in which PSQ needed to make a payment, PSQ received the necessary funds from +one of the Affiliated Entities and immediately paid the obligation with the deposited funds. For +example, to fund PSQ’s obligations under the Purchase Agreement, AIR transferred $1,925,000 to +PSQ, and to cover PSQ’s tender offer obligations, AIR transferred $850,000 and Oxygen +transferred $372,000 (a total of $1,222,000) to PSQ. In exchange, Huff required Pence to sign two +purported promissory notes to AIR in his personal capacity for these amounts ($1,925,000 and +$1,222,000), even though $372,000 had been provided by Oxygen. Although the two promissory +notes required Pence to pay annual interest of 5%, Huff did not actually require Pence to make any +interest payments to AIR and no payments were made. +16. In late June 2009, Pence arranged for Associate-1 to become a signatory on GEE’s +bank account at PAB and Associate-1 remained a signatory from July 2009 until September 2009. +In addition, Associate-1 negotiated certain employment and other agreements on behalf of GEE, +and Associate-1 attended several GEE board meetings in 2009. At the same time, Huff and +Associate-1 controlled WTS, which owned a number of companies that Huff and Associate-1 +intended to sell to GEE. Because Huff and Associate-1 controlled WTS, Pence did not appoint +Associate-1 to be an officer, director, or employee of GEE, which avoided scrutiny of this clear +conflict of interest. +17. Huff and his business partners—including Pence, Heineman, and Associate-1— +created a number of oral and written side agreements regarding ownership, profit sharing, and +management of the Affiliated Entities. For example, at the time AIR purportedly loaned Pence the +funds for PSQ’s transaction with GEE, Pence had no ability to repay the loans without fully +liquidating the GEE shares purchased by PSQ. Thus, in consideration for AIR’s purported loans to +Pence, Pence and Huff orally agreed that if GEE’s stock price increased Pence would compensate +AIR with GEE shares in addition to repaying the amounts of the promissory notes. As a result, + + +6 +Huff and AIR had a beneficial ownership interest in the GEE shares held by PSQ, which was not +disclosed. +18. From March 2009 through at least April 2010, in connection with PSQ’s majority +ownership of GEE, PSQ paid Zizza $20,000 per month for consulting work. Huff funded PSQ’s +payments to Zizza through the Affiliated Entities. For example, Pence notified Huff on January 2, +2010 that PSQ needed to pay Zizza for consulting and specifically asked Huff and Huff’s assistant +to deposit money into PSQ’s account so PSQ could pay Zizza. Huff’s assistant sent PSQ a check +from a River Falls Financial account on January 4, 2010, and Pence sent Zizza a check from PSQ’s +account for $20,000 on the same date. Zizza advised Pence and Huff on several acquisitions that +GEE was considering in 2009. Huff and Pence also promised Zizza that if GEE’s stock price +increased, they would compensate Zizza with at least 500,000 GEE shares. Zizza learned that AIR +had financed PSQ’s purchase of the controlling stake in GEE. Zizza subsequently became the +CEO of GEE on December 23, 2009. +19. Huff covertly exercised influence and control over GEE operations through Pence +and Heineman as a result of his control over AIR, which financed PSQ’s investment in GEE. Huff +also sent substantial monthly payments to Pence ($25,000), Zizza ($20,000), and Heineman +($15,000) from several of the Affiliated Entities in an attempt to ensure his control over, and ability +to influence, GEE operations. +20. Huff exerted control over GEE by, among other things, causing GEE to acquire +several entities owned by WTS, which Huff and Associate-1 controlled. For example, at a GEE +board meeting on August 10, 2009, attended by Pence and Zizza (as Pence’s guest), Heineman +convinced the GEE board of directors to authorize him to enter into a letter of intent with WTS to +acquire its subsidiary On-Site, which was publicly announced on September 6, 2009. Thereafter, +in June 2010, while Zizza was GEE’s CEO, GEE acquired On-Site, resulting in a financial benefit +to Huff. In November 2010, GEE acquired additional assets of WTS doing business as +Ameritemps, RFFG of Cleveland, LLC and DMCC Staffing, LLC, again resulting in a financial +benefit to Huff. During 2010, Zizza had numerous discussions with Huff concerning these +acquisitions. +E. ZIZZA KNEW OR SHOULD HAVE KNOWN THAT THE PURPORTED $2.3 +MILLION CD ASSIGNMENT WAS A RELATED PARTY TRANSACTION + +21. As part of the July 2009 closing of PSQ’s Purchase Agreement with GEE, GEE +opened a checking account at PAB into which PSQ’s escrowed $1,925,000 would be deposited +upon the closing. In June 2009, Associate-1 coordinated with GEE’s chief financial officer (the +“GEE CFO”) to have the GEE checking account opened at PAB and the authorized signatories on +the account were the GEE CFO, Pence, and Associate-1. The GEE CFO, Pence, and Associate-1 +remained the only authorized signatories on the account until September 2009, at which time +Associate-1 was removed and Heineman was added. Following the closing, in early July 2009, +GEE transferred an additional $750,000 from GEE’s accounts at other banks to the GEE PAB +checking account. The approximately $2.6 million deposited in the GEE PAB checking account +constituted substantially all of GEE’s cash and half of its assets. + + + +7 +22. In approximately July 2009, in a conversation in which Zizza did not participate, +Huff discussed with Pence, GEE’s chairman, the possibility of the Company investing money in +Park Avenue Insurance to achieve greater returns on GEE’s cash. Park Avenue Insurance was a +private insurance company owned by Antonucci that was not affiliated with PAB and Pence had +served as Park Avenue Insurance’s president during part of 2009. +23. GEE’s fiscal year ended on September 30, 2009. GEE’s CFO identified that $2.3 +million had been withdrawn from the GEE PAB operating account on July 23, 2009, without the +GEE CFO’s knowledge. The GEE CFO reported that when he asked about the withdrawn funds, +GEE’s CEO Heineman claimed that he had authorized GEE to invest $2.3 million into a CD at +PAB. The GEE CFO also reported that, although he had repeatedly requested documentation +concerning the purported CD, such as a written approval or account agreement—and cited the lack +of documentation as a control deficiency—Heineman only provided the GEE CFO with a one-page +PDF of a typewritten “Certificate of Deposit Receipt” for $2.3 million with a single maturity date +of October 21, 2009, and interest rate of two percent. This information became known to Zizza +before he became GEE’s CEO on December 23, 2009. +24. In early November 2009, the GEE CFO noticed that PAB had not remitted the +proceeds of the purported CD of $2.3 million plus interest into GEE’s operating account upon the +maturity date, October 21, 2009. When the GEE CFO contacted PAB, a PAB representative stated +that the Bank had no record of the purported CD in its system. The GEE CFO then pressed both +Heineman and Pence for an explanation. On November 9, 2009, Pence asked Heineman for +information about the purported CD; Heineman responded to Pence that Huff would contact PAB +on GEE’s behalf. +25. According to the minutes of a November 23, 2009, audit committee meeting, +attended by BDO, the GEE CFO reported his concerns that GEE had little documentation +supporting the purported CD, including no written authorization from an account signatory and no +deposit agreement. According to the minutes, Heineman claimed that he authorized the purported +CD at Pence’s direction, and claimed the lack of documentation was due to “the rapid pace of the +transactions in which he had been involved, coupled with reorganization and personnel changes at +Park Avenue Bank.” Heineman next stated that he had anticipated that the CD would be +maintained on a continuing renewal basis but he had asked Pence to liquidate the purported CD +and have the funds transferred into the PAB checking account by the end of the week. The +minutes also state that the BDO engagement partner “said that the audit was substantially +completed, pending resolution of the missing funds issue, receipt of legal letters from counsel, and +the executed management representation letter” and that BDO “would be issuing an unqualified +opinion on the consolidated financial statements.” + +26. On November 24, 25, and 27, 2009, Huff directed and caused a total of $900,000 to +be transferred to GEE’s bank accounts in installment payments of $300,000 on each such date +from the bank accounts of two Affiliated Entities: SDH and Oxygen. + +27. On November 28, 2009, Pence emailed Zizza that an audit committee member, +whom Pence had appointed in connection with the PSQ transactions in July (the “AC Member”), +“is going to handle the issue with the CD” at the GEE board of directors meeting on November 30, + + +8 +2009. Pence stated: “I would like for you to talk with him before then . . . . I think he has a good +idea.” Zizza replied: “Ok will do.” + +28. On November 30, 2009, Pence, Zizza, Heineman, and the AC Member attended a +GEE board of directors meeting. Zizza, who had no formal role at GEE at this time, attended as an +“invited guest.” The board minutes indicate that the audit committee chairman (the “AC Chair”) +explained that the Company’s Form 10-K had not yet been filed because BDO’s “final” opinion +was predicated on the satisfactory accounting for the PAB CD and an explanation for where GEE’s +funds had been since the CD matured on October 21. During this November 30, 2009, board +meeting, the AC Member stated he believed that the situation occurred as a result of administrative +errors on the part of the Bank, and Pence said that the AC Member had agreed to pursue the matter +with PAB. Neither Pence nor Heineman (or anyone else) mentioned anything about GEE selling +or assigning the purported CD to a third party. + +29. On December 4, 2009, the BDO engagement partner on the GEE audit sent an +email to the AC Chair, Heineman, and Pence, among others, summarizing the open items requiring +resolution prior to the issuance of BDO’s audit report. The email begins by noting that after the +CD had matured in October 2009, when the GEE CFO had contacted the Bank, a PAB +representative informed the GEE CFO that there was no record of the purported CD and that after +some investigation by the AC Member, “in late November it was determined that the funds would +be returned to GEE in installments.” The email then notes that GEE had received the following +wire transfers: (i) November 24: $300,000 wire transfer from SDH; (ii) November 25: $300,000 +wire transfer from Oxygen; (iii) November 27: $300,000 wire transfer from SDH; and (iv) +December 1: $100,000 wire transfer from Oxygen. It then stated that the BDO engagement +partner had discussed the matter with Heineman and Pence, who both referred him to the AC +Member who was working directly with PAB on the matter, and that the AC Member left him a +voicemail “indicating the bank continues to put money against the CD they owe [GEE] and it +should be fully repaid by the close of business on Monday, Dec. 7” and that the Bank would +provide a short apology note. + +30. Later in the day on December 4, the AC Chair sent an email to the BDO +engagement partner and concurring partner summarizing his call with the AC Member, stating that +when he spoke with the AC Member “he told me that [PAB] had reported these transaction [sic] to +the FDIC and that the money sent to the various entities that are now sending GEE the money are +sending us the banks money rather than sending it back to the bank.” The AC Chair continued: +“This makes absolutely no sense. It looks like [PAB] is on the verge of failing. The FDIC and a +bankruptcy estate are going to require [PAB] to collect every cent they can under loans or other +arrangements to settle with the creditors of the bank before they send money to third parties.” + +31. The following day, on December 5, 2009, the AC Chair emailed GEE’s board +(including Pence) and Heineman calling for a special audit committee meeting on December 9 +because of “several unanswered questions related to $2.3 million of the Company’s cash which +supposedly was invested in a Certificate of Deposit (‘CD’) at Park Avenue Bank which will need +to be answered before BDO will complete their Audit Report for the Company’s fiscal year ended +September 30, 2009.” The AC Chair’s email noted several issues, including that (i) there was no + + +9 +account agreement with PAB or regular reporting on the CD; (ii) PAB did not remit the proceeds +of the CD into GEE’s operating account when it reached its maturity date on October 21, 2009; +(iii) PAB provided no explanation to the GEE CFO when he attempted to investigate; and (iv) the +AC Member who took the lead on this matter with PAB “was informed on or about November 21, +2009, that the funds would be returned to [GEE] in a series of deposits.” The email also provided a +chart of seven wire transfers totaling $1.7 million, which included the four noted in Henaghan’s +December 4 email plus a December 2, 2009, wire transfer from Oxygen for $100,000, a December +2, 2009, wire transfer from River Falls Financial of $300,000, and a December 3, 2009, wire +transfer from River Falls Financial also for $300,000. The address listed for both SDH and River +Falls Financial on each of their wire transfers in the chart was 11921 Brinley Ave, Louisville, KY. +32. On December 4 and December 9, 2009, GEE received two additional wire transfers +from River Falls Financial for $300,000 each, bringing the total amount received by GEE from +River Falls Financial to $1.2 million and the total of the nine wire transfers to $2.3 million, the +same amount that Heineman had purported to invest in a CD. Zizza knew or should have known +that Huff, in conjunction with Associate-1, directed the transfers from SDH, Oxygen, and River +Falls Financial to return the missing funds to GEE. +33. On December 8, the AC Chair emailed the BDO engagement partner, providing +some links he suggested the BDO engagement partner review before he had a conversation with +the AC Member and any representatives of PAB, “particularly the Anthony Huff links” and +explained that he “met Anthony Huff when we went to New York” to negotiate PSQ’s acquisition. +The email included links to a press release announcing the Commission’s lawsuit against Huff, a +link to Huff’s website noting the address 11921 Brinley Avenue, Louisville, KY in the text of the +email, and a link to the website for Oxygen noting the identical address. This is the same address +that appeared in the wires sent to GEE by River Falls Financial and SDH, as noted in the AC +Chair’s December 5 email described in paragraph 31, above. Also, Huff’s website at the time +contained references to River Falls Investments, SDH, Oxygen, and O2HR. +34. Also on December 8, 2009, the day before the special audit committee meeting, the +AC Chair received an email from Heineman to the audit committee with several attachments. +Heineman’s email purported to offer a new explanation for why GEE had received $2.3 million +from the three entities rather than PAB. Heineman claimed that he had negotiated an assignment +agreement with the manager of River Falls Investments (Associate-1), who “offered to purchase” +the purported CD from GEE at face value. Heineman also attached to his email an unsigned, draft +assignment agreement and a letter from Heineman to PAB, dated July 21, 2009, that purportedly +authorized the $2.3 million CD investment. Heineman’s email also attached a July 2009 monthly +statement for GEE’s operating account at PAB, which included the description of the $2.3 million +withdrawal as a debit on July 23 with a debit memo stating in handwriting: “To: Park Avenue +Insurance, See Attachment Approval, $2,300,000.00.” Park Avenue Insurance was a private +insurance company separately owned by Antonucci that was not affiliated with PAB. +35. According to the minutes of GEE’s audit committee meeting on December 9, 2009: + + The BDO engagement partner expressed concern that BDO still did not have a clear +understanding of the purported CD transaction. + + +10 + The BDO engagement partner said that BDO needed to understand the nature of the +purported administrative errors at PAB that he had been told were responsible for +the lack of proper documentation regarding the CD transaction. He also explained +that BDO required documentation validating the banking transactions, and an +explanation as to why there was no existence of an account agreement with the +Bank or no record of the CD being at the bank. + Another BDO partner, BDO’s Midwest Regional Business Line Leader, said he +believed members of GEE’s senior management appeared hesitant to provide +information related to these transactions. + The BDO engagement partner stated that the assignment agreement did not resolve +the outstanding issues as BDO still needed to know what transpired within PAB +and make a determination of whether the assignment agreement with River Falls +Investments was a related party transaction. + BDO also advised that although the assignment agreement “may reduce or +eliminate the need for going concern disclosure, it would increase the requirement +that management provide sufficient disclosure regarding any related party +conflicts.” +36. On December 14, 2009, GEE’s outside counsel sent PAB a formal letter requesting +all documentation and information concerning the purported CD. PAB’s December 16, 2009, +response provided only documents relating to GEE’s checking account and did not provide any +documents or other information about the purported CD. The checking account documentation, +however, indicated that only Associate-1, the GEE CFO, and Pence were authorized signers on +GEE’s account from July to September 2009—not Heineman—and the checking account +statements reflected a debit memo for the transfer of $2.3 million of GEE’s cash to Park Avenue +Insurance on July 23, 2009. At some point in December 2009, Zizza understood that a debit memo +attached to the GEE PAB July 2009 account statement stated that the $2.3 million had been +transferred to Park Avenue Insurance, not into a purported CD. +37. On the evening of December 17, 2009, Zizza emailed Pence that BDO’s Midwest +Regional Business Line Leader “w[ould] take a call from us to resolve the Bank issue and then +issue the statement.” The following day, Pence emailed Zizza stating, “We need to decide +[Heineman’s] fate quickly.” Zizza spoke to BDO’s Midwest Regional Business Line Leader +concerning GEE. +38. On December 22, 2009, BDO sent the AC Chair a letter stating that BDO did not +have sufficient audit evidence to formally conclude the audit and demanded an independent +investigation (“BDO’s demand letter”). BDO’s demand letter noted identified multiple +inconsistencies and problems in the audit evidence BDO had received regarding the purported CD, +including that a number of significant questions remained unanswered concerning both the +existence of the purported CD (e.g., why bank records provided by PAB showed a transfer of $2.3 +million to Park Avenue Insurance) and the manner in which $2.3 million had been transferred to +the Company by the Affiliated Entities (e.g., why Associate-1 would pay 100% of the face value of + + +11 +the purported CD after the maturity date had expired without payment by PAB, why had River +Falls Financial—purportedly owned by Pence—transferred approximately $1 million to GEE in +connection with the alleged assignment of the purported CD to River Falls Investments, and why +Heineman had made inconsistent representations about his involvement in negotiating the alleged +assignment with Associate-1). Pence forwarded BDO’s demand letter to Zizza and Associate-1, +the purported manager of River Falls Investments. +39. On the evening of December 22, 2009, BDO learned that the audit committee +meeting that was scheduled for the following day had been cancelled, Zizza, an advisor to Pence +who had attended GEE board meetings through the fall of 2009, would be taking over as CEO, and +that Pence and Associate-1 intended to prepare written responses to each of the issues identified in +the December 21 letter. On December 23, 2009, Heineman formally resigned as GEE’s CEO and +that same day Pence appointed Zizza to be GEE’s new CEO. + +40. Zizza, over the course of many years, had brought new business to BDO in the +form of several auditing clients. A senior partner in BDO’s New York office (the “BDO NY +Partner”) handled some of Zizza’s other business relationships with BDO, including audit or tax +work for Zizza’s private company and three public companies for which Zizza served as a board +member. Thereafter, the NY Partner reached out to auditors in BDO’s Chicago and national +offices to vouch for Zizza. +41. On December 24, 2009, after reviewing BDO’s demand letter, Zizza participated in +two calls with BDO, one that included the AC Chair and another that included both the AC Chair +and Pence. The BDO NY Partner also participated in the call with Zizza and the AC Chair. +During those calls, Zizza requested that BDO conclude the audit without the need for an +independent investigation because GEE had full control of the $2.3 million in question and because +he had replaced Heineman as CEO. When BDO asked Zizza about the CD and the assignment +agreement, Zizza stated that he was comfortable with issuing the financial statements because GEE +had control over the $2.3 million that had been missing. +42. Although a number of critical questions raised in BDO’s demand letter remained +unanswered, shortly after the December 24 telephone conversations with Zizza, BDO issued an +audit report containing an unqualified opinion on GEE’s 2009 financial statements. Zizza also +advised GEE’s audit committee that, in his opinion, there was no need to investigate the potential +related party issues arising out of the assignment agreement between GEE and River Falls +Investments. +43. On January 8, 2010, Zizza signed a representation letter to BDO that stated the +following: + +The following, where applicable and material, have been properly recorded or +disclosed in the consolidated financial statements: (a) Related-party transactions +(e.g., transactions with unconsolidated subsidiaries; affiliates under common +control with the Company or that are directly or indirectly controlled by the +Company; principal owners of record or known beneficial interest of 10 percent +or more of the Company’s voting stock, directors, management, and members of + + +12 +their immediate families), including sales, purchases, loans, transfers, leasing +arrangements, and guarantees, and amounts receivable from or payable to +related parties . . . + +In July 2009 the Company purchased a $2.3 million certificate of deposit (CD) at +Park Avenue Bank. When the CD matured in October 2009 the bank did not +refund the proceeds to the Company. To date the Company has not received an +adequate explanation for the bank’s non-performance relating to the CD. The +Company is not aware of why the Company did not receive the proceeds from its +Park Avenue Bank certificate of deposit upon its maturity and has provided you +all information available to it in regards to this matter. In December 2009 the +Company was reimbursed in full through a non-recourse assignment of the CD to +an unrelated party, who has a business interest in the viability of bank. There are +no side letters, e-mails, or other agreements (oral or written) that materially alter +the terms of the assignment agreement. + +44. Zizza’s representations to BDO in phone calls and in the management +representation letter were materially misleading because, among other things, Zizza knew or +should have known that: +a. On paper, Pence was an indirect owner of River Falls Investments, the entity +that signed the alleged assignment agreement and had signed loan agreements +as River Falls Investments’s manager; +b. Huff controlled River Falls Investments and River Falls Financial; +c. Huff had directed the Affiliated Entities to transfer $2.3 million to GEE to +preserve the financial viability of GEE for the benefit of AIR, Huff, and PSQ; +and +d. Pence, Zizza, Huff and Associate-1 had unwritten agreements, as described in +paragraphs 17 and 18 above, whereby they would benefit from the rise in +GEE’s stock price. +45. Among other things, Zizza also knew or should have known that the assignment +agreement between GEE and River Falls Investments was a related party transaction given Huff’s +influence and control—and Pence’s control, on paper—over both entities. + +46. On January 8, 2010, Zizza signed GEE’s Form 10-K, which classified the $2.3 +million purported CD as a cash equivalent and stated in a footnote disclosure to the financial +statements: + +In July 2009, the Company purchased a $2,300,000 certificate of deposit (“CD”) at +a New York bank. When the CD matured in October 2009, the bank did not timely +credit the proceeds of the CD to the Company’s account. Although the Company +has made a formal inquiry of the bank, to date the Company has not received an + + +13 +adequate explanation for the bank’s non-performance relating to the CD. In +December 2009, the Company was reimbursed in full through a non-recourse +assignment of the CD for face value to an unrelated party, who has other business +interests with the bank. The purchaser of the CD is neither an employee nor a +director of the Company. +47. GEE’s 2009 Form 10-K was materially misstated because, among other things, it +incorrectly represented GEE had a $2.3 million CD and classified it as a cash equivalent as of +September 30, 2009, and did not disclose the assignment agreement as a related party transaction +given Huff’s influence and control—and Pence’s control, on paper—over both entities. + +48. On March 13, 2010, the United States of America filed a 44-page criminal +Complaint against former PAB president Antonucci (the “Antonucci Complaint”), alleging a +scheme and conspiracy involving a $6.5 million round-trip transaction in which GEE’s $2.3 +million was diverted as part of the conspiracy. Huff, Heineman, and Pence are referred to and +identifiable as designated “co-conspirator[s] not named herein” in certain aspects of that +conspiracy. The allegations in the Antonucci Complaint contained several details that indicated +that GEE did not have a CD with PAB, that River Falls Financial, River Falls Investments, +Oxygen, SDH, and PSQ were related parties, and that Heineman had authorized the money to be +transferred to Park Avenue Insurance as part of the conspiracy, and not to purchase a CD: + + “To hide the improper diversion of GEE’s funds from GEE’s auditors and Board of +Directors, [Antonucci] and others created a counterfeit certificate of deposit [], falsely +representing that GEE’s $2.3 million had been invested in a 90-day certificate of deposit at +the Bank. In fact, and as [Antonucci] well knew, there was no $2.3 million CD.” + GEE’s $2.3 million had been transferred to Park Avenue Insurance, which was controlled +by Antonucci. According to the Bank records, Heineman authorized this transfer. + Antonucci fraudulently signed the BDO confirmation of the $2.3 million CD, when +Antonucci knew it did not exist. + +The Antonucci Complaint further identified several “Oxygen-related entities” as participants in the +conspiracy, including, River Falls Financial (which Pence said he owned), PSQ (Pence’s entity that +purchased the majority stake in GEE), and Oxygen and SDH—two companies that paid GEE +purportedly under the assignment agreement with River Falls Investments (which [Associate-1] +said he and a Huff family trust owned). It further alleged that a group of five associates (including +Huff and Pence) were listed on some of the accounts of the Oxygen-related entities, which shared a +common address in Louisville, Kentucky. +49. In a May 25, 2010 email, the BDO engagement partner told Zizza that he would +like to discuss certain issues regarding the Antonucci Complaint. The BDO engagement partner +wrote that he wanted to discuss the allegations that “Pence purchased a 25% interest in Bedford +Consulting from Antonucci for $6.5 million in what the complaint describes as an ‘artifice +designed to cover up the true source of the $6.5 million.’” He also wrote: “The Complaint +indicates that River Falls is owned by Pence, [Associate-1], and Heineman. All previous + + +14 +information disclosed to us by Heineman and Pence indicated that Pence owned 100% of River +Falls.” He further noted that the Complaint indicated that PSQ borrowed money from River Falls +to buy the GEE shares. The email to Zizza did not address the allegations in the Antonucci +Complaint denying the existence of the purported CD or indicating related party issues concerning +the funds received by the “Oxygen-related entities.” + +50. During his conversation with BDO, Zizza withheld material information that bore +upon the accuracy of GEE’s previously-filed 10-K and future filings addressing the purported CD. +Specifically, Zizza failed to disclose to BDO the same material facts identified in paragraph 44 of +this Order. + +51. Later throughout 2010, Zizza failed to disclose to BDO facts that he knew or should +have known, including that companies acquired by GEE, including On-Site, RFFG of Cleveland, +LLC, and DMCC Staffing, LLC were partially controlled by Huff. Zizza’s materially false or +misleading statements and omissions were relevant to BDO’s audit of GEE for 2010 and the +Company’s preparation of its Form 10-K. + +52. In December 2010, Zizza signed a representation letter that included similar +language to the representation letter discussed in paragraph 43 of this Order concerning related +parties, the purported CD with PAB, and the assignment agreement. For the same reasons, Zizza’s +representations in that management representation letter were materially misleading. + +53. GEE’s Form 10-K filed on December 28, 2010, for its fiscal year ended September +30, 2010, classified the $2.3 million CD as a cash equivalent as of September 30, 2009, included a +similar disclosure as the disclosure in the Form 10-K filed in January 2010 and was materially +misleading for the same reasons: +In November 2009, the Company discovered that it did not receive the proceeds +from a bank for a $2,300,000 certificate of deposit that was scheduled to mature +in October 2009. Although the Company made a formal inquiry of the bank, it +did not receive an adequate explanation for the bank’s non-performance related to +the deposit. In December 2009, the Company entered into an agreement to assign +its interests in the certificate of deposit, without recourse, to an unrelated party +that has other business interests with the bank, and the Company was reimbursed +for the face value of the deposit. + +F. VIOLATIONS +54. Rule 13b2-2 of the Exchange Act prohibits officers and directors from, directly or +indirectly, making or causing to be made materially false or misleading statements or omissions to +accountants in connection with an audit or preparation of reports to be filed with the Commission. + +55. As a result of the conduct described above, Zizza violated Rule 13b2-2 under the +Exchange Act. + + +15 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Exchange Act Rule 13b2-2. + + B. Respondent shall within 1 4 days of the entry of this Order , pay a civil money +penalty of $ 150,000 to the Commission for transfer to the general fund of the United States +Treasury in accordance with Exchange Act 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must be made in one of the following +ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Zizza as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Timothy Casey, New York Regional +Office, Securities and Exchange Commission, 200 Vesey Street, New York, NY 10281-1022. + +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 + + +16 +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 + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3692.pdf b/raw/aaer/2015/AAER-3692.pdf new file mode 100644 index 0000000000000000000000000000000000000000..042a0178ac4c51a0dfd095d3341eb363975a6e1c --- /dev/null +++ b/raw/aaer/2015/AAER-3692.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a4ce694535bbdb1c29e79eead8b5c6b4d2afa008d041fce98ff7ab8b664000e7 +size 473485 diff --git a/raw/aaer/2015/AAER-3692.txt b/raw/aaer/2015/AAER-3692.txt new file mode 100644 index 0000000000000000000000000000000000000000..d39b7528e5fc7d438f3a3d3b501582faee91567e --- /dev/null +++ b/raw/aaer/2015/AAER-3692.txt @@ -0,0 +1,1595 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75862 / September 9, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3692 / September 9, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16800 + + + + +In the Matter of + +BDO USA, LLP, + +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections +4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice2 against BDO USA, LLP (“BDO” or “Respondent”). + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (2) . . . to have engaged in unethical or +improper professional conduct. +2 Rule 102(e)(1) provides, in relevant part: +The Commission may censure a person . . . who is found . . . +* * * +(ii) to have engaged in unethical or improper professional conduct. +* * * + + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) that the Commission has determined to accept. Respondent admits the +facts set forth in Sections III.B., C., and E. through H. below, acknowledges that its conduct +violated the federal securities laws, admits the Commission’s jurisdiction over it and the subject +matter of these proceedings, and consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (the +“Order”), as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + +1. This matter involves improper professional conduct by BDO while serving as the +auditor for General Employment Enterprises, Inc. (“GEE” or the “Company”), a staffing services +company whose stock trades on the NYSE MKT. During BDO’s 2009 audit of GEE’s financial +statements for its fiscal year ended September 30, 2009, BDO learned that $2.3 million +(comprising approximately half of GEE’s assets and substantially all of its cash) was unaccounted +for when GEE’s chief financial officer (the “GEE CFO”) advised BDO, in November 2009, that +(a) GEE’s purported 90-day non-renewable certificate of deposit (“CD”) at a New York bank had +not been repaid by the bank after the stated maturity date in mid-October, (b) GEE was missing +documentation supporting the CD, and (c) a bank employee had told GEE’s CFO that the bank had +no record of a CD. Thereafter, BDO received multiple conflicting stories from GEE management + +(iv) with respect to persons licensed to practice as accountants, “improper +professional conduct” under Rule 102(e)(1)(ii) means: +* * * +(B) either of the following two types of negligent conduct: +(1) A single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted. +(2) Repeated instances of unreasonable conduct, each resulting in a +violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission. +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 +and board members concerning both the status of the CD and a series of transfers totaling $2.3 +million made to GEE by three entities unaffiliated with the bank, one of which BDO had been told +was owned by GEE’s Chairman and majority shareholder. After BDO raised questions about these +deposits, GEE’s chief executive officer claimed the deposits were the proceeds of an agreement to +assign the CD to a purported unrelated party. +2. BDO’s engagement and concurring partners consulted with senior BDO partners, +including the assigned BDO regional technical director, BDO’s national director of accounting, +and BDO’s national SEC practice director. The consultation resulted in BDO issuing a five-page +letter, dated December 21, 2009, in which BDO advised GEE of its belief that BDO had not been +provided sufficient audit evidence to formally conclude on the matter and demanded that GEE’s +audit committee commission a full investigation of the matter by an independent firm. BDO +received conflicting information from various sources as to the existence of the CD and never +received rational explanations as to why the $2.3 million went missing and why an equivalent +amount was later received under suspect circumstances. Only days later, however, after GEE’s +chief executive officer resigned, BDO agreed to withdraw its demand for an independent +investigation and issued an audit report containing an unqualified opinion on GEE’s financial +statements. Those financial statements, included in GEE’s Form 10-K filed on January 8, 2010, +represented that GEE had a $2.3 million cash equivalent in the form of CD as of September 30, +2009, and had entered into an assignment agreement to sell the CD for full face value to an +unrelated party. +3. Approximately two months after GEE filed its 2009 Form 10-K with BDO’s +unqualified audit opinion, BDO learned of a criminal complaint against the New York bank +president. The criminal complaint alleged, in connection with a wide-ranging conspiracy +involving, among others, GEE’s then-chief executive officer and GEE’s then-majority shareholder +and chairman of the board, that (i) GEE’s purported $2.3 million CD never existed, (ii) the bank +president signed a false confirmation to BDO, (iii) GEE’s $2.3 million was used to attempt to +conceal a loan default connected to the broader conspiracy, and (iv) the entities that transferred the +$2.3 million back to GEE were related to the bank president’s co-conspirators, including GEE’s +then-majority shareholder and chairman of the board. The bank president pled guilty in October +2010. Despite this additional new information, which was conveyed to senior partners in BDO’s +regional and national offices, BDO failed to perform appropriate audit procedures to determine +whether this new information had any impact on GEE’s 2009 financial statements or BDO’s audit +report thereon. In addition, BDO failed to adequately consider this information during its +subsequent audit when it provided an audit report containing an unqualified opinion on GEE’s +financial statements included in the Company’s 2010 Form 10-K. +4. Specifically, among other audit failures during the 2009 and 2010 audits of GEE, +BDO: (1) failed to adequately plan, design, and perform audit procedures necessary to determine +the existence of a disputed asset and the existence of related party transactions; (2) failed to obtain +sufficient competent evidential matter; (3) failed to exercise professional skepticism and due +professional care; (4) ignored red flags of fraud, potential illegal acts by GEE’s agents, and +unidentified related party transactions; (5) placed improper reliance on management +representations from individuals they did not trust; and (6) failed to appropriately consider the +discovery of new facts. + +4 +5. BDO issued audit reports containing unqualified opinions on the financial +statements in GEE’s 2009 and 2010 Form 10-Ks, which incorrectly stated that GEE had a cash +equivalent of $2.3 million as of September 30, 2009, and did not disclose that the $2.3 million was +returned by entities related to GEE’s chairman of the board. BDO’s reports, which BDO knew +would be filed with GEE’s Form 10-Ks, inaccurately stated that the audits had been conducted in +accordance with standards adopted by the Public Company Accounting Oversight Board +(“PCAOB”) and that GEE’s financial statements presented fairly, in all material respects, the +company’s position and results at September 30, 2009, in conformity with generally accepted +accounting principles in the United States of America (“GAAP”). +B. RESPONDENT + +6. BDO, formerly known as BDO Seidman, LLP, is a Delaware limited liability +partnership and a PCAOB-registered public accounting firm with its headquarters in Chicago, +Illinois. BDO served as GEE’s independent auditor from 2004 through 2012. + +C. RELEVANT BDO PROFESSIONALS + +7. Sean C. Henaghan (“Henaghan”), age 42, is a Certified Public Accountant +(“CPA”) licensed to practice in Illinois and was licensed in Florida from 2010 through 2012. +Henaghan served as the BDO engagement partner on the 2009 and 2010 audits of GEE and had +final responsibility for the audits. +8. John E. Rainis (“Rainis”), age 57, is a CPA licensed to practice in Illinois. Rainis +served as the BDO concurring reviewer on the 2009 and 2010 audits of GEE. + +9. Leland E. Graul (“Graul”), age 66, is a CPA licensed to practice in Illinois. Prior +to his retirement, Graul served as BDO’s national director of accounting and risk management +partner when he was consulted during the 2009 and 2010 audits of GEE. + +10. James J. Gerace (“Gerace”), age 54, is a CPA licensed to practice in Illinois. +Gerace served as the regional technical director of BDO when he was consulted during the 2009 +and 2010 audits of GEE. + +11. Wendy M. Hambleton (“Hambleton”), age 53, is a CPA licensed to practice in +Illinois. Hambleton served as BDO’s national SEC practice director when she was consulted +during the 2009 and 2010 audits of GEE. + +D. ISSUER AND OTHER RELEVANT ENTITIES AND INDIVIDUALS +12. GEE is an Illinois corporation headquartered in Oakbrook Terrace, Illinois that +provides professional placement services and temporary staffing services in certain industries. +GEE’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act and trades on the NYSE MKT stock exchange. GEE files periodic reports, +including Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange +Act and related rules thereunder. + +5 +13. River Falls Financial Services, LLC (“River Falls Financial”), River Falls +Investments, LLC f/k/a Oxygen Unlimited II, LLC (“River Falls Investments”), River Falls +Holdings, LLC (“RFH”), Accredited Investor Resources, LLC f/k/a Oxygen Investment +Partners, LLC (“AIR”), Oxygen Unlimited, LLC (“Oxygen”), O2HR, LLC (“O2HR”), SDH +Realty, LLC (“SDH”), WTS Acquisition LLC (“WTS”), H2H Holdings, LLC (“H2H”), and +PSQ, LLC (“PSQ”) (collectively, the “Affiliated Entities”) are purported holding, investment, +employment-related, and insurance companies. During at least 2009 and 2010, Wilbur Anthony +Huff (“Huff”)4 exercised substantial financial and management control over numerous entities, +including, among others, the Affiliated Entities and their holdings. Huff installed other business +partners to perform day-to-day operational functions and/or serve as the listed owners, directors, or +managers. As a convicted felon, Huff faced legal and practical barriers to operating business +entities in his own name, particularly business in regulated industries, including employment- +related, insurance, and banking companies. + +14. Park Avenue Bank (“PAB” or “the Bank”) was a New York State chartered bank +until it was closed by the New York State Banking Department on March 12, 2010, and the +Federal Deposit Insurance Corporation was named Receiver. The Affiliated Entities primarily +conducted their banking business through PAB. Charles J. Antonucci, Sr. (“Antonucci”) served +as the president and CEO of PAB from June 2004 until October 2009. In October 2010, Antonucci +pled guilty to multiple criminal charges, including securities fraud, bank bribery, embezzlement, +and providing a false confirmation to BDO of GEE’s purported CD at PAB. Separately, Park +Avenue Insurance was a private insurance company owned by Antonucci that was not affiliated +with PAB. +15. Stephen B. Pence (“Pence”) served as the chairman of the board of GEE from July +1, 2009, through November 17, 2010. Although Pence purported to be the sole member and owner +of PSQ, whose sole asset was the GEE shares representing a controlling stake in the Company as +of July 1, 2009, PSQ was one of the Affiliated Entities over which Huff exercised substantial +financial and management control. PSQ’s acquisition of GEE stake was funded by AIR and +Oxygen. Pence also represented to BDO that he was the 100% owner of River Falls Financial, +another of the Affiliated Entities. Huff directed substantial monthly payments to Pence ($25,000) + +4 Huff pled guilty to federal mail fraud charges for obtaining insurance premium finance loans +under false pretenses in the Western District of Kentucky in 2003. In 2008, the Commission filed +charges against Huff related to a scheme to misappropriate assets from and to record fake letters of +credit at Certified Services, Inc. (“Certified”). SEC v. Huff, 08-CV-60315 (S.D. Fla.). On October +22, 2010, the Court entered judgment for the Commission against Huff requiring him to pay more +than $13 million, among other relief. Separately, after an October 2012 indictment against him, +Huff pled guilty on December 23, 2014 to an information, which alleged, among other things, that: +(1) Huff controlled GEE, in whole or in part, by installing other individuals; (2) Huff participated +with Antonucci in a conspiracy in which they stole $2.3 million from GEE and Huff later returned +the $2.3 million to GEE from three companies he controlled; and (3) a large portion of the $2.3 +million received by GEE were funds entrusted to Oxygen by its clients for payment of the clients’ +employment tax and other obligations. U.S. v. Huff, 12-CR-750 (S.D.N.Y.). + +6 +from several of the Affiliated Entities to ensure his control over, and ability to influence, GEE’s +operations. Pence formerly served as the lieutenant governor of Kentucky from 2003 to 2007 and +the United States Attorney for the Western District of Kentucky from 2001 to 2003. +16. Ronald E. Heineman (“Heineman”) was appointed as the chief executive officer +(“CEO”) of GEE on July 1, 2009, in connection with PSQ’s acquisition of a controlling stake in +GEE. Heineman served as CEO until his resignation on December 23, 2009, in connection with +the events described herein. Huff directed substantial monthly payments to Heineman ($15,000) +from the Affiliated Entities during this time period. +17. Salvatore J. Zizza (“Zizza”) served as the CEO of GEE from December 23, 2009, +through December 2012. Prior to his appointment as CEO, Zizza received monthly payments of +$20,000 from PSQ, which were funded by several of the Affiliated Entities, for purported +consulting services, and Zizza frequently attended GEE board meetings as an “invited guest.” In +2009, businesses owned or operated by Zizza received loans in excess of $1 million that Huff +directed from certain of the Affiliated Entities. + +18. Associate-1 was another of Huff’s business partners and was listed or served at +various times as a manager of River Falls Investments, Oxygen, and O2HR, and as co-manager of +River Falls Financial with Heineman. Associate-1 was also involved in PSQ’s acquisition of a +controlling stake in GEE and attended several GEE board meetings in 2009. In addition, from July +2009 until September 2009, Associate-1 was a signatory on GEE’s bank account at PAB despite +the fact that Associate-1 was not an official employee, officer, or director of the Company. +Associate-1 also purported to be the owner of WTS (another of the Affiliated Entities), a holding +company of On-Site Services, Inc. (“On-Site”) and Ameritemps, Inc. (“Ameritemps”), which +WTS had acquired in January 2009 with funding from other Affiliated Entities. Almost +immediately after PSQ’s acquisition of a controlling stake in GEE, Heineman began presenting +proposals to GEE’s board for GEE to acquire these companies. For example, at an August 10, +2009, GEE board meeting, attended by Pence and Zizza, the board authorized Heineman to enter +into a letter of intent with WTS to acquire On-Site, and Heineman reported that he would present +another acquisition candidate, Ameritemps, at the September board meeting. +E. BACKGROUND +19. GEE’s May 18, 2009, definitive proxy statement disclosed that, in January 2009, +GEE began discussions with representatives of River Falls Financial, including Heineman and +Pence, concerning the possibility of a tender offer and direct cash investment in GEE. As BDO +learned later in 2009, Huff was also present for one of the relevant meetings. The proxy statement +further disclosed that, on February 11, 2009, River Falls Financial and PSQ, a special purpose +vehicle purportedly formed by Pence, entered into a non-binding letter of intent with GEE for a +purchase and tender offer agreement to obtain a controlling stake in GEE. +20. According to GEE’s May 18, 2009, definitive proxy statement, on March 30, 2009, +after negotiations continued following the February 2009 non-binding letter of intent, Pence signed +on behalf of PSQ a definitive securities purchase and tender offer agreement (the “Purchase +Agreement”). The Purchase Agreement provided that, subject to shareholder approval, PSQ would + +7 +acquire a controlling stake in GEE by (1) purchasing 7,700,000 newly-issued shares of GEE +common stock in a private placement transaction at a purchase price of $0.25 per share for a total +purchase price of $1,925,000; (2) commencing a cash tender offer to purchase from the Company’s +shareholders up to 2,500,000 shares of common stock at a purchase price of $0.60 per share; (3) +appointing three directors to a five-member board of directors, including Pence becoming the +chairman of the board; and (4) designating Heineman GEE’s CEO. On June 22, 2009, a GEE +press release announced that shareholders approved the Purchase Agreement and the closing of the +Purchase Agreement was announced on July 1, 2009. As a result, PSQ acquired more than 65% +ownership of the Company, Pence became GEE’s chairman and appointed two other directors, and +Heineman became GEE’s CEO. +21. As part of the July 2009 closing of PSQ’s purchase agreement with GEE, GEE +opened a checking account at PAB into which PSQ’s escrowed $1,925,000 would be deposited +upon the closing. According to PAB records received by BDO in 2009, in June 2009, Associate-1 +coordinated with GEE’s chief financial officer (the “GEE CFO”) to have the GEE checking +account opened at PAB and the authorized signatories on the account were the GEE CFO, Pence, +and Associate-1. Those PAB records also indicated that the GEE CFO, Pence, and Associate-1 +remained the only authorized signatories on the account until September 2009, at which time +Associate-1 was removed and Heineman was added. Following the closing in early July 2009, +GEE transferred an additional $750,000 from GEE’s accounts at other banks to the GEE PAB +checking account. The approximately $2.6 million deposited in the GEE PAB checking account +constituted substantially all of GEE’s cash and half of its assets. + +22. According to information received by BDO, GEE’s CFO identified that $2.3 +million had been withdrawn from the GEE PAB operating account on July 23, 2009, without the +GEE CFO’s knowledge. The GEE CFO reported to BDO that when he asked about the withdrawn +funds, GEE’s CEO Heineman claimed that he had authorized GEE to invest $2.3 million into a CD +at PAB. The GEE CFO also informed BDO that, although he had repeatedly requested +documentation concerning the purported CD, such as a written approval or account agreement— +and cited the lack of documentation as a control deficiency—Heineman only provided the GEE +CFO with a one-page PDF of a typewritten “Certificate of Deposit Receipt” for $2.3 million with a +single maturity date of October 21, 2009 and interest rate of two percent. + +F. BDO RECEIVED INCONSISTENT EVIDENCE CONCERNING THE +PURPORTED CD AND THE EXISTENCE OF RELATED PARTY +TRANSCTIONS + +23. GEE’s fiscal year ended on September 30, 2009. As part of its audit of GEE, BDO +addressed confirmations for GEE’s bank accounts, including the purported CD, to a PAB vice +president and branch manager. In October, BDO received a confirmation signed by that vice +president for the operating account and a confirmation signed by the PAB president Antonucci for +the purported CD. BDO concurring partner Rainis noted that it was “unusual” for the PAB +president to sign the confirmation. + +24. On October 19, 2009, the GEE CFO provided to audit committee members and +BDO a report of the evaluation of internal control for fiscal year 2009, which noted the purported + +8 +PAB CD as an identified control deficiency. The report noted that“[t]he transaction was not +executed by the office of the Treasurer, and no written approval or account agreement was +provided to the accounting department” and that “it did not conform to the company’s investment +guidelines” because it did not provide sufficient diversification and PAB did not meet GEE’s size +requirement. However, the report concluded that the control deficiency did not constitute a +material weakness. BDO concurred with this assessment. + +25. In early November 2009, the GEE CFO noticed that PAB had not remitted the +proceeds of the purported CD of $2.3 million plus interest into GEE’s operating account upon the +maturity date, October 21, 2009. When the GEE CFO contacted PAB, a PAB representative stated +that the Bank had no record of the purported CD in its system and then refused to investigate the +matter any further. On November 18, 2009, the GEE CFO conveyed this information to the BDO +engagement partner Henaghan. The GEE CFO also communicated this information to GEE’s +audit committee chairman (the “AC Chair”). + +26. Also in November 2009, BDO partners Henaghan, Graul, and Gerace reviewed +background check reports of Heineman and Associate-1 that identified potential concerns. As part +of BDO’s client retention procedures, BDO had procured a background check of Heineman +because he was the new CEO of GEE and of Associate-1 because he purportedly owned On-Site, a +subsidiary of WTS that GEE intended to acquire and which BDO agreed to audit. Those +background checks revealed that: + + A 2009 lawsuit named GEE’s CEO Heineman as a defendant and alleged that he received a +fraudulent distribution of in excess of $2 million in cash from a bankrupt company he +formally ran. + Associate-1 served as the chief operating officer of a subsidiary of Certified. The +Commission had alleged in a 2008 complaint that Huff was an “undisclosed control +person” who, with others, stole $30 million from Certified. + Associate-1 and Heineman were co-managers of River Falls Financial, and participated in +negotiating PSQ’s acquisition of GEE shares. + Heineman and Associate-1 had several substantial personal tax liens. +27. At a November 23, 2009, audit committee meeting, attended by BDO engagement +partner Henaghan and concurring partner Rainis, the GEE CFO reported his concerns that GEE +had little documentation supporting the purported CD, including no written authorization from an +account signatory and no deposit agreement. According to the audit committee minutes, +Heineman claimed that he authorized the purported CD at Pence’s direction, and claimed the lack +of documentation was due to “the rapid pace of the transactions in which he had been involved, +coupled with reorganization and personnel changes at Park Avenue Bank.” Heineman next stated +that he had anticipated that the CD would be maintained on a continuing renewal basis but he had +asked Pence to liquidate the purported CD and have the funds transferred into the PAB checking +account by the end of the week. The minutes also state that Henaghan “said that the audit was +substantially completed, pending resolution of the missing funds issue, receipt of legal letters from + +9 +counsel, and the executed management representation letter” and that BDO “would be issuing an +unqualified opinion on the consolidated financial statements.” + +28. On November 24, 2009, Henaghan emailed the AC Chair, stating that the GEE +CFO had “indicated there was an update on the CD and that the funds would be returned in +installments. I am not sure if you can provide any further clarity on why this would be. I wanted +to check with you before I had another discussion with [Heineman].” The AC Chair replied that he +“[could] not provide any clarity” and expressed concern that one of the audit committee members +(the “AC Member”) “seems to be tied in with this group.” The AC Member had been appointed +by Pence in connection with the PSQ transaction in July. + +29. Henaghan replied to the AC Chair the following day, November 25, 2009, that he +had spoken to Heineman that morning and Heineman indicated that Pence and the AC Member +“were taking the lead on this as they have a previous working relationship with the bank.” +Henaghan also noted that Heineman, however, had “disagreed with the fact that the CD would be +‘paid back in installments’” and had “indicated that the proceeds of the CD would be in the +Company’s bank account by Monday.” + +30. By the following Monday, November 30, 2009, GEE still had not obtained the $2.3 +million in proceeds of the purported CD from PAB. That day, Pence, Heineman, and Zizza +attended a GEE board of directors meeting. Zizza, who had no formal role at GEE at this time, +attended as an “invited guest.” The board minutes indicate that the AC Chair explained that the +Company’s Form 10-K had not yet been filed because BDO’s “final” opinion was predicated on +the satisfactory accounting for the PAB CD and an explanation for where GEE’s funds had been +since the CD matured on October 21. During this November 30, 2009, board meeting, the AC +Member stated he believed that the situation occurred as a result of administrative errors on the +part of the Bank, and Pence said that the AC Member had agreed to pursue the matter with PAB. +Neither Pence nor Heineman mentioned anything about GEE selling or assigning the purported CD +to a third party.5 +31. By December 3, 2009, BDO learned that GEE had received four transfers from +SDH and Oxygen totaling $1 million. On December 3, 2009, the AC Member, who had been +tasked by Pence with contacting PAB about the purported CD, told the AC Chair and BDO +engagement partner Henaghan that PAB was sending GEE the $2.3 million proceeds of the +purported CD. The AC Member also told Henaghan that the Bank had made an “administrative +error” and would provide a short apology note. + +32. After consulting with fellow BDO partners Rainis and Gerace, Henaghan sent +GEE’s AC Chair an email on December 4, 2009, summarizing the open items requiring resolution +prior to the issuance of BDO’s audit report: (1) the purported CD; (2) identification of potential + +5 BDO engagement partner Henaghan and concurring partner Rainis confirmed in the workpaper +index that they reviewed all of the minutes for the GEE board and audit committee meetings +discussing the purported CD issue. + +10 +related parties to Pence; and (3) additional subsequent event procedures. The email begins by +noting that after the CD had matured in October 2009, when the GEE CFO had contacted the +Bank, a PAB representative informed the GEE CFO that there was no record of the purported CD +and that after some investigation by the AC Member, “in late November it was determined that the +funds would be returned to GEE in installments.” The email then notes that GEE had received the +following wire transfers: (i) November 24: $300,000 wire transfer from SDH; (ii) November 25: +$300,000 wire transfer from Oxygen; (iii) November 27: $300,000 wire transfer from SDH; and +(iv) December 1: $100,000 wire transfer from Oxygen. Henaghan’s email then noted that he had +discussed the matter with Heineman and Pence, who both referred him to the AC Member who +was working directly with PAB on the matter, and that the AC Member left him a voicemail +“indicating the bank continues to put money against the CD they owe [GEE] and it should be fully +repaid by the close of business on Monday, Dec. 7” and that the Bank would provide a short +apology note. Henaghan’s email continued: +[G]iven the highly unusual nature of this issue and the significant amount of time it +is taking to recover the funds, it is critical that we understand both the nature of the +administrative error as well as the underlying cause of this error.... As I have never +encountered such an issue with a bank or CD and any reasonable person (including +the PCAOB or SEC) would certainly question such an issue, I need to be in a +position to fully explain exactly what occurred…. As such, from an audit +perspective I will require the following prior to issuance of the fiscal 2009 financial +statements: +-Source documents (bank statements, etc.) showing the flow of funds from +the closing of the PSQ transaction through the date the funds are fully +transferred to Chase bank in December 2009 (including an understanding of +where the CD funds were disbursed upon maturity of the CD in October) +-Explanation as to why the funds received in November and December are +being wire transferred from entities other than Park Avenue Bank +-To corroborate this documentation, we may request to meet with someone +at Park Avenue Bank to understand the nature of the administrative error +-A written report by management or others to fully explain the +circumstances surrounding the matter including steps [GEE] took to gain its +understanding of what transpired.... +Also, as the $2.3 million is critical to our assessment of the Company’s ability to +continue as a going concern, it is important for us to understand this situation so as +to gain comfort that the funds will remain available to the Company to fund +operations as needed. + +33. Henaghan’s December 4 email also noted as an open item that he had a +conversation with Pence that day “to gain an understanding of other investments he has to make +sure we have appropriately identified any potential related parties and may have a few follow up + +11 +questions regarding that matter.” One of the items Henaghan had spoken to Pence about was the +ownership of River Falls Financial, of which Pence had indicated he was the 100% owner. + +34. Shortly after receiving it, the AC Chair forwarded Henaghan’s email to Heineman, +Pence, the AC Member, the GEE CFO, and GEE’s board, noting: “Multiple representatives of +BDO have told me that they will not sign off on the GEE Audit . . . until they have sufficient +documentation of what has transpired. [BDO’s] position is that the Liabilities associated with a +sign-off far exceed any past or potential future Audit Fees that [they] have received or will receive. +The high level message is that a letter of apology from Park Avenue Bank will not be sufficient.” +Henaghan received a copy of this email and replied to all: “To clarify, [our] primary concern is +getting an understanding of exactly what has occurred in order to allow us to complete our audit +procedures. As I am sure everyone would agree, what has transpired over the last few weeks with +the funds at [PAB] has been highly unusual. I know everyone has been working to resolve the +issue. However, time continues to pass and [GEE’s] filing deadline will be here before we know it. +As such, I wanted to clarify the importance of appropriately addressing the issue as quickly as +possible to allow us to complete the audit.” + +35. Later in the day on December 4, the AC Chair sent an email to Henaghan and +Rainis summarizing his call with the AC Member, stating that when he spoke with the AC +Member “he told me that [PAB] had reported these transaction [sic] to the FDIC and that the +money sent to the various entities that are now sending GEE the money are sending us the banks +money rather than sending it back to the bank.” The AC Chair continued: “This makes absolutely +no sense. It looks like [PAB] is on the verge of failing. The FDIC and a bankruptcy estate are +going to require [PAB] to collect every cent they can under loans or other arrangements to settle +with the creditors of the bank before they send money to third parties.” + +36. The following day, on December 5, 2009, the AC Chair emailed GEE’s board and +Heineman calling for a special audit committee meeting on December 9 because of “several +unanswered questions related to $2.3 million of the Company’s cash which supposedly was +invested in a Certificate of Deposit (‘CD’) at Park Avenue Bank which will need to be answered +before BDO will complete their Audit Report for the Company’s fiscal year ended September 30, +2009.” The AC Chair’s email noted several issues, including that (i) there was no account +agreement with PAB or regular reporting on the CD; (ii) PAB did not remit the proceeds of the CD +into GEE’s operating account when it reached its maturity date on October 21, 2009; (iii) PAB +provided no explanation to the GEE CFO when he attempted to investigate; and (iv) the AC +Member who took the lead on this matter with PAB “was informed on or about November 21, +2009 that the funds would be returned to [GEE] in a series of deposits.” The email also provided a +chart of seven wire transfers totaling $1.7 million, which included the four noted in Henaghan’s +December 4 email plus a December 2, 2009, wire transfer from Oxygen for $100,000, a December +2, 2009, wire transfer from River Falls Financial of $300,000, and a December 3, 2009, wire +transfer from River Falls Financial also for $300,000. The address listed for both SDH and River +Falls Financial on each of their wire transfers in the chart was 11921 Brinley Ave, Louisville, KY. +BDO’s engagement partner Henaghan received a copy of the AC Chair’s December 5 email and +forwarded it to Rainis, Gerace, and BDO’s general counsel. + + +12 +37. River Falls Financial was the entity that Henaghan had just been told was 100% +owned by Pence. BDO had also learned in conducting background investigations that Associate-1 +and Heineman were co-managers of River Falls Financial. + +38. On December 4 and December 9, 2009, GEE received two additional wire transfers +from River Falls Financial for $300,000 each, bringing the total amount received by GEE from +River Falls Financial to $1.2 million and the total of the nine wire transfers to $2.3 million, the +same amount that Heineman had purported to invest in a CD. + +39. On December 8, the AC Chair emailed Henaghan, providing some links he +suggested Henaghan review before Henaghan had a conversation with the AC Member and any +representatives of PAB, “particularly the Anthony Huff links” and explained that he “met Anthony +Huff when we went to New York” to negotiate PSQ’s acquisition. The email included links to a +press release announcing the Commission’s lawsuit against Huff, a link to Huff’s website noting +the address 11921 Brinley Avenue, Louisville, KY in the text of the email, and a link to the +website for Oxygen noting the identical address. This is the same address that appeared in the +wires sent to GEE by River Falls Financial and SDH, as noted in the AC Chair’s December 5 +email described in paragraph 36, above. Also, Huff’s website at the time contained references to +River Falls Investments, SDH, Oxygen, and O2HR. + +40. In addition to the background checks of Heineman and Associate-1 discussed in +paragraph 26, on November 23 and December 21, Henaghan, Rainis, and Gerace participated in +phone calls with Associate-1. According to Henaghan’s notes of the calls, they discussed Huff’s +connections to River Falls Financial and River Falls Investments and the Commission’s lawsuit +against Huff “alleging fraudulent transfer of assets & non-disclosure of related party transactions.” +Associate-1 told BDO that Huff’s wife was the original 100% owner of River Falls Financial +before it was sold to Pence. Associate-1 also told BDO that, through a family trust, Huff had a +70% ownership interest in River Falls Investments. + +41. Also on December 8, 2009, the day before the special audit committee meeting, the +AC Chair received an email from Heineman to the audit committee with several attachments. +Heineman’s email purported to offer a new explanation for why GEE had received $2.3 million +from the three entities rather than PAB. Heineman claimed that he had negotiated an assignment +agreement with the manager of River Falls Investments (Associate-1), who “offered to purchase” +the purported CD from GEE at face value. Heineman also attached to his email an unsigned, draft +assignment agreement and a letter from Heineman to PAB, dated July 21, 2009, that purportedly +authorized the $2.3 million CD investment. Heineman’s email also attached a July 2009 monthly +statement for GEE’s operating account at PAB, which included the description of the $2.3 million +withdrawal as a debit on July 23 with a debit memo stating in handwriting: “To: Park Avenue +Insurance, See Attachment Approval, $2,300,000.00.” + +42. The AC Chair responded to Heineman’s email that day, stating: “Given the chain of +event[s] you described below, why was GEE not informed immediately when River Falls +Investments purchased the CD and why are we just now learning that a law firm has been engaged +to document the assignment of the CD? We have been asking questions about the CD now for + +13 +nearly a month.” BDO engagement partner Henaghan received a copy of Heineman’s email with +attachments and the AC Chair’s reply email. On a printout of the AC Chair’s reply email, BDO +engagement partner Henaghan wrote “$ Anthony Huff.” + +43. Henaghan also exchanged emails with the AC Chair later that day, noting his +agreement with the AC Chair’s questions to Heineman and that “the sale of the CD would +constitute a related party transaction which typically should be approved by the board.” The AC +Chair replied to Henaghan that he had just spoken to Heineman and Heineman “claims that RFI +(River Falls Investment) is 100% owned by [Associate-1] and is not related to River Falls +Financial Services or any of the other entities.” Henaghan replied, “That is consistent with what [] +Pence told me in my conversation with him. The common names are a little strange though.” + +44. Prior to the December 9, 2009, special audit committee meeting, BDO had learned +of several indications of fraud relating to the purported CD. Moreover, during the 2009 audit of +GEE, BDO became aware of multiple indications that the purported assignment agreement with +River Falls Investments was a related party transaction, including: + + the common names of River Falls Investments (purportedly owned by a Huff family trust +and Associate-1) and River Falls Financial (purportedly owned by Pence, GEE’s +chairman); + River Falls Financial had sent GEE $1.2 million in four installments in connection with the +assignment agreement ; + Heineman and Associate-1 were co-managers of River Falls Financial; + Associate-1 was a signatory for GEE’s operating account at PAB from July to September +2009, when the $2.3 million was purportedly invested in a CD; + Heineman’s email address was rheineman@riverfallsfinancialgroup.com; + The validity of a business purpose for River Falls Investments to purchase the CD at face +value was questionable given that (i) PAB stated that it had no record of the purported CD +in its system; and (ii) GEE did not have a binding agreement in its possession concerning +its purported purchase of the CD with PAB; + River Falls Investments was not listed in GEE’s banking records as the originator of the +wire transfers that were purported to be in connection with the assignment agreement. +GEE received the payments from SDH, River Falls Financial, and Oxygen—all of which +were made before a binding agreement with River Falls Investments was executed; and + River Falls Financial, River Falls Investments, SDH, Oxygen, and Huff all shared a +common address: 11921 Brinley Avenue in Louisville, KY 40234. +45. Prior to the GEE special audit committee meeting scheduled for December 9, 2009, +Henaghan alerted Rainis, Gerace, and BDO’s Midwest Regional Business Line Leader (the “BDO + +14 +Midwest Leader”) of Heineman’s new explanation concerning the assignment agreement and each +of them attended the meeting. According to the audit committee meeting minutes: + + Henaghan expressed concern that BDO still did not have a clear understanding of the +purported CD transaction. + Henaghan said that BDO needed to understand the nature of the purported administrative +errors at PAB that he had been told were responsible for the lack of proper documentation +regarding the CD transaction. Henaghan also explained that BDO required documentation +validating the banking transactions, and an explanation as to why there was no existence of +an account agreement with the Bank or no record of the CD being at the bank. + The BDO Midwest Leader said he believed members of GEE’s senior management +appeared hesitant to provide information related to these transactions. + Henaghan stated that the assignment agreement did not resolve the outstanding issues as +BDO still needed to know what transpired within PAB and make a determination of +whether the assignment agreement with River Falls Investments was a related party +transaction. + BDO also advised that although the assignment agreement “may reduce or eliminate the +need for going concern disclosure, it would increase the requirement that management +provide sufficient disclosure regarding any related party conflicts.” +46. On December 14, 2009, GEE’s outside counsel sent PAB a formal letter requesting +all documentation and information concerning the purported CD. BDO received a copy of this +letter. PAB’s December 16, 2009, response, also received by BDO, provided only documents +relating to GEE’s checking account and did not provide any documents or other information about +the purported CD. The checking account documentation, however, indicated that only +Associate-1, the GEE CFO, and Pence were authorized signers on GEE’s account from July to +September 2009—not Heineman—and the checking account statements reflected a debit memo for +the transfer of $2.3 million of GEE’s cash to Park Avenue Insurance on July 23, 2009. +47. On Friday, December 18, 2009, BDO received a letter from GEE’s general counsel +that attached the final assignment agreement, dated December 11, and a letter from Associate-1 +claiming that the $2.3 million sent to GEE by SDH, Oxygen, and River Falls Financial originated +from River Falls Investments and its “wholly owned subsidiaries or affiliates.” The letter +concluded: “The entirety, sans interest, used by the Company for the purchase of the CD was +received into the Company’s Chase bank account…. Since time is certainly of the essence to +complete the audit work for the Form 10-K to be filed by the Company no later than December 31, +2009, we believe that any open concerns your firm had with respect to the source of the initial +concerns over the CD are now resolved.” The letter did not provide any additional information +concerning what had happened with the purported CD and why Associate-1 and River Falls +Investments would pay face value for the purported CD which PAB had not honored and had no +records to support. + +15 +48. Following the receipt of the December 18 letter, BDO partners Henaghan, Rainis, +and Gerace requested consultation with Graul, BDO’s national director of accounting and risk +management partner, Hambleton, BDO’s national director of SEC practice, and BDO’s general +counsel. After discussion of the situation, these BDO partners agreed they should inform GEE that +the December 18 letter did not fully address the questions BDO had raised and demand that the +audit committee commission an independent investigation to determine exactly what happened. +G. BDO DEMANDED AN INDEPENDENT INVESTIGATION AND, SHORTLY +THEREAFTER, WITHDREW THE DEMAND + +49. On Monday, December 21, 2009, Henaghan sent an email to Graul and Hambleton, +copying Rainis and Gerace, stating: “This morning we informed the [AC Chair] that we will +require an independent investigation of the CD matter in order to conclude the audit of General +Employment (consistent with our discussions with you on Friday.) Attached is our proposed +written communication.” The five-page draft communication described in detail much of the +inconsistent evidence BDO had received concerning the purported CD and the purported +assignment agreement with River Falls Investments and also included a number of proposed +questions. Graul responded: + +We do not owe the Board any explanation other than our “audit” of the CD +in question is incomplete because we have been unable to obtain sufficient +evidence to support the existence and ownership of this asset. You could +say that we have obtained bits and pieces of evidence[] but are not satisfied +with the sufficiency of such evidence to support our opinion on the financial +statements. You could also say that because of the unusual circumstances +surrounding the evidence provided thus far, we concluded that the Board +should undertake a full investigation of the matter. +50. Later that day, Hambleton replied to Graul’s email, asking whether they “should go +into detail of the issues in the letter.” Graul responded to Hambleton: “Short of saying we think +there is fraud, the point is we have been looking for support for months and don’t have anything +satisfactory to support a final opinion. If we give a list of questions, we’ll get answers to those +questions and still not know what is really going on. An independent investigation is the only way +to get to the bottom of this. The list doesn’t look like it would get us there.” +51. Also on December 21, 2009, BDO partners Henaghan, Rainis, and Gerace +questioned Associate-1 about the assignment agreement and Huff’s involvement with GEE, River +Falls Financial, and River Falls Investments. According to summary notes of the call, Associate- +1’s explanation for why River Falls Financial, purportedly owned by Pence, wired payments of +$300,000 each to GEE on four days (December 2, 3, 4, and 9), was that the funds were “initially +inadvertently transferred to the [River Falls Financial] account rather than the GEE account.” +Associate-1 also informed BDO that Huff’s wife was the original 100% owner of River Falls +Financial and that Pence acquired the company in 2009. The notes also reflect that Associate-1 +conveyed that through a trust Huff has an ownership interest in River Falls Investments. +Associate-1 further told BDO that he was familiar with Park Avenue Insurance and he believes it +“is insolvent at this point.” + +16 +52. Ultimately it was determined that the detailed letter would be sent and, early on +December 22, 2009, Henaghan sent GEE’s AC Chair a five-page letter, dated December 21, 2009, +in substantially the same form as Henaghan had internally circulated earlier. Henaghan’s letter +identified a number of inconsistencies in the audit evidence BDO had received regarding the +purported CD: + BDO had not received “sufficient audit evidence” to support the existence of a CD +investment as of September 30, 2009. The questions raised in regards to the CD at both the +November and December audit committee meetings remained unaddressed. + BDO had not received an adequate explanation from PAB as to the whereabouts of the $2.3 +million after July 23, 2009, because the Bank claimed to have no record of a CD in its +system. PAB never “repaid the CD proceeds or provided an adequate explanation +regarding the status of the CD.” + BDO had “requested (but not been granted) an opportunity to speak directly with [PAB] +regarding this matter.”6 + The July 2009 PAB statement “indicates the amount was transferred to Park Avenue +Insurance. We would like to understand why it appears that the funds were transferred to +Park Avenue Insurance and were not invested into a CD. . . . [M]anagement has provided +no explanation for this. The documentation also appears to indicate that prior to September +2009, [Associate-1] was an authorized signor on the Company’s operating account.” + Heineman’s statements to BDO: (1) claiming on November 23 that “the issue would be +resolved and the funds deposited in the Company’s bank account within a few days”— +which did not happen; (2) stating on November 25 that the money would not be “paid back +in installments”—which did happen; (3) claiming GEE would have the proceeds by +November 30—which did not happen; (4) asserting on December 8 that he negotiated the +assignment with Associate-1—but “during [BDO’s] earlier discussions with Mr. Heineman +he had represented that he was not involved in the process of resolving the issues related to +the CD.” + BDO received conflicting reports regarding the return of the CD funds: (1) the AC +Member stated on December 4 that “the bank continues to put money against the CD they +owe the Company and it should be fully repaid”; (2) Pence and Heineman referred BDO to +the AC Member; and (3) “In all discussions leading up to December 7, 2009, no one ever +indicated that the CD had been assigned to [Associate-1].” + “At the December 9, 2009 audit committee meeting, general counsel and one audit +committee member requested that BDO not be present for the discussion regarding +the CD matter.” + +6 BDO never contacted PAB or spoke to anyone from PAB after learning that PAB failed to +repay the CD proceeds. + +17 + BDO had not received a clear explanation as to why River Falls Investments would +purchase the CD that the Bank has said does not exist, why River Falls Investments +would transfer funds to GEE before an assignment agreement had been executed, +and whether Associate-1’s intent to sell companies to GEE was related to his +agreement to purchase the CD. + “Approximately $900,000 of the proceeds recovered by the Company was received +from River Falls Financial Services. [BDO] had previously been informed that +River Falls Financial Services was 100% owned by Steve Pence. However, in a +December 18, 2009 telephone conversation with Steve Pence, he was unable to +explain why these amounts were transferred from River Falls Financial Services (as +the proceeds were for [Associate-1’s] purchase of the CD).” + +53. Henaghan’s letter indicated that he included specific facts in the letter “to illustrate +that it appears that management has not been forthcoming with information surrounding this +matter. This fact pattern has caused us to raise the level of scrutiny surrounding this issue.” + +54. At the end of his letter, Henaghan stated that BDO did not have sufficient audit +evidence at that time to formally conclude the audit and demanded an independent investigation: + +While BDO recognizes that the issue related to the CD may be the result of +potential administrative or other errors at [PAB], we do not believe we have been +provided sufficient audit evidence to formally conclude on this matter at this point. +As a result of the fact that almost one month has passed since the first audit +committee meeting discussing this matter, that it appears management has not been +fully forthcoming on how it was resolving the issue, and certain question remain +unanswered, we will require the audit committee to commission a full investigation +of this matter prior to the completion of our audit for the year ended September 30, +2009. This investigation should be conducted by an independent firm that is +acceptable to our firm and should address the following unexplained matters: + Why would the Company maintain $2.3 million at Park Avenue Bank in direct +violation of its own investment policy? + Why was [Associate-1] an authorized signor on the Company’s account at Park +Avenue Bank? + What happened to the CD? We would like an explanation for all of the facts +noted above surrounding the situation. + Why did the Company not pursue legal action against the bank and report the +situation to the FDIC when the bank failed to reimburse the Company when the +CD matured? + Why would Mr. Heineman & Mr. Pence represent they were unaware of the +status of the CD resolution and why funds were being received from entities +other than Park Avenue Bank when it appears they were aware of the +assignment agreement with [Associate-1]? + +18 + Why would [Associate-1] be willing to purchase an asset whose value is in +question when he has no relationship to the Company? + Why did River Falls Financial Services reimburse the Company for the CD if +they did not have any relationship with [Associate-1] and were not a party to the +assignment agreement? + We would like a clear understanding of the relationships between [Associate-1], +Mr. Pence and Mr. Heineman and any entities where they may have joint +ownership? + What is the relationship between [Associate-1], Mr. Pence, Mr. Heineman and +Park Avenue Bank? +Please note that the issues listed above represent[] some of the areas of concern +based on our current understanding of the facts. The above items should not be +considered an all-inclusive list and the investigation should not be limited to the +above identified items. We may identify additional questions and require additional +audit evidence based on the results of the investigation. BDO recommends that this +investigation be commissioned as soon as possible. + +55. On the evening of December 22, 2009, BDO learned that the audit committee +meeting that was scheduled for the following day had been cancelled, Zizza, an advisor to Pence +who had attended GEE board meetings through the fall of 2009, would be taking over as CEO, and +that Pence and Associate-1 intended to prepare written responses to each of the issues identified in +the December 21 letter. In email exchanges that evening and the following morning regarding +these events, Henaghan, Gerace, Hambleton, and the BDO Midwest Leader agreed that BDO +should communicate to GEE in writing that BDO “will continue to require an independent +investigation.” + +56. Following Zizza’s appointment as GEE’s new CEO, BDO partners Henaghan, +Rainis, Gerace, and the BDO Midwest Leader spoke to Zizza and the AC Chair on December 24, +2009. A senior partner in BDO’s New York office (the “NY Partner”) also attended the call +because he handled some of Zizza’s other business relationships with BDO, including audit or tax +work for Zizza’s private company and three public companies for which Zizza served as a board +member. Henaghan later wrote a memo describing the December 24 call, stating that Zizza +“requested that BDO conclude the audit without the need for an independent investigation” +because of “the change in management and the fact that the Company had recovered full control of +the $2.3 million in question” and that the AC Chair agreed. The memo also indicates that both +Zizza and the AC Chair “acknowledged that some inappropriate actions were taken within the +Company and that it was likely that even more inappropriate actions were taken at the Bank” and +that both “felt that with [Heineman’s] removal from the management team, the inappropriate +actions within the Company would stop.” + +57. Also on December 24, BDO partners Henaghan, Rainis, and Gerace had a +telephone conversation with Pence, Zizza, and the AC Chair. According to a memo Henaghan +later wrote describing this call, Pence indicated he asked GEE to move its business to PAB because +of his prior working relationship as an attorney for Antonucci, PAB’s then-President, and + +19 +Associate-1’s association with PAB as a customer. The memo also indicates that Pence had told +BDO that the reason he represented he was unaware of the status of the CD resolution and why +funds were being received from entities other than PAB was because “he was unaware of the +assignment agreement until after the funds were returned to the Company.” The memo further +noted that Associate-1’s explanation for why River Falls Financial transferred funds to GEE was +because River Falls Financial “also has an operating account” at the same bank and “[t]he funds +were transferred from one of his companies to [River Falls Financial] in error,” and as such, River +Falls Financial “then had to transfer the funds to GEE.” + +58. After these calls with Zizza, Pence, and the AC Chair, Henaghan sent Rainis, Graul, +Gerace, Hambleton, the NY Partner, the BDO Midwest Leader, and BDO’s general counsel an +email on December 24, 2009, asking for their availability for a call and stating he was drafting a +memo summarizing current facts. Graul responded: “Unless there is something new that hasn’t +been discussed in the last few calls, what’s the purpose?” The NY Partner replied: “The purpose +is to try to salvage an account where they made [] changes in the management because of the +alleged wrongdoing.” Graul responded: “Did they change the guy that can’t support the $2 +million that supposedly was put into company? What about the two audit committee members that +stalled the investigation and the lawyer that wouldn’t let us participate in a board meeting to +preserve privilege. There’s something funny going on here.” The NY Partner replied that he had +no disagreement with Graul on the last point. +59. BDO’s 2009 Assurance Manual required Henaghan to consult with Graul, +Hambleton, and Gerace in the circumstances presented here. The Manual required the engagement +partner seeking consultation to prepare a memorandum concerning all consultations, which should, +among other things, define the issues; “identify client source documents/evidence reviewed”; +summarize the proper accounting treatment; summarize the impact on the financial statement +presentation and disclosure; and describe any alternative solutions considered and why they were +rejected. Finally, BDO’s 2009 Assurance Manual required the memorandum to be sent to all +consultants, who “should acknowledge their agreement with the memorandum.” +60. Early in the morning on December 28, Henaghan sent a draft memo to Rainis, +Graul, Gerace, Hambleton, the NY Partner, the BDO Midwest Leader, and BDO’s general counsel. +The memo summarized BDO’s calls with Zizza, the AC Chair, Pence, and Associate-1, and +attempted to answer the questions posed in Henaghan’s letter to the AC Chair dated December 21, +2009. The memo concluded: “the engagement team believes it is appropriate to reconsider the +need for an independent investigation and as such is requesting a consultation on this matter.” +61. That same day, Henaghan, Graul, Gerace, Hambleton, the NY Partner, the BDO +Midwest Leader, and BDO’s general counsel discussed GEE for approximately one hour. Despite +the existence of multiple, unanswered questions, they ultimately agreed to drop the demand for an +independent investigation if GEE agreed to include commentary on two material weaknesses in +internal controls, including certain circumstances surrounding the purported CD, in a Form 8-K +and that Associate-1 would not become part of management, among other things. A memo later +written by Henaghan to document the discussion notes as considerations, among other things, that +Zizza—whom BDO trusted—had replaced Heineman as CEO and that the AC Chair, who had +initially supported the independent investigation, no longer believed that it was required. + +20 +62. Following their call, the NY Partner spoke to Zizza and Henaghan spoke to the AC +Chair about the statements BDO wanted made in the Form 8-K and Associate-1’s contemplated +role with GEE. Henaghan emailed an update to Rainis, Graul, Gerace, Hambleton, the NY +Partner, the BDO Midwest Leader, and BDO’s general counsel, stating that the AC Chair indicated +that GEE was contemplating an acquisition that would make Associate-1 an approximate 20% +shareholder of GEE, but not an officer, director, or part of management. Graul responded: “I don’t +like it but won’t object provided [that Associate-1] is not a board member and has no managerial +responsibilities, even with respect to the business he is selling. Please make it perfectly clear that +this is the last accommodation that I am willing to make from a risk management perspective.” +63. Also following their December 28 call, Hambleton sent an email to the other BDO +partners asking whether they were comfortable with the classification of the $2.3 million as cash at +September 30. Henaghan responded: “we have a confirmation from Park Ave Bank & the +subsequent execution and funding of the assignment agreement as evidence of the existence of the +CD at 9/30.” Henaghan did not mention any of the inconsistent evidence that he identified in his +letter to the AC Chair dated December 21, 2009, and that indicated that no such CD or other cash +equivalent existed as of September 30, 2009. Neither Hambleton nor any of the other BDO +partners responded or commented on these omissions. +64. BDO provided a draft Form 8-K disclosure to GEE, and reviewed and agreed to the +language ultimately included in GEE’s Form 8-K filed on December 30, 2009. The Form 8-K +disclosed Heineman’s resignation, Zizza’s appointment as CEO, and the fact that Zizza was paid +$20,000 per month since March 2009 to consult for Pence. The Form 8-K also stated: + +In July 2009, the Registrant purchased a $2.3 million certificate of deposit (“CD”) +at a New York bank. When the CD matured in October 2009, the bank did not +timely credit the proceeds of the CD to the Registrant’s account. Although the +Registrant has made a formal inquiry of the bank, to date the Company has not +received an adequate explanation for the bank’s non-performance relating to the +CD. In December 2009, the Registrant was reimbursed in full through a non- +recourse assignment of the CD for face value to an unrelated party, who has other +business interests with the bank. The purchaser of the CD is neither an employee +nor a director of the Registrant. + +65. The Form 8-K also disclosed two material weaknesses: (1) “the size of the New +York bank from which the CD was purchased did not meet the minimum requirements of [GEE]’s +investment policy”; and (2) the Company “authorized an individual that was neither an employer +nor a director as an authorized signor on the Registrant’s bank account.” The Form 8-K did not +indicate that Associate-1 was both the authorized signatory and the purportedly “unrelated party” +who purchased the purported CD. + +66. On January 4, 2010, Henaghan sent an email to the other BDO partners attaching +the Form 8-K, the December 21, 2009, letter to the AC Chair demanding an independent +investigation, Heineman’s resignation email, and a final memo discussing BDO’s calls with the +AC Chair, Pence, Zizza, and Associate-1 and concluding that BDO should issue its opinion on +GEE’s financial statements. The final memo noted that Zizza and the AC Chair “acknowledged + +21 +that some inappropriate actions were taken within the Company and that it was likely that even +more inappropriate actions were taken at the Bank…. Both men also acknowledged that they felt +that with [Heineman’s] removal from the management team, the inappropriate actions within the +Company would stop.” The memo noted that “without the cooperation of [Heineman] and the +Bank – neither of which anyone was likely to obtain, it was highly unlikely that the motivations or +even all of the actions would ever be learned.” BDO did not attempt to contact Heineman +following his resignation nor did BDO attempt to contact PAB at any time after this issue arose. + +67. The memo also stated that Zizza “represented to BDO that [Associate-1] will not +become an employee or director of the Company” and concluded: “To the extent any new adverse +information related to the transaction comes to our attention we will again consult with BDO’s risk +management and National SEC groups in regards to continued client retention.” Rainis, Graul, +Gerace, and Hambleton each reviewed the memo and concurred with the decision to drop the +demand for an independent investigation. BDO’s general counsel also agreed with the approach +outlined in the memo. + +68. On January 5, 2010, after BDO had already decided that GEE’s Form 8-K +disclosure concerning the purported CD was adequate and informed GEE that it would withdraw +its demand for an investigation and issue an unqualified audit opinion, Hambleton asked BDO’s +general counsel, Henaghan, Rainis, Graul, Gerace, and the NY Partner: “I want to make sure we +believe the company’s response is a sufficient response to a potential illegal act. Although we +didn’t specifically say we thought there was a potential illegal act in the [December 21] letter, we +did include enough issues that would lead someone to that view as does the memo’s statement +about some ‘inappropriate actions.’” BDO’s general counsel responded: “I do believe the +company’s response was appropriate under the circumstances.” + +69. On January 8, 2010, GEE filed its Form 10-K, which classified the $2.3 million +purported CD as a cash equivalent and stated in footnote disclosure to the financial statements: + +In July 2009, the Company purchased a $2,300,000 certificate of deposit (“CD”) at +a New York bank. When the CD matured in October 2009, the bank did not timely +credit the proceeds of the CD to the Company’s account. Although the Company +has made a formal inquiry of the bank, to date the Company has not received an +adequate explanation for the bank’s non-performance relating to the CD. In +December 2009, the Company was reimbursed in full through a non-recourse +assignment of the CD for face value to an unrelated party, who has other business +interests with the bank. The purchaser of the CD is neither an employee nor a +director of the Company. +70. GEE’s Form 10-K filed on January 8, 2010 contained an audit report from BDO +that stated BDO’s audits were conducted “in accordance with the standards of the Public +Company Accounting Oversight Board (United States)” and that GEE’s financial statements +presented fairly, in all material respects, the company’s position and results at September 30, 2009, +in conformity with GAAP. + + + +22 +H. IN 2010, BDO LEARNED OF FACTUAL ALLEGATIONS IN A CRIMINAL +COMPLAINT AGAINST THE PAB PRESIDENT ALLEGING THAT THE +PURPORTED CD DID NOT EXIST + +71. On January 19, 2010, just days after BDO issued its unqualified opinion and GEE +filed its 2009 Form 10-K, Henaghan sent an email to Rainis, Graul, Gerace, Hambleton, the BDO +Midwest Leader, and NY Partner attaching a January 12, 2010, Grand Jury Subpoena, issued to the +AC Chair seeking his appearance and production of “any and all documents relating to any account +maintained at Park Avenue Bank.” + +72. On March 13, 2010, the United States of America filed a 44-page criminal +Complaint against former PAB president Antonucci (the “Antonucci Complaint”), alleging a +scheme and conspiracy involving a $6.5 million round-trip transaction in which GEE’s $2.3 +million was diverted as part of the conspiracy. Huff, Heineman, and Pence are referred to and +identifiable as designated “co-conspirator[s] not named herein” in certain aspects of that +conspiracy. The allegations in the Antonucci Complaint contained several details that indicated +that GEE did not have a CD with PAB, that River Falls Financial, River Falls Investments, +Oxygen, SDH, and PSQ were related parties, and that Heineman had authorized the money to be +transferred to Park Avenue Insurance as part of the conspiracy, and not to purchase a CD: + + “To hide the improper diversion of GEE’s funds from GEE’s auditors and Board of +Directors, [Antonucci] and others created a counterfeit certificate of deposit [], falsely +representing that GEE’s $2.3 million had been invested in a 90-day certificate of deposit at +the Bank. In fact, and as [Antonucci] well knew, there was no $2.3 million CD.” + GEE’s $2.3 million had been transferred to Park Avenue Insurance, which was controlled +by Antonucci. According to the Bank records, Heineman authorized this transfer. + Antonucci fraudulently signed the BDO confirmation of the $2.3 million CD, when +Antonucci knew it did not exist. + +The Antonucci Complaint further identified several “Oxygen-related entities” as participants in the +conspiracy, including, River Falls Financial (which Pence said he owned), PSQ (Pence’s entity that +purchased the majority stake in GEE), and Oxygen and SDH—two companies that paid GEE +purportedly under the assignment agreement with River Falls Investments (which Associate-1 said +he and a Huff family trust owned). It further alleged that a group of five associates (including Huff +and Pence) were listed on some of the accounts of the Oxygen-related entities, which shared a +common address in Louisville, Kentucky. + +73. On April 27, 2010, Henaghan sent an email attaching the Antonucci Complaint to +Rainis, Graul, Gerace, Hambleton, the BDO Midwest Leader, and BDO’s general counsel. +Henaghan’s email also attached a March 10, 2010 Grand Jury Subpoena issued to GEE, requesting +(i) documents relating to Huff, Pence, Heineman, the purported CD, SDH, Oxygen, O2HR, and +River Falls Financial and (ii) documents reflecting any payments to Heineman, Pence, Associate-1, +or the AC Member. Henaghan further attached a client retention memo addressed to Graul, +Hambleton, Gerace, the BDO Midwest Leader, and BDO’s general counsel. The memo stated: + +23 +“As I believe everyone is aware, in March 2010, Charles Antonucci, the president of Park Avenue +Bank was arrested related to allegations of criminal acts in his role as bank president, including +signing a counterfeit CD and our confirmation when he had in fact diverted the funds for his own +personal use.” The memo also noted that Pence was an unnamed co-conspirator. The memo +concluded that the engagement team recommended that BDO continue its relationship with GEE +because, among other factors, “Pence has not been formally charged yet with any criminal wrong- +doing.” However, the memo did not address what impact the Antonucci Complaint’s allegations +might have on the representations contained in GEE’s financial statements (issued two months +before the complaint) concerning the purported CD. + +74. On April 28, 2010, Graul responded to Henaghan’s email requesting that he obtain +additional information concerning certain allegations in connection with client retention concerns. +Specifically, Graul indicated that Gerace had confirmed to him that “[w]hen the missing company +funds were ‘dribbling’ in from other sources” those sources included entities linked to the +conspiracy alleged in the Antonucci Complaint. Graul asked Henaghan to determine (i) whether +any related party transactions might involve the entities mentioned in the complaint; (ii) who +authorized the funds to be paid to GEE from the “Oxygen-related entities” River Falls Financial, +SDH, and Oxygen; and (iii) whether the AC Chair and Zizza are comfortable working with Pence +because “the preponderance of the accusations seem pretty bad for Mr. Pence.” Hambleton +responded to all, stating: “I agree with [Graul]. It seems there are more potential connections +here.” However, neither Graul, Hambleton, Gerace, nor Rainis ever followed up with Henaghan to +learn whether he had identified those “potential connections.” + +75. In a May 25, 2010, email, Henaghan told Zizza that he would like to discuss certain +issues regarding the Antonucci Complaint. Henaghan wrote that he wanted to discuss the +allegations that “Pence purchased a 25% interest in Bedford Consulting from Antonucci for $6.5 +million in what the complaint describes as an ‘artifice designed to cover up the true source of the +$6.5 million.’” Henaghan also wrote: “The Complaint indicates that River Falls is owned by +Pence, [Associate-1], and Heineman. All previous information disclosed to us by Heineman and +Pence indicated that Pence owned 100% of River Falls.” He further noted that the Complaint +indicated that PSQ borrowed money from River Falls to buy the GEE shares. Henaghan’s email to +Zizza did not address the allegations in the Antonucci Complaint denying the existence of the +purported CD or indicating related party issues concerning the funds received by the “Oxygen- +related entities.” + +76. On June 1, 2010, in connection with the allegations contained in the Antonucci +Complaint, an Assistant United States Attorney for the Southern District of New York interviewed +Henaghan in detail about BDO’s 2009 audit, including the information BDO received about the +ownership structures of River Falls Financial, River Falls Investments, WTS, On-Site, Oxygen, +and AIR. + +77. Other than Henaghan’s single discussion with Pence (who denied the allegations) +and further communications with Zizza (who stated that he still trusted Pence), BDO did not +perform any additional procedures specific to the allegations in the Antonucci Complaint +concerning GEE, its chairman and former CEO, or the purported CD. BDO’s workpapers do not + +24 +include any information about what BDO did to investigate the allegation that PAB records +indicated that Heineman authorized the transfer of $2.3 million to Park Avenue Insurance. BDO’s +workpapers also do not include any analysis of the impact on GEE’s financial statements if +Heineman had conspired with Antonucci to steal GEE’s $2.3 million, by authorizing the transfer of +the money to Antonucci’s company, Park Avenue Insurance, as alleged in the Antonucci +Complaint. The workpapers do not include an analysis of whether the assignment agreement with +River Falls Investments, in which GEE received $2.3 million from SDH, Oxygen, or River Falls +Financial, was a related party transaction. In fact, Henaghan did not document any answers he +received pursuant to his discussions with Pence or Zizza. Moreover, the client retention memo and +“matters for reviewer concern” memo retained in the workpapers for the 2010 audit make no +reference to the Antonucci Complaint or guilty plea. + +78. In October 2010, Antonucci pled guilty to multiple criminal charges in a criminal +information, including securities fraud, bank bribery, and embezzlement of bank funds. As part of +his guilty plea, Antonucci admitted that he and his co-conspirators caused GEE to use $2.3 million +of its funds to make PAB whole on a loan PAB made to a company controlled by his co- +conspirators that had gone bankrupt, that the purported CD had never existed, and that he had +signed a false confirmation that the bank had issued a CD to GEE that he then sent to BDO. BDO +learned of this guilty plea shortly thereafter. + +79. BDO also learned, through GEE’s November 2010 Form 8-K filing and publicly +available information, that Pence purportedly sold PSQ to a person associated with Huff +(“Associate-2”). After Associate-2 became the majority owner of GEE, a BDO senior manager on +the GEE audit noted that Google showed that Associate-2 was connected to O2HR, Huff, and +Associate-1. According to the Form 8-K, Associate-2 paid nothing for PSQ; he just assumed +promissory notes issued by Pence to AIR for approximately $3 million, which funded PSQ’s +purchase of the majority of GEE shares in July 2009. Associate-1 had previously informed +Henaghan in a December 21, 2009 email that AIR had “investments received and invested in” +River Falls Investments, the entity that purchased the purported CD from GEE. + +80. Despite all of these additional indications of affiliation among AIR, River Falls +Investments, River Falls Financial, Pence, Associate-1, and Huff, BDO did not perform additional +audit procedures in 2010 to determine whether the purported purchase by River Falls Investments +of the purported CD from GEE (i) was fairly characterized in GEE’s financial statements or (ii) +should have been identified as a related party transaction in GEE’s financial statements. Instead, +BDO relied on GEE management and director representations that there were no undisclosed +related party transactions. BDO also relied on Associate-1’s representations although, as Graul +acknowledged to Gerace and Henaghan on August 10, 2010: “Anything and everything that +involves [Associate-1] should be scrutinized carefully . . . [Associate-1] is not to be trusted and +everyone on the engagement should be made aware of this.” + +81. GEE’s Form 10-K filed on December 28, 2010, for its fiscal year ended September +30, 2010, classified the $2.3 million CD as a cash equivalent as of September 30, 2009, included a +similar disclosure as the disclosure in the Form 10-K filed in January 2010: + +25 +In November 2009, the Company discovered that it did not receive the proceeds +from a bank for a $2,300,000 certificate of deposit that was scheduled to mature +in October 2009. Although the Company made a formal inquiry of the bank, it +did not receive an adequate explanation for the bank’s non-performance related to +the deposit. In December 2009, the Company entered into an agreement to assign +its interests in the certificate of deposit, without recourse, to an unrelated party +that has other business interests with the bank, and the Company was reimbursed +for the face value of the deposit. + +82. GEE’s Form 10-K filed on December 28, 2010, as amended on April 15, 2011, +contained an audit report from BDO that stated BDO’s audits were conducted in accordance with +PCAOB standards and that GEE’s financial statements presented fairly, in all material respects, +the company’s position and results at September 30, 2010 and 2009, in conformity with GAAP. + +I. VIOLATIONS +RULE 102(e) AND SECTION 4C OF THE EXCHANGE ACT +83. BDO’s 2009 and 2010 audits were deficient and not performed in accordance +with PCAOB standards.7 Section 4C(b) and Rule 102(e)(1)(iv) define improper professional +conduct with respect to persons licensed to practice as accountants. Pursuant to these provisions, +“improper professional conduct” includes two types of negligent conduct: (1) a single instance +of highly unreasonable conduct that results in a violation of professional standards in +circumstances in which heightened scrutiny is warranted; or (2) repeated instances of +unreasonable conduct, each resulting in violations of professional standards, that indicate a lack +of competence. + +84. As set forth above, BDO knew or should have known facts that cast substantial +doubt on the existence of the purported CD given, among other things, (1) significant integrity +issues with Heineman, the person who claimed to have authorized the investment, and Associate-1, +the person with whom Heineman purportedly “negotiated” the assignment agreement; (2) PAB had +told GEE that it had no record of the purported CD; and (3) PAB had provided GEE and BDO with +documentation showing the $2.3 million actually had been transferred to Park Avenue Insurance +on July 23, 2009. + +85. BDO also knew or should have known that the circumstances presented by the +purported $2.3 million CD that was not honored by PAB, the subsequent receipt by GEE of $2.3 +million from River Falls Financial, SDH, and Oxygen, and the purported assignment agreement +with River Falls Investments warranted heightened scrutiny. Notwithstanding the many red flags +concerning the purported CD and the assignment agreement discussed above, BDO issued audit +reports in both 2009 and 2010 containing unqualified opinions that were filed with GEE’s financial + +7 References to auditing standards in this Order are to PCAOB standards in effect at the time the +audit work was performed. + +26 +statements in the Form 10-Ks. In those reports, BDO inaccurately stated that the audit had been +conducted in accordance with PCAOB standards and that GEE’s financial statements presented +fairly, in all material respects, the company’s position and results in conformity with GAAP. + +Failed to exercise due professional care and an attitude of professional +skepticism (AU § 230) + +86. PCAOB standards require auditors to exercise due professional care in the +planning and performance of the audit and the preparation of the report. (AU § 230.01) +Auditors must maintain an attitude of professional skepticism, which includes “a questioning +mind and a critical assessment of audit evidence.” (AU § 230.07) In addition, the auditor should +“consider the competency and sufficiency of the evidence. Since evidence is gathered and +evaluated throughout the audit, professional skepticism should be exercised throughout the audit +process.” (AU § 230.08) The Commission and courts have held that related party transactions +require heightened scrutiny.8 +87. As a result of BDO’s conduct described above, BDO failed to exercise due +professional care and an attitude of professional skepticism in its 2009 and 2010 audits of GEE. +Failed to obtain sufficient competent evidential matter concerning the +purported CD (AU §§ 326 and 333) +88. PCAOB standards require auditors to obtain sufficient competent evidential matter +to afford a reasonable basis for an opinion with respect to the financial statements under audit. To +be “competent,” evidence “must be both valid and relevant.” (AU § 326.21) “The amount and +kinds of evidential matter required to support an informed opinion are matters for the auditor to +determine in the exercise of his or her professional judgment after a careful study of the +circumstance in the particular case.” (AU § 326.22) This includes evaluating the reliability of the +evidence,9 and weighing all of the evidence obtained. The validity and sufficiency of required +evidence depends on the circumstances and the auditors’ judgment, but should be “persuasive” +though it need not be “convincing.” (AU § 326.22) + +89. PCAOB standards also provide that management representations “are not a +substitute for the application of th[e] auditing procedures necessary to afford a reasonable basis +for an opinion regarding the financial statements under audit,” that “the auditor obtains written +representations from management to complement other auditing procedures,” and that “[i]n + +8 See McCurdy v. SEC, 396 F.3d 1258, 1261 (D.C. Cir. 2005) (citing Howard v. SEC, 376 F.3d +1136, 1149 (D.C. Cir. 2004)) (noting that related party transactions “are viewed with extreme +skepticism in all areas of finance”). +9 AU § 330.33: “the auditor should consider (a) the reliability of the confirmations….” + +27 +exercising professional skepticism, the auditor should not be satisfied with less than persuasive +evidence because of a belief that management is honest.” (AU §§ 333.02, 333.03, 230.09)10 +90. As a result of BDO’s conduct described above, BDO failed to obtain sufficient +evidence supporting assertions in GEE’s 2009 and 2010 Form 10-K financial statements that the +purported CD existed and was a cash equivalent as of September 30, 2009, and that GEE entered +into an assignment agreement with an unrelated party.11 + +Failed to determine whether fraud or potential illegal acts may have impacted +GEE’s fiscal year 2009 and 2010 financial statements (AU §§ 316, 317) +91. Under AU § 316.01, an auditor must 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. The auditors must brainstorm “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) AU § 316.06 states that there are “[t]wo types +of misstatements relevant to the auditor’s consideration of fraud—misstatements arising from +fraudulent financial reporting and misstatements arising from misappropriation of assets.” It +explains that financial reporting may be accomplished by falsification of supporting +documentation, or misrepresentations of events, transactions, or other significant information. It +further instructs that fraudulent financial reporting “need not be the result of a grand plan or +conspiracy” and may instead “be that management representatives rationalize the appropriateness +of a material misstatement … as a temporary misstatement of financial statement … expected to +be corrected later.” It instructs that that misappropriation of assets may be accompanied by +“false or misleading records or documents, possibly created by circumventing controls.” AU § +316.09 also notes that management engaged in fraud will take steps to conceal the fraud from +auditors. AU § 316.10 further states that fraud may be concealed through collusion among +management and third parties. For these reasons, AU § 316.13 requires auditors to exercise +professional skepticism when considering the risk of material misstatement due to fraud. +92. AU § 316.68 lists conditions that may be identified during the fieldwork that are +indicators of potential fraud, including (i) unsupported or unauthorized balances or transactions; +(ii) missing documents; (iii) unusual discrepancies between the entity’s records and confirmation +replies; (iv) inconsistent, vague or implausible responses from management or employees; and + +10 AU § 508.20 also provided that “[c]ertain circumstances may require a qualified opinion … +[when] “[t]here is a lack of sufficient competent evidential matter or there are restrictions on the +scope of the audit that have led the auditor to conclude that he or she cannot express an +unqualified opinion….” +11 In addition, AS § 3.12 required BDO to “document significant audit findings or issues, actions +taken to address them (including additional evidence obtained), and the basis for the conclusions +reached.” BDO failed to comply with this documentation requirement with respect to each of the +major auditing issues encountered during the 2009 and 2010 audits. + +28 +(v) denial of access to records, facilities, certain employees, customers, vendors or others from +whom audit evidence might be sought. +93. AU § 317.10 notes that auditors may become aware of possible illegal acts during +the course of their audit: “When the auditor becomes aware of information concerning a +possible illegal act, the auditor should obtain an understanding of the nature of the act, the +circumstances in which it occurred and sufficient other information to evaluate the effect on the +financial statements.” +94. As a result of BDO’s conduct described above, BDO failed to adhere to these +PCAOB standards during its 2009 or 2010 audits of GEE. +Failed to obtain sufficient audit evidence to determine whether the assignment +agreement was a related party transaction (AU §§ 326 and 334) +95. PCAOB standards require that “[an] auditor should view related party transactions +within the framework of existing [accounting] pronouncements, placing primary emphasis on the +adequacy of disclosure. In addition, the auditor should be aware that the substance of a +particular transaction could be significantly different from its form and that the financial +statements should recognize the substance of particular transactions rather than merely their legal +form.” (AU § 334.02) +96. PCAOB standards require an auditor to obtain sufficient competent evidential +matter to afford a reasonable basis for an opinion regarding the financial statements under audit. +(AU § 326.01) In selecting particular substantive tests to achieve the audit objectives, an auditor +considers, among other things, the risk of material misstatement of the financial statements. (AU § +326.11) With respect to related party transactions, PCAOB standards require that after an auditor +identifies related party transactions, he or she should apply the procedures considered necessary to +obtain satisfaction concerning their purpose, nature, and extent and their effect on the financial +statements. (AU § 334.09) For each related party transaction for which disclosure is required, +PCAOB standards require that the auditor satisfy himself that the transaction is adequately +disclosed in the financial statements. (AU § 334.11) + +97. The failure to disclose the assignment agreement as a related party transaction +caused the financial statements to be misleading. Financial Accounting Standards Board +Accounting Standards Codification (“ASC”) Topic 850, Related Party Disclosures required that +the following must be disclosed concerning related party transactions: (a) the nature of the +relationship involved; (b) a description of the transaction; (c) the dollar amount of the transaction; +and (d) amounts due from or to related parties and, if not otherwise apparent, the terms and manner +of settlement. Related party transactions cannot be presumed to have been conducted at arm’s- +length. GAAP requires these disclosures so the reader can be alerted to their existence, so as to +help the reader of the financial statements detect and explain possible differences in financial + +29 +statements of a company that engaged in related party transactions to those that did not.12 Such +disclosure helps the reader evaluate the substance of the related party transaction. + +98. As a result of BDO’s above-described conduct, BDO failed to exercise the +requisite level of care, failed to perform sufficient procedures to identify related party +transactions, failed to obtain sufficient audit evidence to determine whether the assignment +agreement was a related party transaction during its 2009 or 2010 audits of GEE, and failed to +follow up on evidence indicating that assertions regarding the purported CD and assignment +agreement were unsubstantiated. BDO also failed to ensure the issuance of an accurate audit +report in 2009 and 2010, which misrepresented that GEE’s financial statements were presented +fairly, in all material respects, in accordance with GAAP. +Failed to Investigate Newly Discovered Facts in 2010 (AU § 561) +99. AU § 561.04 states that when an auditor becomes aware of information that he +would have investigated if it had come to his attention during the course of the audit, he must +determine if the information is reliable and whether the facts existed at the date of his report. If the +information is reliable and existed at the date of the report, the auditor must determine if his report +would have been affected and people relying on the financial statements would find it important. +(AU § 561.05.) + +100. As a result of BDO’s conduct described above, BDO failed to adhere to this +PCAOB Standard after learning of, among other things, the Antonucci Complaint in March 2010 +and subsequent guilty plea in October 2010, as it concerned GEE’s 2009 financial statements. +Finding + +101. As a result of the conduct described above, the Commission finds that BDO +engaged in improper professional conduct within the meaning of Sections 4C(a)(2), 4C(b)(2)(A), +and 4C(b)(2)(B) of the Exchange Act and Rules 102(e)(1)(ii), 102(e)(1)(iv)(B)(1), and +102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice. BDO’s conduct in the 2009 and 2010 +audits of GEE involved repeated instances of unreasonable conduct, each resulting in violations of +PCAOB standards and indicating a lack of competence, and also satisfies the standard of highly +unreasonable conduct resulting in violations of PCAOB standards in circumstances in which +heightened scrutiny was warranted. + +BDO VIOLATED SECTION 10A OF THE EXCHANGE ACT + +102. Section 10A(a)(1) of the Exchange Act requires each audit conducted of an issuer +by a registered public accounting firm to include “procedures designed to provide reasonable +assurance of detecting illegal acts that would have a direct and material effect on the +determination of financial statement amounts.” Section 10A(a)(2) of the Exchange Act requires + +12 ASC 850-10-05-2. + +30 +each audit conducted of an issuer by a registered public accounting firm to include “procedures +designed to identify related party transactions that are material to the financial statements or +otherwise require disclosure therein.” Section 10A(b)(1) requires a registered public accounting +firm to, in accordance with PCAOB standards, “determine whether it is likely that an illegal act +has occurred” if the firm “detects or otherwise becomes aware of information indicating that an +illegal act (whether or not perceived to have a material effect on the financial statements of the +issuer) has or may have occurred.” No showing of scienter is necessary to establish a violation +of Section 10A. See SEC v. Solucorp Indus., Ltd., 197 F. Supp. 2d. 4, 10-11 (S.D.N.Y. 2002). + +103. In connection with the 2009 and 2010 GEE audits, BDO violated Section +10A(a)(1) of the Exchange Act by failing to plan, design, and carry out audit procedures to +provide reasonable assurance of detecting illegal acts that would have a direct and material effect +on the determination of financial statements amounts. + +104. In connection with the 2009 and 2010 GEE audits, BDO violated Section +10A(a)(2) of the Exchange Act by failing to plan, design, and carry out audit procedures to +identify GEE’s material related party transactions that required disclosure in the financial +statements. + +105. In connection with the 2009 and 2010 GEE audits, BDO violated Section +10A(b)(1) of the Exchange Act by failing to determine whether it was likely that an illegal act +had occurred after BDO was made aware of information indicating that an illegal act may have +occurred. + +106. As a result of the conduct described above, the Commission finds that BDO +violated Sections 10A(a)(1), (a)(2), and (b)(1) of the Exchange Act. + +BDO WAS A CAUSE OF VIOLATIONS OF SECTION 13(a) OF +THE EXCHANGE ACT AND RULE 13a-1 THEREUNDER + +107. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require that every +issuer of a security registered pursuant to Section 12 of the Exchange Act file with the +Commission annual reports (i.e., Form 10-K) as the Commission may require, and mandate that +periodic reports contain such further material information as may be necessary to make the +required statements not misleading. The obligation to file such reports embodies the requirement +that they be true and correct. + +108. GEE’s annual reports on Form 10-K for fiscal years 2009 and 2010 included audit +reports from BDO that stated BDO’s audits were conducted “in accordance with the standards of +the Public Company Accounting Oversight Board (United States)” and that GEE’s financial +statements presented fairly, in all material respects, the company’s position and results. These +statements were materially misleading. As a result of BDO’s above-described conduct, BDO’s +2009 and 2010 audits were not conducted in accordance with PCAOB standards and the financial +statements included in GEE’s 2009 and 2010 Form 10-Ks were materially misstated because, +among other things, they incorrectly represented GEE had a $2.3 million CD and classified it as a + +31 +cash equivalent as of September 30, 2009, and did not disclose the assignment agreement as a +related party transaction, contrary to GAAP. At a minimum, BDO knew or should have known +that its unreasonable conduct would contribute to GEE’s filing of inaccurate 2009 and 2010 Form +10-Ks. + +109. As a result of the conduct described above, the Commission finds that BDO was a +cause of GEE’s violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. + +J. UNDERTAKINGS + +110. BDO’s Review. Within one hundred and twenty days after the entry of this Order, +BDO shall perform and complete a review and evaluation (“BDO’s Review”) of the sufficiency +and adequacy of BDO’s quality controls set forth in its audit manual, including its policies and +procedures set forth therein for audit and interim review procedures, regarding the following +(hereinafter referred to as “BDO’s Policies”): +(i) client acceptance and retention; +(ii) the exercise of due professional care and professional skepticism (as set forth in AU +§ 230); +(iii) the identification and consideration of disclosures of related parties and related +party transactions (as set forth in Auditing Standard No. 18 and AU § 334); +(iv) fraud detection (as set forth in AU § 316); +(v) compliance with the requirements of AU § 317, including the identification of +“illegal acts” as defined in AU § 317.02: “Illegal acts by clients are acts +attributable to the entity whose financial statements are under audit or acts by +management or employees acting on behalf of the entity. Illegal acts by clients do +not include personal misconduct by the entity’s personnel unrelated to their +business activities”; +(vi) compliance with Section 10A of the Securities Exchange Act of 1934, including +designing procedures to provide reasonable assurance of detecting illegal acts that +would have a direct and material effect on the determination of financial statement +amounts, and to comply with all requirements under the standards of the +Commission, the PCAOB, and Section 10A to evaluate and report suspected illegal +acts; +(vii) obtaining sufficient appropriate audit evidence (as set forth in Auditing Standard +No. 15); +(viii) evaluation of and reliance upon management representations (as set forth in AU § +333); + +32 +(ix) third-party confirmations (as set forth in AU § 330), including evaluating the results +of the confirmation procedures in accordance with AU § 330.33, “In performing +that evaluation, the auditor should consider (a) the reliability of the confirmations +and alternative procedures; (b) the nature of any exceptions, including the +implications, both quantitative and qualitative, of those exceptions; (c) the evidence +provided by other procedures; and (d) whether additional evidence is needed.” +(x) consultations with local, regional or national office technical oversight +professionals; +(xi) adequate audit documentation, including work paper sign-off, archiving, and dating +(as set forth in Auditing Standard No. 3); +(xii) document retention; and +(xiii) the response to the discovery of new facts subsequent to the issuance of audit report +(as set forth in AU § 561). +BDO’s Review shall assess the forgoing areas to determine whether BDO’s Policies are adequate +and sufficient to provide reasonable assurance of compliance with all relevant Commission +regulations and PCAOB standards and rules. +111. BDO Report. Within sixty days of completing the BDO Review, BDO shall deliver +to the Commission staff a detailed written report (“BDO Report”) summarizing its review and +changes to BDO’s Policies, if any, to provide reasonable assurance of compliance with all relevant +Commission regulations and PCAOB standards and rules. The BDO Report shall identify the +undertaking, provide written evidence of compliance in the form of a narrative, and be supported +by exhibits sufficient to demonstrate compliance. The Commission staff may make reasonable +requests for further evidence of compliance, and BDO agrees to provide such evidence. +112. Independent Consultant’s Review. BDO has undertaken to retain, within one +hundred and eighty days after the entry of this Order, an independent consultant (“Independent +Consultant”), not unacceptable to the Commission staff. BDO shall provide to the Commission +staff a copy of the engagement letter detailing the scope of the Independent Consultant’s +responsibilities. The Independent Consultant’s compensation and expenses shall be borne +exclusively by BDO. BDO shall deliver to the Independent Consultant the BDO Report at the +same time as BDO provides such report to the Commission staff as specified in paragraph 111 +above. BDO shall require that the Independent Consultant perform a review (the “IC Review”) of +BDO’s Policies to determine whether BDO’s Policies are adequate and sufficient to provide +reasonable assurance of compliance with all relevant Commission regulations and PCAOB +standards and rules. BDO shall cooperate fully with the Independent Consultant and shall provide +reasonable access to firm personnel, information, and records as the Independent Consultant may +reasonably request for the IC Review (including training materials pertaining to the undertaking in +paragraph 116), subject to BDO’s right to withhold from disclosure any information or records +protected by any applicable protection or privilege such as the attorney-client privilege or the +attorney work product doctrine. + +33 +113. Independent Consultant’s Report. After the IC Review is completed, but no later +than ninety days after receiving the BDO Report, the Independent Consultant shall issue a detailed +written report (the “IC Report”) to BDO: (a) summarizing the IC Review; and (b) making +recommendations, where appropriate, reasonably designed to ensure that BDO’s Policies are +adequate and sufficient to provide reasonable assurance of compliance with all relevant +Commission regulations and PCAOB standards and rules. BDO shall require the Independent +Consultant to provide a copy of the IC Report to the Commission staff and the PCAOB staff when +the IC Report is issued. +114. BDO shall adopt, as soon as practicable, all recommendations of the Independent +Consultant in the IC Report. Provided, however, that within thirty days of issuance of the IC +Report, BDO may advise the Independent Consultant in writing of any recommendation that it +considers to be unnecessary, outside the scope of this Order, unduly burdensome, or impractical. +BDO need not adopt any such recommendation at that time, but instead may propose in writing to +the Independent Consultant and the Commission staff an alternative policy or procedure designed +to achieve the same objective or purpose. BDO and the Independent Consultant shall engage in +good-faith negotiations in an effort to reach agreement on any recommendations objected to by +BDO. In the event that the Independent Consultant and BDO are unable to agree on an alternative +proposal within sixty days, BDO shall abide by the determinations of the Independent Consultant. +115. Certification by BDO’s CEO. Within sixty days of issuance of the IC Report, but +not sooner than thirty days after a copy of the IC Report is provided to the Commission staff, +BDO’s chief executive officer (“CEO”) must certify to the Commission staff in writing that (i) +BDO has adopted and has implemented or will implement all recommendations of the Independent +Consultant, if any; and (ii) the Independent Consultant agrees with BDO’s adoption and +implementation of the recommendations. To the extent that BDO has not implemented all +recommendations of the Independent Consultant within sixty days of issuance of the IC Report, +BDO’s CEO must certify to the Commission staff in writing, thirty days after their +implementation, that (i) BDO has adopted and has implemented all recommendations of the +Independent Consultant; and (ii) the Independent Consultant agrees that the recommendations have +been adequately adopted and implemented by BDO. The certifications by BDO’s CEO 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 BDO agrees to provide such evidence. +116. Undertakings Regarding Audit Training. Prior to September 30, 2016, BDO shall +require each audit professional serving public company audits to complete successfully: +a. A Minimum of 24 Hours of Audit-Related Training. The audit-related training +requirement shall cover the topics specified in paragraph 110(i)-(xiii). A minimum +of four hours must be allocated to each of these two topics: (i) potential illegal acts +and Section 10A of the Exchange Act, and (ii) identification and disclosure of +related party transactions. The audit-related training requirement may be fulfilled +by completing course(s) conducted in accordance with the applicable state boards +of accountancy. + + +34 +b. A Minimum of 8 Hours of Fraud-Detection Training. BDO shall ensure that audit +professionals assigned to public company engagements undergo fraud detection +training. The training shall include techniques in detecting and responding to +possible fraud in the course of public company audits by audit clients or by +employees, officers or directors of audit clients. + +117. To ensure the independence of the Independent Consultant, BDO: (1) shall not have +the authority to terminate the Independent Consultant or substitute another independent compliance +consultant for the initial Independent Consultant, without the prior written approval of the +Commission staff; and (2) shall compensate the Independent Consultant and persons engaged to +assist the Independent Consultant for services rendered pursuant to this Order at their reasonable +and customary rates. +118. BDO shall require the Independent Consultant to enter into an agreement that +provides that, for the period of engagement and for a period of two years from completion of the +engagement, the Independent Consultant shall not enter into any employment, consultant, attorney- +client, auditing or other professional relationship with BDO, or any of its present or former +affiliates, directors, officers, employees, or agents acting in their capacity as such. The agreement +shall also provide that the Independent Consultant will require that any firm with which he/she is +affiliated or of which he/she is a member, and any person engaged to assist the Independent +Consultant in performance of his/her duties under this Order shall not, without prior written +consent of the Division of Enforcement, enter into any employment, consultant, attorney-client, +auditing or other professional relationship with BDO, or any of its present or former affiliates, +directors, officers, employees, or agents acting in their capacity as such for the period of the +engagement and for a period of two years after the engagement. +119. BDO shall not be in, and shall not have an attorney-client relationship with the +Independent Consultant and shall not seek to invoke the attorney-client privilege or any other +doctrine or privilege to prevent the Independent Consultant from transmitting any information, +reports, or documents to Commission staff. +120. BDO shall inform its audit professionals of the terms of the Order within ten +business days after entry of the Order. +121. By December 31, 2016, BDO’s CEO shall certify, in writing, compliance with the +undertakings set forth in paragraphs 116 and 120. 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 BDO agrees to provide such evidence. +122. Annual Certifications. With respect to each of the calendar year periods 2017 and +2018, BDO’s chief compliance officer (“CCO”) shall certify that BDO has assessed whether +BDO’s Policies are adequate and sufficient to provide reasonable assurance of compliance with all +relevant Commission regulations and PCAOB standards and rules by, among other things, testing +the firm’s implementation of BDO’s Policies during the twelve (12) months preceding the +certification (“Annual Certification”). The Annual Certification shall describe the nature and + +35 +scope of BDO’s testing. The Annual Certification shall represent that the CCO has reviewed and +evaluated the firm’s assessment and testing process and that, based on belief and after reasonable +inquiry, the CCO believes that BDO’s Policies are adequate and sufficient to provide reasonable +assurance of compliance with all relevant Commission regulations and PCAOB standards and +rules. If the CCO cannot represent that BDO’s Policies are adequate and sufficient, then the CCO +shall describe in reasonable detail the reasons for the inability to so certify. The CCO shall provide +the Annual Certifications to the Commission’s staff within sixty days of the end of the annual +period. BDO shall preserve and retain all documentation regarding the CCO’s Annual +Certification for seven (7) years and will make it available to the staffs of the Commission or the +PCAOB upon request. +123. All reports and certifications mentioned in these undertakings shall be submitted to +Wendy Tepperman, Assistant Regional Director, Division of Enforcement, Securities and +Exchange Commission, 200 Vesey Street, New York, NY 10281, with a copy to the Office of +Chief Counsel of the Enforcement Division. +124. 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. +125. In determining whether to accept BDO’s Offer, the Commission has considered +these undertakings. BDO agrees that if the Division of Enforcement believes that BDO has not +satisfied these undertakings, it may petition the Commission to reopen the matter to determine +whether additional sanctions are appropriate. +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in the Respondent’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, BDO shall cease and desist from +committing or causing any violations and any future violations of Sections 10A and 13(a) of the +Exchange Act and Rule 13a-1 thereunder. + +B. BDO is censured. + +C. BDO shall comply with the undertakings enumerated in Section III.J. above. + +D. BDO shall within 14 days of the entry of this Order, pay disgorgement of +$536,000 and prejudgment interest of $76,000, to the 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 SEC Rule of Practice +600. + +36 + +E. BDO shall within 14 days of the entry of this Order, pay a civil money penalty of +$1,500,000 to the 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. § 3717. + +F. Payments ordered in paragraphs D and E above 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 +BDO as a Respondent in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Timothy Casey, New York Regional Office, +Securities and Exchange Commission, 200 Vesey Street, New York, NY 10281-1022. + + 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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3693.pdf b/raw/aaer/2015/AAER-3693.pdf new file mode 100644 index 0000000000000000000000000000000000000000..dc6d630ee189d2dc2fd628dbadd7843f0eef1541 --- /dev/null +++ b/raw/aaer/2015/AAER-3693.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:28497caa7748e72849025424a0d96eb46ddfa24e48882bc5aefa9fd4cbc15112 +size 139433 diff --git a/raw/aaer/2015/AAER-3693.txt b/raw/aaer/2015/AAER-3693.txt new file mode 100644 index 0000000000000000000000000000000000000000..0b3c3faa0c6069de982c97be01dc7be4cee7d53d --- /dev/null +++ b/raw/aaer/2015/AAER-3693.txt @@ -0,0 +1,84 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75907 / September 11, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3693 / September 11, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16808 + + +In the Matter of + +STEVEN M. DOMBROWSKI, CPA + +Respondent. + + + + +ORDER OF SUSPENSION PURSUANT +TO RULE 102(e)(2) OF THE +COMMISSION’S RULES OF PRACTICE + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate to issue an +order of forthwith suspension of Steven M. Dombrowski (“Respondent” or “Dombrowski”) +pursuant to Rule 102(e)(2) of the Commission’s Rules of Practice [17 C.F.R. § 201.102(e)(2)].1 + +II. + + The Commission finds that: + + 1. Dombrowski, age 50, resides in Chicago, Illinois. Dombrowski received a +Certified Public Accountant (“CPA”) certificate in the State of Illinois. After 2006, Dombrowski +continued to hold himself out as a CPA despite not being licensed or registered as a CPA with the +State of Illinois. + + 2. On July 15, 2015, a judgment of conviction was entered against Dombrowski in +United States v. Steven M. Dombrowski, case no. 1:14-CR-00041 in the United States District +Court for the Northern District of Illinois, finding him guilty of one count of securities fraud by +insider trading in the securities of Dombrowski’s former employer, Allscripts Healthcare + +1 Rule 102(e)(2) provides in relevant part that “any person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before +the Commission.” + 2 +Solutions, Inc., in violation of Title 15, U.S.C. Sections 78j(b) and 78ff(a), and Title 17 C.F.R. +Section 240.10b-5. + + 3. As a result of this conviction, Dombrowski was sentenced to 12 months and 1 day +imprisonment, to be followed by two years of supervised release, and ordered to forfeit $286,211 +as proceeds of his crime. + +III. + + In view of the foregoing, the Commission finds that Dombrowski has been convicted of a +felony within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + + Accordingly, it is ORDERED, that Steven M. Dombrowski is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. + + + By the Commission. + + + + + + + Brent J. Fields + Secretary + +. + + + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3694.pdf b/raw/aaer/2015/AAER-3694.pdf new file mode 100644 index 0000000000000000000000000000000000000000..033b2924e33b2994d0219cc44665b37e60ea9134 --- /dev/null +++ b/raw/aaer/2015/AAER-3694.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9fe1e1abe4866189e7c373ffb43dd658672fdaa71285337cafc41d514e9c9a07 +size 167024 diff --git a/raw/aaer/2015/AAER-3694.txt b/raw/aaer/2015/AAER-3694.txt new file mode 100644 index 0000000000000000000000000000000000000000..fd58f0da484c72b41575c226b07b6a9202b4f838 --- /dev/null +++ b/raw/aaer/2015/AAER-3694.txt @@ -0,0 +1,105 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75920 / September 15, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3694 / September 15, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16809 +____________________________________ + : ORDER INSTITUTING PUBLIC +In the Matter of : ADMINISTRATIVE PROCEEDINGS + : PURSUANT TO RULE 102(e) OF THE +WILFRED ROBERT SUTCLIFFE, : COMMISSIONS RULES OF PRACTICE, + : MAKING FINDINGS, AND IMPOSING +Respondent. : 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 Wilfred Robert +Sutcliffe (“Respondent” or “Sutcliffe”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + + + + + + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + +The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . +suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by +any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from +violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + + +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over him and the subject matter of +these proceedings, and the findings contained in Section III.3 below, which are admitted, +Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant +to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. +On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Wilfred Robert Sutcliffe, age 52, is a citizen and resident of the United +Kingdom. From April 2004 until May 2012, Sutcliffe was the Finance Director for Computer +Sciences Corporation (CSC)’s multi-billion-dollar contract with the United Kingdom’s +National Health Service (“the NHS Contract”), to build and deploy an electronic patient +records system across the UK. Sutcliffe studied accounting and business finance at +Manchester University. He is a fellow of the Charted Institute of Management Accountants +(CIMA) in the United Kingdom. + +2. CSC, a Nevada corporation headquartered in Falls Church, Virginia, +sells information technology services. At all relevant times, CSC’s common stock traded on +the New York Stock Exchange. + +3. On June 5, 2015, the Commission filed a complaint in the United States +District Court for the Southern District of New York against Sutcliffe in Securities and +Exchange Commission v. Wilfred Robert Sutcliffe, Civil Action Number 15-cv-4340 (RJS). +On September 9, 2015, the court entered an order permanently enjoining Sutcliffe, by consent, +from future violations of Section 17(a) of the Securities Act of 1933 (the “Securities Act”) and +Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (the “Exchange Act”) and +Rules 10b-5(a) and (c) and 13b2-1 promulgated thereunder, and from aiding and abetting +violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 13a-1 and +13a-13 promulgated thereunder. Sutcliffe was also barred from acting as an officer or director +of any public company pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of +the Exchange Act and ordered to pay $6,003.33 in disgorgement and $1,060.62 in prejudgment +interest. + +4. The Commission’s complaint alleged that, in September 2009, Sutcliffe +manipulated CSC’s accounting model for the NHS Contract to maintain a 16% profit margin +after learning that the contract was likely to generate a loss. This allowed CSC to report $221 +million in operating profit in Q2FY2010. But for Sutcliffe’s fraudulent acts, the company + +would have reported a materially lower amount for that quarter, and for fiscal year 2010. + +IV. +In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanction agreed to in Respondent Sutcliffe’s Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Sutcliffe is suspended from appearing or practicing before the Commission as an +accountant. + +By the Commission. + + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3695.pdf b/raw/aaer/2015/AAER-3695.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f42a17c366cfdbedfef3585d23b1ef540faea3a9 --- /dev/null +++ b/raw/aaer/2015/AAER-3695.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:1be1e8db4519f5698b099c1355df52e926c5eb79591dcd4bd867c240c644b5a6 +size 156044 diff --git a/raw/aaer/2015/AAER-3697.pdf b/raw/aaer/2015/AAER-3697.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5f7e6a2f4ccc5592214493c21ee42c3579842d23 --- /dev/null +++ b/raw/aaer/2015/AAER-3697.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:6135b6282318d1742857071626a9981f56d876c55f0a5e3181633b971be69f39 +size 278023 diff --git a/raw/aaer/2015/AAER-3698.pdf b/raw/aaer/2015/AAER-3698.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b9f4d85aa53815cee471108197df6d1f9194394a --- /dev/null +++ b/raw/aaer/2015/AAER-3698.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:debf0ed4966d496090874e504cac751de1a21fb12e5ee860c28b5e11100e7769 +size 308845 diff --git a/raw/aaer/2015/AAER-3698.txt b/raw/aaer/2015/AAER-3698.txt new file mode 100644 index 0000000000000000000000000000000000000000..9c99f208f338a47a30e858e58b8908d21b91f3ca --- /dev/null +++ b/raw/aaer/2015/AAER-3698.txt @@ -0,0 +1,1063 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9915 / September 17, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75944 / September 17, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3698 / September 17, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16820 + + + + +In the Matter of +TERRY L. JOHNSON, CPA, +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 4C1 and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”), and Rule 102(e)(1)(ii) and (iii) of the + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + + +2 + +Commission’s Rules of Practice against Respondent Terry L. Johnson, CPA (“Johnson” or +“Respondent”).2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over him and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondent +consents to the entry of this Order Making Findings And Imposing Remedial Sanctions Pursuant +to Section 8A of the Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act +of 1934, and Rules 102(e) of the Commission’s Rules of Practice and a Cease-and-Desist Order, +as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that:3 + +A. SUMMARY + +1. Respondent, Terry L. Johnson, a Casselberry, Florida-based certified public +accountant, who performed highly deficient and fraudulent audits and quarterly reviews of the +financial statements of at least eight issuer clients and issued audit reports containing materially +false statements on these annual financial statements. These audit reports were included in the +issuers’ filings under the Exchange Act or in registration statements under the Securities Act. +Specifically, Johnson issued audit reports with unqualified opinions on the December 31, 2012 +and 2013 fiscal year-end financial statements included in the Form 10-K annual reports of six +clients, including Boreal Water Collection, Inc., Monster Arts, Inc., Primco Management, Inc., + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or willfully aided +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + +3 + +Puissant Industries, Inc., UMED Holdings, Inc., and Valley High Mining Company, and for +inclusion in Form S-1 registration statements of two clients, including ADM Endeavors, Inc. and +Legendary Ventures Inc. (collectively the “Eight Issuers”). + +2. Johnson’s numerous audit deficiencies included, among other things, the failure to +obtain engagement quality reviews, properly plan audits, obtain sufficient appropriate audit +evidence, and maintain audit documentation. Johnson’s audits were so deficient that they +amounted to no audits at all and could not be relied upon as having afforded him with a +reasonable basis for his opinions regarding the financial statements that he audited. Moreover, +Johnson falsely stated in audit reports that he conducted his audits “in accordance with the +standards of the Public Company Accounting Oversight Board [PCAOB],” when, in fact, his +conduct of the audits did not conform with and violated numerous PCAOB auditing standards. + +3. Johnson also created, or caused to be created, back-dated, artificial audit +documentation for certain audit clients, which he produced to the Commission staff in response +to document subpoenas as a contemporaneous work paper4. In reality, the work papers did not +exist at the time of the actual audits, but were created after Johnson was requested to produce +work papers in connection with the Commission staff’s investigation. + +B. RESPONDENT + +4. Terry L. Johnson, age 56, a resident of Casselberry, Florida operates a self- +named sole-proprietorship accounting firm in Casselberry, Florida. Johnson is a Florida- +licensed CPA. Johnson’s accounting firm, “Terry L. Johnson, CPA, had its PCAOB registration +withdrawn as of July 7, 2015.5 Johnson audited and issued audit reports, purportedly in +accordance with PCAOB standards, for the December 31, 2012 and 2013 year-end financial +statements of the Eight Issuers. + +C. RELEVANT ENTITIES + +5. ADM Endeavors, Inc. (“ADM”) is a Nevada corporation with its principal place +of business in Bismarck, North Dakota. ADM has common stock registered pursuant to Section +12(g) of the Exchange Act and files periodic reports with the Commission pursuant to Section 13 +of the Exchange Act. ADM has filed a Form S-1 registration statement, which became effective +on May 14, 2015. + +6. Boreal Water Collection, Inc. (“Boreal”) is a Nevada corporation with its +principal place of business in Kiamesha Lake, New York. Boreal has common stock registered + +4 The term “work paper” is used in this memorandum interchangeably with, and has the same meaning as, the term +“audit documentation.” +5 On December 17, 2013, Johnson’s accounting firm became a PCAOB-registered firm. On May 14, 2015, Johnson +requested the withdrawal of his firm’s PCAOB registration. + + +4 + +pursuant to Section 12(g) of the Exchange Act and files periodic reports with the Commission +pursuant to Section 13 of the Exchange Act. Boreal’s common stock trades on OTC Link. + +7. Legendary Ventures, Inc. (“Legendary”) is a Nevada corporation with its +principal place of business in Mississauga, Ontario, Canada. Legendary has filed a Form S-1 +registration statement that is currently being reviewed by the Division of Corporation Finance. + +8. Monster Arts, Inc. (“Monster”) is a Nevada corporation with its principal place +of business in San Clemente, California. Monster’s common stock is registered pursuant to +Section 12(g) and files periodic reports with the Commission pursuant to Section 13 of the +Exchange Act. Monster is delinquent in its Exchange Act reporting obligations, having failed to +file its Form 10-K for the fiscal year ended December 31, 2014 and Form 10-Q for the quarter +ending March 31, 2015. Monster’s common stock trades on OTC Link. + +9. Primco Management, Inc. (“Primco”) is a Delaware corporation with its +principal place of business in Seattle, Washington. Primco has common stock registered +pursuant to Section 12(g) of the Exchange Act and files periodic reports with the Commission +pursuant to Section 13 of the Exchange Act. Primco is delinquent in its Exchange Act reporting +obligations, having failed to file its Form 10-Q for the quarter ending March 31, 2015. Primco’s +common stock trades on OTC Link. + +10. Puissant Industries, Inc. (“Puissant”) is a Florida corporation with its principal +place of business in London, Kentucky. Puissant filed periodic reports with the Commission +pursuant to Section 13 and 15(d) of the Exchange Act through December 31, 2014. On +December 31, 2014, Puissant filed a Form 15 to terminate or suspend its duty to file reports with +the Commission. Puissant’s common stock trades on OTC Link. + +11. UMED Holdings, Inc. (“UMED”) is a Texas corporation with its principal place +of business in Fort Worth, Texas. UMED has common stock registered pursuant to Section +12(g) of the Exchange Act and files periodic reports with the Commission pursuant to Section 13 +of the Exchange Act. UMED’s common stock trades on OTC Link. + +12. Valley High Mining Company (“Valley High”) is a Nevada corporation with its +principal place of business in Silverdale, Washington. Valley High has common stock registered +pursuant to Section 12(g) of the Exchange Act and files periodic reports with the Commission +pursuant to Section 13 of the Exchange Act. Valley High’s common stock trades on OTC Link. + +D. FACTS + +13. Johnson was first registered with the PCAOB on December 17, 2013. Within two +months of becoming registered, Johnson acquired eighteen new issuer audit clients. The vast +majority of these audit clients were previously audited by an auditor who was censured and +barred from being an associated person of a registered public accounting firm by the PCAOB in +March 2014. Once the predecessor auditor’s registration was revoked by the PCAOB, Johnson, +who had previously worked for the predecessor auditor, became the new auditor for audit clients +of the predecessor auditor. Out of the eighteen audit clients, at least two were previously audited + +5 + +by a second predecessor auditor, who was also previously sanctioned by the PCAOB in +November 2013. Johnson had no prior experience in serving as an engagement partner for +Commission registrants prior to the numerous engagements that he picked up after the +predecessor auditors were barred by the PCAOB. + +14. For the audits of the Eight Issuers, Johnson falsely stated that he had conducted +his audits in accordance with the standards of the PCAOB. Johnson’s audits were grossly +deficient, evidencing numerous and repeated violations of auditing standards and, among other +things, lacked audit planning, engagement quality reviews, audit documentation, and sufficient +appropriate audit evidence. + +1. Failure to Obtain Engagement Quality Reviews +15. PCAOB Auditing Standard No. 7, Engagement Quality Review, requires an +engagement quality review (“EQR”) and concurring approval of issuance for each audit +engagement and each engagement to review interim financial information. Auditing Standard +No. 7, ¶ 1. To maintain objectivity, the engagement quality reviewer should not make decisions +on behalf of the engagement team or assume any of the responsibilities of the engagement team. +Auditing Standard No. 7, ¶ 7. Johnson repeatedly failed to comply with PCAOB Auditing +Standard No. 7. + +16. Auditing Standard No. 7 allows firms, including sole practitioners such as +Johnson, to engage qualified individuals from outside the firm to serve as the engagement quality +reviewer. Auditing Standard No. 7, ¶ 3. Johnson knew that each of his audit engagements +required an EQR, but failed to obtain an EQR for the December 31, 2012 and 2013 audits of the +financial statements of the Eight Issuers. + +17. Johnson also failed to obtain engagement quality reviews of the March 31 and +June 30, 2014 quarterly reviews of ADM, Boreal Water, Monster, Primco, Puissant, UMED and +Valley High; the March 31, 2014 quarterly review of Legendary. + +2. Lack of Audit Work Papers + +18. Johnson repeatedly violated PCAOB Auditing Standard No. 3, Audit +Documentation, which requires that audit documentation contain sufficient information to enable +an experienced auditor, having no previous connection with the engagement (a) to understand the +nature, timing, extent, and results of the procedures performed, evidence obtained, and +conclusions reached, and (b) to determine who performed the work and the date such work was +completed. Auditing Standard No. 3, ¶ 6, Audit Documentation. If, after the documentation +completion date, an auditor becomes aware, as a result of a lack of documentation or otherwise, +that audit procedures may not have been performed, evidence may not have been obtained, or +appropriate conclusions may not have been reached, the auditor must determine, and if so +demonstrate that, sufficient procedures were performed, sufficient evidence was obtained, and +appropriate conclusions were reached with respect to the relevant financial statement assertions. +To accomplish this, the auditor must have persuasive other evidence, and oral explanations alone +does not constitute persuasive other evidence. Auditing Standard No. 3, ¶ 9, Audit +Documentation. + +6 + + +19. Johnson’s audit work papers related to the December 31, 2012 and 2013 year-end +audits of the Eight Issuers were grossly deficient. The audits consistently failed to include +evidence of the procedures performed, evidence obtained, and conclusions reached with respect +to relevant financial statement assertions. + +a. 2012 Audits + +20. Johnson was engaged to perform a re-audit of the December 31, 2012 year-end +financial statements of six audit clients, including, ADM, Boreal, Legendary, Monster, Puissant, +and UMED, as a result of the PCAOB revoking the registration of the predecessor auditor. +Johnson was required to take full responsibility for the 2012 audits and perform his own audit +work that provided a basis for his opinion on the financial statements.6 Johnson, however, relied +on the predecessor auditor’s audit work to afford a basis for his 2012 audit opinions, without +performing an independent audit. + +21. Johnson’s re-audits of the December 31, 2012 financial statements amounted to +no audits at all, and the information he obtained from any review of the predecessor auditor’s +work papers was insufficient to afford a basis for expressing an opinion on the financial +statements. Significant categories of work papers were either completely absent from the audit +file or consisted of a schedule prepared by the client that detailed the particular account balance, +but contained no other documentation from Johnson such as the procedures performed, evidence +obtained, or conclusions reached. For example, virtually no work papers existed for the Boreal +and Puissant audits. The majority of work papers for the Monster audit only contained a notation +from Johnson indicating that he “traced to w/p in prior auditor file, reviewed procedures.” + +22. Johnson’s 2012 audits of Primco and Valley High (which were not audited by the +predecessor auditor), were lacking in work paper documentation, evidence obtained, or evidence +that he performed audit procedures to reach conclusions with respect to the relevant financial +statement assertions. + +b. 2013 Audits + +23. Johnson’s audit work papers related to the December 31, 2013 year-end audits of +the Eight Issuers were grossly deficient. The audits failed to include evidence of the procedures +performed, evidence obtained, and conclusions reached with respect to relevant financial +statement assertions. For example, for all Eight Issuers, Johnson’s files contained no work +papers related to significant categories of financial statement line items and transactions +including cost of sales, operating expenses, and equity transactions. + +6 If the successor auditor accepts the re-audit engagement, he or she may consider the information obtained from +inquiries of the predecessor auditor and review of the predecessor auditor's report and working papers in planning +the re-audit. However, the information obtained from those inquiries and any review of the predecessor auditor's +report and working papers is not sufficient to afford a basis for expressing an opinion. The nature, timing, and extent +of the audit work performed and the conclusions reached in the re-audit are solely the responsibility of the successor +auditor performing the re-audit. AU 315 ¶ 15, Communication Between Predecessor and Successor Auditors. The +successor auditor should plan and perform the re-audit in accordance with PCAOB standards. AU 315 ¶ 16. + +7 + + +c. Financial Statements and Other Information + +24. In his audits of the December 31, 2012 and 2013 year-end financial statements of +the Eight Issuers, Johnson failed to include work papers that demonstrated that he reconciled +underlying accounting records to the issuers’ financial statements.7 No documentation existed +evidencing procedures performed to obtain audit evidence for the financial statement footnotes +or reconciling the footnotes to supporting documentation. Further, no documentation existed +within the audit files evidencing that Johnson read and considered any of the other information in +the annual audit reports of Boreal, Monster, Primco, Puissant, UMED and Valley High that were +filed with the Commission.8 + +25. For the audit of Primco, for example, Johnson had no copy of the issuer’s Form +10-K (or subsequent amended 10-Ks) in his work papers. Primco subsequently restated its Form +10-K because it later came to Johnson’s attention that the issuer “inadvertently” included among +other things, approximately $1,496,000 in assets on the balance sheet that should not have been +recorded in the company’s books and records. Significantly, as a result of the restatement, +certain amounts reflected in Primco’s original tax footnote should have changed in the restated +filing but were not. Johnson, however, did not review the tax footnote. + +26. In other instances, for the audits of Puissant, UMED and Valley High, Johnson +had a copy of the Commission filing in his work papers which contained no notations or any +other evidence that he reviewed the financial statements contained within those filings. Further, +for the audits of Monster and Boreal, for example, the work papers included a printout of the +issuers’ filings with a header containing the SEC EDGAR internet address, demonstrating that +that the filings were printed from the SEC EDGAR website and inserted in the work papers after +they were filed with the Commission. Therefore, no evidence existed in the work papers +indicating that Johnson reviewed the financial statements or read and considered the other +information contained in those documents before they were filed with the Commission. + +27. Two other clients, ADM and Legendary, had filed a series of amended Form S-1s +with the Commission. The work papers do not contain evidence that Johnson reviewed the +financial statements contained within these filings in order to reconcile them with the underlying +accounting records. The ADM work papers merely contained a copy of the last amended Form +S-1, but no copies of the previous three amended Form S-1s that included his opinions. The +Legendary work papers contained a copy of the first Form S-1 filed, but none of the subsequent + +7 The auditor’s substantive procedures must include reconciling the financial statements with the underlying +accounting records. AS No. 13 ¶ 41, The Auditor’s Responses to the Risks of Material Misstatement. +8 Other information in a document may be relevant to an audit performed by an independent auditor or to the +continuing propriety of his report. The auditor's responsibility with respect to information in a document does not +extend beyond the financial information identified in his report, and the auditor has no obligation to perform any +procedures to corroborate other information contained in a document. However, he should read the other +information and consider whether such information, or the manner of its presentation, is materially inconsistent with +information, or the manner of its presentation, appearing in the financial statements. AU 550 ¶ 04, Other +Information in Documents Containing Audited Financial Statements. + +8 + +amended Form S-1 filings. Legendary’s second amended Form S-1 contained a restatement of +previously issued financial statements and the inclusion of the financial statements of an +additional interim period, but a copy of which was not included in the work papers. + +3. Inappropriate Addition of Documents to Work Papers + +28. PCAOB Auditing Standard No. 3, Audit Documentation requires that prior to the +report release date, the auditor must have completed all necessary auditing procedures and +obtained sufficient evidence to support the representations in the auditor's report. A complete +and final set of audit documentation should be assembled for retention as of a date not more than +45 days after the report release date (documentation completion date). Auditing Standard No. 3, +¶ 15, Audit Documentation. Circumstances may require additions to audit documentation after +the report release date. Audit documentation must not be deleted or discarded after the +documentation completion date; however, information may be added. Any documentation added +must indicate the date the information was added, the name of the person who prepared the +additional documentation, and the reason for adding it. Auditing Standard No. 3, ¶ 16, Audit +Documentation. Johnson repeatedly failed to comply with PCAOB Auditing Standard No. 3. + +29. Johnson failed to document the addition of several documents to the work papers +after the documentation completion date for the Puissant and Primco engagements, as required +by Auditing Standard No. 3, Audit Documentation. To the contrary, Johnson, after receiving a +request for work papers by Commission staff, engaged in a scheme with several of his audit +clients to draft back-dated, fraudulent work papers and create the appearance of having proper +contemporaneous work papers. + +30. For the Puissant audit, the report release date for Johnson’s audit of the +company’s December 31, 2013 year-end financial statements was April 14, 2014.9 In a +September 23, 2014 email from Johnson to the CEO of Puissant, following the staff’s request for +documents, Johnson sent a “management inquiries” work paper and a “SAS 99 fraud +questionnaire” work paper—critical parts of an audit—and asked “can you get these back to me +as soon as possible.” Puissant’s CEO, on that same day, responded “signed documents…” and +attached completed copies of the “management inquiries” and “SAS 99 fraud questionnaire” +work papers. Johnson sent another email to Puissant’s CEO on September 23, 2014 in which he +attached a management representation letter and asked the CEO “can you copy this on to your +letter head and sign and date April 12, 2014.” + +31. For the Primco audit, the report release date for Johnson’s audit of Primco’s +December 31, 2013 year-end financial statements was April 15, 2014.10 In another September +23, 2014 email from Johnson to the CEO of Primco, Johnson wrote, “Could you please fill out +these and get back to me today. I need these for my audit files.” Attached to this email were + +9 No report release date is documented in the work papers. In fact, April 14, 2014 represents the date Puissant’s +Form 10-K was filed with the Commission. Johnson’s audit opinion is also dated April 14, 2014. +10 No report release date is documented in the work papers. April 15, 2014 represents the date Primco’s Form 10-K +was filed with the Commission. + +9 + +blank copies of two documents, a “management inquiries” work paper and a “SAS 99 fraud +questionnaire” work paper, which were to be completed by Primco’s CEO. In another instance, +Primco’s CFO and Johnson worked together to create or alter Johnson’s work papers in +connection with responding to the Commission staff’s document requests. An email dated +September 17, 2014 from Primco’s CFO to its CEO states “…over the last 10 days we have been +in Florida helping Terry [Johnson] with the pcaob review, one of the accounts picked was the +12312013 primco file…so we have been working on this and several other accounts they want to +see…unfortunately when the SEC calls everything else comes to a halt…” + +4. Lack of Sufficient Appropriate Audit Evidence + +32. Johnson repeatedly violated PCAOB Auditing Standard No. 15, Audit Evidence, +which requires that the auditor must plan and perform audit procedures to obtain sufficient +appropriate audit evidence to provide a reasonable basis for his or her opinion. Auditing +Standard No. 15, ¶ 4, Audit Evidence. Sufficiency is the measure of the quantity of audit +evidence. Appropriateness is the measure of the quality of audit evidence, i.e., its relevance and +reliability. To be appropriate, audit evidence must be both relevant and reliable in providing +support for the conclusions on which the auditor's opinion is based. Auditing Standard No. 15, ¶ +5-6, Audit Evidence. Johnson repeatedly failed to comply with Auditing Standard No. 15. + +33. In those instances which Johnson prepared audit work papers, they were +perfunctory and did not contain sufficient and appropriate audit evidence to provide a reasonable +basis for his opinions. The lack of sufficient and appropriate audit evidence is pervasive +throughout the audits for the Eight Issuers. + +a. Valley High – “Mineral Rights” + +34. For the audit of Valley High, Johnson prepared a work paper related to “mineral +rights,” the company’s principal asset, representing 80% and 98% of its total assets at December +31, 2013 and 2012, respectively. The mineral rights represented monies paid by Valley High to +a newly formed joint venture that was going to operate and develop mineral properties in Peru. +In 2013, the joint venture was terminated because Valley High could not access the mining +property. Johnson included a note on the relevant work paper stating that “per agreement all +payments made by VHMC [Valley High] will be returned one year after y/e 12/31/13.” Johnson, +however, failed to obtain any evidence on whether the monies paid by Valley High and included +on the balance sheet would be recovered or returned. Further, once the joint venture was +terminated, the amounts due to Valley High should have been classified as a receivable due to +Valley High. However, Johnson knew that the amount was still misclassified as “mineral rights” +in Valley High’s December 31, 2013 financial statements. + +35. In an email dated September 10, 2014 from Johnson to the CEO of Valley High, +Johnson stated “Also, I need backup for the mineral rights property at 12/31/13…” and “the +mineral rights should have been written off at 12/31/13.”11 This email was sent approximately + +11 The email was sent by Johnson to his client shortly after Johnson received the first document request from the +Commission staff on August 26, 2014. + +10 + +six months after Valley High’s December 31, 2013 Form 10-K was filed with the Commission. +Johnson knew that, by September, Valley High believed that it would not recover the monies +and, thus, would have to write-off the amount in the third quarter of 2014. Valley High’s +September 30, 2014 Form 10-Q, the company’s most recent filing, however, still included the +non-existent asset on its balance sheet. + +b. UMED Audit - “Tea Farm” +36. In 2012, UMED acquired a tea bush farm located in Hawaii for consideration of +5.5 million restricted shares and $278,000 in cash. At December 31, 2012 and 2013, UMED +valued the tea bushes at $750,000, and this item constituted the second largest asset recorded on +the books and records of the company. Notwithstanding its significance, only two work papers +addressed this transaction, including: (1) a “property, plant and equipment” work paper, which +listed the tea bushes as a single line item and included the notation, “traced to original +agreement,” next to this line item; and (2) an undated two sentence memo which stated +“Traveled to Wood Valley to observe existence of ranch. Attached find pictures of the farm as +well as documents that were found online regarding the farm.” The audit evidence Johnson +obtained with respect to financial statement assertions associated with this asset was wholly +inadequate and do not indicate that Johnson did any inspection of or confirmation of the +existence of the tea farm, its tea bushes, facilities and equipment. + +c. Multiple Issuers -- Derivative Liability +37. For the Monster, Primco and Valley High engagements, Johnson failed to obtain +“sufficient appropriate” evidence concerning the recording of “derivative liabilities,” which +generally arise when certain features of convertible debt are required to be accounted for +separately as a derivative financial instrument. Johnson performed no analyses to determine +whether the issuers’ convertible notes, including the potential for recording a related derivative +liability, were appropriately accounted for under Generally Accepted Accounting Principles +(“GAAP”). Nor did Johnson obtain evidence to determine whether the derivative liabilities were +valued correctly or should have even been recorded in the first place. + +38. Monster, for example, recorded an implausibly large derivative liability in the +amount of $21,876,947 on its December 31, 2013 balance sheet that pertained to only $261,000 +in outstanding convertible notes. The derivative liability work papers contained implausible +assumptions, including, for example, a risk-free rate, used to calculate the derivative liability.12 +During the relevant time, the risk-free rate would have been less than 1%, but the rate +documented in the work papers and used in calculating the liability was 10%. Had Johnson +reviewed the company’s footnotes, he would have noted the company disclosed that it was using +risk-free rates of less than 1% in its calculations for valuing stock options. Johnson testified that +he did not understand the risk-free rate assumption used to value the derivative. Thus, the audit +evidence Johnson obtained with respect to financial statement assertions associated with these +liabilities was completely deficient. + + +12 The risk-free rate generally represents the discount rate on short term U.S. Government Treasury Bills. + +11 + + +d. Multiple Issuers – Revenue +39. Johnson consistently failed to obtain sufficient appropriate audit evidence with +respect to his audits of the revenue reported by various issuers. In the Monster 2013 year-end +audit, for example, Johnson did not test revenue because it was “under materiality” even though +it was above the materiality threshold Johnson had calculated for that audit and was in fact +material.13 + +40. For the UMED audit, revenue “testing” consisted of Johnson including a notation +next to the revenue balance on the income statement simply stating that revenue recorded was +the result of the purchase of another entity. The only procedure Johnson performed with respect +to revenue was to trace a sample of individual sales transactions to an “invoice,” “contract” or +“customer file.” The work papers did not provide any information pertaining to how the sample +was determined or the basis for selecting items to “test.” In addition, the work papers did not +provide any details concerning the invoice, contract or file that was examined. Johnson did not +obtain sufficient appropriate evidence pertaining to whether fundamental revenue recognition +criteria had been met. Further, Johnson did not test whether the sales were realized or recorded +in the appropriate period. + +41. For all Eight Issuers, Johnson glossed over the audit testing of revenue and failed +to obtain sufficient appropriate evidence that reported sales did in fact occur. The grossly +deficient audits of revenue combined with the non-existent audits of cost of sales and operating +expenses, resulted in essentially “non-audits” of the Eight Issuers income statements. +Accordingly, based on the foregoing, Johnson failed to comply with PCAOB Auditing Standard +No. 15 for the audits of the Eight Issuers. + +5. Failure to Properly Plan Audits + +42. Johnson repeatedly violated PCAOB Auditing Standard No. 9, Audit Planning, +which requires that planning the audit includes establishing the overall audit strategy for the +engagement and developing an audit plan, which includes, in particular, planned risk assessment +procedures and planned responses to the risks of material misstatement. Auditing Standard No. +9, ¶ 5, Audit Planning. The auditor should develop and document an audit plan that includes a +description of: the planned nature, timing, and extent of the risk assessment procedures; the +planned nature, timing, and extent of tests of controls and substantive procedures; and other +planned audit procedures required to be performed so that the engagement complies with +PCAOB standards. Auditing Standard No. 9, ¶ 10, Audit Planning. The purpose and objective +of planning the audit are the same for an initial audit or a recurring audit engagement. However, +for an initial audit, the auditor should determine the additional planning activities necessary to +establish an appropriate audit strategy and audit plan, including determining the audit procedures +necessary to obtain sufficient appropriate audit evidence regarding the opening balances. +Auditing Standard No. 9, ¶ 19, Audit Planning. Johnson’s audits of the financial statements of +the Eight Issuers violated PCAOB Auditing Standard No. 9. + +13 2013 revenues amounted to $32,568. The materiality threshold Johnson had calculated for this audit was $25,000. + +12 + + +43. The work papers for the Eight Issuers contained the same types of forms, +checklists and questionnaires that amounted to nothing more than superficial planning work +papers for each audit. The veneer of the audit planning work performed is demonstrated by the +fact that the audit planning work papers for four of the issuers contained basic erroneous +information that related to other issuers. For example, some of the planning forms contained the +names of other clients, names of employees from other issuers and/or references to fiscal years +Johnson did not audit. The evidence indicates that Johnson just copied planning documents from +one client to another without taking the time to change or delete incorrect information. + +44. Johnson further failed to establish a materiality level for the 2012 year-end +audits.14 + +45. With the exception of audit clients, Boreal and Primco, Johnson did not meet any +employee of the Eight Issuers or visit their offices. + +46. The “SAS 99 audit planning & risk assessment” work paper for the issuers was +not completed properly.15 Given that Johnson’s clients were microcap issuers and seven were +issued a “going concern” audit opinion, various risk factors were mostly present at each of the +Eight Issuers. The following are examples of such factors that Johnson, inexplicably, indicated +were not present: (1) recurring operating losses; (2) recurring negative cash flows; (3) need to +refinance or obtain additional financing; (4) marginal ability to meet debt obligations; and (5) +management’s net worth threatened. Johnson acknowledged his audit failure in this area, +testifying, “Yeah, they [risk factors] were present. That [the SAS 99 audit planning & risk +assessment] should have been checked yes.” + +47. Further, the planning work papers did not include documentation concerning the +planned nature, timing, and extent of substantive procedures and other planned audit procedures +required to be performed so that the engagement complies with PCAOB standards. In addition, +the work papers did not contain any planning documents concerning the audit procedures +necessary to obtain sufficient appropriate audit evidence regarding the opening balances. In fact, +Johnson’s audit files contained no audit programs for any account balances. + +6. Deficient Interim Reviews + +48. The objective of a review of interim financial information pursuant to AU § 722, +Interim Financial Information, is to provide the accountant with a basis for communicating +whether he or she is aware of any material modifications that should be made to the interim +financial information for it to conform with GAAP. A review consists principally of performing + +14 To plan the nature, timing, and extent of audit procedures, the auditor should establish a materiality level for the +financial statements as a whole that is appropriate in light of the particular circumstances. AS No. 11, ¶ 6, +Consideration of Materiality in Planning and Performing an Audit. +15 This work paper contained a list of factors that might create incentives or pressures for management to commit +fraud. In order to help assess the risk of misstatement due to fraud, the auditor indicates whether each stated factor +is present at the issuer. + +13 + +analytical procedures and making inquiries of persons responsible for financial and accounting +matters, and does not contemplate (a) tests of accounting records through inspection, +observation, or confirmation; (b) tests of controls to evaluate their effectiveness; (c) obtaining +corroborating evidence in response to inquiries; or (d) performing certain other procedures +ordinarily performed in an audit. AU § 722.07. Johnson’s review of the interim financial +information of the Eight Issuers did not meet the standards required of a reviewing accountant by +AU § 722.07, Interim Financial Information. + +49. The accountant should apply analytical procedures to the interim financial +information to identify and provide a basis for inquiry about the relationships and individual +items that appear to be unusual and that may indicate a material misstatement. Analytical +procedures, for the purposes of this section, should include, among other things, comparing the +quarterly interim financial information with comparable information for the immediately +preceding interim period and the quarterly and year-to-date interim financial information with +the corresponding period(s) in the previous year, giving consideration to knowledge about +changes in the entity's business and specific transactions. AU §722.16, Interim Financial +Information. The auditor should also obtain evidence that the interim financial information +agrees or reconciles with the accounting records. AU §722.18, Interim Financial Information. + +50. In each quarterly review work paper file for the Eight Issuers, Johnson included a +half page to one page work paper which constituted his “analytical procedures” for that period. +In all the quarterly review work papers produced to the staff, no balance sheet accounts were +subject to analytical procedures. The analytical procedures applied to the interim income +statement line items were perfunctory and contained no meaningful analysis of variances in +account balances from one period to another. + +51. For example, in one review, Johnson notes that an increase in revenue was due to +“increased outputs.” In another review, Johnson notes that an income statement line item, +“Contract Labor”, decreased because of “less contract labor.” + +52. In many instances, material variances were not investigated. Further, the +analytical procedures pertaining to the income statement accounts did not contain comparisons of +the current interim financial information to the immediately preceding interim period. Because +this comparison was not completed, Johnson did not identify that Primco’s revenue for the three +month period ended March 30, 2014 and June 30, 2014 did not equal the revenue for the six +months ended June 30, 2014. This error is contained in Primco’s June 30, 2014 Form 10-Q. +Finally, in each quarterly review, Johnson failed to obtain evidence that the interim financial +information agreed or reconciled with the accounting records. + +7. Failure to Apply Procedures to Required Supplementary Information + +53. Accounting Standards Codification No. 932, Extractive Activities – Oil and Gas +(formerly FASB Statement No. 69, Disclosures About Oil and Gas Producing Activities), +requires publicly traded entities that have significant oil and gas producing activities to include, +with complete sets of annual financial statements, supplementary disclosures of proved oil and + +14 + +gas reserve quantities, changes in reserve quantities, a standardized measure of discounted future +net cash flows relating to reserve quantities, and changes in the standardized measure. + +54. Required supplementary information differs from other types of information +outside the basic financial statements because the FASB considers the information an essential +part of the financial reporting of certain entities and because authoritative guidelines for the +measurement and presentation of the information have been established. Accordingly, the auditor +should apply certain limited procedures to required supplementary information and should report +deficiencies in, or the omission of, such information. AU § 558.06, Required Supplementary +Information. + +55. Johnson violated AU § 558 by failing to apply certain limited procedures to +required supplementary information with respect to his audits of the December 31, 2012 and +2013 year-end financial statements of Puissant. Johnson failed to undertake any procedures with +respect to the “Supplemental Disclosures about Oil and Gas Producing Activities” contained in +Puissant’s Form 10-K. Johnson claimed to have reviewed a report from the engineer hired by +Puissant to help prepare the supplemental disclosures. However, this report was not in the work +papers and no other evidence exists suggesting Johnson reviewed the report. Among other +things, Johnson should have inquired whether the person who estimated the issuer’s reserve +information had appropriate qualifications and make certain other comparisons and inquiries +related to information contained in the supplemental disclosures. Further, Johnson’s work papers +did not include a copy of the engineer’s report and there is no evidence that Johnson reviewed +this report. + +56. Based on the foregoing, Johnson did not meet the standards required of an audit +by AU § 558, Required Supplementary Information. + +8. Subsequent Events + +57. An independent auditor's report ordinarily is issued in connection with historical +financial statements that purport to present financial position at a stated date and results of +operations and cash flows for a period ended on that date. However, events or transactions +sometimes occur subsequent to the balance-sheet date, but prior to the issuance of the financial +statements, which have a material effect on the financial statements and therefore require +adjustment or disclosure in the statements. These occurrences hereinafter are referred to as +"subsequent events." AU § 560.01, Subsequent Events. Subsequent events require consideration +by management and evaluation by the independent auditor. AU § 560.02, Subsequent Events. +The independent auditor should perform other auditing procedures with respect to the period +after the balance sheet date for the purpose of ascertaining the occurrence of subsequent events +that may require adjustment or disclosure essential to a fair presentation of the financial +statements in conformity with generally accepted accounting principles. AU § 560.12, +Subsequent Events. + +58. In connection with the Valley High 2013 audit, Johnson became aware before his +audit report was released, that a balance sheet entry for “Note receivable” in the amount of +$75,000 was uncollectible as of the date of the balance sheet. Valley High’s 2013 Form 10-K + +15 + +was filed with the Commission on April 15, 2014. Johnson’s work paper concerning the note +receivable was dated March 31, 2014 and indicated that the “Client recorded a receivable for a +payment for services not performed. Pursued matter. Amount written-off in Q1 2014. Passed +adjust since not material to overall presentation in financial statements.” The $75,000 note, +however, was material. It was only one of two assets on the company’s balance sheet and more +than the $1,530 materiality threshold amount Johnson calculated for this audit. The note +receivable, thus, should not have been recorded on Valley High’s December 31, 2013 balance +sheet or, at a minimum, the non-collectability of the note should have been disclosed.16 + +59. Accordingly, Johnson violated AU § 560.02 and § 560.12 by failing to properly +evaluate the subsequent events to determine whether Valley High should adjust or disclose a +non-collectible receivable on its December 31, 2013 balance sheet. + +9. Lack of Due Professional Care + +60. Due professional care is to be exercised in the planning and performance of the +audit and the preparation of the report. AU § 230.01, Due Professional Care in the Performance +of Work. This standard requires the independent auditor to plan and perform his or her work +with due professional care. Due professional care imposes a responsibility upon each +professional within an independent auditor's organization to observe the standards of field work +and reporting. AU § 230.02. The matter of due professional care concerns what the +independent auditor does and how well he or she does it. AU § 230.04. An auditor should +possess "the degree of skill commonly possessed" by other auditors and should exercise it with +"reasonable care and diligence" (that is, with due professional care). AU § 230.05. + +61. Johnson violated AU § 230.01 as evidenced by his repeated audit deficiencies +such as his failure to obtain engagement quality reviews, properly plan audits, obtain sufficient +appropriate audit evidence, and maintain audit documentation. + +10. Failure to Issue Accurate Audit Reports + +62. PCAOB standards require that the auditor’s standard report state that the +financial statements present fairly, in all material respects, an entity’s financial position, results +of operations, and cash flows in conformity with generally accepted accounting principles. This +conclusion may be expressed only when the auditor has formed such an opinion on the basis of +an audit performed in accordance with PCAOB standards. AU § 508.07, Report on Audited +Financial Statements. + +63. Regulation S-X, 17 CFR § 210 et seq., prescribes the qualifications of accountants +and the contents of the accountants’ reports that must be submitted with corporate financial +statements. This regulation defines “audit,” when used in regard to financial statements, to mean + +16 Subsequent events affecting the realization of assets such as receivables and inventories or the settlement of +estimated liabilities ordinarily will require adjustment of the financial statements (see paragraph .03) because such +events typically represent the culmination of conditions that existed over a relatively long period of time. AU +§ 560.07, Subsequent Events. + + +16 + +an examination of the financial statements by an independent accountant in accordance with +generally accepted auditing standards (“GAAS”), as may be modified or supplemented by the +Commission, for the purpose of expressing an opinion thereon.17 17 CFR § 210.1-02(d). +“[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)). 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 Andrew Sims, CPA, Rel. No.34-59584, AAER No. 2950 (Mar. 17, 2009) (settled +action). Johnson failed to comply with PCAOB standards in every audit engagement examined +by the staff. + +64. The culmination of Johnson’s numerous audit deficiencies rendered any +representations that the audits were conducted in accordance with the PCAOB standards +materially false and misleading because the audits were grossly out of compliance. Johnson +made such representations in each of his audit reports for the Eight Issuers, falsely stating that +his audits of the issuers’ financial statements were conducted in accordance with the standards of +the PCAOB. + +E. VIOLATIONS + +1. Johnson’s Deficient Audits Amounted to Securities Fraud and Violations of +Rule 2-02 of Regulation S-X +65. An auditor violates Section 10(b) and Rule 10b-5 thereunder by preparing or +certifying a false audit report that he knew would be included in a Form 10-K. McGann v. Ernst +& Young, 102 F.3d 390, 397 (9th Cir. 1996). Johnson violated the antifraud provisions by issuing +audit reports that falsely stated that his audit were conducted in accordance with PCAOB +standards. In fact, Johnson’s auditing practices were so deficient that the audits amounted to no +audits at all. See, e.g., SEC v. Moore, Lit. Rel. No. 21189A (Aug. 27, 2009) (auditor consented +to an injunction against future violations of Exchange Act Section 10(b) and Rule 10b-5 +thereunder for failure to comply with PCAOB standards where his audits were assisted by high +school graduates hired with little or no education or experience in accounting or auditing); +Norman Stumacher, CPA, Rel. No. 34-58624 (Sept. 23, 2008) (auditor violated Exchange Act +Section 10(b) and Rule 10b-5 thereunder when he falsely claimed his audits were conducted in +accordance with GAAS, GAAP, and professional standards); SEC v. Midgley, Case No. 2:96-cv- +00783 (D. Utah, March 3, 1997) (permanent injunction issued against auditor for violations of +Exchange Act Section 10(b) and Rule 10b-5 thereunder where he committed gross violations of +GAAS). + +66. In Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296 (2011), +the Supreme Court held that persons “with ultimate authority over the statement, including its +content and whether and how to communicate it,” may be held primarily liable for “making” a + +17 These standards include the auditing standards adopted by the PCAOB following passage of the Sarbanes-Oxley +Act of 2002. + +17 + +misleading statement under Section 10(b) and Rule 10b-5(b) Id. at 2302. Accordingly, primary +liability under Rule 10b-5(b) attaches to a person with “ultimate authority” over the fraudulent +statements. + +67. Johnson had ultimate authority over the audit opinions issued in his name, or in +the firm’s name. Johnson is the only person in his firm with the authority to sign the firm’s audit +reports or consent to its inclusion in public filings. Accordingly, under Janus, Johnson is the +“maker” of the statements in the Johnson firm’s audit reports. Thus, Johnson willfully violated +Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, as the knowing “maker” of the +materially false or misleading audit reports included in the Form 10-K filings of six of his audit +clients. + +68. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s reports to state +“whether the audit was made in accordance with generally accepted auditing standards.” +“[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)). Thus, Johnson also willfully violated Regulation S-X Rule 2- +02(b)(1) when he issued his audit reports stating that he had conducted his audits in accordance +with PCAOB standards, when he had not. See In re Andrew Sims, CPA, Rel. No. 34-59584, +AAER No. 2950 (Mar. 17, 2009) (settled action). + +69. Johnson’s audit reports provided public investors with the false impression that +Johnson’s audits of the financial statements included in Form 10-K filings of six issuer clients +(Boreal, Monster, Primco, Puissant, UMED, and Valley High) were in accordance with PCAOB +standards and applicable rules of the Commission and, thus, reliable. For instance, an investor +examining Valley High’s December 31, 2013 financial statements, in the their Form 10-K filed +with the Commission on April 15, 2014, might take comfort in Valley High’s $75,000 note +receivable as an asset that may ultimately provide some liquidity to a company that has no cash +on its balance sheet. + +70. An accounting firm acts "in connection with" securities trading when it produces +an audit report that it knows its client will include in a Form 10-K. McGann v. Ernst & Young, +Id. at 397. At the time Valley High filed its Form 10-K, Valley High’s common stock was +trading on OTC Link. Accordingly, its audited financial statements, which investors rely on, and +Johnson’s materially false certifications thereof, constituted material misstatements in connection +with the purchase or sale of Valley High securities trading on OTC Link. + +71. In addition, Johnson’s materially false audit reports on the financial statements of +Boreal Water, Monster, Primco, Puissant and UMED were in connection with the purchase and +sale of securities of these issuers. Each of these issuers had equity securities trading on OTC +Link or OTC BB at the time the issuers’ respective Forms 10-K were publicly filed. +Accordingly, Johnson willfully violated Section 10(b) of the Exchange Act, Rule 10b-5(b) +thereunder, and Rule 2-02(b)(1) of Regulation S-X. + + +18 + +72. The Commission has charged auditors with violation of Section 17(a) of the +Securities Act where the conduct of an audit was so deficient that it would be knowing or +reckless to assert that the audit was performed in accordance with GAAS. See, e.g., SEC v. +Friehling, Lit. Rel. No. 20959 (Mar. 18, 2009) (charged with violation of antifraud provisions, +including Securities Act 17(a), for among other things, falsely stating in annual audit reports that +he audited Bernard L. Madoff Investment Securities LLC’s financial statements in conformity +with GAAS when, in fact, he performed no meaningful audits); SEC v. Savvides & +Partners/PKF Cyprus, et al., Lit. Rel. No. 19622 (Mar. 22, 2006) (auditor failed to conduct basic +audit procedures or maintain audit work papers). Further, the Commission has taken the broader +view that the three subdivisions of Section 17(a) and Rule 10b-5 should be considered mutually +supportive, rather than mutually exclusive. See In re John P. Flannery, 2014 WL 7145625 *12 +& n.52, Rel. No. 3981 (Dec. 15, 2014) (Commission Opinion) (holding that primary liability +under Rules 10b-5(a) and (c) and Section 17(a)(1) encompasses all “scienter-based, +misstatement-related misconduct”). Establishing violations of Section 17(a)(1) of the Securities +Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, requires proof of +scienter. The scienter of an officer acting on its behalf may be imputed to a corporation. See, +e.g., SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1096-97 nn.16-18 (2d Cir. 1972). + +73. Johnson knowingly consented to the inclusion of his audit reports in Form S-1 +registration statements of ADM and Legendary, filed pursuant to the Securities Act. Registration +statements constitute offering documents disclosing material information, including financial +information, concerning an offering of securities. Filed registration statements, even prior to +effectiveness, are offering documents and may be used to “offer to sell” or “offer to buy” +securities. Securities Act Section 5(c). Johnson’s audit reports in ADM and Legendary Form S-1 +registration statements were in an offer to sell securities. Johnson’s audit reports were materially +false, stating that the financial statements were audited in accordance with PCAOB standards, +when they were not. Such false statements, knowingly made, in an offering of securities +constitute a device, artifice or scheme to defraud, in violation of Section 17(a)(1). Accordingly, +Johnson willfully violated Section 17(a)(1) of the Securities Act. + +2. Johnson Willfully Aided and Abetted and Caused Violations of Exchange +Act Section 13(a) and Rule 13a-1 +74. In administrative proceedings, the Commission may impose sanctions upon any +person that is, was, or would be a cause of a violation, due to an act or omission the person knew +or should have known would contribute to such violation. In order to establish that a person +caused a violation, the Commission has specifically ruled that a showing of negligence will +suffice. KPMG Peat Marwick LLP, 289 F.3d 109 (D.C. Cir. 2002) (negligence is sufficient to +establish ‘causing’ liability under Exchange Act 21C” where the underlying violation is non- +scienter based); see also Rita L. Schwartz, Exch. Act Rel. No. 42684, 2000 SEC LEXIS 737 +(Apr. 13, 2000) (settled case) (“the Commission must prove that the person knew or should have +known that such person’s inaction would contribute to the violation”). For willful aiding and +abetting or causing liability, “”[a] finding of willfulness does not require an intent to violate, but +merely an intent to do the act which constitutes a violation.” In the Matter of Anthony Fields +CPA, Initial Decision Release No. 474, 2012 WL 6042354, at *8 (Dec. 5, 2012). + + +19 + +75. An issuer violates Section 13(a) of the Exchange Act, and Exchange Act Rule +13a-1, when such issuer of registered securities files with the Commission factually inaccurate +annual reports. SEC v. IMC International,Inc., 384 F.Supp. 889, 893 (N.D. Texas), aff’d mem., +505 F.2d 733 (5th Cir 1974), cert. denied sub nom. An issuer violates these provisions if its +filings contains materially false or misleading information. SEC v. Falstaff Brewing Corp., 629 +F.2d 62, 72 (D.C. Cir. 1980). Scienter is not required for a violation of Section 13(a). SEC v. +McNulty, 137 F.3d 732, 741 (2d Cir. 1998). + +76. By not conducting his audits of the financial statements of the six aforementioned +issuers in accordance with the PCAOB standards, Johnson willfully aided and abetted and caused +those issuers to file annual reports with misleading financial statements, in violation of Section +13(a) and Rule 13a-1, in violation of Section 13(a) and Rule 13a-1. + +4. Johnson Engaged in Improper Professional Conduct and May Be Barred +From Practicing or Appearing Before the Commission + +77. Johnson’s, numerous and repeated violations of auditing standards and his +issuances of audit reports that falsely stated that he conducted his audits in accordance with the +standards of PCAOB, when he had not, constituted “improper professional conduct” within the +meaning of Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice (“CRP”). Further, in Johnson willfully violating Securities Act Section 17(a) and +Exchange Act Section 10(b) and Rule 10b-5(b) thereunder, he also engaged in conduct that falls +within the meaning of Exchange Act Section 4C(a)(3) and CRP Rule 102(e)(1)(iii). Exchange +Act Section 4C(a) and CRP Rule 102(e)(1) authorize the Commission to institute administrative +proceedings to determine whether a person has engaged in “improper professional conduct” or +has willfully violated, or willfully aided and abetted and caused violations of, any provisions of +the securities laws and rules issued thereunder, and censure or temporarily or permanently deny +that person of the privilege of appearing or practicing before the Commission. + +78. With respect to persons licensed to practice as accountants, “improper +professional conduct” includes, “intentional or knowing conduct, including reckless conduct that +results in a violation of applicable professional standards.” CRP Rule 102(e)(1)(iv)(A). In +addition, under CRP Rule 102(e)(1)(iv)(B), negligent conduct can constitute “improper +professional conduct” where the negligence involves: + +(1) a single instance of highly unreasonable conduct that results in a violation of +applicable professional standards in circumstances in which an accountant knows, or +should know, that heightened scrutiny is warranted; or +(2) repeated instances of unreasonable conduct, each resulting in a violation of applicable +professional standards, that indicate a lack of competence to practice before the +Commission. +79. “Unreasonable conduct” as used in CRP Rule 102(e)(1)(iv)(B), means ordinary +negligence. See In re Dohan & Co. CPA, et al., Int. Dec. Rel. No. 420, at p. 16 (June 27, 2011). + + +20 + +80. “The Commission defines recklessness under Rule 102(e) to be the same as +recklessness under the antifraud provisions…. Thus, recklessness is ‘an extreme departure from +the standards of ordinary care, . . . which presents a danger of misleading buyers or sellers that is +either known to the [actor] or is so obvious that the actor must have been aware of it.” +Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 Fed. Reg. 57164, 57167 +(Oct. 26, 1998). It is “a lesser form of intent,” “not merely a heightened form of ordinary +negligence.” Id. (internal citations and quotations omitted). + +81. Johnson’s false representations in his audit reports that he had conducted the +audits in accordance with PCAOB standards, when he had not, constituted extreme departure +from the standards of ordinary care and presented a danger of misleading the public about the +fair presentation, in all material respects, of the financial statements he had audited. Johnson +failed to engage in any meaningful audit procedures and violated numerous auditing standards in +his audits of the financial statements of the Eight Issuers. His audits were so deficient that they +amounted to no audits at all. Accordingly, Johnson engaged in reckless “improper professional +conduct” as an accountant within the meaning of CRP Rule 102(e)(1)(iv)(A). + +82. Johnson failed to perform any audit procedures on the valuation of “derivative +liabilities” in the financial statements of Monster, Primco and Valley High. Johnson failed to +obtain sufficient evidence that the “tea bushes” recorded as a $750,000 asset in UMED’s +financial statements, actually existed. These are but a few examples of Johnson’s numerous +violations of auditing standards through negligence, if not willful or reckless disregard of the +standards. The repeated instances of negligent conduct resulting in violations of auditing +standards constitute “improper professional conduct” within the meaning of CRP Rule +102(e)(iv)(B) and shows Johnson’s lack of competence to practice before the Commission as an +accountant. + +83. Willful violations of Exchange Act Section 10(b) and Rule 10b-5(b) thereunder, +Securities Act Section 17(a)(1) and Rule 2-02(b)(1) of Regulation S-X constitute conduct within +the meaning of Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii). + +84. Based on the foregoing, the Commission finds that Johnson willfully violated +Section 10(b) of the Exchange Act, Rule 10b-5(b) thereunder, Section 17(a)(1) of the Securities +Act, and Regulation S-X Rule 2-02(b)(1). + +85. Based on the foregoing, the Commission finds that Johnson willfully aided and +abetted and caused violations of Section 13(a) of the Exchange Act, Rule 13a-1 thereunder. + +86. Based on the foregoing, the Commission finds that Johnson engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice and conduct within the meaning of Exchange Act Section +4C(a)(3) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + + + + + +21 + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Johnson’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Respondent Johnson shall cease-and-desist from committing or causing any +violation and any future violations of Sections 10(b) and 13(a) of the Exchange Act, Rules 10b- +5(b) and 13a-1 promulgated thereunder; Section 17(a)(1) of the Securities Act; and Regulation S- +X Rule 2-02(b)(1). + +B. Respondent Johnson is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. Respondent Johnson shall pay disgorgement of $96,000, plus prejudgment +interest thereon of $3,662. + +D. Respondent Johnson shall pay a civil money penalty of $50,000. + +E. Respondent Johnson shall make the following payments required by Sections +IV.C and IV.D, above, 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), as +follows: + +1. $20,000 on the day of entry of this Order; +2. $64,831 within 180 days of entry of this Order; +3. $64,831, within 360 days of entry of this Order. + +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. Payments must be made in +one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the Commission website at +http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +22 + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +F. Payments by check or money order must be accompanied by a cover letter +identifying Terry L. Johnson 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 simultaneously sent +to Gerald W. Hodgkins, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., N.E., Washington, DC 20549. + +G. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +H. 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 + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3699.pdf b/raw/aaer/2015/AAER-3699.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7d19cdb9badc5dcb8c8d905fd902cb4f18c06ac4 --- /dev/null +++ b/raw/aaer/2015/AAER-3699.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:6546b48dd19fe27c7e2b792aaab57fe78fd8148475f720899e7b88b198865b1e +size 277644 diff --git a/raw/aaer/2015/AAER-3699.txt b/raw/aaer/2015/AAER-3699.txt new file mode 100644 index 0000000000000000000000000000000000000000..6513e27416784415a14e311432ad106aa660c335 --- /dev/null +++ b/raw/aaer/2015/AAER-3699.txt @@ -0,0 +1,913 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9917 / September 18, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75947 / September 18, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3699 / September 18, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16339 + + +In the Matter of + +JOHN BRINER, ESQ., +DIANE DALMY, ESQ., +DE JOYA GRIFFITH, LLC, +ARTHUR DE JOYA, CPA, +JASON GRIFFITH, CPA, +CHRIS WHETMAN, CPA, +PHILIP ZHANG, CPA, +M&K CPAS, PLLC, +MATT MANIS, CPA, +JON RIDENOUR, CPA, and +BEN ORTEGO, 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 DE JOYA GRIFFITH, LLC, ARTHUR DE +JOYA, CPA, JASON GRIFFITH, CPA, AND +PHILIP ZHANG, CPA + +I. + + On January 15, 2015, the Securities and Exchange Commission (“Commission”) deeming +it appropriate, instituted public administrative and cease-and-desist proceedings pursuant to +Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 4C and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), and Rule 102(e) of the Commission’s Rules of Practice +against De Joya Griffith, LLC (“De Joya”), Arthur De Joya, CPA, Jason Griffith, CPA (“Griffith”), +and Philip Zhang, CPA (“Zhang”) (together, “Respondents”). + + +2 + +II. + + Respondents have submitted an Offer of Settlement (the “Offer”), which the Commission +has determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over them and +the subject matter of these proceedings, which are admitted, Respondents consent to the entry of +this Order, as set forth below. + +III. + +On the basis of this Order and Respondents’ Offer, the Commission finds1 that: + +RESPONDENTS +1. De Joya is a registered public accounting firm based in Henderson, Nevada. De +Joya issued audit reports for nine issuers, as further described below. For all relevant times, Arthur +De Joya, Griffith, and Zhang were partners of De Joya. +2. Arthur De Joya, 48, of Las Vegas, Nevada, is a CPA licensed in the state of +Nevada, a partner of De Joya, and has served as a managing partner of De Joya. +3. Griffith, 37, of Las Vegas, Nevada, is a CPA licensed in the state of Nevada, a +partner of De Joya, and was a managing partner of De Joya. +4. Zhang, 40, of Las Vegas, Nevada, is a CPA licensed in the state of Nevada and was +a partner of De Joya. +RELEVANT ENTITIES AND INDIVIDUALS +5. John Briner (“Briner”), 35, is an attorney and a Canadian citizen who resides in +Vancouver, British Columbia. Briner’s law firm was MetroWest Law Corporation (“MetroWest”). +Briner also controlled Jervis Explorations Inc. (“Jervis”), a British Columbia corporation. In 2010, +to resolve a Commission action against him alleging a pump-and-dump and market manipulation +scheme, Briner consented to the entry of a federal court judgment that enjoined him from violating +the antifraud and securities registration provisions of the federal securities laws; barred him for five +years from participating in penny stock offerings; and ordered him to disgorge ill-gotten gains of +$52,488.32 plus prejudgment interest and pay a civil penalty of $25,000. SEC v. Golden Apple Oil +and Gas, Inc., et al., 09-Civ-7580 (S.D.N.Y.) (HB). The Commission subsequently suspended +Briner from appearing or practicing before it as an attorney, with a right to apply for reinstatement +after five years. John Briner, Exchange Act Release No. 63371, 2010 WL 4783445 (Nov. 24, +2010). +6. Diane Dalmy (“Dalmy”), 58, is an attorney who resides in Denver, Colorado and is + + 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 + +admitted to practice law in Colorado. Dalmy issued opinion letters for the issuers identified below. +7. Jervis is a British Columbia corporation whose sole director is John Briner. Jervis +purportedly sold certain British Columbia mineral claims to each of the issuers, further described +below. +8. La Paz Mining Corp. (“La Paz”) is a Nevada corporation organized in November +2011. On July 19, 2012, La Paz filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in a $20,000 public offering. On +September 25, 2012, La Paz filed an amendment to its Form S-1 registration statement. La Paz’s +registration statement states that it has its principal offices in Peoria, Arizona. + +9. Tuba City Gold Corp. (“Tuba City”) is a Nevada corporation organized in June +2012. On January 2, 2013, Tuba City filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in a $12,000 public offering. Its Form +S-1 states that it has its principal offices in Dundas, Ontario, Canada. + +10. Braxton Resources Inc. (“Braxton”) is a Nevada corporation organized in May +2012. On January 2, 2013, Braxton filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in a $24,000 public offering. Its Form +S-1 states that it has its principal offices in Peoria, Arizona. + +11. Clearpoint Resources Inc. (“Clearpoint”) is a Nevada corporation organized in +May 2012. On January 2, 2013, Clearpoint filed a Form S-1 registration statement with the +Commission seeking to register management’s common shares for resale in a $16,000 public +offering. Its Form S-1 states that it has its principal offices in Peoria, Arizona. + +12. Gold Camp Explorations Inc. (“Goldcamp”) is a Nevada corporation organized in +June 2012. On January 2, 2013, Goldcamp filed a Form S-1 registration statement with the +Commission seeking to register management’s common shares for resale in a $10,000 public +offering. Its Form S-1 states that it has its principal offices in St. Alberta, Alberta, Canada. + +13. Gaspard Mining Inc. (“Gaspard”) is a Nevada corporation organized in May +2012. On January 25, 2013, Gaspard filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in a $20,000 public offering. Its Form +S-1 states that it has its principal offices in Ocala, Florida. + +14. Coronation Mining Corp. (“Coronation”) is a Nevada corporation organized in +May 2012. On January 25, 2013, Coronation filed a Form S-1 registration statement with the +Commission seeking to register management’s common shares for resale in a $30,000 public +offering. Its Form S-1 states that it has its principal offices in Ocala, Florida. + +15. Jewel Explorations Inc. (“Jewel”) is a Nevada corporation organized in May +2012. On January 25, 2013, Jewel filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in a $20,000 public offering. Its Form +S-1 states that it has its principal offices in Winnipeg, Manitoba, Canada. + + +4 + +16. Canyon Minerals Inc. (“Canyon”) is a Nevada corporation organized in May +2012. On January 25, 2013, Canyon filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in a $24,000 public offering. Its Form +S-1 states that it has its principal offices in Salt Lake City, Utah. + +RESPONDENTS CONDUCTED MATERIALLY DEFICIENT AUDITS + Background +17. Beginning in or about November 2011, Briner contacted De Joya to conduct audits +of nine issuers’ financial statements that were to be included in Form S-1 registration statements. +Zhang was the engagement partner for audits of Tuba City, Braxton, Clearpoint, Goldcamp, +Gaspard, Coronation, Jewel, and Canyon (collectively, the “Issuers”). Arthur De Joya was the +engagement quality review partner for audits of Clearpoint and Gaspard. Griffith (together with +Zhang and Arthur De Joya, the “De Joya Partners”) was the engagement quality review partner for +audits of La Paz, Tuba City, Braxton, Goldcamp, Coronation, Jewel, and Canyon. +18. The De Joya Partners knew that Briner did the accounting and created the financial +statements to be used in the Form S-1 registration statements for each of the Issuers. The De Joya +Partners also knew that Briner maintained all of the Issuers’ purported funds “in trust” in an +account Briner controlled (the “Master Trust Account”). +19. Briner and his assistant were the exclusive contacts between De Joya and each +Issuer’s officer. The De Joya Partners did not directly communicate with any of the Issuers’ sole +officers. The De Joya Partners knew that Briner provided all of the information concerning the +Issuers and all of the supporting evidence for their audits. +20. The Issuers two largest transactions consisted of the officer’s purchase of Issuer +stock for $30,000 and the Issuer’s purchase of British Columbia mineral claims for between $7,500 +and $8,500 from Jervis. +21. Zhang conducted the Issuers’ audits, including auditing the above transactions, and +consented to the inclusion of De Joya’s audit report in each of the Issuers’ Form S-1 registration +statements filed with the Commission. De Joya was paid a total of $37,500 in fees for the audits, +including the fee for auditing of La Paz. Each audit report stated that “[w]e conducted our audit in +accordance with the standards of the Public Company Accounting Oversight Board (United +States)” and that the financial statements present the Issuers’ financial position “in conformity with +U.S. generally accepted accounting principles.” As described below, the audit was so deficient that +it amounted to no audit at all, and the De Joya Partners ignored red flags. +Respondents Failed to Detect Red Flags in Accepting +and Continuing with the Issuers as Clients +22. Under PCAOB standard QC Section 20 (System of Quality Control for a CPA +Firm’s Accounting and Auditing Practice) (“QC 20”), “[p]olicies and procedures should be +established for deciding whether to accept or continue a client relationship” and “[s]uch policies +and procedures should provide the firm with reasonable assurance that the likelihood of association + +5 + +with a client whose management lacks integrity is minimized” (at .14). 2 +23. Under PCAOB Auditing Standard No. 12 (Identifying and Assessing Risks of +Material Misstatement) (“AS 12”), auditors should “evaluate whether information obtained from +the client acceptance and retention evaluation process or audit planning activities is relevant to +identifying risks of material misstatement” (¶ 41). +24. Additionally, under PCAOB Auditing Standard No. 7 (Engagement Quality +Review) (“AS 7”), among other things, engagement quality review partners, should “evaluate the +significant judgments made by the engagement team,” (¶ 9) including “consideration of the firm’s +recent engagement experience with the company and risks identified in connection with the firm’s +client acceptance and retention process” (¶ 10 a.). +25. Finally, auditors must meet PCAOB standard AU Section 230 (Due Professional +Care in the Performance of Work) (“AU 230”), which requires that auditors “exercise professional +skepticism” (at .07), “consider the competency and sufficiency of the evidence” (at .08), and +“neither assume[] that management is dishonest nor assume[] unquestioned honesty” (at .09). +26. De Joya’s client acceptance policies and procedures in effect at the time it accepted +the Issuers as clients required very little. De Joya’s policy instructed its staff to “confirm +individuals” and, if there was something to report, to “summarize findings, site [sic] sources, and +email Partner.” In practice, such check consisted of a simple Internet search. +27. Zhang failed to sufficiently question or otherwise investigate the Issuers’ +management, which would have revealed Briner’s undisclosed role as a control person. Nor did he +conduct a background check of Briner or Dalmy, which at minimum would have turned up, among +other things, the Commission’s complaint alleging fraud and suspension order against Briner, and +that Briner had been on the OTC Market’s Prohibited Attorney List since March 15, 2006, and that +Dalmy had also been on the list since September 25, 2009. +28. Additionally, De Joya’s client acceptance policies and procedures failed to detect +clues that should have raised concerns. Upon referring the Issuers, Briner’s assistant provided De +Joya with the names of the officers, the inception dates, and the year-end dates for each of the +Issuers. From this, De Joya was on notice that two of the officers controlled four Issuers. De Joya +was also on notice that seven of the nine Issuers were incorporated on the same day or within one +day of each other (May 31, 2012 or June 1, 2012). +29. This information should have at least caused De Joya and Zhang to question why +the Issuers’ dates of incorporation appeared to be coordinated. Zhang failed to ask any questions +with respect to this information. +30. For the above reasons, De Joya’s client acceptance policies and procedures failed to +meet QC 20 and, in the course of utilizing these procedures during the engagements at issue, +Zhang failed to meet AS 12 and AU 230, and Griffith and Arthur De Joya failed to meet AS 7. + + 2 The PCAOB standards referenced herein are the standards that were in effect during the +time of relevant conduct. + +6 + +Zhang Failed to Obtain an Understanding of the Issuers +31. Under AS 12, auditors should “obtain an understanding of the company and its +environment . . . to understand the events, conditions, and company activities that might reasonably +be expected to have a significant effect on the risks of material misstatement,” including “[t]he +nature of the company” (¶ 7.b.) and “[t]he company’s objectives and strategies and those related +business risks that might reasonably be expected to result in risks of material misstatement” (¶ +7.d.). Further, obtaining an understanding of the nature of the company includes understanding +“[t]he company’s organizational structure and management personnel; [t]he sources of funding of +the company’s operations and investment activities, including the company’s capital structure[, +t]he company’s operating characteristics, including its size and complexity” (¶ 10), and “an +understanding of internal control includes evaluating the design of controls that are relevant to the +audit and determining whether the controls have been implemented” (¶ 20). +32. Additionally, auditors must meet AU 230, which requires that auditors “exercise +professional skepticism” (at .07) and “should be knowledgeable about the client” and are +responsible for the “supervision of[] members of the engagement team” (.06). +33. Zhang failed to obtain a sufficient understanding of the Issuers. What little +understanding of the Issuers he obtained came almost entirely from draft Form S-1 registration +statements and responses to certain questionnaires from the Issuers, both provided by Briner. +Zhang did not obtain an understanding of the Issuers through direct communication with the +Issuers’ officers. +34. In obtaining an understanding of the Issuers, Zhang did not question the substantial +similarities among the Issuers. The Issuers filed eight nearly identical Form S-1 registration +statements. Using almost exactly the same language, each stated the following: (1) the Issuers are +not blank check companies; (2) the Issuers’ officers purchased Issuer stock for $30,000; (2) the +Issuers purchased British Columbia mineral claims from Jervis; (3) Jervis supplied nearly all the +Issuers’ with their business plans; (4) the officers “solely” control the company; (5) the officers +planned to devote only 4 to 5 hours each week to the business; and (6) the officers have not +inspected the land comprising the mineral claims. +35. Within about a four-week period, Zhang read eight of these registration statements. +Despite this, Zhang did not raise any concern about the similarities among the registration +statements, or perform any enhanced procedures to respond to the level of risk presented. +36. For the above reasons, Zhang failed to meet AS 12 and AU 230. +The De Joya Partners Failed to Adequately Respond to Concerns +that Briner and Dalmy May Have Been Engaging in Fraud +37. In early November 2012, while Zhang was conducting the initial audit for the +Issuers, a De Joya staff member raised concerns to the De Joya Partners, including Griffith and +Arthur De Joya, that Briner and Dalmy may be engaging in fraud with respect to the Issuers. +38. Under QC 20, “policies and procedures should provide the firm with reasonable +assurance that the likelihood of association with a client whose management lacks integrity is + +7 + +minimized” (at .14) and that the firm “[a]ppropriately considers the risks associated with providing +professional services in the particular circumstances” (at .15 b.). +39. Under AS 12, “[t]he auditor’s assessment of the risks of material misstatement, +including fraud risks, should continue throughout the audit. When the auditor obtains audit +evidence during the course of the audit that contradicts the audit evidence on which the auditor +originally based his or her risk assessment, the auditor should revise the risk assessment and +modify planned audit procedures or perform additional procedures in response to the revised risk +assessments” (¶ 74). +40. Further, under PCAOB Auditing Standard No. 13 (The Auditor’s Responses to the +Risks of Material Misstatement) (“AS 13”), “[t]he auditor’s responses to the assessed risks of +material misstatement, particularly fraud risks, should involve the application of professional +skepticism in gathering and evaluating audit evidence [including] . . . modifying the planned audit +procedures to obtain more reliable evidence regarding relevant assertions and (b) obtaining +sufficient appropriate evidence to corroborate management’s explanations or representations +concerning important matters, such as through third-party confirmation, use of a specialist engaged +or employed by the auditor, or examination of documentation from independent sources” (¶ 7). +41. Finally, under AS 7, the engagement quality review partner should “evaluate the +significant judgments made by the engagement team and the related conclusions reached in +forming the overall conclusion on the engagement,” (¶ 9) including “significant risks identified by +the engagement team, including fraud risks” (¶ 10.b.). +42. De Joya and Zhang failed to (a) properly consider the risks associated with the +Issuers’ audits, (b) apply professional skepticism in evaluating audit evidence indicating Briner and +Dalmy may be engaging in fraud, (c) re-evaluate their risk assessments for the Issuers’ audits in +light of such evidence, and (d) regarding Arthur De Joya’s and Griffith’s roles as engagement +quality review partners, appropriately evaluate the engagement teams’ judgments to continue with +the audits without appropriately re-assessing and responding to the risk of fraud in violation of QC +20, AS 12, AS 13, and AS 7. +43. On or about November 5, 2012, a De Joya staff member became concerned that +Briner might be engaging in fraud in connection with the De Joya Issuers. Her concern stemmed +from conversations she had with certain Issuers’ officers in which nearly all her questions about +the Issuers were deferred to Briner. These conversations caused her to conduct an internet search +on Briner. She found, among other things, the Commission’s complaint against him. Additional +searches yielded news articles describing Briner and Dalmy as repeat securities fraud offenders. +44. As a result, the De Joya staff member sent four emails over three days sharing the +negative information she found concerning Briner and Dalmy. First, on November 5, 2012, she +sent Zhang and another De Joya partner, who was reviewing an interim financial statement for La +Paz, an email containing links to the Commission’s complaint against Briner (SEC v. Golden +Apple Oil and Gas, Inc., et al., 09-Civ-7580 (S.D.N.Y.) (HB)) and a Canadian news article stating, +among other things, that the British Columbia Securities Commission issued an order (reciprocal to +the Commission’s order suspending Briner) banning Briner from trading shares in British + +8 + +Columbia or “acting in a management or consultative capacity in any securities related matter.”3 +In the email, she asked Zhang and the other De Joya partner to “review the links” and stated that +she “will call [Zhang] tonight.” +45. Second, that same day, the De Joya staff member sent another email to Zhang and +the other De Joya partner with a link to an article posted on Pumpsanddumps.com stating that +Briner and Dalmy “together and apart, the pair has been involved in dozens of schemes on the +Vancouver market as well as the Pink sheets and OTC Bulletin Board, writing many a dubious +legal opinion resulting in millions of dollars lost by thousands of investors.”4 +46. Third, on November 7, 2012, the De Joya staff member sent yet another email to +Zhang and the other De Joya partner attaching an article about a De Joya client, MoneyMinding +International Corp., and its counsel, Dalmy, who was described as having “a reputation for helping +scoundrel promoters take dubious companies public on the U.S. over-the-counter markets.” The +article also specifically mentions De Joya as having “similarly helped many dubious companies go +public on the bulletin board.”5 +47. Finally, the same day, the De Joya staff member forwarded the email and article to +Griffith stating, “I thought I should forward this to you as well. I was doing research on Diane +Dalmy and John Briner as we are working on some of their jobs and that’s how I can [sic] across +this article.” Griffith then forwarded her email with the attached article to Arthur De Joya without +comment. +48. In light of the negative background the De Joya staff member found and the +officers’ apparent inability to answer questions about the issuers, the staff member found it +suspicious that Briner and Dalmy were working together on eight of the nine issuers that De Joya +was auditing. The staff member discussed her concerns with Zhang. Zhang then discussed the +staff member’s concerns with the other De Joya partner and resolved that Zhang would raise them +with Griffith and Arthur De Joya, which Zhang did. +49. Zhang opened the links in the emails the De Joya staff member sent, printed the +documents, highlighted relevant portions, and brought them to separate face-to-face meetings with +Arthur De Joya and Griffith. At these meetings it was collectively decided that De Joya could +continue with the engagements because Briner was not appearing before the Commission in +violation of his suspension. +50. Zhang and Arthur De Joya each informed the De Joya staff member of this decision +and then continued with the audits without adjusting any audit procedures or taking any additional +precautions in light of the facts they learned about Briner and Dalmy. Zhang ultimately signed + +3 http://www.canadianjusticereviewboard.ca/article-securities%20lawyer.htm + +4 http://www.pumpsanddumps.com/2011/06/all-that-glitters-is-not-greenwood-gold.html + +5 http://blogs.vancouversun.com/2011/03/17/david-baines-two-victoria-startups-wade- +into-bulletin-board-swamp/ + + +9 + +audit reports containing unqualified opinions for the Issuers and Arthur De Joya and Griffith +signed off on the Issuers’ audits as Engagement Quality Review partners without taking any +further action. +51. None of the above purported discussions were documented in any workpaper, or +otherwise, in violation of PCAOB Auditing Standard No. 3 (Audit Documentation) (“AS 3”), +which provides that auditors “must document significant findings or issues, actions taken to +address them (including additional evidence obtained), and the basis for the conclusions reached in +connection with each engagement” (¶ 12). +Zhang Failed to Properly Audit the Issuers’ Cash +52. Under PCAOB standard AU Section 330 (The Confirmation Process) (“AU 330”), +when “information about the respondent’s [i.e., the person or entity from which a confirmation is +requested] competence, knowledge, motivation, ability, or willingness to respond, or about the +respondent’s objectivity and freedom from bias with respect to the audited entity comes to the +auditor’s attention, the auditor should consider the effects of such information on designing the +confirmation request and evaluating the results” and, in circumstances where “the respondent is the +custodian of a material amount of the audited entity’s assets,” the auditor should exercise “a +heightened degree of professional skepticism” and “should consider whether there is sufficient +basis for concluding that the confirmation request is being sent to a respondent from whom the +auditor can expect the response will provide meaningful and appropriate audit evidence” (at .27). +53. Additionally, under PCAOB Auditing Standard No. 15 (Audit Evidence) (“AS +15”), “[t]he auditor must plan and perform audit procedures to obtain sufficient appropriate audit +evidence to provide a reasonable basis for his or her opinion” (¶ 4). To be appropriate, audit +evidence must be both relevant and reliable in providing support for the conclusions on which the +auditor’s opinion is based. “The reliability of evidence depends on the nature and source of the +evidence and the circumstances under which it is obtained” (¶ 8). Under AS 13, “[t]he auditor’s +responses to the assessed risks of material misstatement, particularly fraud risks, should involve the +application of professional skepticism in gathering and evaluating audit evidence” (¶ 7). +54. Zhang exhibited no concern about Briner’s handling of the Issuers’ alleged cash. +Zhang knew that Briner held all of the Issuers’ purported funds in the Master Trust Account and +that none of the Issuers had their own bank account. Zhang also knew that Briner was a +“consultant” to the Issuers and that MetroWest was a law firm. Zhang did not seek any appropriate +audit evidence about what, if any, limitations governed Briner’s use of the cash in his Master Trust +Account. Nor did he ask for a reconciliation between Briner’s Master Trust Account and the +schedules Briner provided purportedly showing how much cash in his account was attributable to +each Issuer. +55. In addition, Zhang violated the above standards by failing to apply professional +skepticism in gathering and evaluating the evidence obtained, such as Briner’s confirmation of +Issuer cash, and consider Briner’s “objectivity and freedom from bias with respect to the audited +entity” in relation to the Issuers’ cash confirmation Briner provided. + +10 + +Zhang Disregarded Red Flags that Briner’s Services to +the Issuers Were Not Given Accounting Recognition +56. Under PCAOB standard AU Section 334 (Related Parties) (“AU 334”), transactions +that are indicative of the existence of related parties include, among other things, “transactions +[that] are occurring, but are not being given accounting recognition, such as receiving or providing +accounting, management or other services at no charge” (at .08(f)). Further, under AS 15, “[i]f +audit evidence obtained from one source is inconsistent with that obtained from another, or if the +auditor has doubts about the reliability of information to be used as audit evidence, the auditor +should perform the audit procedures necessary to resolve the matter and should determine the +effect, if any, on other aspects of the audit” (¶ 29). Finally, auditors must exercise professional +skepticism throughout the course of the engagement consistent with standard AU 230. +57. Zhang failed to question Briner’s fee arrangement with the Issuers. Instead, he +relied on legal confirmation letters from Briner that conflicted on their face with what he knew to +be true about the services Briner provided. +58. These letters each stated that “[a]s of the date of inception and up to the present +date, the [Issuers were] not indebted to us for services and expenses (billed or unbilled) of which +we are aware.” Zhang knew that Briner provided substantial services to the Issuers, such as, +among other things, performing accounting functions (paying expenses and recording +transactions), drafting the Issuers’ registration statements, and preparing the Issuers’ financial +statements for their registration statements. Zhang also knew that the Issuers’ financial statements +and general ledgers did not reflect payment for Briner’s services. Despite this, Zhang did not ask +Briner for any invoices, agreements, engagement letters, or any details about his fee arrangements +with the Issuers. Nor did he conduct any related party analysis. +59. For the above reasons, Zhang failed to meet AU 334, AS 15, and AU 230. +Zhang Disregarded Red Flags that the Issuers’ +Stock Sales to Their Officers Were Shams +60. Under AS 15, “[i]f audit evidence obtained from one source is inconsistent with +that obtained from another, or if the auditor has doubts about the reliability of information to be +used as audit evidence, the auditor should perform the audit procedures necessary to resolve the +matter and should determine the effect, if any, on other aspects of the audit” (¶ 29 ). Under AS 12, +the auditor should obtain “an understanding of the nature of the company include[ing]…the +sources of funding of the company’s operations” (¶ 10) and “[w]hen the auditor obtains audit +evidence during the course of the audit that contradicts the audit evidence on which the auditor +originally based his or her risk assessment, the auditor should revise the risk assessment and +modify planned audit procedures or perform additional procedures in response to the revised risk +assessments” (¶ 74). Further, under AS 14, auditors should consider “[t]he sufficiency and +appropriateness of the audit evidence obtained” (¶ 4.f.). In meeting these standards, auditors must +apply professional skepticism and due care consistent with AU 230. +61. Briner provided De Joya with schedules for each of the Issuers that purportedly +listed all of the Issuer’s transactions (prepared by Briner allegedly reflecting cash attributable to + +11 + +each Issuer from his Master Trust Account). Each appeared to indicate that individuals or entities +named “Hyperion” management, “Luke Pretty,” or “Dhaliwal” supplied the funds to pay for the +officers’ stock purchases. As such, these schedules contradicted the Stock Purchase Agreements, +which all indicated that the officer purchased the Issuer’s stock. +62. For some Issuers, the date listed for the stock purchase was prior to the Issuers’ +incorporation. +63. For others, the date listed for the stock purchase was after the Issuers purchased +their mineral claims, which, if true, raises questions as to how the Issuers were able to finance a +mineral claim purchase before having received the funds necessary to make the mineral claim +purchase. +64. Despite the contradicting evidence regarding who paid for (and owned) the Issuers’ +stock, and when the transactions took place, Zhang took no further action with respect to these +alleged stock purchases. +65. Although Zhang and De Joya staff questioned Briner about who paid for the stock +purchase, they failed to obtain adequate supporting evidence that resolved this issue. In or about +October 2012, De Joya staff requested supporting documentation and a breakdown by Issuer +identifying who paid for the stock. Briner replied that the officers borrowed the funds, not only for +the stock purchase, but also for the Issuers’ mineral claim purchase from Jervis as well. As +support, Briner sent copies of three checks: (1) $300,000 from Jagjit Dhaliwal to MetroWest, (2) +$42,500 from MetroWest to Jervis, and (3) $41,543.75 from an unidentified individual or entity to +Jervis. Briner also stated that the $300,000 was really from an entity called Global Investments +(not Dhaliwal), which purportedly loaned the funds to the officers to incorporate and pay for +company stock. +66. As Briner’s response did not make clear who paid for the stock, the De Joya staff +continued to request a breakdown by Issuer of who paid for the stock purchases (and also for the +mineral claims). The breakdown Briner provided stated that an individual referred to as Luke +Pretty paid $15,000 for the mineral claims allegedly purchased by Goldcamp and Tuba City. And +that Luke Pretty paid $60,000 for Goldcamp’s and Tuba City’s officers’ purchase of company +stock. Global Investments paid the remaining funds to the Issuers. +67. Not satisfied with Briner’s response, on November 27, 2012, Zhang emailed Briner +asking who paid Jervis for the mineral claims stating “we have received contradicting information +for this” and that if it was Global Investments “why [is it] not shown in [the] books.” He also +asked about Luke Pretty. But Briner did not provide any additional supporting documentation. +Nor did Zhang seek clarification from the Issuers’ officers. +68. As a result, Zhang failed to resolve these conflicts or obtain sufficient appropriate +audit evidence to support De Joya’s opinions and therefore violated PCAOB standards AS 15, AS +12, and AU 230. + +12 + +Zhang Disregarded Red Flags that the Issuers’ +Mineral Claim Purchases Were Shams +69. Zhang failed to investigate evidence from Briner that should have caused him to +question the Issuers’ alleged mineral claim purchases from Jervis. +70. During the audits, Zhang sought information about Briner’s relationship with +Jervis, in part because all of the Issuers purchased their mineral claims from Jervis. On or about +October 25, 2012, Zhang participated in a conference call with Briner to discuss the issue. +Following the call, Briner provided a letter dated October 26, 2012 stating that he “is only a +director of Jervis Explorations Inc. [and a]s such he neither holds any ownership interests in that +company nor is he involved in any decision making process of Jervis Explorations Inc.” Learning +that Briner was a director of Jervis and knowing that Briner played a substantial role in the Issuers’ +affairs should have caused Zhang to obtain evidence to corroborate Briner’s assertions regarding +the Issuers’ mineral claim purchases from Jervis. +71. Zhang, therefore, violated AU 334 (because Briner appeared to control Jervis and +Zhang failed to, among other things, “review the extent and nature of business transacted with +[Jervis] for indications of previously undisclosed relationships” (.08(e))) and AS 13, which states +that “[t]he auditor’s responses to the assessed risks of material misstatement, particularly fraud +risks, should involve the application of professional skepticism in gathering and evaluating audit +evidence.” (¶ 7) Zhang also violated AS 15, AS 12, and AU 230 for failing to resolve the conflict +between Briner’s role as a director of Jervis and his statement that he is not involved in Jervis’s +decision making. +Zhang Failed to Resolve Discrepancies in the Audit +Evidence Supporting the Officers’ Fees +72. Zhang accepted evidence that purported to support the officers’ fees that did not in +fact provide support. In some instances the evidence also was inconsistent with the schedules for +the Issuers prepared by Briner purportedly reflecting cash attributable to the Issuers in the Master +Trust Account. +73. On or about October 28, 2012, a De Joya staff accountant asked for documents +reflecting the payment of fees to the officers (in the same communication discussed in ¶ 137, +above). The next day, Briner’s assistant sent documents reflecting wire transfers from MetroWest +to, among others, Crown Capital Partners for $6,000 and Strategic Air Consultants for $4,000. +Although Briner’s assistant indicated that the wire to Crown Capital Partners was for La Paz’s +officer (for services to three companies), no other documents made this connection and La Paz’s +officer was not asked whether he was paid his fee. Briner’s assistant did not state which officer +was associated with Strategic Air Consultants, and Zhang did not try to find out. Nonetheless, +Zhang accepted these documents as support for the officers’ fees. +74. Further, the documents reflecting wire transfers from MetroWest to the officers for +Canyon and Clearpoint were not consistent with these Issuers’ schedules. The wire transfers were +as follows: USD $4,000 to Canyon’s officer and C $4,000 to Jewel’s officer. But the schedule +Briner provided for Canyon indicates that its officer was paid USD $3,000, and the schedule for + +13 + +Jewel indicates that its officer was paid USD $3,000 in U.S. currency. Moreover, the wire transfer +documents Briner provided do not indicate when the wire transfers purportedly occurred. The +dates of the transactions listed in the schedules, therefore, cannot be compared with the wire +transfer documents provided. +75. Zhang failed to resolve these conflicts or obtain sufficient appropriate audit +evidence to support De Joya’s opinions and therefore violated AS 15, AS 12, and AU 230. +Zhang and Griffith Failed to Detect Basic Accounting Errors and Inconsistencies +Between the Financial Statements and the Registration Statements +76. Under AU 230, “[a]n auditor should possess ‘the degree of skill commonly +possessed’ by other auditors and should exercise it with ‘reasonable care and diligence’ (that is, +with due professional care)” (at .05). Further, under AS 7, an engagement quality review partner +should “review the financial statements” and “read other information in documents containing the +financial statements to be filed with the Securities and Exchange Commission . . . and evaluate +whether the engagement team has taken appropriate action with respect to any material +inconsistencies with the financial statements or material misstatements of fact of which the +engagement quality reviewer is aware” (¶ 10 f. and g.). +77. During the audits and engagement quality reviews, Zhang and Griffith failed to +detect basic mistakes in the Issuers’ financial statements and inconsistencies between the financial +statements and information contained in other parts of the registration statements as reflected in the +chart under Appendix A. +78. Mistakes in the financial statements include, among other things, balance sheets +that do not foot and conflicts between balance sheets and the notes to the financial statements. +Inconsistences between the financial statements and other information in the registration +statements include, among other things, the disclosure of a net loss in the registration statement that +conflicts with what should be the same disclosure in the Statement of Operations in the financial +statements. These errors may constitute material misstatements and reflect Zhang and Griffith’s +apparent lack of due care in conducting their audits and engagement quality reviews, respectively. +79. For the reasons contained in the chart under Appendix A, Zhang failed to meet AU +230 and Griffith failed to meet AU 230 and AS 7. +RESPONDENTS VIOLATED SECTION 17(a) OF THE SECURITES ACT, RULE 2-02 OF +REGULATION S-X, AND ENGAGED IN IMPROPER PROFESSIONAL CONDUCT + +80. De Joya falsely stated in its audit reports filed with each of the nine issuers’ +registration statements that they “conducted [their] audit in accordance with the standards of the +Public Company Accounting Oversight Board (United States)” and that the financial statements +present the Issuers’ financial positions “in conformity with U.S. generally accepted accounting +principles.” Zhang signed or consented to the filings of these audit reports and Authur De Joya and +Griffith provided concurring approval of issuance. +81. Additionally, De Joya and the De Joya Partners failed to meet the PCAOB +standards discussed herein. + +14 + +82. For these false reports, De Joya and the De Joya Partners collected a total of +$37,500 in fees. +83. De Joya and the De Joya Partners knew, or were reckless in not knowing, that each +of the Issuers for which they provided audit reports was a device, scheme, or artifice to defraud in +violation of Section 17(a)(1) of the Securities Act. Further, by providing such reports, De Joya and +the De Joya Partners acted unreasonably and caused the Issuers’ violations of Sections 17(a)(1), +(2), and (3) of the Securities Act. De Joya and the De Joya Partners also violated Sections 17(a)(2) +and (3) of the Securities Act by falsely claiming that their audits complied with PCAOB standards. +84. Additionally, for failing to meet the PCAOB audit standards identified above in +auditing the Issuers, De Joya and the De Joya Partners engaged in improper professional conduct +pursuant to the Commission’s Rules of Practice Rule 102(e)(1)(ii) by each engaging in at least one +instance of highly unreasonable conduct or at least two instances of unreasonable conduct under +Rule 102(e)(1)(iv). Further, De Joya violated Rule 2-02(b)(1) of Regulation S-X by providing +audit reports included in the Issuers’ Form S-1 Registration statements that falsely state that the +Issuers’ audits were made in accordance with PCAOB standards. The De Joya Partners caused De +Joya’s violations of Rule 2-02(b)(1) of Regulation S-X by consenting to the filing of these audit +reports. +85. Further, as described above, De Joya and the De Joya Partners willfully violated +Sections 17(a)(1), (2), and (3) of the Securities Act thereby engaging in conduct subject to the +Commission’s Rules of Practice Rule 102(e)(1)(iii). +COMMISSION FINDINGS +Based on the foregoing, the Commission finds that: +A. Respondents willfully violated Sections 17(a)(1), (2), and (3) of the Securities Act; +B. Respondents engaged in improper professional conduct pursuant to Section +4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice; +C. De Joya violated Rule 2-02(b)(1) of Regulation S-X; +D. the De Joya Partners caused violations of Rule 2-02(b)(1) of Regulation S-X; and +E. Respondents willfully violated Sections 17(a)(1), (2), and (3) of the Securities Act +thereby engaging in conduct subject to Section 4C(a)(3) of the Exchange Act and Practice Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offer. + +Accordingly, pursuant to Section 8A of the Securities Act and Sections 4C and 21C of the +Exchange Act, it is hereby ORDERED that: + +15 + + +A. Respondents shall cease and desist from committing or causing any violations and +any future violations of Sections 17(a)(1), (2), and (3) of the Securities Act and Rule 2-02(b)(1) of +Regulation S-X. +B. Respondent De Joya is denied the privilege of appearing or practicing before the +Commission as an accountant. +C. After five years from the date of this Order, De Joya may request that the +Commission consider its reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as an independent +accountant. Such an application must satisfy the Commission that: +a) De Joya 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. However, if registration with the Board is dependent upon reinstatement by the +Commission, the Commission will consider the application on its other merits; +b) De Joya 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 control system that +would indicate that the respondent will not receive appropriate supervision; +c) De Joya 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) De Joya acknowledges its responsibility, as long as it appears or practices +before the Commission as an independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all requirements relating to registration, +inspections, concurring partner reviews and quality control standards. +D. The Commission will consider an application by De Joya to resume appearing or +practicing before the Commission provided that its 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’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. +E. Respondent De Joya shall pay disgorgement of $37,500.00 and prejudgment interest +of $2,903.79, and a civil penalty of $18,750.00, for a total of $59,153.79, to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3), which shall be paid in the following installments: (1) $14,788.44 +within 10 days of the entry of this Order; (2) $14,788.44 within 120 days of the entry of this Order; +(3) $14,788.44 within 210 days of the entry of this Order; and (4) $14,788.47 within 300 days of +entry of this Order. If timely payment is not made, additional interest shall accrue pursuant to SEC +Rule of Practice 600 or 31 U.S.C. § 3717. + +16 + +F. Respondent Zhang is denied the privilege of appearing or practicing before the +Commission as an accountant. +G. After five years from the date of this Order, Zhang 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: +a) 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 Zhang’s work in his practice before the Commission +will be reviewed either by the independent audit commi ttee 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 +b) an independent accountant. Such an application must satisfy the +Commission that: +i. Zhang, 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; +ii. Zhang, or the registered public acco unting 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 respondent’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; +iii. Zhang 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 +iv. Zhang acknowledges his responsibility, as long as Zhang appears or +practices before the Commission as an independent accountant, to comply with all requirements of +the Commission and the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality control standards. +H. The Commission will consider an application by Zhang 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 Zhang’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. +I. Respondent Zhang shall pay a civil penalty of $25,000.00, to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3), which shall be paid in the following installments: $5,000.00 +within 10 days of the entry of this Order, and $20,000.00 in four installments of $5,000.00 due on +October 1, 2015, January 1, 2016, April 1, 2016, and one year from entry of this Order. If timely + +17 + +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +J. Respondent Griffith is denied the privilege of appearing or practicing before the +Commission as an accountant. +K. After three years from the date of this O rder, Griffith 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: +a) 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 Griffith’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 +b) an independent accountant. Such an application must satisfy the +Commission that: +i. Griffith, 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; +ii. Griffith, 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 Griffith’s or the firm’s quality control system that would indicate that Griffith +will not receive appropriate supervision; +iii. Griffith has resolved all disciplinary issues with the Board, and has +complied w ith all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and +iv. Griffith 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. +L. The Commission will consider an application by Griffith 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 his +application on other merits. The Commission’s review may include consideration of, in addition to +the matters referenced above, any other matters relating to Griffith’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. +M. Respondent Arthur De Joya is denied the privilege of appearing or practicing before +the Commission as an accountant. + +18 + +N. After three years from the date of this O rder, Arthur De Joya 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: +a) 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 Arthur De Joya’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 +b) an independent accountant. Such an application must satisfy the +Commission that: +i. Arthur De Joya , 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; +ii. Arthur De Joya, 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 Arthur De Joya’s or the firm’s quality control system that would indicate +that Arthur De Joya will not receive appropriate supervision; +iii. Arthur De Joya 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 +iv. Arthur De Joya 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. +O. The Commission will consider an application by Arthur De Joya 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 +his application on other merits. The Commission’s review may include consideration of, in addition +to the matters referenced above, any other matters relating to Arthur De Joya’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. +P. Respondent Griffith shall pay a civil penalty of $15,000.00, to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3), which shall be paid in the following installments: $3,000.00 +within 10 days of the entry of this Order, and $12,000.00 in four installments of $3,000.00 due on +October 1, 2015, January 1, 2016, April 1, 2016, and one year from entry of this Order. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +Q. Respondent Arthur De Joya shall pay a civil penalty of $15,000.00, to the Securities + +19 + +and Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3), which shall be paid in the following installments: $3,000.00 +within 10 days of the entry of this Order, and $12,000.00 in four installments of $3,000.00 due on +October 1, 2015, January 1, 2016, April 1, 2016, and one year from entry of this Order. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +R. Payment of disgorgement and civil penalties as described herein 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 the +Respondent by name in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Lara Shalov Mehraban, Division of +Enforcement, Securities and Exchange Commission, 200 Vesey Street, NY 10281. + +S. The Division of Enforcement (“Division”) may, at any time following the entry of +this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent +provided accurate and complete financial information at the time such representations were made; +and (2) seek an order directing payment of disgorgement and pre-judgment interest. No other issue +shall be considered in connection with this petition other than whether the financial information +provided by Respondent was fraudulent, misleading, inaccurate, or incomplete in any material +respect. Respondent may not, by way of defense to any such petition: (1) contest the findings in this +Order; (2) assert that payment of disgorgement and interest should not be ordered; (3) contest the +amount of disgorgement and interest to be ordered; or (4) assert any defense to liability or remedy, +including, but not limited to, any statute of limitations defense. + +T. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To preserve +the deterrent effect of the civil penalty, Respondents agree that in any Related Investor Action, they +shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondents’ payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, + +20 + +Respondents agree that they shall, within 30 days after entry of a final order granting the Penalty +Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty Offset to +the Securities and Exchange Commission. Such a payment shall not be deemed an additional civil +penalty and shall not be deemed to change the amount of the civil penalty imposed in this +proceeding. For purposes of this paragraph, a “Related Investor Action” means a private damages +action brought against Respondent by or on behalf of one or more investors based on substantially +the same facts as alleged in the Order instituted by the Commission in this proceeding. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S. C. §523, that 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 + + +21 + +Appendix A + +Issuer Engagement +Partner +EQR +Partner +Audited Financial Statement Errors/ +Conflict Between Audited Financial Statements and Other +Registration Statement Information +Tuba City Zhang Griffith Audited Financial Statement Errors + The Total Liabilities and Stockholders’ Equity amount on the +Balance Sheet on Page F-3 does not foot. It is reported as +$27,325, but the accurately footed amount is $19,825. + The amounts for Net Cash Used in Operating Activities of +$(10,175), Net Cash Used in Investing Activities of $(7,500) and +Net Cash Provided by Financing Activities of $30,000 do not foot +to the amount presented as Increase in Cash on the Statement of +Cash Flows on Page F-6. The amount presented is $19,825, but the +amount accurately footed is $12,325. + Note 3, Acquisition of a Mineral Claim, on Page F-11 discloses +that “the acquisitions costs have been impaired and expensed +during 2012.” The line Mineral property for $7,500 on the Balance +Sheet on Page F-3 and the Statement of Operations on page F-4 +reflect an unimpaired amount. + Note 6, Going Concern on page F-11, discloses that the company +“has incurred a loss of $4,008.” This amount does not match the +Net loss of $10,175 presented on the Statement of Operations on +Page F-4. + Note 7, Income Tax on Page F-11, discloses that the company “has +$4,008 of net operating losses carried forward.” This amount does +not match the Net loss of $10,175 presented on the Statement of +Operations on Page F-4. The SEC staff has not found any audit +workpapers related to income taxes. +Conflicts Between Audited Financial Statements and Other +Registration Statement Information + The Net loss from operations of $4,008 in the Consolidated +Statements of Income under Summary Financial Information on +Page 5 does not match the same line item on the Statement of +Operations on Page F-4 of $(10,175). The period for the $4,008 +amount, however, was not specified. + The accounts payable amount of $1,333 in the Balance Sheet Data +under Summary Financial Information on Page 5 does not match +the same line item on the Balance Sheet on Page F-3, which is $0. + The deficit accumulated during exploration period amount of +$(4,008) in the Balance Sheet Data under Summary Financial +Information on Page 5 does not match the same line item on the +Balance Sheet on Page F-3, which is $(10,175). +Canyon Zhang Griffith Audited Financial Statement Error + The Stockholder’s Equity section of the Balance Sheet does not +foot. The amount reported is $25,325, but the accurate footing is +$24,325. + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3700.pdf b/raw/aaer/2015/AAER-3700.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9cf6a84325f0f65a5b8c77d7669b0546aeaa2048 --- /dev/null +++ b/raw/aaer/2015/AAER-3700.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:063c0962f5acc0f1f433d383a321d6c64d97e3a70c3a29c5c90eaafc66dc3c1a +size 267515 diff --git a/raw/aaer/2015/AAER-3700.txt b/raw/aaer/2015/AAER-3700.txt new file mode 100644 index 0000000000000000000000000000000000000000..88a2c221f14d53d5c027f4c11946ffc2bcac33c8 --- /dev/null +++ b/raw/aaer/2015/AAER-3700.txt @@ -0,0 +1,892 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9918 / September 18, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75948 / September 18, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3700 / September 18, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16339 + + +In the Matter of + +JOHN BRINER, ESQ., +DIANE DALMY, ESQ., +DE JOYA GRIFFITH, LLC, +ARTHUR DE JOYA, CPA, +JASON GRIFFITH, CPA, +CHRIS WHETMAN, CPA, +PHILIP ZHANG, CPA, +M&K CPAS, PLLC, +MATT MANIS, CPA, +JON RIDENOUR, CPA, and +BEN ORTEGO, 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 M&K CPAS, PLLC, MATT MANIS, CPA, +AND JON RIDENOUR, CPA + +I. + + On January 15, 2015, the Securities and Exchange Commission (“Commission”) deeming +it appropriate, instituted public administrative and cease-and-desist proceedings pursuant to +Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 4C and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), and Rule 102(e) of the Commission’s Rules of Practice +against M&K CPAS, PLLC (“M&K”), Matt Manis, CPA (“Manis”), and Jon Ridenour +(“Ridenour”) (together, “Respondents”). + + +2 + +II. + + Respondents have submitted an Offer of Settlement (the “Offer”), which the Commission +has determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over them and +the subject matter of these proceedings, which are admitted, Respondents consent to the entry of +this Order, as set forth below. + +III. + +On the basis of this Order and Respondents’ Offer, the Commission finds1 that: + +RESPONDENTS +1. M&K is a registered public accounting firm based in Houston, Texas. M&K +issued audit reports for eleven issuers described further below. +2. Manis, 53, of Houston, Texas, is a CPA licensed in the state of Texas and a partner +of M&K. +3. Ridenour, 37, of Houston, Texas, is a CPA licensed in the state of Texas and a +partner of M&K. +RELEVANT ENTITIES AND INDIVIDUALS +4. John Briner (“Briner”), 35, is an attorney and a Canadian citizen who resides in +Vancouver, British Columbia. Briner’s law firm was MetroWest Law Corporation (“MetroWest”). +Briner also controlled Jervis Explorations Inc. (“Jervis”), a British Columbia corporation. In 2010, +to resolve a Commission action against him alleging a pump-and-dump and market manipulation +scheme, Briner consented to the entry of a federal court judgment that enjoined him from violating +the antifraud and securities registration provisions of the federal securities laws; barred him for five +years from participating in penny stock offerings; and ordered him to disgorge ill-gotten gains of +$52,488.32 plus prejudgment interest and pay a civil penalty of $25,000. SEC v. Golden Apple Oil +and Gas, Inc., et al., 09-Civ-7580 (S.D.N.Y.) (HB). The Commission subsequently suspended +Briner from appearing or practicing before it as an attorney, with a right to apply for reinstatement +after five years. John Briner, Exchange Act Release No. 63371, 2010 WL 4783445 (Nov. 24, +2010). +5. Diane Dalmy (“Dalmy”), 58, is an attorney who resides in Denver, Colorado and is +admitted to practice law in Colorado. Dalmy issued opinion letters for the issuers identified below. +6. Jervis is a British Columbia corporation whose sole director is John Briner. Jervis +purportedly sold certain British Columbia mineral claims to each issuer described below. + + 1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 + +7. Stone Boat Mining Corp. (“Stone Boat”) is a Nevada corporation organized in +September 2011. On January 27, 2012, Stone Boat filed a Form S-1 registration statement with the +Commission seeking to register management’s common shares for resale in a $20,000 public +offering. On September 24, 2012 and on October 17, 2012, Stone Boat filed amendments to its +Form S1 registration statement. Stone Boat’s registration statement states that it has its principal +offices in Chihuahua, Mexico. + +8. Goldstream Mining Inc. (“Goldstream”) is a Nevada corporation organized in +November 2011. On August 6, 2012, Goldstream filed a Form S-1 registration statement with the +Commission seeking to register management’s common shares for resale in a $15,000 public +offering. On September 24, 2012 and on October 17, 2012, Goldstream filed amendments to its +Form S1 registration statement. Its registration statement states that it has its principal offices in +Ocala, Florida. + +9. Kingman River Resources. (“Kingman”) is a Nevada corporation organized in +June 2012. On January 31, 2013, Kingman filed a Form S-1 registration statement with the +Commission seeking to register management’s common shares for resale in a $14,000 public +offering. Its registration statement states that it has its principal offices in Dundas, Ontario, +Canada. + +10. Bonanza Resources Corp. (“Bonanza”) is a Nevada corporation organized in June +2012. On January 31, 2013, Bonanza filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in a $18,000 public offering. Its +registration statement states that it has its principal offices in Edmonton, Alberta, Canada. + +11. CBL Resources Inc. (“CBL”) is a Nevada corporation organized in June 2012. On +January 31, 2013, CBL filed a Form S-1 registration statement with the Commission seeking to +register management’s common shares for resale in a $10,000 public offering. Its registration +statement states that it has its principal offices in Panama City, Panama. + +12. Lost Hills Mining Inc. (“Lost Hills”) is a Nevada corporation organized in June +2012. On January 31, 2013, Lost Hills filed a Form S-1 registration statement with the +Commission seeking to register management’s common shares for resale in a $20,000 public +offering. Its registration statement states that it has its principal offices in Panama City, Panama. + +13. Yuma Resources Inc. (“Yuma”) is a Nevada corporation organized in June 2012. +On January 31, 2013, Yuma filed a Form S-1 registration statement with the Commission seeking +to register management’s common shares for resale in a $16,000 public offering. Its registration +statement states that it has its principal offices in St. Albert, Alberta, Canada. + +14. Seaview Resources Inc. (“Seaview”) is a Nevada corporation organized in June +2012. On January 31, 2013, Seaview filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in a $10,000 public offering. Its +registration statement states that it has its principal offices in Sterrett, Alabama. + +15. Chum Mining Group Inc. (“Chum”) is a Nevada corporation organized in June + +4 + +2012. On November 30, 2012, Chum filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in a $20,000 public offering. Its +registration statement states that it has its principal offices in Edmonton, Alberta, Canada. + +16. Eclipse Resources Inc. (“Eclipse”) is a Nevada corporation organized in May +2012. On December 3, 2012, Eclipse filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in an $18,000 public offering. Its +registration statement states that it has its principal offices in Winnipeg, Manitoba, Canada. + +17. PRWC Energy Inc. (“PRWC”) is a Nevada corporation organized in May 2012. +On December 6, 2012, PRWC filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in a $20,000 public offering. Its +registration statement states that it has its principal offices in Salt Lake City, Utah. + +RESPONDENTS CONDUCTED MATERIALLY DEFICIENT AUDITS + Background +18. In or about November 2011, Briner contacted M&K to conduct audits of certain +issuers’ financial statements that were to be included in Form S-1 registration statements. Manis +was the engagement partner for audits of Stone Boat and Goldstream and the engagement quality +review partner for audits of Chum, Eclipse, Kingman, Bonanza, CBL, Lost Hills, Yuma, and +Seaview. Ridenour (together with Manis, the “Audit Partners”) was the engagement partner for +audits of Kingman, Bonanaza, CBL, Lost Hills, Yuma, and Seaview and the engagement quality +review partner for audits of Stone Boat, Goldstream, and PRWC (together with Eclipse and Chum, +the “Issuers”). +19. The Audit Partners knew that Briner did the accounting and created the financial +statements to be used in the Form S-1 registration statements for each of the Issuers. The Audit +Partners also knew that Briner maintained all of the Issuers’ purported funds “in trust” in an +account Briner controlled (the “Master Trust Account”). +20. Briner and his assistant were the exclusive contacts between M&K and each +Issuer’s officer. The Audit Partners did not directly communicate with any of the Issuers’ officers. +The Audit Partners knew that Briner provided all of the information concerning the Issuers and all +of the supporting evidence for their audits. +21. The Issuers two largest transactions consisted of the officer’s purchase of Issuer +stock for $30,000 and the Issuer’s purchase of British Columbia mineral claims for between $7,500 +and $8,500 from Jervis. +22. The Audit Partners conducted the Issuers’ audits, including auditing the above +transactions, and consented to the inclusion of M&K’s audit report in each of the Issuers’ Form S-1 +registration statements filed with the Commission. M&K was paid a total of $49,500 in fees for +the Issuers’ audits. Each audit report stated that “[w]e conducted our audit in accordance with the +standards of the Public Company Accounting Oversight Board (United States)” and that the +financial statements present the Issuers’ financial position “in conformity with U.S. generally + +5 + +accepted accounting principles.” +Respondents Failed to Detect Red Flags in Accepting +and Continuing with the Issuers as Clients +23. Under PCAOB standard QC Section 20 (System of Quality Control for a CPA +Firm’s Accounting and Auditing Practice) (“QC 20”), “[p]olicies and procedures should be +established for deciding whether to accept or continue a client relationship” and “[s]uch policies +and procedures should provide the firm with reasonable assurance that the likelihood of association +with a client whose management lacks integrity is minimized” (at .14). 2 +24. Under PCAOB Auditing Standard No. 12 (Identifying and Assessing Risks of +Material Misstatement) (“AS 12”), auditors should “evaluate whether information obtained from +the client acceptance and retention evaluation process or audit planning activities is relevant to +identifying risks of material misstatement” (¶ 41). +25. Additionally, under PCAOB Auditing Standard No. 7 (Engagement Quality +Review) (“AS 7”), among other things, engagement quality review partners, should “evaluate the +significant judgments made by the engagement team,” (¶ 9) including “consideration of the firm’s +recent engagement experience with the company and risks identified in connection with the firm’s +client acceptance and retention process” (¶ 10 a.). +26. Finally, auditors must meet PCAOB standard AU Section 230 (Due Professional +Care in the Performance of Work) (“AU 230”), which requires that auditors “exercise professional +skepticism” (at .07), “consider the competency and sufficiency of the evidence” (at .08), and +“neither assume[] that management is dishonest nor assume[] unquestioned honesty” (at .09). +27. M&K’s client acceptance policies and procedures in effect at the time it accepted +the Issuers as clients required very little. M&K’s policy called for “background checks on all +significant owners and chief executives.” In practice, such check consisted of a simple Internet +search. +28. The Audit Partners failed to sufficiently question or otherwise investigate the +Issuers’ management, which would have revealed Briner’s undisclosed role as a control person. +Nor did they conduct a background check of Briner or Dalmy, which at minimum would have +turned up, among other things, the Commission’s complaint alleging fraud and suspension order +against Briner, and that Briner had been on the OTC Market’s Prohibited Attorney List since +March 15, 2006, and that Dalmy had also been on the list since September 25, 2009. +29. Additionally, M&K’s client acceptance policies and procedures failed to detect +clues that should have raised concerns. Upon referring the Issuers, Briner’s assistant provided +M&K with the names of the officers, the inception dates, and the year-end dates for each of the +Issuers. From this, M&K was on notice that two of the officers controlled four Issuers. M&K was +also on notice that seven of the eleven Issuers were incorporated on the same day or within one day +of each other (May 31, 2012 or June 1, 2012). + + 2 The PCAOB standards referenced herein are the standards that were in effect during the +time of relevant conduct. + +6 + +30. This information should have at least caused M&K and the Audit Partners to +question why the Issuers’ dates of incorporation appeared to be coordinated. The Audit Partners +failed to ask any questions with respect to this information. +31. For the above reasons, M&K’s client acceptance policies and procedures failed to +meet QC 20 and, in the course of utilizing these procedures during the engagements at issue, the +Audit Partners failed to meet AS 7, AS 12, and AU 230. +The Audit Partners Failed to Obtain an Understanding of the Issuers +32. Under AS 12, auditors should “obtain an understanding of the company and its +environment . . . to understand the events, conditions, and company activities that might reasonably +be expected to have a significant effect on the risks of material misstatement,” including “[t]he +nature of the company” (¶ 7.b.) and “[t]he company’s objectives and strategies and those related +business risks that might reasonably be expected to result in risks of material misstatement” (¶ +7.d.). Further, obtaining an understanding of the nature of the company includes understanding +“[t]he company’s organizational structure and management personnel; [t]he sources of funding of +the company’s operations and investment activities, including the company’s capital structure[, +t]he company’s operating characteristics, including its size and complexity” (¶ 10), and “an +understanding of internal control includes evaluating the design of controls that are relevant to the +audit and determining whether the controls have been implemented” (¶ 20). +33. Additionally, auditors must meet AU 230, which requires that auditors “exercise +professional skepticism” (at .07) and engagement partners “should be knowledgeable about the +client” and are responsible for the “supervision of[] members of the engagement team” (.06). +34. The Audit Partners failed to obtain a sufficient understanding of the Issuers. What +little understanding of the Issuers they obtained came almost entirely from draft Form S-1 +registration statements and responses to certain questionnaires from the Issuers, both provided by +Briner. The Audit Partners did not obtain an understanding of the Issuers through direct +communication with the Issuers’ officers. +35. In obtaining an understanding of the Issuers, the Audit Partners did not question the +substantial similarities among the Issuers. The Issuers filed eleven nearly identical Form S-1 +registration statements. Using almost exactly the same language, each stated the following: (1) the +Issuers are not blank check companies; (2) the Issuers’ officers purchased Issuer stock for $30,000; +(2) the Issuers purchased British Columbia mineral claims from Jervis; (3) Jervis supplied nearly +all the Issuers’ with their business plans; (4) the officers “solely” control the company; (5) the +officers planned to devote only 4 to 5 hours each week to the business; and (6) the officers have +not inspected the land comprising the mineral claims. +36. Despite Manis reviewing ten of these Form S-1 registration statements and +Ridenour reviewing nine, neither raised any concern about the similarities among the registration +statements, or perform any enhanced procedures to respond to the level of risk presented. +37. For the above reasons, the Audit Partners failed to meet AS 12 and AU 230. + +7 + +The Audit Partners Failed to Properly Audit the Issuers’ Cash +38. Under PCAOB standard AU Section 330 (The Confirmation Process) (“AU 330”), +when “information about the respondent’s [i.e., the person or entity from which a confirmation is +requested] competence, knowledge, motivation, ability, or willingness to respond, or about the +respondent’s objectivity and freedom from bias with respect to the audited entity comes to the +auditor’s attention, the auditor should consider the effects of such information on designing the +confirmation request and evaluating the results” and, in circumstances where “the respondent is the +custodian of a material amount of the audited entity’s assets,” the auditor should exercise “a +heightened degree of professional skepticism” and “should consider whether there is sufficient +basis for concluding that the confirmation request is being sent to a respondent from whom the +auditor can expect the response will provide meaningful and appropriate audit evidence” (at .27). +39. Additionally, under PCAOB Auditing Standard No. 15 (Audit Evidence) (“AS +15”), “[t]he auditor must plan and perform audit procedures to obtain sufficient appropriate audit +evidence to provide a reasonable basis for his or her opinion” (¶ 4). To be appropriate, audit +evidence must be both relevant and reliable in providing support for the conclusions on which the +auditor’s opinion is based. “The reliability of evidence depends on the nature and source of the +evidence and the circumstances under which it is obtained” (¶ 8). Under PCAOB Auditing +Standard No. 13 (The Auditor’s Responses to the Risks of Material Misstatement) (“AS 13”), +“[t]he auditor’s responses to the assessed risks of material misstatement, particularly fraud risks, +should involve the application of professional skepticism in gathering and evaluating audit +evidence” (¶ 7). +40. The Audit Partners exhibited no concern about Briner’s handling of the Issuers’ +alleged cash. The Audit Partners knew that Briner held all of the Issuers’ purported funds in the +Master Trust Account and that none of the Issuers had their own bank account. The Audit Partners +also knew that Briner was a “consultant” to the Issuers and that MetroWest was a law firm. The +Audit Partners did not seek any appropriate audit evidence about what, if any, limitations governed +Briner’s use of the cash in his Master Trust Account. Nor did they ask for a reconciliation between +Briner’s Master Trust Account and the schedules Briner provided purportedly showing how much +cash in his account was attributable to each Issuer. +41. In addition, the Audit Partners violated the above standards by failing to apply +professional skepticism in gathering and evaluating the evidence obtained, such as Briner’s +confirmation of Issuer cash, and consider Briner’s “objectivity and freedom from bias with respect +to the audited entity” in relation to the Issuers’ cash confirmation Briner provided. +The Audit Partners Disregarded Red Flags that Briner’s Services +to the Issuers Were Not Given Accounting Recognition +42. Under PCAOB standard AU Section 334 (Related Parties) (“AU 334”), transactions +that are indicative of the existence of related parties include, among other things, “transactions +[that] are occurring, but are not being given accounting recognition, such as receiving or providing +accounting, management or other services at no charge” (at .08(f)). Further, under AS 15, “[i]f +audit evidence obtained from one source is inconsistent with that obtained from another, or if the +auditor has doubts about the reliability of information to be used as audit evidence, the auditor + +8 + +should perform the audit procedures necessary to resolve the matter and should determine the +effect, if any, on other aspects of the audit” (¶ 29). Finally, auditors must exercise professional +skepticism throughout the course of the engagement consistent with standard AU 230. +43. The Audit Partners failed to question Briner’s fee arrangement with the Issuers. +Instead, they relied on legal confirmation letters from Briner that conflicted on their face with what +ledgers in their possession showed to be true about the services Briner provided. +44. These letters each stated that “[a]s of the date of inception and up to the present +date, the [Issuers were] not indebted to us for services and expenses (billed or unbilled) of which +we are aware.” The Audit Partners knew that Briner provided substantial services to the Issuers, +such as, among other things, performing accounting functions (paying expenses and recording +transactions), drafting the Issuers’ registration statements, and preparing the Issuers’ financial +statements for their registration statements. The Audit Partners also knew that the Issuers’ +financial statements and general ledgers did not reflect payment for Briner’s services. Despite +this, the Audit Partners did not ask Briner for any invoices, agreements, engagement letters, or any +details about his fee arrangements with the Issuers. Nor did they conduct any related party +analysis. +45. For the above reasons, the Audit Partners failed to meet AU 334, AS 15, and AU +230. +The Audit Partners Disregarded Red Flags that the +Issuers’ Stock Sales to Their Officers Were Shams +46. Under PCAOB Auditing Standard No. 10 (Supervision of the Audit Engagement) +(“AS 10”), the engagement partner “is responsible for proper supervision of the work of +engagement team members and for compliance with PCAOB standards” (¶ 3) and should “[d]irect +engagement team members to bring significant accounting and auditing issues arising during the +audit to the attention of the engagement partner or other engagement team members performing +supervisory activities so they can evaluate those issues and determine that appropriate actions are +taken in accordance with PCAOB standards” (¶ 5 b.). +47. Briner provided an M&K staff member with schedules for each of the Issuers +(prepared by Briner) purportedly listing all transactions that the M&K staff member reviewed (the +same person reviewed the audit evidence for all of the Issuers’ audits). +48. Each of the schedules appeared to indicate that individuals or entities named +“Hyperion Mgmt.”, “Luke Pretty”, or “Dhaliwal” supplied the funds to pay for the officers’ stock +purchases and characterized these transactions as “investments.” The Issuers’ registration +statements and stock purchase agreements (also reviewed by the same M&K staff member referred +to above), by contrast, indicated that the Issuers’ respective officers paid for and purchased the +Issuers’ stock. +49. Additionally, these schedules contained contradictions, such as dates listed for stock +purchases that occurred (1) before the Issuers were incorporated or (2) after the Issuers purchased +their mineral claims. + +9 + +50. The Audit Partners disregarded these inconsistencies and contradictions in the audit +evidence in violation of AS 15, AS 12, and AU 230. The Audit Partners also failed to meet AS 10 +by failing to direct the M&K staff member reviewing the audit evidence to bring significant +accounting and auditing issues to their attention and by otherwise failing to supervise the M&K +Issuers’ audits. +The Audit Partners Failed to Detect Basic Accounting Errors and Inconsistencies +Between the Financial Statements and the Registration Statements +51. Under AU 230, “[a]n auditor should possess ‘the degree of skill commonly +possessed’ by other auditors and should exercise it with ‘reasonable care and diligence’ (that is, +with due professional care)” (at .05). Further, under AS 7, an engagement quality review partner +should “review the financial statements” and “read other information in documents containing the +financial statements to be filed with the Securities and Exchange Commission . . . and evaluate +whether the engagement team has taken appropriate action with respect to any material +inconsistencies with the financial statements or material misstatements of fact of which the +engagement quality reviewer is aware” (¶ 10 f. and g.). +52. During the audits and engagement quality reviews, the Audit Partners failed to +detect basic mistakes in the Issuers’ financial statements and inconsistencies between the financial +statements and information contained in other parts of the registration statements as reflected in the +chart under Appendix A. +53. Mistakes in the financial statements include, among other things, balance sheets +that do not foot and conflicts between balance sheets and the notes to the financial statements. +Inconsistences between the financial statements and other information in the registration +statements include, among other things, the disclosure of a net loss in the registration statement that +conflicts with what should be the same disclosure in the Statement of Operations in the financial +statements. These errors may constitute material misstatements and reflect the Audit Partners +apparent lack of due care in conducting their audits and engagement quality reviews, respectively. +54. For the reasons contained in the attached Chart under Appendix A, the Audit +Partners failed to meet AU 230 and AS 7. +Manis Did Not Investigate Failures to Account For Audit Fees +55. Under AS 15, “[t]he auditor must plan and perform audit procedures to obtain +sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion” (¶ 4). In +doing so, the auditor must exercise professional skepticism throughout the course of the +engagement consistent with AU 230. +56. Additionally, under PCAOB Auditing Standard No. 14 (Evaluating Audit Results) +(“AS 14”), the “auditor should take into account all relevant audit evidence, regardless of whether +it appears to corroborate or to contradict the assertions in the financial statements” (¶ 3) and should +take into account “[t]ransactions that are not recorded in a complete or timely manner or are +improperly recorded as to amount, accounting period, classification, or company policy” +(Appendix C, C1.a.(1)). + +10 + +57. Manis did not question the Issuers’ failures to account for audit fees paid during the +audit period. Specifically, M&K requested retainers from Stone Boat and Goldstream, which were +paid via wire transfers from Briner’s Master Trust Account during the audit period for these +Issuers. But the retainers M&K received from these Issuers were not reflected in the +corresponding schedules that Briner prepared from his Master Trust Account and provided to +M&K. +58. For the above reasons, Manis failed to meet AS 14, AS 15, and AU 230. +Manis Accepted Accounting that Violated GAAP +59. From November 2011 through June 2013, Manis served as the engagement partner +in charge of auditing Stone Boat’s financial statements, the first of the eleven Issuers that M&K +would audit. On or about July 27, 2012, Manis consented to the inclusion of M&K’s audit report +in Stone Boat’s Form S-1 registration statement. +60. Manis accepted without question Briner’s improper accounting of certain material +transactions. Specifically, Briner deleted Stone Boat transactions that purportedly occurred during +the audit period on grounds that Stone Boat had purportedly “rescind[ed]” the transactions after the +audit period. +61. On June 11, 2012, Briner’s assistant sent to M&K, among other things, a schedule +purportedly reflecting cash attributable to Stone Boat in the Master Trust Account and financial +statements for Stone Boat reflecting all transactions as of May 31, 2012 (Stone Boat’s period end). +These documents reflected, among other things, (1) a $250,000 private placement for the sale of +Stone Boat stock, (2) payments of $75,000 and $67,500 for property, and (3) a $10,000 legal +retainer. Briner’s assistant also sent a cash confirmation, dated June 11, 2012, signed by Briner +confirming that as of May 31, 2012, Briner held $106,105 in cash attributable to Stone Boat in the +Master Trust Account. +62. On June 27, 2012, approximately one month after the period’s end, Briner sent an +email to an M&K employee working on the Stone Boat audit stating the following: +There have been some dramatic changes with the company over the +past two weeks. The Company was forced to rescind the private +placement it received for $250,000. As such, it has reversed the two +property payments it made as well as the legal retainer for $10,000. +Accordingly, I have reversed all of the transactions required by these +changes and am sending you the updated financials and [general +ledger]. +63. According to Briner’s email, the purported rescission apparently occurred after +Briner sent the first set of Stone Boat financial statements on June 11, 2012 and therefore, after the +period ending May 31, 2012. These subsequent events, therefore, should be treated as non- +recognized subsequent events and should not result in adjustment of the financial statements. See +ASC 855-10-25-3 (Evidence about Conditions That Did Not Exist at the Date of the Balance +Sheet). Briner’s accounting on behalf of Stone Boat, therefore, violated GAAP. Manis did not + +11 + +question the business rationale or motive behind the rescission or Stone Boat’s ability to back-out +of the transactions such as by conducting an “examination of data to assure that proper cutoffs have +been made and . . . information to aid the auditor in his evaluation of the assets and liabilities as of +the balance-sheet date,” as required under PCAOB standard AU Section 560 (Subsequent Events) +(“AU 560”) (at .11). +64. Yet Manis accepted this accounting without question. Further, Manis raised no +concern with the new documents Briner provided that excluded the above transactions as well as a +second cash confirmation dated July 20, 2012 and signed by Briner confirming that, as of May 31, +2012, Briner held $9,570.00 of cash attributable to Stone Boat in his Master Trust Account. Manis +failed to resolve the material difference between the June 11, 2012 cash confirmation of $106,105 +and the July 20, 2012 cash confirmation of $9,570. +65. In addition to consenting to the filing of his firm’s audit report where the Issuers’ +underlying accounting violated GAAP, Manis failed to meet AS 15, AS 12, AS 3, AU 560, and +AU 230 for failing to obtain sufficient appropriate evidence, exercise professional skepticism, and +document the consideration of Briner’s accounting with respect to the alleged rescission. Manis +also failed to meet PCAOB standard AU Section 316 (Consideration of Fraud in a Financial +Statement Audit) (“AU 316”) for not gaining “an understanding of the business rationale for [a +significant transaction that is outside of the normal course of business for the entity] and whether +that rationale (or the lack thereof) suggests that the transactions may have been entered into to +engage in fraudulent financial reporting or conceal misappropriation of assets” (at .66). +66. Further, Ridenour, as the engagement quality review partner for Stone Boat, +violated AS 7, which provides that an engagement quality review partner should “evaluate the +significant judgments made by the engagement team and the related conclusions reached in +forming the overall conclusion on the engagement” (¶ 9). Manis’s decision not to evaluate the +manner in which Briner, on behalf of Stone Boat, accounted for the purported rescission was a +significant judgment Ridenour should have, but failed, to evaluate. +Manis Ignored Red Flags Indicating that Briner May Have +Engaged in a Related Party Transaction With Stone Boat +67. Under AU 334, transactions that because of their nature may be indicative of the +existence of related parties include, among other things, “[b]orrowing or lending on an interest-free +basis” and “[m]aking loans with no scheduled terms for when or how the funds will be repaid” (at +.03(a) and (d)). Further, under AS 15, “[i]f audit evidence obtained from one source is inconsistent +with that obtained from another, or if the auditor has doubts about the reliability of information to +be used as audit evidence, the auditor should perform the audit procedures necessary to resolve the +matter and should determine the effect, if any, on other aspects of the audit” (¶ 29). Finally, +auditors must exercise professional skepticism throughout the course of the engagement consistent +with AU 230. +68. Manis ignored evidence indicating that Stone Boat may have engaged in a related +party transaction with Briner and therefore failed to meet the above standards. +69. On June 13, 2012, Briner’s assistant sent an email to an M&K employee with two + +12 + +documents: (1) a related party worksheet listing no related parties for the period ending May 31, +2012 that was signed by Stone Boat’s officer, and (2) a confirmation that as of May 31, 2012, +MetroWest issued a $100,000 “non-interest bearing demand loan” to Stone Boat. +70. Despite the apparent contradiction between the MetroWest loan to Stone Boat and +Stone Boat’s officer’s assertion that that there were no related party transactions during the audit +period, the M&K employee did not investigate the nature of the alleged noninterest bearing loan +from MetroWest, including whether it constituted a related party transaction. As a result, Manis +violated AU 334, AS 15, AU 230, and AS 10 by failing to direct the M&K staff member reviewing +the audit evidence to bring this significant accounting and auditing issue to his attention and by +otherwise failing to supervise the Stone Boat audit. +RESPONDENTS VIOLATED SECTION 17(a) OF THE SECURITES ACT, RULE 2-02 OF +REGULATION S-X, AND ENGAGED IN IMPROPER PROFESSIONAL CONDUCT + +71. As a result of the conduct described above, Respondents violated Sections 17(a)(2) +and (3) of the Securities Act by claiming that they conducted the Issuers’ audits in accordance with +PCAOB standards when in fact they did not. +72. Additionally, for failing to meet the PCAOB audit standards identified above in +auditing the Issuers, Respondents engaged in improper professional conduct pursuant to the +Commission’s Rules of Practice Rule 102(e)(1)(ii) by each engaging in at least one instance of +highly unreasonable conduct or at least two instances of unreasonable conduct under Rule +102(e)(1)(iv). Further, M&K violated Rule 2-02(b)(1) of Regulation S-X by providing audit +reports included in the Issuers’ Form S-1 Registration statements that state that the Issuers’ audits +were conducted in accordance with PCAOB standards when in fact they were not. Manis and +Ridenour caused M&K’s violations of Rule 2-02(b)(1) of Regulation S-X by consenting to the +filing of such audit reports. +73. Further, as described above, Respondents willfully violated Sections 17(a)(2) and +(3) of the Securities Act thereby engaging in conduct subject to the Commission’s Rules of +Practice Rule 102(e)(1)(iii). +COMMISSION FINDINGS +Based on the foregoing, the Commission finds that: +A. Respondents willfully violated Sections 17(a)(2) and (3) of the Securities Act; +B. Respondents engaged in improper professional conduct pursuant to Section +4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice; +C. M&K violated Rule 2-02(b)(1) of Regulation S-X; +D. Manis and Ridenour caused violations of Rule 2-02(b)(1) of Regulation S-X; and +E. Respondents willfully violated Sections 17(a)(2) and (3) of the Securities Act +thereby engaging in conduct subject to Section 4C(a)(3) of the Exchange Act and Practice Rule + +13 + +102(e)(1)(iii) of the Commission’s Rules of Practice. +UNDERTAKINGS +Respondent M&K has undertaken to: +A. Acceptance of New Audit Clients. M&K will not accept any new audit client (i) +registered with the Commission or (ii) seeking an audit for the purpose of registering securities +with the Commission (together, “New Clients”) between the date of entry of this Order and the +later of twelve months or the date that an independent consultant, described in paragraph B below, +certifies in writing that the undertakings discussed herein have been completed to the satisfaction +of the independent consultant, as described in paragraph D(5) below. +B. Independent Consultant. +(1) M&K will retain, within thirty days after the entry of this Order, an +independent consultant (“Independent Consultant”), not unacceptable to the Commission staff. +M&K shall provide to the Commission staff a copy of the engagement letter detailing the scope of +the Independent Consultant’s responsibilities. The Independent Consultant’s compensation and +expenses shall be borne exclusively by M&K. +(2) To ensure the independence of the Independent Consultant, M&K: (1) shall +not have the authority to terminate the Independent Consultant or substitute another independent +compliance consultant for the initial Independent Consultant, without the prior written approval of +the Commission staff; and (2) shall compensate the Independent Consultant and persons engaged +to assist the Independent Consultant for services rendered pursuant to this Order at their reasonable +and customary rates. +(3) M&K will require the Independent Consultant to enter into an agreement +that provides that, for the period of engagement and for a period of two years from completion of +the engagement, the Independent Consultant shall not enter into any employment, consultant, +attorney-client, auditing or other professional relationship with M&K, or any of its present or +former affiliates, directors, officers, employees, or agents acting in their capacity as such. The +agreement will also provide that the Independent Consultant will require that any firm with which +he/she is affiliated or of which he/she is a member, and any person engaged to assist the +Independent Consultant in performance of his/her duties under this Order shall not, without prior +written consent of the Division of Enforcement, enter into any employment, consultant, attorney- +client, auditing or other professional relationship with M&K, or any of its present or former +affiliates, directors, officers, partners, employees, or agents acting in their capacity as such for the +period of the engagement and for a period of two years after the engagement. +C. Areas Independent Consultant Is To Review. Within the periods specified in +paragraph D below, the Independent Consultant will review and evaluate M&K’s audit and interim +review policies and procedures regarding: +(1) fraud detection; +(2) the exercise of due professional care and professional skepticism; + +14 + +(3) client acceptance and retention; +(4) obtaining sufficient appropriate audit evidence; +(5) third-party confirmations; +(6) the identification and consideration of disclosures of related parties and +related party transactions; +(7) evaluation of and reliance upon management representations; +(8) supervision of individuals working on audits; and +(9) adequate audit documentation, including work paper sign-off, archiving, +and dating. +M&K shall cooperate fully with the Independent Consultant and shall provide reasonable access to +firm personnel, information, and records as the Independent Consultant may reasonably request for +the Independent Consultant’s review and evaluation described herein and the reports specified in +paragraph D below. +D. Independent Consultant Reports and Certifications. +(1) Within five months of the Independent Consultant being retained, M&K +shall require the Independent Consultant to issue a detailed written report (“Report”) to M&K: (a) +summarizing the Independent Consultant’s review and evaluation of the areas identified in +paragraph C above; and (b) making recommendations, where appropriate, reasonably designed to +ensure that audits conducted by M&K comply with Commission regulations and with PCAOB +standards and rules. M&K shall require the Independent Consultant to provide a copy of the +Report to the Commission staff when the Report is issued. +(2) M&K will adopt, as soon as practicable, all recommendations of the +Independent Consultant in the Report. Provided, however, that within thirty days of issuance of +the Report, M&K may advise the Independent Consultant in writing of any recommendation that it +considers to be unnecessary, unduly burdensome, or impractical. M&K need not adopt any such +recommendation at that time, but instead may propose in writing to the Independent Consultant +and the Commission Staff an alternative policy or procedure designed to achieve the same +objective or purpose. M&K and the Independent Consultant will engage in good-faith negotiations +in an effort to reach agreement on any recommendations objected to by M&K. +(3) In the event that the Independent Consultant and M&K are unable to agree +on an alternative proposal within thirty days, M&K either will abide by the determinations of the +Independent Consultant or seek approval from the Commission staff pursuant to paragraph B(2) +above to engage, at M&K’s expense, a qualified third party acceptable to the Commission Staff to +promptly resolve the issue(s). +(4) Within sixty days of issuance of the Report, but not sooner than thirty days +after a copy of the Report is provided to the Commission staff, M&K will certify to the + +15 + +Commission staff in writing that it has adopted and has implemented or will implement all +recommendations of the Independent Consultant (“Certification of Compliance”). M&K will +provide a copy of the Certification of Compliance to the Commission staff. +(5) Within six months of the issuance of the Report, M&K shall require the +Independent Consultant to test whether M&K has implemented and enforced its written policies +and procedures concerning the areas specified in paragraph C above and assess the effectiveness of +those policies and procedures. M&K shall require the Independent Consultant to issue a written +final report summarizing the results of the Independent Consultant’s test and assessment (“Final +Report”) and to provide a copy of the Final Report to the Commission Staff. At this time, if the +Independent Consultant determines that the undertakings discussed herein have been completed to +the satisfaction of the Independent Consultant, M&K shall require the Independent Consultant to +certify in writing that the undertakings have been so completed (“Independent Consultant +Certification”) and provide a copy of this certification to the Commission staff. M&K’s +undertaking to not accept any New Clients, as described in paragraph A above, shall continue until +the Independent Consultant has issued the Independent Consultant Certification. +E. The Report, Final Report, Certification of Compliance, Independent Consultant +Certification, and any related correspondence or other documents shall be submitted to Lara +Shalov Mehraban, Assistant Regional Director, Division of Enforcement, Securities and Exchange +Commission, 200 Vesey Street, New York, NY 10281, with a copy to the Office of Chief Counsel +of the Enforcement Division. +F. 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. +G. M&K agrees that if the Division of Enforcement believes that M&K has not +satisfied these undertakings, it may petition the Commission to reopen the matter to determine +whether additional sanctions are appropriate. +H. In determining whether to accept M&K’s Offer, the Commission has considered +these undertakings. +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offer. + +Accordingly, pursuant to Section 8A of the Securities Act and Sections 4C and 21C of the +Exchange Act, it is hereby ORDERED that: + +A. Respondents shall cease and desist from committing or causing any violations and +any future violations of Sections 17(a)(2) and (3) of the Securities Act and Rule 2 -02(b)(1) of +Regulation S-X. + +16 + +B. Respondent M&K is censured. +C. Respondent M&K shall pay disgorgement of $49,500.00 and prejudgment interest +of $3,833.00, which represents profits gained as a result of the conduct described herein, and civil +penalties of $50,000.00 for a total of $103,333.00 to the Securities and Exchange Commission for +transfer to the general fun d of the United States Treasury, subject to Exchange Act Section +21F(g)(3). Payment shall be made in the following installments: (1) $20,666.60, within 10 days of +the entry of this Order, (2) $20,666.60, within 90 days of the entry of this Order, (3) $20,666.60, +within 180 days of the entry of this Order, (4) $20,666.60, within 270 days of the entry of this +Order, and (5) $20,666.60, within 360 days of the entry of this Order. 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 at the +discretion of the staff of the Commission, without further application. +D. Respondent Manis is denied the privilege of appearing or practicing before th e +Commission as an accountant. +E. Respondent Manis shall pay civil penalties of $ 20,000.00 to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). Payment shall be made in the following installments: (1) +$4,000.00, within 10 days of the entry of this O rder, (2) $4,000.00, within 90 days of the entry of +this Order, (3) $4,000.00, within 180 days of the entry of this Order, (4) $4,000.00, within 270 days +of the entry of this Order, and (5) $4,000.00, within 360 days of the entry of this Order. If any +payment is not made by the date the payment is required by this Order, the entire outstanding +balance of civil penalties, plus any additional interest accrued pursuant to 31 U.S.C. § 3717, shall be +due and payable immediately at the discretion of the staff of the Commission, without further +application. +F. Respondent Ridenour is denied the privilege of appearing or practicing before the +Commission as an accountant. +G. Respondent Ridenour shall pay civil penalties of $ 15,000.00 to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). Payment shall be made in the following installments: (1) +$3,000.00, within 10 days of the entry of this Order, (2) $3,000.00, within 90 days of the entry of +this Order, (3) $3,000.00, within 180 days of the entry of this Order, (4) $3,000.00, within 270 days +of the entry of this Order, and (5) $3,000.00, within 360 days of the entry of this Order. If any +payment is not made by the date the payment is required by this Order, the entire outstanding +balance of civil penalties, plus any additional interest accrued pursuant to 31 U.S.C. § 3717, shall be +due and payable immedi ately at the discretion of the staff of the Commissi on, without further +application. +H. Payment of disgorgement and civil penalties as described in Section IV, paragraphs +C, E, and G herein must be made in one of the following ways: + + (1) Respondent may transmit payment electronically to the Commission, which + +17 + +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 the +Respondent by name in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Lara Shalov Mehraban , Division of +Enforcement, Securities and Exchange Commission, 200 Vesey Street, NY 10281. + +I. The Division of Enforcement (“Division”) may, at any time following the entry of +this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent +provided accurate and complete financial information at the time such representations were made; +and (2) seek an order directing payment of disgorgement and pre-judgment interest. No other issue +shall be considered in connection with this petition other than whether the financial information +provided by Respondent was fraudulent, misleading, inaccurate, or incomplete in any material +respect. Respondent may not, by way of defense to any such petition: (1) contest the findings in this +Order; (2) assert that payment of disgorgement and interest should not be ordered; (3) contest the +amount of disgorgement and interest to be ordered; or (4) assert any defense to liability or remedy, +including, but not limited to, any statute of limitations defense. + +J. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To preserve +the deterrent effect of the civil penalty, Respondents agree that in any Related Investor Action, they +shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondents’ payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +Respondents agree that they shall, within 30 days after entry of a final order granting the Penalty +Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty Offset to +the Securities and Exchange Commission. Such a payment shall not be deemed an additional civil +penalty and shall not be dee med to change the amount of the civil penalty imposed in this +proceeding. For purposes of this paragraph, a “Related Investor Action” means a private damages +action brought against Respondent by or on behalf of one or more investors based on substantially +the same facts as alleged in the Order instituted by the Commission in this proceeding. + + +18 + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S. C. §523, that 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 + + +19 + +Appendix A + +Issuer Engagement +Partner +EQR +Partner +Audited Financial Statement Errors/ +Conflict Between Audited Financial Statements and Other +Registration Statement Information +Stone Boat Manis Ridenour Audited Financial Statement Errors + The amounts for Net Cash Used in Operating Activities of +$(20,430), Net Cash Used in Investing Activities of $(20,000) and +Net Cash Provided by Financing Activities of $30,000 do not foot +to the amount presented as Net Change in Cash of $9,570 on the +Statement of Cash Flows on Page F-6. The accurately footed +amount is $(10,430). + The Net Change in Cash of $9,570 reported on Page F-6 of the +Statements of Cash Flows and the Cash at beginning of period of +$30,000 do not foot to the Cash at End of Period reported as +$9,570. The accurately footed amount is $19,570. + The Recognition of an Impairment Loss (Mineral Claims) of $0 in +the Statement of Cash Flows on Page F-6 does not match the +Recognition of an Impairment Loss (Property Expenses) of +$20,000 on the Statement of Operations on Page F-4. The +Statement of Cash Flows is effectively prepared incorrectly. The +Net Cash Used in Operating Activities of ($20,430) is overstated +for both periods presented. + The Cash at beginning of period of $30,000 “For the period +ending” May 31, 2012 does not match the amount of $0 in the +column From Inception (September 28, 2011) to May 31, 2012, +both amounts appear on the Statement of Cash Flows on Page F-6. +The amounts in both columns on page F-6 appear to be the same +for both periods presented until the $30,000 amount at the +beginning of period in “For the period ending May 31, 2012” +column. There is no balance sheet presented that shows the +$30,000 opening balance for cash. + +Conflict Between Audited Financial Statements and Other +Registration Statement Information + + The Weighted average shares outstanding basic of 16,175,342 +under Consolidated Statements of Income and Summary Financial +Information on Page 5 does not match the amount of 24,000,000 +listed on the Statement of Operations on Page F-4. + +Kingman Ridenour Manis Audited Financial Statement Errors + The Net Cash Used in Operating Activities of $0 does not foot to +the amount of Net Change in Cash of $(1,995) on the Statement of +Cash Flows for the 3 months ended November 30, 2012 (Page F- +16). The Cash at the End of Period of $14,330 on page F-16 does +not match cash of $16,325 as of November 30, 2012 on the +Balance Sheet on page F-14. + The NOL listed in Note 2 as $13,675 is not consistent with Note 7, +which lists the NOL as $6,175. + +Conflict Between Audited Financial Statements and Other +Registration Statement Information + + +20 + +Issuer Engagement +Partner +EQR +Partner +Audited Financial Statement Errors/ +Conflict Between Audited Financial Statements and Other +Registration Statement Information + “The Company has incurred a net loss of $15,670 for the period +from inception to August 31, 2012” as disclosed on Page 34 under +Liquidity and Capital Resources, does not match the amount in the +Statement of Operations for the same period, which is $(13,675) +(Page F-4). + +Bonanza Ridenour Manis Audited Financial Statement Error + The NOL listed in Note 2 on page F-7 as $13,675 is not consistent +with Note 7 on page F-12, which lists the NOL as $6,175. + +Conflict Between Audited Financial Statements and Other +Registration Statement Information + + “The Company has current assets of $14,330… as of November +30, 2012” as disclosed on Page 30 under Liquidity and Capital +Resources does not match the amount of Total current assets as of +November 30, 2012 on the Balance Sheet, which is $16,325 (Page +F-14). + +CBL Ridenour Manis Audited Financial Statement Error + The NOL listed in Note 2 on page F-7 as $13,675 is not consistent +with Note 7 on page F-12, which lists the NOL as $6,175. + +Conflict Between Audited Financial Statements and Other +Registration Statement Information + + “The Company has incurred a net loss of $13,675 for the period +from inception to November 30, 2012” as disclosed on Page 32 +under Liquidity and Capital Resources does not match the amount +in the Statement of Operations for the same period, which is +$(15,670) (Page F-15). + +Lost Hills Ridenour Manis Audited Financial Statement Error + The NOL listed in Note 2 on page F-7 as $13,675 is not consistent +with Note 7 on page F-12, which lists the NOL as $6,175. + +Yuma Ridenour Manis Audited Financial Statement Error + The NOL listed in Note 2 on page F-7 as $13,675 is not consistent +with Note 7 on page F-12, which lists the NOL as $6,175. + +Eclipse Another +M&K Partner +Manis Audited Financial Statement Error + The NOL listed in Note 2 on page F-7 as $11,175 is not consistent +with Note 7 on page F-11, which lists the NOL as $2,675. + +Chum Another +M&K Partner +Manis Audited Financial Statement Error + The NOL listed in Note 2 on page F-7 as $10,175 is not consistent +with the table in Note 7 on page F-12, which lists the net loss +before taxes as $2,675. + + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3701.pdf b/raw/aaer/2015/AAER-3701.pdf new file mode 100644 index 0000000000000000000000000000000000000000..78e1ada2d8177363fbea73852eb73a9a2b9a9f6f --- /dev/null +++ b/raw/aaer/2015/AAER-3701.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a136bd0f1360858c540ca92cb7d06e339d3e425c89418026950f0f6463f6f3ce +size 207551 diff --git a/raw/aaer/2015/AAER-3701.txt b/raw/aaer/2015/AAER-3701.txt new file mode 100644 index 0000000000000000000000000000000000000000..4bb3d2f93ae1ae43466d8e76bbf55ebd61ef8e19 --- /dev/null +++ b/raw/aaer/2015/AAER-3701.txt @@ -0,0 +1,457 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9919 / September 18, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75949 / September 18, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3701 / September 18, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16339 + + +In the Matter of + +JOHN BRINER, ESQ., +DIANE DALMY, ESQ., +DE JOYA GRIFFITH, LLC, +ARTHUR DE JOYA, CPA, +JASON GRIFFITH, CPA, +CHRIS WHETMAN, CPA, +PHILIP ZHANG, CPA, +M&K CPAS, PLLC, +MATT MANIS, CPA, +JON RIDENOUR, CPA, and +BEN ORTEGO, 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 BEN ORTEGO, CPA + +I. + + On January 15, 2015, the Securities and Exchange Commission (“Commission”) deeming +it appropriate, instituted public administrative and cease-and-desist proceedings pursuant to +Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 4C and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), and Rule 102(e) of the Commission’s Rules of Practice +against Ben Ortego (“Ortego” or “Respondent”). + + +II. + + Respondent has submitted an Offer of Settlement (the “Offer”), which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over him and +the subject matter of these proceedings, which are admitted, Respondent consents to the entry of +this Order, as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +RESPONDENT +1. Ortego, 35, of Houston, Texas, is a CPA licensed in the state of Texas and, for the +relevant time period, a partner of M&K. +RELEVANT ENTITIES AND INDIVIDUALS +2. John Briner (“Briner”), 35, is an attorney and a Canadian citizen who resides in +Vancouver, British Columbia. Briner’s law firm was MetroWest Law Corporation (“MetroWest”). +Briner also controlled Jervis Explorations Inc. (“Jervis”), a British Columbia corporation. In 2010, +to resolve a Commission action against him alleging a pump-and-dump and market manipulation +scheme, Briner consented to the entry of a federal court judgment that enjoined him from violating +the antifraud and securities registration provisions of the federal securities laws; barred him for five +years from participating in penny stock offerings; and ordered him to disgorge ill-gotten gains of +$52,488.32 plus prejudgment interest and pay a civil penalty of $25,000. SEC v. Golden Apple Oil +and Gas, Inc., et al., 09-Civ-7580 (S.D.N.Y.) (HB). The Commission subsequently suspended +Briner from appearing or practicing before it as an attorney, with a right to apply for reinstatement +after five years. John Briner, Exchange Act Release No. 63371, 2010 WL 4783445 (Nov. 24, +2010). +3. Diane Dalmy (“Dalmy”), 58, is an attorney who resides in Denver, Colorado and is +admitted to practice law in Colorado. Dalmy issued opinion letters for the issuers identified below. +4. Jervis is a British Columbia corporation whose sole director is John Briner. Jervis +purportedly sold certain British Columbia mineral claims to each of the issuers. +5. M&K CPAS, PLLC (“M&K”) is a registered public accounting firm based in +Houston, Texas. For all relevant times, Ortego was a partner of M&K. +6. Chum Mining Group Inc. (“Chum”) is a Nevada corporation organized in June +2012. On November 30, 2012, Chum filed a Form S-1 registration statement with the Commission + + 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. + +seeking to register management’s common shares for resale in a $20,000 public offering. Its +registration statement states that it has its principal offices in Edmonton, Alberta, Canada. + +7. Eclipse Resources Inc. (“Eclipse”) is a Nevada corporation organized in May +2012. On December 3, 2012, Eclipse filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in an $18,000 public offering. Its +registration statement states that it has its principal offices in Winnipeg, Manitoba, Canada. + +8. PRWC Energy Inc. (“PRWC”) is a Nevada corporation organized in May 2012. +On December 6, 2012, PRWC filed a Form S-1 registration statement with the Commission +seeking to register management’s common shares for resale in a $20,000 public offering. Its +registration statement states that it has its principal offices in Salt Lake City, Utah. + +9. The issuers identified in paragraphs 6 through 8 are collectively defined herein as +the “Issuers.” + +ORTEGO CONDUCTED MATERIALLY DEFICIENT AUDITS + Background +10. In or about November 2011, Briner contacted M&K to conduct audits of certain +issuers’ financial statements that were to be included in Form S-1 registration statements. Ortego +was the engagement partner for the Issuers’ audits. +11. Ortego knew that Briner did the accounting and created the financial statements to +be used in the Form S-1 registration statements for each of the Issuers. Ortego also knew that +Briner maintained all of the Issuers’ purported funds “in trust” in an account Briner controlled (the +“Master Trust Account”). +12. Briner and his assistant were the exclusive contacts between M&K and each +Issuer’s officer. Ortego did not directly communicate with any of the Issuers’ officers. Ortego +knew that Briner provided all of the information concerning the Issuers and all of the supporting +evidence for their audits. +13. The Issuers two largest transactions consisted of the officer’s purchase of Issuer +stock for $30,000 and the Issuer’s purchase of British Columbia mineral claims for between +$7,500 and $8,500 from Jervis. +14. Ortego conducted the Issuers’ audits, including auditing the above transactions, and +consented to the inclusion of M&K’s audit report in each of the Issuers’ Form S-1 registration +statements filed with the Commission. M&K was paid a total of $49,500 in fees for the audits, +including $9,900 for the Issuers’ audits. Each audit report stated that “[w]e conducted our audit in +accordance with the standards of the Public Company Accounting Oversight Board (United +States)” and that the financial statements present the Issuers’ financial position “in conformity +with U.S. generally accepted accounting principles.” + +Ortego Failed to Detect Red Flags in Accepting +and Continuing with the Issuers as Clients +15. Under PCAOB Auditing Standard No. 12 (Identifying and Assessing Risks of +Material Misstatement) (“AS 12”), auditors should “evaluate whether information obtained from +the client acceptance and retention evaluation process or audit planning activities is relevant to +identifying risks of material misstatement” (¶ 41).2 +16. Also, auditors must meet PCAOB standard AU Section 230 (Due Professional Care +in the Performance of Work) (“AU 230”), which requires that auditors “exercise professional +skepticism” (at .07), “consider the competency and sufficiency of the evidence” (at .08), and +“neither assume[] that management is dishonest nor assume[] unquestioned honesty” (at .09). +17. M&K’s policy called for “background checks on all significant owners and chief +executives.” In practice, such check consisted of a simple Internet search. +18. Ortego failed to sufficiently question or otherwise investigate the Issuers’ +management, which would have revealed Briner’s undisclosed role as a control person. Nor did he +conduct a background check of Briner or Dalmy, which at minimum would have turned up, among +other things, the Commission’s complaint alleging fraud and suspension order against Briner, and +that Briner had been on the OTC Market’s Prohibited Attorney List since March 15, 2006, and that +Dalmy had also been on the list since September 25, 2009. +19. Upon referring the Issuers, Briner’s assistant provided M&K with the names of the +officers, the inception dates, and the year-end dates for each of the Issuers. From this, Ortego was +on notice that the three Issuers were incorporated the same day or within one day of each other +(May 31, 2012 or June 1, 2012). +20. This information should have at least caused Ortego to question why the Issuers’ +dates of incorporation appeared to be coordinated. Ortego failed to ask any questions with respect +to this information. +21. For the above reasons, Ortego failed to meet AS 12 and AU 230. +Ortego Failed to Obtain an Understanding of the Issuers +22. Under AS 12, auditors should “obtain an understanding of the company and its +environment . . . to understand the events, conditions, and company activities that might reasonably +be expected to have a significant effect on the risks of material misstatement,” including “[t]he +nature of the company” (¶ 7.b.) and “[t]he company’s objectives and strategies and those related +business risks that might reasonably be expected to result in risks of material misstatement” (¶ +7.d.). Further, obtaining an understanding of the nature of the company includes understanding +“[t]he company’s organizational structure and management personnel; [t]he sources of funding of +the company’s operations and investment activities, including the company’s capital structure[, +t]he company’s operating characteristics, including its size and complexity” (¶ 10), and “an + + 2 The PCAOB standards referenced herein are the standards that were in effect during the +time of relevant conduct. + +understanding of internal control includes evaluating the design of controls that are relevant to the +audit and determining whether the controls have been implemented” (¶ 20). +23. Additionally, auditors must meet AU 230, which requires that auditors “exercise +professional skepticism” (at .07) and engagement partners “should be knowledgeable about the +client” and are responsible for the “supervision of[] members of the engagement team” (.06). +24. Ortego failed to obtain a sufficient understanding of the Issuers. What little +understanding of the Issuers he obtained came almost entirely from draft Form S-1 registration +statements and responses to certain questionnaires from the Issuers, both provided by Briner. +Ortego did not obtain an understanding of the Issuers through direct communication with the +Issuers’ officers. +25. In obtaining an understanding of the Issuers, Ortego did not question the substantial +similarities among the Issuers. The Issuers filed three nearly identical Form S-1 registration +statements. Using almost exactly the same language, each stated the following: (1) the Issuers are +not blank check companies; (2) the Issuers’ officers purchased Issuer stock for $30,000; (2) the +Issuers purchased British Columbia mineral claims from Jervis; (3) Jervis supplied nearly all the +Issuers’ with their business plans; (4) the officers “solely” control the company; (5) the officers +planned to devote only 4 to 5 hours each week to the business; and (6) the officers have not +inspected the land comprising the mineral claims. +26. Despite reviewing all three of the Issuers’ registration statements within a six-week +period, Ortego did not raise any concern about the similarities among the registration statements, or +perform any enhanced procedures to respond to the level of risk presented. +27. For the above reasons, Ortego failed to meet AS 12 and AU 230. +Ortego Failed to Properly Audit the Issuers’ Cash +28. Under PCAOB standard AU Section 330 (The Confirmation Process) (“AU 330”), +when “information about the respondent’s [i.e., the person or entity from which a confirmation is +requested] competence, knowledge, motivation, ability, or willingness to respond, or about the +respondent’s objectivity and freedom from bias with respect to the audited entity comes to the +auditor’s attention, the auditor should consider the effects of such information on designing the +confirmation request and evaluating the results” and, in circumstances where “the respondent is the +custodian of a material amount of the audited entity’s assets,” the auditor should exercise “a +heightened degree of professional skepticism” and “should consider whether there is sufficient +basis for concluding that the confirmation request is being sent to a respondent from whom the +auditor can expect the response will provide meaningful and appropriate audit evidence” (at .27). +29. Additionally, under PCAOB Auditing Standard No. 15 (Audit Evidence) (“AS +15”), “[t]he auditor must plan and perform audit procedures to obtain sufficient appropriate audit +evidence to provide a reasonable basis for his or her opinion” (¶ 4). To be appropriate, audit +evidence must be both relevant and reliable in providing support for the conclusions on which the +auditor’s opinion is based. “The reliability of evidence depends on the nature and source of the +evidence and the circumstances under which it is obtained” (¶ 8). Under PCAOB Auditing +Standard No. 13 (The Auditor’s Responses to the Risks of Material Misstatement) (“AS 13”), + +“[t]he auditor’s responses to the assessed risks of material misstatement, particularly fraud risks, +should involve the application of professional skepticism in gathering and evaluating audit +evidence” (¶ 7). +30. Ortego exhibited no concern about Briner’s handling of the Issuers’ alleged cash. +Ortego knew that Briner held all of the Issuers’ purported funds in the Master Trust Account and +that none of the Issuers had their own bank account. Ortego also knew that Briner was a +“consultant” to the Issuers and that MetroWest was a law firm. Ortego did not seek any +appropriate audit evidence about what, if any, limitations governed Briner’s use of the cash in his +Master Trust Account. Nor did he ask for a reconciliation between Briner’s Master Trust Account +and the schedules Briner provided purportedly showing how much cash in his account was +attributable to each Issuer. +31. In addition, Ortego violated the above standards by failing to apply professional +skepticism in gathering and evaluating the evidence obtained, such as Briner’s confirmation of +Issuer cash, and consider Briner’s “objectivity and freedom from bias with respect to the audited +entity” in relation to the Issuers’ cash confirmation Briner provided. +Ortego Disregarded Red Flags that Briner’s Services to +the Issuers Were Not Given Accounting Recognition +32. Under PCAOB standard AU Section 334 (Related Parties) (“AU 334”), transactions +that are indicative of the existence of related parties include, among other things, “transactions +[that] are occurring, but are not being given accounting recognition, such as receiving or providing +accounting, management or other services at no charge” (at .08(f)). Further, under AS 15, “[i]f +audit evidence obtained from one source is inconsistent with that obtained from another, or if the +auditor has doubts about the reliability of information to be used as audit evidence, the auditor +should perform the audit procedures necessary to resolve the matter and should determine the +effect, if any, on other aspects of the audit” (¶ 29). Finally, auditors must exercise professional +skepticism throughout the course of the engagement consistent with standard AU 230. +33. Ortego failed to question Briner’s fee arrangement with the Issuers. Instead, he +relied on legal confirmation letters from Briner that conflicted on their face with what ledgers in +his possession showed to be true about the services Briner provided. +34. These letters each stated that “[a]s of the date of inception and up to the present +date, the [Issuers were] not indebted to us for services and expenses (billed or unbilled) of which +we are aware.” Ortego knew that Briner provided substantial services to the Issuers, such as, +among other things, performing accounting functions (paying expenses and recording +transactions), drafting the Issuers’ registration statements, and preparing the Issuers’ financial +statements for their registration statements. Ortego also knew that the Issuers’ financial statements +and general ledgers did not reflect payment for Briner’s services. Despite this, Ortego did not ask +Briner for any invoices, agreements, engagement letters, or any details about his fee arrangements +with the Issuers. Nor did he conduct any related party analysis. +35. For the above reasons, Ortego failed to meet AU 334, AS 15, and AU 230. + +Ortego Did Not Investigate the Issuers’ Failures to Account For Audit Fees +36. Under AS 15, “[t]he auditor must plan and perform audit procedures to obtain +sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion” (¶ 4). In +doing so, the auditor must exercise professional skepticism throughout the course of the +engagement consistent with AU 230. +37. Additionally, under PCAOB Auditing Standard No. 14 (Evaluating Audit Results) +(“AS 14”), the “auditor should take into account all relevant audit evidence, regardless of whether +it appears to corroborate or to contradict the assertions in the financial statements” (¶ 3) and should +take into account “[t]ransactions that are not recorded in a complete or timely manner or are +improperly recorded as to amount, accounting period, classification, or company policy” +(Appendix C, C1.a.(1)). +38. Ortego did not question the Issuers’ failures to account for audit fees paid during +the audit period, or failures to account for audit fees paid during the subsequent events period. +39. Specifically, Ortego failed to investigate conflicting evidence regarding the audit +fees received for the Issuers: Chum, Eclipse, and PRWC. Even though M&K received $9,900 on +August 14, 2012 from Briner to cover the Issuers’ audit fees ($3,300 each), Ortego did not question +why Briner accounted only for the payment he made for Chum in the schedules he provided and +not the payments he made for Eclipse and PRWC. Ortego was the engagement partner for all three +Issuers. Yet he did not investigate this discrepancy. +40. For the above reasons, Ortego failed to meet AS 14, AS 15, and AU 230. +Ortego Failed to Detect Basic Accounting Errors and Inconsistencies +Between the Financial Statements and the Registration Statements +41. Under AU 230, “[a]n auditor should possess ‘the degree of skill commonly +possessed’ by other auditors and should exercise it with ‘reasonable care and diligence’ (that is, +with due professional care)” (at .05). +42. During the audits, the Ortego failed to detect inconsistencies between the financial +statements and information contained in other parts of the registration statements. Specifically, in +the Eclipse Form S-1 registration statement, the NOL listed in Note 2 on page F-7 as $11,175 is +not consistent with Note 7 on page F-11, which lists the NOL as $2,675. Additionally, in the +Chum Form S-1 registration statement, the NOL listed in Note 2 on page F-7 as $10,175 is not +consistent with the table in Note 7 on page F-12, which lists the net loss before taxes as $2,675. +These errors may constitute material misstatements and reflect Ortego’s apparent lack of due care +in conducting the Issuers’ audits. +43. For these reasons, Ortego failed to meet AU 230. +Ortego Disregarded Red Flags that the Issuers’ +Stock Sales to Their Officers Were Shams +44. Under PCAOB Auditing Standard No. 10 (Supervision of the Audit Engagement) + +(“AS 10”), the engagement partner “is responsible for proper supervision of the work of +engagement team members and for compliance with PCAOB standards” (¶ 3) and should “[d]irect +engagement team members to bring significant accounting and auditing issues arising during the +audit to the attention of the engagement partner or other engagement team members performing +supervisory activities so they can evaluate those issues and determine that appropriate actions are +taken in accordance with PCAOB standards” (¶ 5 b.). +45. Briner provided an M&K staff member with schedules for each of the Issuers +(prepared by Briner) purportedly listing all transactions that the M&K staff member reviewed (the +same person reviewed the audit evidence for all of the Issuers’ audits). +46. Each of the schedules appeared to indicate that individuals or entities named “Luke +Pretty” or “Dhaliwal” supplied the funds to pay for the officers’ stock purchases and characterized +these transactions as “investments.” The Issuers’ registration statements and stock purchase +agreements (also reviewed by the same M&K staff member referred to above), by contrast, +indicated that the Issuers’ respective officers paid for and purchased the Issuers’ stock. +47. Additionally, these schedules contained contradictions, such as dates listed for stock +purchases that occurred (1) before the Issuers were incorporated or (2) after the Issuers purchased +their mineral claims. +48. Ortego disregarded these inconsistencies and contradictions in the audit evidence in +violation of AS 15, AS 12, and AU 230. Ortego also failed to meet AS 10 by failing to direct the +M&K staff member reviewing the audit evidence to bring significant accounting and auditing +issues to his attention and by otherwise failing to supervise the M&K Issuers’ audits. +ORTEGO VIOLATED SECTION 17(a) OF THE SECURITES ACT, RULE 2-02 OF +REGULATION S-X, AND ENGAGED IN IMPROPER PROFESSIONAL CONDUCT + +49. As a result of the conduct described above, Ortego violated Sections 17(a)(2) and +(3) of the Securities Act by claiming that the audits he conducted the Issuers audits in accordance +with PCAOB standards when in fact he did not. +50. Additionally, for failing to meet the PCAOB audit standards identified above in +auditing the Issuers, Ortego engaged in improper professional conduct pursuant to the +Commission’s Rules of Practice Rule 102(e)(1)(ii) by each engaging in at least one instance of +highly unreasonable conduct or at least two instances of unreasonable conduct under Rule +102(e)(1)(iv). Ortego also caused violations of Rule 2-02(b)(1) of Regulation S-X by consenting +to the provision of audit reports included in the Issuers’ Form S-1 Registration statements that state +that the Issuers’ audits were conducted in accordance with PCAOB standards when in fact they +were not. +51. Further, as described above, Ortego willfully violated Sections 17(a)(2) and (3) of +the Securities Act thereby engaging in conduct subject to the Commission’s Rules of Practice Rule +102(e)(1)(iii). + +COMMISSION FINDINGS +Based on the foregoing, the Commission finds that Respondent: +A. willfully violated Sections 17(a)(2) and (3) of the Securities Act; +B. engaged in improper professional conduct pursuant to Section 4C(a)(2) of the +Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice; +C. caused violations of Rule 2-02(b)(1) of Regulation S-X; and +D. willfully violated Sections 17(a)(2) and (3) of the Securities Act thereby engaging +in conduct subject to Section 4C(a)(3) of the Exchange Act and Practice Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice. +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Ortego’s Offer. + +Accordingly, pursuant to Section 8A of the Securities Act and Sections 4C and 21C of the +Exchange Act, it is hereby ORDERED that: + +A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Sections 17(a)(2) and (3) of the Securities Act and Rule 2 -02(b)(1) of +Regulation S-X. +B. Respondent is denied the privilege of appearing or practicing before the Commission +as an accountant. +C. After three years from the date of this O rder, 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 Respondent’s work in his practice before th e +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, 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, 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 respondent’s or the firm’s quality control 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 c onditions of any sanctions imposed by the Board +(other than reinstatement by the Commission); and + + (d) Respondent acknowledges his 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. + +D. The Commission will consider an application by Respondent 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 reins tatement 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. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $ 50,000 to the Securities and Exchange Commission for transfer t o the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must +be made in one of the following ways: + + (1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + + (2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + (3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange Commission and hand - +delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying + +Ortego as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Lara Shalov Mehraban, Division of +Enforcement, Securities and Exchange Commission, 200 Vesey Street, NY 10281. + +F. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To preserve +the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, he +shall not argue tha t he is entitled to, nor shall he benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +Respondent agrees that he shall, within 30 days after entry of a final order granting the Penalty +Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty Offset to +the Securities and Exchange Commission. Such a payment shall not be deemed an additional civil +penalty and shall not be deemed to change the amount of the civil penalty imposed in this +proceeding. For purposes of this paragraph, a “Related Investor Action” means a private damages +action brought against Respondent by or on behalf of one or more investors based on substantially +the same facts as alleged in the Order instituted by the Commission in this proceeding. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S. C. §523, that 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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3702.pdf b/raw/aaer/2015/AAER-3702.pdf new file mode 100644 index 0000000000000000000000000000000000000000..74cbe63023b022ab7639e7d26bdfd33454862caa --- /dev/null +++ b/raw/aaer/2015/AAER-3702.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:d934753ff937c3790b50d793adeef0d64a1cbd68bb82da0702207f4d0bfeb4d7 +size 285011 diff --git a/raw/aaer/2015/AAER-3703.txt b/raw/aaer/2015/AAER-3703.txt new file mode 100644 index 0000000000000000000000000000000000000000..7662aacf9075c743e77cca98a30230548c06c0d5 --- /dev/null +++ b/raw/aaer/2015/AAER-3703.txt @@ -0,0 +1,1371 @@ + + + + + + + + + + + + + + + + SEC.gov | Joseph F. Apuzzo + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/517306","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Joseph F. Apuzzo + + + + + + + + + + + + Joseph F. Apuzzo + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 23356 / September 21, 2015 + Accounting and Auditing Enforcement Release No. AAER-3703 / September 21, 2015 + SEC v. Joseph F. Apuzzo , Civil Action No. 3:07-cv-1910 (D.Ct) + + SEC Files Settled Aiding and Abetting Charges Against Joseph F. Apuzzo, Former CFO of Terex Corporation + + + On September 8, 2015, Judge Alvin W. Thompson of the U.S. District Court for the District of Connecticut entered a judgment against Joseph F. Apuzzo, former Chief Financial Officer of Terex Corporation. Apuzzo consented, without admitting or denying the allegations in the Commission's complaint, to be permanently enjoined from violation of Sections 10(b) and 13(b)(5) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rule 13a-1 thereunder, and to pay a penalty of $100,000. Upon motion by the Commission, Judge Thompson will determine whether to impose an officer and director bar against Apuzzo. Apuzzo, who was a Certified Public Accountant at the time of the alleged fraudulent conduct, has further agreed to the entry of a Commission order suspending him from appearing as an accountant before the Commission, with a right to apply for reinstatement after five years. The Commission issued such an Order on September 16, 2015 ( http://www.sec.gov/litigation/admin/2015/34-75933.pdf ). + + The Commission's complaint, filed on December 27, 2007, charged Apuzzo with aiding and abetting a fraudulent accounting scheme involving two sale-leaseback transactions, carried out between 2000 and 2002 by United Rentals, Inc. ("URI") and Michael J. Nolan ("Nolan"), a former CFO of URI. The transactions were structured to improve URI's 2000 and 2001 financial results by allowing URI to recognize revenue prematurely and to inflate the profit generated from the sales. The complaint further alleges that Apuzzo substantially assisted URI and Nolan in implementing the fraudulent scheme by, among other things, signing agreements with URI that he knew or was reckless in not knowing were designed to hide URI's continuing risks and financial obligations relating to the sale-leaseback transactions, and directing or approving the issuance of inflated invoices that he knew or was reckless in not knowing URI, through Nolan and others, would use to inflate URI's gain on the transactions. As a result of the fraudulent transactions, URI materially overstated its financial results in its Forms 10-K for fiscal years 2000 and 2001, as well as in other filings and public releases. + + For further information, see Litigation Release Nos. 20396 (December 12, 2007), 20418 (December 31, 2007), and 20706 (September 8, 2008). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3704.txt b/raw/aaer/2015/AAER-3704.txt new file mode 100644 index 0000000000000000000000000000000000000000..2b512324e21d7eafa3a597444f5f832ac814d6eb --- /dev/null +++ b/raw/aaer/2015/AAER-3704.txt @@ -0,0 +1,390 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75958 / September 22, 2015 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3704 / September 22, 2015 +ADMINISTRATIVE PROCEEDING +File No. 3-16826 + +In the Matter of + STEIN MART, INC., +Respondent. + 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 Stein Mart, Inc. (“Respondent”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, +Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as +set forth below. +2 + + + + +III. +On the basis of this Order and Respondent’s Offer, the Commission finds +1 that: +SUMMARY +From at least 2010 to November 2012, Stein Mart, Inc. (“Stein Mart”) materially +misstated its pre-tax income in certain quarterly periods as a result of improperly valuing +inventory that was subject to price discounts, or markdowns. During the relevant period, Stein +Mart used three types of markdowns: a temporary markdown, which was a temporary price +reduction for certain promotional sales; a permanent markdown, which was a permanent price +reduction; and a “Perm POS” markdown, which also was a permanent price reduction but the +merchandise subject to Perm POS markdowns was marketed in a manner similar to merchandise +subject to temporary markdowns. +Stein Mart did not value the inventory associated with Perm POS markdowns in +accordance with Generally Accepted Accounting Principles (“GAAP”). In particular – despite +the fact that merchandise subject to Perm POS markdowns had a permanent price reduction – +Stein Mart improperly valued the inventory associated with Perm POS markdowns by writing +down the inventory values at the time the product was sold as opposed to immediately when the +markdown was taken. Moreover, during the relevant period, Stein Mart had a number of other +internal control deficiencies and accounting errors surrounding, among other things, software +assets, credit card liabilities, and other inventory-related issues. +Ultimately, in May 2013, Stein Mart restated its financial results for the first quarter of +2012, all reporting periods in fiscal year 2011, and its annual reporting period in fiscal year 2010 +primarily because of its accounting error involving Perm POS markdowns. As a result, of this +error, in the first quarter of 2012, Stein Mart materially overstated its pre-tax income by almost +30%. Moreover, in connection with the restatement, the company acknowledged material +weaknesses in internal control over financial reporting. By engaging in the foregoing conduct, +Stein Mart violated the reporting, books and records, and internal controls provisions of the +federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act +and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. +RESPONDENT +Stein Mart, Inc. (“Stein Mart”), a Delaware corporation headquartered in Jacksonville, +Florida, is a national apparel retailer with 270 stores operating in 30 states. Stein Mart’s + +1 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or +entity in this or any other proceeding. +3 + + + + +common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act +and trades on the NASDAQ. Stein Mart’s fiscal year ends at the end of business on the Saturday +closest to January 31. +FACTS +A. Introduction +1. Stein Mart, as a retail company, carries inventory as one of its most significant assets. +Under GAAP, companies value their inventory pursuant to FASB Accounting Standards +Codification Topic 330 (“ASC 330”) which requires valuing inventory at the lower of +cost or market. To arrive at the lower of cost or market, Stein Mart utilized the Retail +Inventory Method (“RIM”), an averaging method commonly used within the retail +industry that is consistent with GAAP. +2. Stein Mart, a national retailer, often offers its merchandise to customers at retail price +reductions referred to as “markdowns.” As described in greater detail below, proper +analysis of these markdowns is critical in properly determining the value of ending +inventories. +3. Stein Mart has historically used three categories of markdowns for tracking merchandise: +(i) temporary or point of sale (“POS”) markdowns, (ii) permanent markdowns, and (iii) +“Perm POS” markdowns. +4. Temporary Markdowns are a temporary reduction in the selling price of an item to +stimulate demand or reduce the inventory. Stein Mart used these types of markdowns for +certain promotional sales, like a Fourth of July weekend sale. Once the sale period +ended, the merchandise subject to a temporary markdown returned to its original retail +price. +5. Permanent Markdowns are a permanent reduction in the selling price of an item to +stimulate demand and clear out seasonal inventory. Stein Mart referred to these +markdowns as “hardmarks,” because the original price on the price tag for merchandise +subject to a permanent markdown was crossed out and replaced with the marked down +price. Unlike temporary markdowns, merchandise subject to a permanent markdown +never returned to its original retail price. +6. Stein Mart used a third type of markdown known as “Perm POS” markdowns. Like +permanent markdowns, merchandise subject to a Perm POS markdown never reverted +back its original retail price. Unlike merchandise subject to permanent markdowns, +however, this permanent price change was reflected by store signage as opposed to a +change in the price tag; and the merchandise subject to Perm POS markdowns was placed +in the stores with merchandise subject to temporary markdowns while merchandise +subject to permanent markdowns was placed separately in stores . +4 + + + + +7. Prior to 2009, Stein Mart generally used three percentage discounts associated with +merchandise subject to Perm POS markdowns – 30%, 50%, and 75%. After 2009, +however, Stein Mart removed the 50% and 75% Perm POS markdowns, but maintained +the 30% Perm POS markdown. +8. By 2009, Stein Mart changed its markdown strategy by increasing the number of +permanent markdowns taken throughout the year and particularly by year-end, compared +to other types of markdowns including Perm POS. As a result of the fact that +merchandise subject to perm POS markdowns was permanently marked down and then +marked out of stock by year-end, Perm POS markdowns did not significantly impact +Stein Mart’s full-year financial results. The manner in which Stein Mart accounted for +Perm POS markdowns, however, could have still significantly impacted Stein Mart’s +quarterly inventory values and related financial results. +B. Stein Mart’s Accounting for Perm POS Markdowns and Absence of Internal Controls +9. Despite the fact that the price associated with merchandise subject to Perm POS +markdowns never reverted back to its original retail price, Stein Mart accounted for this +merchandise in the same manner as it did merchandise subject to temporary markdowns. +10. The difference between temporary/Perm POS markdowns and permanent markdowns +was significant from an accounting perspective, and more specifically, from an inventory +valuation perspective. In particular, Stein Mart reduced the value of inventory subject to +a temporary/Perm POS markdown at the time the item was sold, while Stein Mart +reduced the value of inventory subject to a permanent markdown immediately at the +time the markdown was applied (emphasis added). +11. Despite this significant difference in accounting treatment, Stein Mart did not – until at +least the middle of 2011 – have adequate internal accounting controls concerning Perm +POS markdowns. +12. For example, the decision to categorize a markdown as permanent, temporary, or Perm +POS resided solely with Stein Mart’s merchandising department, which had no +knowledge of the impact that these markdowns had on the inventory valuation +accounting. +13. Moreover, prior to at least the middle of 2011, Stein Mart had insufficient internal +accounting controls that provided for its accounting department to review (i) how the +merchants categorized markdowns as permanent, temporary, or Perm POS or (ii) whether +the merchandise associated with Perm POS markdowns was accounted for properly. + + +5 + + + + +C. Stein Mart’s CFO Discovers Perm POS Markdowns and Consults With Others +14. In the summer of 2011, Stein Mart’s Chief Financial Officer (“CFO”) – who had been +hired as CFO in August of 2009 – learned for the first time that Stein Mart used “Perm +POS” markdowns. Prior to this time, and as a reflection of the insufficient internal +accounting controls surrounding Perm POS markdowns, Stein Mart’s CFO believed the +company used only permanent and temporary markdowns. +15. Upon learning of these markdowns, Stein Mart’s CFO gathered additional information by +consulting with Stein Mart’s merchandising department and others. Stein Mart’s CFO +understood after these consultations that – like permanent markdowns – the price +associated with Perm POS markdowns did not revert to its original retail price. +16. Stein Mart’s CFO subsequently had internal and external consultations concerning Stein +Mart’s accounting for Perm POS markdowns. Some, including Stein Mart’s Audit +Committee Chair, believed that Stein Mart’s practice was an acceptable method while +others provided information indicating that certain other retailers utilized different +methods for valuing Perm POS-like merchandise. Following these consultations, Stein +Mart’s CFO ultimately concluded that Stein Mart’s practice of writing down Perm POS +inventory at the time the product was sold was an acceptable method under GAAP. +D. Discussion with Stein Mart’s External Auditor +17. Despite the extensive internal and external discussions and additional steps noted above, +Stein Mart did not consult with its external auditor concerning Perm POS markdowns +until the fall of 2012. +18. In the fall of 2012, Stein Mart’s Audit Committee Chair concluded that the company +should account for Perm POS markdowns on the same basis as Permanent Markdowns, +meaning that the company should write down the inventory associated with Perm POS +markdowns at the time the markdown was taken instead of when the product was sold. +19. Stein Mart’s CFO subsequently contacted the engagement partner for the company’s +external auditor to discuss this issue. Stein Mart’s CFO informed the audit engagement +partner that the company’s proposed change in accounting treatment for Perm POS +markdowns was a change from one acceptable GAAP method to another, as opposed to a +change in method to correct for an accounting error under GAAP. +20. Stein Mart’s external auditor disagreed with the company’s view, and more specifically, +believed that Stein Mart’s current accounting for Perm POS Markdowns was not in +accordance with GAAP, and in turn, represented an accounting error. + + +6 + + + + +E. Stein Mart Restates and Discloses Accounting Error for Perm POS Markdowns +21. Subsequently, in May 2013, Stein Mart restated its financial statements for the first +quarter of 2012, all quarterly and annual periods in fiscal year 2011, and the annual +period for fiscal year 2010. In its restatement, Stein Mart stated that its original +accounting for Perm POS markdowns was an accounting error and not in accordance +with GAAP. +22. As a result of Stein Mart’s accounting error for Perm POS markdowns and as reflected by +the chart below (in 000s), Stein Mart materially overstated or understated pre-tax income +in certain quarterly reporting periods. Most notably, Stein Mart reported an approximate +30% overstatement in its pre-tax income for its first quarter 2012 results because of its +improper accounting for Perm POS markdowns. + FY +2010 +Q1 '11 Q2 '11 Q3 '11 Q4 '11 FY +2011 +Q1 '12 + Pre-Tax Income/(Loss) – +Originally Reported 53,192 26,215 2,250 (5,417) 8,923 31,971 20,372 + Pre-Tax Income/(Loss) – Restated 52,426 23,164 4,154 (6,392) 11,740 32,667 15,685 + Pre-Tax Income/(Loss) – +Over/(Under) Statement 766 3,051 (1,904) 975 (2,817) (696) 4,687 + +Percentage Over/(Under) +Statement + +1.5% 13.2% -45.8% -15.3% -24.0% -2.1% 29.9% + +23. Moreover, in the restatement, Stein Mart acknowledged that it not only had a material +weakness in its internal control over financial reporting surrounding Perm POS +markdowns but also that it had a material weakness in “its control environment related to +the level of information and communication between the finance department and other +departmental functions.” +F. Other Stein Mart Accounting and Internal Control Issues +24. In addition to the issues surrounding Perm POS markdowns, Stein Mart had a number of +other accounting and internal controls related issues during the relevant period. +25. First, in the first quarter of 2011, Stein Mart identified an error related to its liability for +credit card rewards earned under Stein Mart’s co-brand credit program with a bank. This +error was caused by two issues: (i) an operational error in the information technology +systems used to calculate these liabilities and (ii) the reconciliation performed by Stein +Mart’s accounting department to detect these types of errors was done improperly. This +error resulted in an approximate $2 million total understatement of Stein Mart’s other +income across certain periods, which the company corrected as an out-of-period +adjustment in the first quarter of 2011. +7 + + + + +26. Second, in the third quarter of 2011, Stein Mart identified an error in connection with the +operation of its inventory retail stock ledger system. This error was also caused by two +issues: (i) an operational error in the applicable informational technology systems and (ii) +a failure to perform timely reconciliations in the accounting department. This error +caused Stein Mart to overstate its gross margin and inventory by $2.2 million in its +earnings release for the third quarter of 2011. The company disclosed the error and +accounted for these items correctly in the financial statements filed with the company’s +third quarter 2011 Form 10-Q. The company subsequently disclosed in the fourth quarter +of 2011 that this error resulted from a material weakness in its internal control over +financial reporting. +27. Third, in the fourth quarter of 2011, the company identified during the reconciliation +process an unsupported credit card variance for its outstanding credit card settlements. +The company found that it was improperly relating these credit card variances to prior +periods. This error resulted in a slight overstatement of pre-tax income across certain +periods, which the company recorded as a cumulative adjustment in the fourth quarter of +2011. In its fiscal year-end 2011 annual report, Stein Mart acknowledged that this error +reflected a material weakness in its internal control over financial reporting. +28. Fourth, in the middle of 2012, the company identified an error relating to incorrect +capitalization and amortization of software in prior periods and software assets that +should have been retired prior to 2012. This error resulted from both information +technology and accounting personnel improperly interpreting certain software invoices +received from a Stein Mart software service provider. This error resulted in Stein Mart +understating its Selling, General and Administrative expenses by approximately $2 +million over a certain period – an error that Stein Mart disclosed in its earnings release +for the second quarter of 2012. In the May 2013 restatement, Stein Mart stated that this +error reflected a material weakness in its internal control over financial reporting. +VIOLATIONS +29. Under Section 21C of the Exchange Act, the Commission may impose a cease-and-desist +order upon any person who is violating, has violated, or is about to violate any provision +of the Act and upon any other person that is, was, or would be a cause of the violation, +due to an act or omission the person knew or should have known would contribute to +such violation. +30. Section 13(a) of the Exchange Act requires issuers to file such periodic and other reports +as the Commission may prescribe and in conformity with such rules as the Commission +may promulgate. Exchange Act Rules 13a-1, 13a-11, and 13a-13 require the filing of +annual, current, and quarterly reports, respectively. In addition to the information +expressly required to be included in such reports, Rule 12b-20 of the Exchange Act +requires issuers to add such further material information, if any, as may be necessary to +make the required statements, in the light of the circumstances under which they are +8 + + + + +made not misleading. “The reporting provisions of the Exchange Act are clear and +unequivocal, and they are satisfied only by the filing of complete, accurate, and timely +reports.” SEC v. Savoy Industries, 587 F.2d 1149, 1165 (D.C. Cir. 1978) (citing SEC v. +IMC Int’1, Inc., 384 F. Supp. 889, 893 (N.D. Tex. 1974)). A violation of the reporting +provisions is established if a report is shown to contain materially false or misleading +information. SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975). +31. Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep books, +records, and accounts, which, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the issuer.” Section 13(b)(2)(B) of the +Exchange Act requires issuers to devise and maintain a system of internal accounting +controls sufficient to provide reasonable assurances that transactions are recorded as +necessary to permit the preparation of financial statements in conformity with generally +accepted accounting principles. +32. By engaging in the conduct above, Stein Mart violated Section 13(a) of the Exchange Act +and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. +COOPERATION AND REMEDIAL ACTION +33. In determining to accept Respondent’s Offer, the Commission considered remedial acts +undertaken by Stein Mart, including its enhancement of internal controls, retention of +additional accounting personnel, and Stein Mart’s cooperation with the staff’s +investigation. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Section 13(a), 13(b)(2)(A), an +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. +B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $800,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment +must be made in one of the following three ways: +9 + + + + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request +2 +; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofin.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +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 +Stein Mart 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 Antonia Chion, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549- +5720. + + + + + + + + + + +2 + The minimum threshold for transmission of payment electronically is $1,000,000. For amounts below the +threshold, respondents must make payments pursuant to option (2) or (3) above. +10 + + + +4845-7691-2677.4 +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. +By the Commission. + + Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3705.pdf b/raw/aaer/2015/AAER-3705.pdf new file mode 100644 index 0000000000000000000000000000000000000000..eb70f6a93e13a7201b0fc74e9d5e93f1cfb87731 --- /dev/null +++ b/raw/aaer/2015/AAER-3705.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8b99921effa84becebfde2a73911809e784ba792a7b7a856db7b014e67b226f8 +size 172584 diff --git a/raw/aaer/2015/AAER-3705.txt b/raw/aaer/2015/AAER-3705.txt new file mode 100644 index 0000000000000000000000000000000000000000..1e6ea7eb5e88632c990ebb39575ae541f12bc17f --- /dev/null +++ b/raw/aaer/2015/AAER-3705.txt @@ -0,0 +1,321 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75963 / September 22, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3705 / September 22, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16828 + + +In the Matter of + +IDLE MEDIA, INC. and +MARCUS FRASIER, + +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 Idle Media, Inc. (“Idle Media”) and Marcus +Frasier (“Frasier”) (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, 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 + + These proceedings arise out of Idle Media’s numerous reporting, books and records, and +internal control violations during the period it was a reporting company from August 2012 +through December 2013. Because of Idle Media’s accounting errors, Idle Media restated its +financial statements multiple times during this period. First, Idle Media determined that its +financial statements for the 2010 fiscal year required restatement because the company failed to +record revenue and expenses generated by its subsidiary, Datpiff, LLC (“Datpiff”), that were +processed through accounts of its parent, Zoeter, LLC (“Zoeter”). However, rather than +correcting these revenue and expense line items, Idle Media improperly consolidated Zoeter as a +variable interest entity. When Idle Media reported these consolidated financial statements, it +failed to include Zoeter’s accounts within each financial statement line item, leading to another +restatement. Idle Media eventually acknowledged that its consolidation of Zoeter was incorrect, +resulting in a final restatement to deconsolidate Zoeter’s financial statements and recognize all of +Datpiff’s revenue and expenses in its own financial statements. + + Marcus Frasier, Idle Media’s founder and Chief Executive Officer (“CEO”), signed the +company’s relevant SEC filings and a certification. Although Frasier was responsible for +maintaining Idle Media’s books and records and implementing adequate internal accounting +controls, he failed to do so. As a result, Frasier caused Idle Media’s reporting, books and +records, and internal accounting controls violations and improperly certified Idle Media’s Form +10-Q filing. + +Respondents + +1. Idle Media, Inc., is a Nevada corporation based in Leesport, Pennsylvania. Idle +Media develops and operates several websites focusing on music, music videos and gaming. Idle +Media became a publicly traded company in May 2010 through a reverse merger with another +corporation. Idle Media’s stock was registered with the Commission pursuant to Section 12(g) +of the Exchange Act from August 2012 to December 2013. During that period, its stock was +quoted on the OTC Bulletin Board under the ticker symbol “IDLM.” The stock is currently +quoted on the OTC Link, which is operated by OTC Markets Group Inc. Approximately 65% of +Idle Media’s outstanding stock is owned by Zoeter. Idle Media operates through Datpiff, a +wholly owned subsidiary. +2. Marcus Frasier, age 30, is a resident of Shoemakersville, Pennsylvania. Frasier is +the founder of Idle Media and is its CEO. Frasier also owns Zoeter and is its only member. + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 + +Background + + 3. In 2005, Frasier created Zoeter to hold and run certain web development projects. +Zoeter held datpiff.com, a website that enabled customers to upload and share music. + + 4. In 2008, Frasier formed Datpiff to hold and run the datpiff.com website. +Although Frasier intended Datpiff to operate separately from Zoeter, Frasier used accounts in +Zoeter’s name to receive revenue and pay expenses for Datpiff. + +5. In May 2010, Frasier formed Idle Media and caused it to merge with a shell +company. At the same time, Frasier made Datpiff a wholly owned subsidiary of Idle Media. +Zoeter received 40 million shares of Idle Media stock, representing a 65% share, and thereby +became the parent company of Idle Media. Frasier became Idle Media’s CEO. Datpiff was the +primary revenue generating business of Idle Media. + + 6. Following Idle Media’s formation, Zoete r and Datpiff shared employees, +including Frasier. Zoeter continued to pay the payroll expenses for Datpiff employees and paid +operating expenses, such as costs of servers, for both companies. + +Idle Media ’s Restatement to Consolidate its Parent Company + + 7. Subsequent to the company issuing financial statements in its Form 10-K for its +2010 fiscal year and in its Form 10-Q for the first quarter ended December 31, 2010, Idle Media +discovered that it failed to record certain revenue and expenses generated by Datpiff but +processed through Zoeter’s accounts. On February 28, 2011, Idle Media issued a Form 8-K +announcing its previously issued financial statements for the fiscal year ended September 30, +2010 and the quarter ended December 31, 2010 should not be relied upon. + + 8. Nearly a year later and without having issued restated financial statements, the +company filed a Form 15 on March 8, 2012, terminating its SEC registration. Three months +later, however, the company filed a Form 10 to recommence registration. In the Form 10 filed +June 13, 2012, the company issued restated financial statements for the fiscal year ended +September 30, 2010. However, the company did not correct its accounting deficiencies resulting +from the misallocation of revenues and expenses between Datpiff and Zoeter. Rather, the +company consolidated Zoeter’s financial statements into those of Idle Media, claiming Zoeter +was a variable interest entity (“VIE”) requiring consolidation by Idle Media. + + 10. Idle Media issued consolidated financial statements in its Form 10-Q for the +quarter ended June 30, 2012, filed on August 17, 2012, and in its Forms 10 and 10/A filed on +June 13, 2012, July 31, 2012, September 25, 2012, September 26, 2012, and October 29, 2012, +respectively. Frasier signed and/or certified each of these reports. + + + + + 4 +Idle Media ’s Restatement to Correct Consolidation Errors + + 11. When Idle Media originally reported its consolidated financial statements, it +improperly failed to consolidate Zoeter’s accounts within each financial statement line item and +incorrectly presented the impact of the noncontrolling interest on Idle Media’s income. Idle +Media amended its Form 10 on September 25, 2012 to restate the form and contents of its +consolidated financial statements. + +Idle Media ’s Deconsolidat ion of its Parent Company + + 12. Idle Media’s consolidation of Zoeter was improper because Idle Media did not +have a variable interest in Zoeter. Idle Media filed a Form 8-K on January 15, 2013, announcing +it would restate its financial statements again to deconsolidate Zoeter and acknowledging that its +VIE accounting was incorrect. + + 13. In December 2013, Idle Media issued restated financial statements for fiscal years +2010 and 2011 and related quarterly periods. As a result of Idle Media’s improper consolidation +of Zoeter and its earlier revenue and expense allocation errors between Datpiff and Zoeter, the +company had materially misstated revenue and net income by 18% and 24%, respectively, for +2010. Idle Media had also materially misstated net income by 24% for 2011. + +Idle Media’s Failure to Maintain Adequate Books and Records + + 14. Throughout the relevant period, Idle Media failed to maintain adequate books and +records. For example, Idle Media used Zoeter accounts for Datpiff’s operations without +correctly allocating revenue and expenses between the two companies. Idle Media’s improper +recording of revenue and expenses contributed to its incorrect determination that Zoeter’s +financial statements should be consolidated with those of Idle Media. + + 15. Frasier knew that Idle Media failed to segregate its accounts from Zoeter’s +accounts but failed to ensure that Idle Media properly allocated revenues and expenses to the +correct entity. + +Idle Media’s Failure to Establish and Implement Adequate Internal Accounting Controls + + 16. Throughout the relevant period, Idle Media did not maintain adequate internal +accounting controls. The company failed to maintain any written policies or take other +meaningful steps to ensure that the company reported its financial results accurately. + + 17. Idle Media announced in its Form 8-K filed on March 30, 2011 the existence of +material weaknesses in the company’s internal control over financial reporting and that an +assessment of those controls was being conducted. The company, however, failed to take +adequate steps to improve its internal control over financial reporting. + + 18. Frasier was aware that the company failed to assess, implement, evaluate, or +maintain adequate internal accounting controls. Although these controls were his responsibility, + 5 +he failed to take any action to address this issue and therefore caused Idle Media’s internal +accounting controls violations. + +Frasier Violated the Certification Provisions + +19. As Idle Media’s CEO, Frasier was required to sign certifications each fiscal +quarter and fiscal year pursuant to Sarbanes-Oxley Act Section 302 and Exchange Act Rule 13a- +14. Frasier executed the certification attached to Idle Media’s quarterly report for the period +ended June 30, 2012. + + 20. In the certification, Frasier stated that he had designed, or caused others to design, +internal control over financial reporting to provide reasonable assurance regarding the reliability +of financial reports and the presentation of financial statements. + + 21. Frasier’s certification was untrue because Frasier did not design, or cause others +to design, internal control over financial reporting. + +Violations + +22. As a result of the conduct described above, Idle Media violated Sections 12(g) and +13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. Section 12(g), which contains +an express voluntary registration provision, requires that every issuer who seeks to register a class +of equity securities pursuant to Section 12(g) must file a registration statement (e.g., on Form 10) +containing such information and documents as the Commission may specify. In addition, every +issuer of such a registered class of securities that is required to file annual reports on Form 10-K +pursuant to Section 13(a) is also required to file quarterly reports on Form 10-Q pursuant to the +provisions of Rule 13a-13 thereunder. Finally, Rule 12b-20 under the Exchange Act requires that +such registration statements and quarterly reports contain such further material information as may +be necessary to make the required statements, in light of the circumstances under which they are +made, not misleading. + + 23. As a result of the conduct described above, Idle Media committed violations of +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. + + 24. As a result of the conduct described above, Idle Media violated Section 13(b)(2)(B) +of the Exchange Act, which requires all reporting companies to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that transactions are +recorded as necessary to permit preparation of financial statements in conformity with generally +accepted accounting principles. + + 25. As a result of the conduct described above, Frasier caused Idle Media’s violations +of Sections 12(g), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-13 and +12b-20 thereunder. Also as a result of the conduct described above, Frasier violated Rule 13a-14, + 6 +which requires each principal executive officer of an issuer to include certain certifications in +filings made pursuant to Section 13(a) of the Exchange Act. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. Respondent Idle Media cease and desist from committing or causing any violations +and any future violations of Sections 12(g), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act +and Rules 13a-13 and 12b-20 thereunder. + +B. Respondent Frasier cease and desist from committing or causing any violations and +any future violations of Sections 12(g), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and +Rules 13a-13, 13a-14 and 12b-20 thereunder. + + C. Respondents Idle Media and Frasier shall each, within 10 days of the entry of this +Order, pay a civil money penalty in the amount of $50,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act +Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 +U.S.C. 3717. Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Idle +Media and Frasier 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 M. Metcalfe, Division of + 7 +Enforcement, Securities and Exchange Commission, 1961 Stout Street, Suite 1700, Denver, CO +80294. + + D. Such civil money penalties may be distributed pursuant to Section 308(a) of the +Sarbanes-Oxley Act of 2002, as amended (“Fair Fund distribution”). Regardless of whether any +such Fair Fund distribution is made, amounts ordered to be paid as civil money penalties pursuant +to this Order shall be treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondents agree that in any +Related Investor Action, they shall not argue that they are entitled to, nor shall they benefit by, +offset or reduction of any award of compensatory damages by the amount of any part of +Respondents’ payment of a civil penalty in this action ("Penalty Offset"). If the court in any +Related Investor Action grants such a Penalty Offset, Respondents agree that they shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. Such +a payment shall not be deemed an additional civil penalty and shall not be deemed to change the +amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a "Related +Investor Action" means a private damages action brought against Respondents by or on behalf of +one or more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +V. + + 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 Frasier, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Respondent Frasier 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 Frasier of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3706.pdf b/raw/aaer/2015/AAER-3706.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7167621abbcfe92ae417d2f737ad2da0512e741e --- /dev/null +++ b/raw/aaer/2015/AAER-3706.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:fa066b7262550650629aef54066ae9948dfe7cccea006dcd029b5d289935fb29 +size 197163 diff --git a/raw/aaer/2015/AAER-3706.txt b/raw/aaer/2015/AAER-3706.txt new file mode 100644 index 0000000000000000000000000000000000000000..f21d18b64766d6772eec9f803f0295a684d0c446 --- /dev/null +++ b/raw/aaer/2015/AAER-3706.txt @@ -0,0 +1,313 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75999 / September 28, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3708 / September 28, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16839 + + +In the Matter of + +Daniel R. Bartholomew and +Karl I. Hjelvik, + +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 AND NOTICE OF +HEARING + +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 Daniel R. Bartholomew and Karl I. Hjelvik +(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, 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 and Notice of Hearing (“Order”), as set forth +below. + 2 +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: +Summary + As the New Mexico economy declined during the financial crisis, Trinity Capital +Corporation and its wholly-owned subsidiary, Los Alamos National Bank (collectively, “Trinity” +or “the Bank”), experienced an increase in problem loans and a decrease in the collateral values +supporting its loan portfolio and other real estate owned (“OREO”). In response, certain former +members of the Bank’s management caused the Bank to engage in false and misleading +accounting and reporting that concealed the Bank’s delinquencies and declining collateral values +and to hide the true nature of its loan and OREO portfolio. This conduct resulted in the Bank +materially misstating its provision for loan losses and its allowance for loan and lease losses +(“ALLL”), included in quarterly and annual filings with the Commission during 2010, 2011 and +the first two quarters of 2012. This conduct by certain former members of the Bank’s +management was aided by the Bank’s deficient internal accounting controls over loan and OREO +accounting, as well as the circumventing internal accounting controls by certain employees and +former members of management. + While serving as the Bank’s Chief Financial Officer, Daniel Bartholomew failed to +implement adequate internal controls over, among other areas, impaired loan loss calculations, +troubled debt restructurings (“TDRs”), subsequent events, OREO, and appraisals. In some +instances, Bartholomew was also a cause of Trinity’s false books and records and the submission +of inaccurate reports because he was on notice of certain transactions that failed to comply with +generally accepted accounting principles (“GAAP”), but he failed to correct the accounting errors. + While serving as the Bank’s head of Internal Audit, Karl Hjelvik was directly responsible +for testing the Bank’s internal accounting controls and compliance with GAAP. When Hjelvik +became aware of issues in the way in which loans were accounted for under the direction of the +Bank’s management, he failed to report his concerns to the Bank’s audit committee, and in some +instances, he failed to take action to remedy inaccurate reports and books and records as required +by the Bank’s policies and procedures. Hjelvik also failed to ensure that effective internal controls +were in place over impaired loan loss calculations, TDRs, subsequent events, OREO, and +appraisals. +Respondents +1. Daniel Bartholomew is a 49-year-old resident of Los Alamos, New Mexico. +Bartholomew served as the Bank’s chief financial officer (“CFO”) from 2003 until September +2014. He has never been a certified public accountant. + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + 3 +2. Karl Hjelvik is a 53-year-old resident of Los Alamos, New Mexico. Hjelvik has +served as the Bank’s head of internal audit since 1997 and has held the title of Vice President of +Internal Audit since 2007. Hjelvik has never been a certified public accountant. +Related Entity +3. Trinity Capital Corporation is a New Mexico corporation headquartered in Los +Alamos, New Mexico. Trinity is the holding company of Los Alamos National Bank, a national +banking organization with $1.4 billion in assets. Trinity’s common stock is registered with the +Commission pursuant to Section 12(g) of the Exchange Act; however, its stock is not listed on any +automated quotation system or securities exchange and no firm makes a market in its stock. In +2010, Trinity issued common stock under a registration statement filed on Form S-8 (Registration +No. 333-126980, filed July 28, 2005). In 2012, Trinity awarded Restricted Stock Units to certain +personnel under the same registration statement. The registration statement incorporated by +reference subsequent filings, including Trinity’s 2010 Forms 10-Q and 10-K, 2011 Forms 10-Q +and 10-K, and 2012 Forms 10-Q. +Facts +4. During 2010, 2011 and the first two quarters of 2012 (the “Relevant Periods”), +Trinity failed to properly account for the Bank’s loan portfolio and failed to properly account for +its OREO in 2011. As a result, the Bank filed inaccurate periodic reports with the Commission in +2010, 2011, and the first two quarters of 2012. +5. On December 12, 2014, Trinity filed its Form 10-K for the year ended December +31, 2013, which included the restatement of Trinity’s consolidated financial data for the year ended +December 31, 2011 and the quarterly periods ended March 31, 2012 and June 30, 2012, and the +restated, unaudited, selected consolidated financial data for the year ended December 31, 2010. +According to its restatement, Trinity’s provision for loan losses was understated by $6.8 million +(25%) in 2010, $22.3 million (73%) in 2011, and $4.5 million (68%) in the first quarter of 2012. +Trinity overstated its provision for loan losses for the second quarter of 2012 by $2.3 million +(31%). Additionally, in 2011, Trinity’s OREO losses were understated by $364,000 (10%). The +restatement also noted that these failures were caused in part by the override of controls by certain +former members of management because of Trinity’s insufficient internal accounting controls, +including controls in the loan department, internal audit, and loan accounting. The restatement +also identified material weaknesses in Trinity’s internal control over financial reporting. +6. Certain former members of the Bank’s management, directly and through +instructions to lower-level employees, caused the Bank to materially misstate its ALLL and loan +loss provision by: (1) failing to downgrade troubled loans; (2) failing to identify loans as +individually impaired – including hundreds of TDRs; (3) failing to measure the impairment on +impaired loans properly; and (4) making various misrepresentations to the Respondents and other +third parties. In 2011, certain former members of the Bank’s management also caused the Bank to +improperly value its OREO. + 4 +7. In furtherance of the scheme, and to avoid downgrading loans to special mention or +substandard, certain former members of the Bank’s management established a practice, followed +by loan department employees, of using a variety of “extend and pretend” tactics to ignore and +hide a borrower’s troubled financial situation, such as extending additional credit to troubled +borrowers so that interest payments could be made and borrowers would remain off the past due +list; instructing employees to keep certain borrowers “off the radar” of the Office of the +Comptroller of the Currency (“OCC”) and other third parties; and delaying, ignoring, and +improperly rejecting appraisals. The scheme was motivated, at least in part, by a desire to have the +Bank released from a Formal Agreement with the OCC, which was in place from January 2010 to +April 2012. +8. Hjelvik and the internal audit department he headed were directly responsible for +ensuring: that risk was assessed, monitored and managed; that internal accounting controls existed +and functioned properly; that GAAP was followed; that an effective internal audit program was +developed and maintained; that audit results were reported to the audit committee each quarter; and +that internal audit’s independence was maintained. However, the Bank’s internal audit department +was not independent from management, internal controls either did not exist or did not function +properly, GAAP was not always followed, an effective internal audit program was not maintained, +and the Bank’s audit committee was not always provided with complete and independent audit +findings. The Bank’s internal audit department also lacked a formalized risk assessment process +and, as a result, did not sufficiently consider risks in financial reporting in establishing audit +procedures. +9. During the Relevant Periods, the Bank lacked sufficient internal accounting +controls for the periodic review of loans to ensure loans were accurately graded and to identify +troubled and impaired loans. Bartholomew and Hjelvik reviewed all internal control flow charts +annually and were aware that they lacked sufficient controls over identification of loans for +impairment and collateral fair value determination. Bartholomew and Hjelvik also repeatedly saw +quarterly grade change reports that indicated loans were not being downgraded timely. +10. In one specific instance, Hjelvik informed management within the loan department +that a loan should be impaired; however, the loan department refused to impair the loan and +Hjelvik never reported the incorrect loan classification to the audit committee or outside auditors. +In another example, a borrower’s loans were downgraded from pass to substandard by the internal +audit department in late March 2011, were then upgraded to pass at the direction of former +members of management in early April 2011, and were then again downgraded to substandard in +May 2011 when the borrower appeared on a list of loans to be reviewed by a third party. Other +than flagging these loans for testing by the third party reviewer, Hjelvik did not report the loan +department’s attempted override of internal controls or bank policies to the audit committee though +Hjelvik was required by the Bank’s policies and procedures to report such problems to the audit +committee, and once a year was asked by the audit committee in executive session to report his +concerns. +11. In response to another red flag, Bartholomew took no action when he was “dis- +invited” from attending loan department meetings where problem loans were discussed, even +though he suspected that he was dis-invited because he thought the loan department wanted to keep + 5 +information from the accounting department. Hjelvik was also aware that senior members of the +accounting department were dis-invited from these meetings but took no action in response. +12. The Bank also lacked sufficient internal accounting controls over the use of +overdraft loans and the analysis of TDRs. For example, the Bank’s internal loan approval and +credit review documents failed to require an analysis of whether a loan or a modification was a +TDR. Bartholomew and Hjelvik were both aware that the Bank might not be identifying all TDRs +and that the Bank’s systems were not able to run reports that would identify TDRs. Similarly, in +some instances, feedback and working papers from independent, third-party loan reviews indicated +that a TDR analysis should be performed on specific loans; however, there were no controls in +place to confirm that this feedback was reviewed, noted, and acted upon. Bartholomew and +Hjelvik were aware that none of Trinity’s internal control flow charts addressed TDRs and they +failed to take action to put sufficient controls in place. +13. The Bank failed to devise and maintain internal accounting controls sufficient to +provide reasonable assurances that its accounting for impaired loans was in conformity with +GAAP. Bartholomew, Hjelvik, and loan department personnel involved in calculating and +reviewing the impaired loan loss calculations did not possess sufficient accounting expertise. As a +result, errors occurred in the calculation of impaired loan losses by the loan department that were +not remediated by Bartholomew or Hjelvik during their review of the calculations. For example, +Bartholomew and Hjelvik were aware of loans that relied upon stale appraisals and collateral +values improperly based on “as-stabilized” valuations. They were also aware of other indications +of value – including listing agreements and negotiated sales prices – that suggested fair value was +substantially below the Bank’s dated appraised value used for its impairment calculation. +Nevertheless, Bartholomew and Hjelvik failed to take action to ensure that the impairment +measurements considered updated and accurate “as-is” values or to notify the audit committee of +any concerns. Further, in one example, neither of them followed up to ensure that an appraisal was +being handled properly when they were made aware that the appraisal had been deleted out of a +Bank database. +14. The Bank also lacked sufficient processes and controls over appraisals. While the +appraisal process was to be separate and independent from the loan department, in practice, loan +department employees were charged with determining when appraisals would be ordered on +classified loans and OREO properties. Further, at the direction of certain former members of the +Bank’s management and loan department, appraisals were sometimes not ordered timely, +delayed, or ordered without the standard request for an “as-is” fair value. Neither the internal +audit nor accounting departments were automatically notified when appraisals were received, +which meant that they were not always aware of appraisals relevant to impairment measurements +or OREO write downs. During the Relevant Periods, Bartholomew and Hjelvik were both aware +of these appraisal irregularities in connection with loans and yet they took no action to increase +controls over the appraisal process. +15. Additionally, appraisals received in the subsequent event period were not always +considered, as required by GAAP, in the Bank’s loan and OREO impairment accounting. +Bartholomew and Hjelvik were aware of this by at least 2009 when the Bank’s outside auditor +found a material accounting error. They were also aware of instances of the loan department + 6 +failing to properly account for subsequent events throughout 2010 and 2011. Nonetheless, +Bartholomew and Hjelvik failed to implement controls to adequately address this issue and, +throughout the Relevant Periods, the Bank’s internal audit and accounting departments continued +to stumble across appraisals received in the subsequent event period that had not been considered +in the Bank’s accounting. +16. Bartholomew and Hjelvik were also aware that sufficient controls were lacking +over the Bank’s processes and computerized systems that housed appraisals and loan information. +Controls were inadequate to ensure all received appraisals were preserved in the Bank’s +database. Numerous employees, including loan officers, had edit rights to these systems allowing +them to alter or delete data about loans, appraisals, collateral values, and customers. Because of +these internal control weaknesses, employees could delete appraisals or change collateral values +without documenting why the alterations were made. When appraisals and collateral values were +deleted, the result was that information was not made available to the OCC and other third parties, +as well as other Bank employees. +17. Bartholomew signed Trinity’s 10-K and 10-Q filings, including certifications, as +well as management representation letters to the outside auditors that included representations on +GAAP, internal controls, and any suspected fraud. Hjelvik signed Trinity’s 2011 internal control +representation letter to the external auditor and signed sub-certifications to Trinity’s 2010 Form 10- +K, 2011 Form 10-K, and the 2012 first quarter 10-Q, knowing that their purpose was to bring up +issues that could affect the filings. Notwithstanding the facts described above, Bartholomew and +Hjelvik signed these representations, while also failing to adequately address concerns raised by +Bank employees about how certain significant loans were being risk rated and accounted for by the +Bank. +Violations +18. As a result of the conduct described above, Bartholomew and Hjelvik were a cause +of Trinity’s violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 +thereunder, which require every issuer of a security registered pursuant to Section 12 of the +Exchange Act to file with the Commission information, documents, and annual and quarterly +reports as the Commission may require, and mandate that periodic reports contain such further +material information as may be necessary to make the required statements not misleading. +19. As a result of the conduct described above, Bartholomew and Hjelvik were a cause +of Trinity’s violations of 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 +reflect their transactions and dispositions of their assets. +20. As a result of the conduct described above, Bartholomew and Hjelvik were a cause +of Trinity’s violations of Section 13(b)(2)(B) of the Exchange Act, which requires all reporting +companies to devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that transactions are recorded as necessary to permit preparation of financial +statements in accordance with generally accepted accounting principles; and prohibit persons from +knowingly circumventing or knowingly failing to implement a system of internal accounting + 7 +controls, knowingly falsifying any book, record, or account, and directly or indirectly falsifying or +causing to be falsified any book, record, or account. +IV. + Respondents acknowledge that the Commission is not at this time imposing a civil penalty +based upon their agreement to cooperate in a related enforcement action. However, pursuant to +this Order, Respondents agree to additional proceedings in this proceeding to determine what, if +any, civil penalties pursuant to Section 21B(a) of the Exchange Act against Respondents are in +the public interest. In connection with such additional proceedings: (a) Respondents agree that +they will be precluded from arguing that they did not violate the federal securities laws described +in this Order; (b) Respondents agree that they may not challenge the validity of this Order; (c) +solely for the purposes of such additional proceedings, the findings of the Order shall be +accepted as and deemed true by the hearing officer; and (d) the hearing officer may determine +the issues raised in the additional proceedings on the basis of affidavits, declarations, excerpts of +sworn deposition or investigative testimony, and documentary evidence. +V. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondents Bartholomew and +Hjelvik cease and desist from committing or causing any violations and any future violations of +Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and +13a-13 thereunder. +B. IT IS FURTHER ORDERED pursuant to Rule 100(c) of the Commission’s Rules +of Practice, 17 C.F.R. § 201.100(c), in the interest of justice and without prejudice to any party, +that a public hearing for the purpose of taking evidence on the questions set forth in Section IV +hereof shall be convened at a time and place to be fixed, and before an Administrative Law +Judge to be designated by further order as provided by Rule 110 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.110, following the entry of a final judgment against the last remaining +defendant(s) in Securities and Exchange Commission v. Jill D. Cook and Mark C. Pierce, Civil +Action No. 15-cv-00864 (D.N.M., filed September 28, 2015 (the “Related Actions”). +If Respondents fail to appear at a hearing after being duly notified, Respondents may be +deemed in default and the proceedings may be determined against them upon consideration of +this Order, the allegations of which may be deemed to be true as provided by Rules 155(a), +221(f), and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.221(f), +and 201.310. +The Order shall be served forthwith upon Respondents personally or by certified mail. + 8 +C. IT IS FURTHER ORDERED pursuant to Rule 100(c) of the Commission’s Rules +of Practice, 17 C.F.R. § 201.100(c), in the interest of justice and without prejudice to any party, +that the Administrative Law Judge shall issue an initial decision no later than 120 days from the +date of the entry of a final judgment in the Related Actions. + +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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3707.pdf b/raw/aaer/2015/AAER-3707.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bf4ce3bc1c7c2d5143671021e2b6ab5c54a5f8c0 --- /dev/null +++ b/raw/aaer/2015/AAER-3707.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:08be963f95df84e3dc2c556a37a2667921a70e9daf7068a08ef1853e28f80bce +size 140729 diff --git a/raw/aaer/2015/AAER-3707.txt b/raw/aaer/2015/AAER-3707.txt new file mode 100644 index 0000000000000000000000000000000000000000..fdba41fdfedcbf7b41f752b86f2c9c29baa35813 --- /dev/null +++ b/raw/aaer/2015/AAER-3707.txt @@ -0,0 +1,487 @@ + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9931 / September 28, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75998 / September 28, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3707 / September 28, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16838 + + +In the Matter of + +William C. Enloe, + +Respondent. + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER AND +PENALTIES + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against William C. Enloe (“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 in Section V herein, Respondent consents +to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the +Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, +and Imposing a Cease-and-Desist Order and Penalties (“Order”), as set forth below. + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +Summary + This proceeding resulted from the failure of Trinity Capital Corporation and its wholly- +owned subsidiary, Los Alamos National Bank (collectively, “Trinity” or “the Bank”), to account +properly for the Bank’s loan portfolio during 2010, 2011 and the first two quarters of 2012 (the +“Relevant Periods”), and to account properly for its real estate held as a result of foreclosures +(referred to as “other real estate owned” or “OREO”) in 2011. + By 2009, as the New Mexico economy declined during the financial crisis, the Bank +experienced an increase in delinquent and problem loans and a decrease in the collateral values +supporting its loan and OREO portfolio, requiring the Bank to record loan and OREO losses. +Enloe and other former members of Trinity’s management caused the Bank to engage in false and +misleading accounting and reporting that concealed the Bank’s loan delinquencies and declining +collateral values and to hide the true value of its loan and OREO portfolio. This conduct resulted +in the Bank materially misstating its provision for loan losses on its income statement and its +allowance for loan and lease losses (“ALLL”) on its balance sheet during the Relevant Periods, +including in its quarterly and annual filings with the Commission during 2010, 2011, and the first +two quarters of 2012, and understating its OREO losses in 2011. This conduct by Enloe and other +former members of the Bank’s management was aided by the Bank’s deficient internal accounting +controls over loan and OREO accounting, as well as the overriding of internal accounting controls +by Enloe and other employees and former members of management. + While serving as the CEO of the Bank, Enloe facilitated the false and misleading +accounting by pressuring loan officers to engage in improper conduct that kept the Bank from +properly recording losses on its financial statements. Specifically, Enloe instructed and +encouraged loan officers and others: (1) not to downgrade loans that were delinquent; (2) to make +delinquent loans appear to be paying on time; (3) not to identify loans for which the Bank was not +going to be paid in full; and (4) not to accurately value the Bank’s collateral. In addition, Enloe +circumvented the Bank’s internal controls by, among other things: (a) permitting the extension of +additional credit to delinquent borrowers without the appropriate financial analysis or supervisory +approval; (b) improperly rejecting appraisals that evidenced declining values for real estate that +collateralized loans; and (c) continuing to act as a loan officer when he had no lending authority. +The fraudulent conduct was also aided by Enloe’s failure to implement sufficient internal controls +over financial reporting at the Bank. +Respondent +1. William C. Enloe is a 66-year-old resident of Los Alamos, New Mexico. Enloe +worked at the Bank from 1971 until his employment concluded on February 1, 2013. From 1979 + +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 +until 1994 he was the President of Trinity, and from 1994 to February 1, 2013, Enloe served as +Trinity’s CEO. Enloe is now employed by a private company. +Related Entity +2. Trinity Capital Corporation is a New Mexico corporation headquartered in Los +Alamos, New Mexico. Trinity is the holding company of Los Alamos National Bank, a national +banking organization with $1.4 billion in assets. Trinity’s common stock is registered with the +Commission pursuant to Section 12(g) of the Exchange Act; however, its stock is not listed on any +automated quotation system or securities exchange and no firm makes a market in its stock. In +2010, Trinity issued common stock under a registration statement filed on Form S-8 (Registration +No. 333-126980, filed July 28, 2005). In 2012, Trinity awarded Restricted Stock Units to certain +personnel under the same registration statement. The registration statement incorporated by +reference subsequent filings, including Trinity’s 2010 Forms 10-Q and 10-K, 2011 Forms 10-Q +and 10-K, and 2012 Forms 10-Q. +Facts +3. During 2010, 2011, and the first two quarters of 2012 (the “Relevant Periods”), +Trinity failed to properly account for the Bank’s loan portfolio and OREO. As a result, the Bank +filed inaccurate periodic reports with the Commission in 2010, 2011, and the first two quarters of +2012. +4. On December 12, 2014, Trinity filed its Form 10-K for the year ended December +31, 2013, which included the restatement of Trinity’s consolidated financial data for the year ended +December 31, 2011 and the quarterly periods ended March 31, 2012 and June 30, 2012, and the +restated, unaudited, selected consolidated financial data for the year ended December 31, 2010. +According to its restatement, Trinity’s provision for loan losses was understated by $6.8 million +(25%) in 2010, $22.3 million (73%) in 2011, and $4.5 million (68%) in the first quarter of 2012. +Trinity overstated its provision for loan losses for the second quarter of 2012 by $2.3 million +(31%). Additionally, in 2011, Trinity’s OREO losses were understated by $364,000 (10%). The +restatement noted that these failures were caused in part by the override of controls by certain +former members of management because of Trinity’s insufficient internal accounting controls, +including controls in the loan department, internal audit, and loan accounting. The restatement +also identified material weaknesses in Trinity’s internal controls over financial reporting. +5. During the time period at issue, the Bank’s loan policies required that loans be +assigned one of seven descending grades based on the decreasing likelihood that the loan principal +and interest would be collected. As discussed herein, the Bank was thereafter required under +relevant accounting principles to recognize and/or reserve against likely loan losses. Enloe, +directly and through instructions to lower-level employees, caused the Bank to materially misstate +its ALLL and loan loss provision by: (1) pressuring loan officers not to downgrade troubled loans; +(2) instructing and encouraging loan officers and others to modify loan terms and extend additional +credit to delinquent borrowers to make unpaid loans falsely appear to be current; (3) failing to +identify loans that were not going to be paid in full – including loans where the Bank granted +concessions to the borrowers through restructured terms, known as troubled debt restructurings + 4 +(“TDRs”); and (4) failing to utilize accurate collateral valuations on impaired loans. In 2011, the +Bank and Enloe failed properly to value and account for impairments to its OREO by not using +appraisals that indicated that the value of OREO properties had decreased and that OREO write- +downs were required. +Failure To Downgrade Loans +6. During the Relevant Periods, the Bank’s loan department operated under a culture +that discouraged downgrading loans to special mention or substandard since the downgrading +would lead to the recording of additional losses. Loans were to be graded special mention when +they had potential weaknesses that deserved management’s close attention. Loans were to be +graded substandard when they demonstrated a well-defined weakness. Loan officers were under +pressure from Enloe and other members of management to avoid having “bad loans” in their loan +portfolios, including any loans that were graded below pass and loans that were more than 30 days +past due. As a result, the Bank’s loan department ignored and hid loan weaknesses that required +downgrades and waited as long as possible to downgrade loans below pass, which sometimes +included waiting until the loan was at or over 90 days past due, or until the loan was selected for +review by a third party and was therefore at risk for being identified as a grade “miss.” These +grading errors resulted in the Bank understating its ALLL because its lower graded loans carried a +higher historical loss rate, which would have required additional losses and increased the ALLL. +7. Enloe and the Bank’s loan department undertook steps to prevent downgrades on +certain loan relationships, including authorizing checking account overdrafts and the extension of +additional credit to borrowers who were unable to make their required principal and interest +payments on their existing debt. Sometimes this additional credit would be granted using loans +referred to as “ABC Loans,” which stood for “Additional Balance Club Loans.” The additional +credit was used to make required payments on the existing debt, which would result in the +borrower appearing current on loan payments when, in fact, the Bank was not actually making any +collections from the borrower. +8. Enloe, other former members of the Bank’s management, and loan department +employees circumvented and ignored internal accounting controls by failing to downgrade troubled +loan relationships. For example, in one instance, Enloe extended credit to a borrower without the +required credit analyses being completed. In another instance, a borrower’s loans were first +downgraded from pass to substandard by the internal audit department in late March 2011, were +then updated to pass at Enloe’s direction in early April 2011, and were then again downgraded to +substandard in May 2011 when the borrower appeared on a list of loans to be reviewed by a third +party. +9. In the case of one borrower and his associated entities, approximately $8.8 million +in loans were improperly graded as pass during nearly all of the Relevant Periods. In connection +with these loans, Enloe established a practice, followed by loan department employees, of using a +variety of techniques to ignore and hide the borrower’s troubled financial situation, including +granting additional credit to the borrower for the purpose of making payments on existing loans +and modifying the loans and granting the borrower concessions without downgrading the loans or + 5 +evaluating them as TDRs.2 Enloe and other members of the Bank’s management did not follow up +on certain Bank employees’ concerns regarding the manner in which the Bank was managing and +accounting for these loans. Further, Enloe and other former members of the Bank’s management +and loan department employees undertook efforts to prevent the OCC, the Board, and other Bank +personnel from reviewing this borrower’s loans and discovering the troubled nature of the +borrower. +10. In another instance, Enloe authorized numerous extensions to a borrower that +delayed the borrower’s repayment of the loans. The borrower’s financial situation and payment +history clearly indicated that he was struggling to make his payments in accordance with the terms +of his notes; nonetheless, at Enloe’s direction, the loan officer continued to extend additional credit +to make interest payments and to provide renewals and extensions to prevent the borrower from +appearing on the Bank’s past due list. Under Enloe’s direction, this borrower’s loans were not +handled in accordance with the Bank’s internal policies and procedures. Further, in at least one +instance, Enloe had the loan department provide the borrower additional funds in the name of his +entity so it would not be readily apparent that a loan payment was made through the extension of +additional credit. +Failure To Measure Individual Loan Impairments Properly +11. The Bank also made material errors by failing to measure properly the loss for +individually impaired loans. A loan is impaired when it is probable a creditor will be unable to +collect all amounts due according to the contractual terms of the loan agreement. If a loan is +individually impaired, the amount of impairment must be measured and recorded as a loss with a +corresponding amount recorded to the ALLL. Generally Accepted Accounting Principles +(“GAAP”) permits the impairment to be measured using the fair value of the underlying collateral +if the loan is collateral dependent, which is the method the Bank typically utilized. GAAP requires +that the best information available in the circumstances be used to determine fair value. +12. Among other things, appraisals were used to value the Bank’s collateral that was +used to measure the loss on impaired collateral-dependent loans. For purposes of measuring the +impairment on a collateral-dependent loan, the Bank was required to consider the current condition +of the property, which can be accomplished by using an “as-is” appraisal value.3 However, in at +least two instances, Enloe directed the use of higher “as stabilized” or “as completed” values in +measuring impairment losses when an as-is appraisal value should have been used. +13. One example involved a $4.2 million loan that was substandard and impaired +during the Relevant Periods. In 2010, at the direction of Enloe, the Bank used an as-stabilized +appraisal based on the hypothetical value of the project assuming construction was completed and +operating profitably. The Bank then subtracted the cost-to-complete as provided by the borrower. + +2 Pursuant to GAAP, a restructuring of a debt constitutes a TDR if the creditor grants a concession to the +debtor due to the debtor's financial difficulties. +3 ASC 820-10-20 defines fair value as the price that would be received to sell an asset in an orderly +transaction between market participants as of the measurement date. The as-is appraisal considers the +conditions of the property as of the measurement date, while the as-completed and as-stabilized appraisals +do not. + 6 +In the second half of 2011, the Bank obtained updated cost estimates that, if utilized, would have +resulted in an impairment loss of approximately $1 million; however, Enloe ignored those updated +cost-to-complete estimates. In the second quarter of 2012, the Bank finally received an appraisal +that included an “as-is” value, which would have required an impairment loss of approximately +$3.7 million. Enloe “rejected” the appraisal, requested it be deleted from the Bank’s electronic +loan file, and the Bank continued to use the 2010 as-stabilized appraisal less the outdated cost to +complete numbers. The resulting improper valuations on this loan resulted in the Bank avoiding +approximately $3.7 million in impairment losses throughout 2011 and in the first two quarters of +2012. +14. In another instance, the Bank ignored an appraisal valuing the collateral supporting +an $8.9 million loan that was substandard and impaired. Throughout 2011 and the first two +quarters of 2012, the Bank measured the loan’s impairment by relying on a February 2011 +appraisal that valued the property at approximately $15.9 million. In March 2012, the Bank was +notified that the property had been appraised in January 2012 in connection with foreclosure +litigation. Using the January 2012 appraisal would have resulted in an impairment loss of +approximately $3 million. At Enloe’s direction, the Bank disregarded the January 2012 appraisal, +ordered another appraisal from a different appraiser, and continued to solely rely on the outdated +February 2011 appraisal in accounting for the loan for the year-end 2011 and in the first two +quarters of 2012, thereby avoiding recognizing loan losses totaling approximately $3 million. +15. In another example, the Bank participated in a $20.5 million loan that was +substandard and impaired throughout the Relevant Periods. In calculating the impairment +throughout the Relevant Periods, Enloe directed that the Bank use the “as-stabilized” value of $32 +million from a January 2010 appraisal and $27.4 million from a January 2011 appraisal. These +“as-stabilized” values significantly overstated the fair value of the collateral, however, because +they assumed significant changes to the property’s operations, none of which occurred during the +Relevant Periods. +16. In connection with that same loan, Enloe ignored other material information +relevant to the property’s value that indicated that the loan required a significant impairment loss, +including a listing agreement that listed the property for sale at a price that was millions of dollars +below the appraised “as-stabilized” values. Enloe also responded to inquiries of multiple potential +buyers that the Bank was willing to accept a sales price that was millions of dollars below the +appraised “as-stabilized” values. In addition, Enloe knew that another bank with an interest in the +loan was accounting for the loan based on a collateral value of $13 million, and that an internal +Bank analysis showed that the property could be worth $14 to $15 million assuming some +improvements to the property’s operating condition. By failing to measure the impairment on this +loan properly, Enloe caused the Bank to avoid recording approximately $8.9 million of loan losses +throughout the Relevant Periods. +17. Similarly, on another loan for $2.7 million, the Bank avoided a $1.1 million +impairment loss in 2011 by ignoring clear evidence of a lower collateral value. In February 2012, +the Bank consented to a letter of intent for the sale of a loan’s collateral so long as the Bank +obtained $1.65 million from the sale. In accounting for the loan in the first quarter of 2012, + 7 +however, at Enloe’s direction, the Bank ignored the letter of intent and instead used the outstanding +loan balance of $2.7 million as the collateral value. +18. Enloe also avoided necessary write downs on OREO properties by interfering with +Trinity’s appraisal process and obtaining appraisals late. For example, in early 2011, the Bank was +in the process of foreclosing on a facility that was held as collateral on a loan. The facility had +appraised for $1 million in February 2010, but in March 2011 the bank received a new appraisal +that valued the property at $550,000. Enloe directed the loan department not to use the March +2011 appraisal and to hire a different appraiser to conduct another appraisal. On June 22, 2011, the +Bank received a new appraisal, which valued the property at $382,000. Upon receiving an +appraisal with an even lower value, Enloe instructed the loan department to use the March 2011 +appraisal with the value of $550,000. As a result of this conduct, the Bank improperly failed to +recognize approximately $444,000 of impairment losses as of March 30, 2011. +Circumventing and Failing to Implement Internal Accounting Controls +19. The material misstatements and the conduct by certain former members of Bank +management, including Enloe, were facilitated by the intentional circumvention of internal +accounting controls, but were also aided by Enloe’s failure to devise and maintain a system of +internal accounting controls. +20. During the Relevant Periods, Enloe failed to implement sufficient internal +accounting controls over the periodic review of loans to ensure loans were accurately graded and to +identify troubled and impaired loans. Further, due to Enloe’s influence, the Bank’s internal audit +department was not independent from management and, as a result, the Bank’s Audit Committee +was not always provided with complete and independent internal audit findings. The Bank’s +internal audit department also lacked a formalized risk assessment process and, as a result, did not +sufficiently consider risks in financial reporting in establishing audit procedures. +21. Enloe also circumvented the Bank’s processes and internal accounting controls over +TDRs, impaired loan loss calculations, and appraisals. As noted above, Enloe was involved in +loans that relied upon stale appraisals and collateral values improperly based on “as-stabilized” +valuations. Enloe also ignored appraisals that came in with valuations that would result in charge +offs. By circumventing the Bank’s processes and controls in these ways, Enloe caused the Bank to +materially misstate its ALLL and loan loss provision. +22. Enloe also failed to implement sufficient internal controls over the accounting for +ABC Loans and the analysis of TDRs. For example, the Bank’s internal loan approval and credit +review processes failed to require an analysis of whether a loan modification or extension was a +TDR. Similarly, in some instances, feedback and working papers from independent, third-party +loan reviews indicated that a TDR analysis should be performed on specific loans; however, there +were no controls in place to confirm that this feedback was reviewed, noted, and acted upon. +Further, during the Relevant Periods, TDRs were rarely discussed within the loan department, and +employees were not properly instructed as to how and when to analyze modifications as potential +TDRs. Finally, numerous loans should have been evaluated as TDRs because a new loan was + 8 +provided to pay interest or principal due on an existing loan. Enloe and the Bank’s loan policy +failed to consider whether this situation resulted in a “concession.” +23. Enloe failed to devise and maintain internal accounting controls sufficient to +provide reasonable assurances that the Bank’s accounting for impaired loans was in conformity +with GAAP. Loan department personnel calculating the impaired loan losses did not possess +sufficient accounting expertise and there was not adequate involvement or review by the +accounting department. As a result, errors occurred in the calculation of impaired loan losses. +24. Enloe also failed to implement sufficient internal controls over appraisals. While +the appraisal process was to be separate and independent from the loan department, in practice, +loan department employees were charged with determining when appraisals would be ordered on +classified loans. Further, at the direction of certain former members of the Bank’s management +and loan department, including Enloe, appraisals were sometimes not ordered timely, delayed, or +ordered without the standard request for an “as-is” fair value. The accounting department was not +automatically notified when appraisals were received, which meant that it was not always aware of +appraisals relevant to impairment measurements. +25. Additionally, appraisals and other information were not always used, as required by +GAAP, in the Bank’s loan impairment accounting. Enloe was aware of this by at least 2009 when +the Bank’s outside auditor found a $2.2 million accounting error. Nonetheless, Enloe failed to +implement controls to adequately address this issue and, throughout the Relevant Periods, the +Bank’s internal audit and accounting departments continued to stumble across appraisals that had +not been considered in the Bank’s accounting. +26. Enloe also failed to implement sufficient internal accounting controls over the +Bank’s processes and computerized systems that housed appraisals and loan information. Controls +were inadequate to ensure all received appraisals were preserved in the Bank’s database. +Numerous employees, including loan officers, had edit rights to these systems allowing them to +alter or delete data about loans, appraisals, collateral values and customers. Because of these +inadequacies, employees could delete appraisals or change collateral values without documenting +why the alterations were made. When appraisals and collateral values were deleted, the result was +that information was not made available to the OCC and other third parties, as well as other Bank +employees. +Misleading Statements to Accountants +27. Enloe also made, or caused to be made, misleading statements to the Bank’s +accountants. For example, Enloe was aware of false and misleading information in impairment +memos that were provided to internal accountants and the external auditors, including incorrect +impairment calculations on loans that understated losses. Enloe was also aware of material +information regarding the Bank’s loan portfolio that was not provided to the external auditors, +including evidence of significant borrower relationships where the borrowers were delinquent or +had indicated an inability to pay and yet the Bank did not downgrade the loans below pass or +designate the loans as impaired. + 9 +False Certifications +28. As CEO, during all Relevant Periods, Enloe signed certifications pursuant to +Sections 302 and 906 of SOX in which he certified, among other things, that: (1) the information +contained in the reports fairly presented, in all material respects, the financial condition and results +of Trinity; (2) the financial statements were free of material misstatements and omissions; (3) he +had disclosed any fraud involving management or other employees who had a significant role in +the company’s internal control over financial reporting; and (4) he had designed, or caused to be +designed, internal controls over financial reporting to provide reasonable assurance regarding the +reliability of financial reporting and the preparation of financial statements for external purposes in +accordance with GAAP. Nevertheless, during all Relevant Periods, Enloe knew about: (i) false +and misleading information in impairment memos that made the information presented in Trinity’s +quarterly and annual reports not fairly present the Bank’s financial condition and results; (ii) +material misstatements and omissions in the Bank’s financial statements tied to the Bank’s loan +portfolio; (iii) Trinity’s failure to follow GAAP and its own loan policy in grading loans, +designating loans as impaired, and designating loans as TDRs; and (iv) insufficient internal +accounting controls over properly measuring impaired loans, use of ABC loans, appraisals, and the +Bank’s processes and computerized systems that housed appraisals and loan information. +Enloe Controlled and Directed Trinity’s Violations +29. Enloe, as the CEO of Trinity, had management authority over Trinity, and did in fact +control and direct Trinity’s loan and OREO accounting. Further, as set forth above, Enloe orchestrated +and was directly involved in Trinity’s fraudulent financial reporting. +Violations +30. As a result of the conduct described above, Enloe 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. +31. As a result of the conduct described above, Enloe violated Sections 17(a)(1) and (3) +of the Securities Act, which prohibit fraudulent conduct in connection with the offer or sale of +securities. +32. As a result of the conduct described above, Enloe violated Section 13(b)(5) of the +Exchange Act and Rule 13b2-1 thereunder, which prohibit persons from knowingly circumventing +or knowingly failing to implement a system of internal accounting controls, or knowingly +falsifying any book, record, or account. +33. As a result of the conduct described above, Enloe violated Rule 13b2-2 of the +Exchange Act, which prohibits any officer from either (1) making or causing to be made a +materially false or misleading statement to an accountant, or (2) omitting to state, or causing +another person to omit to state, any 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 any audit, review, or examination of the financial statements of +an issuer. + 10 +34. As a result of the certifications described above, Enloe violated Rule 13a-14 of the +Exchange Act, which requires that each report filed on Forms 10-Q and10-K include +certifications signed by the principal executive and principal financial officer of the issuer. +35. As a result of the conduct described above, Enloe caused Trinity’s violation of +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. +36. As a result of the conduct described above, Enloe caused Trinity’s violations of +Section 17(a) of the Securities Act, which prohibits fraudulent conduct in connection with the offer +or sale of securities. +37. As a result of the conduct described above, Enloe caused Trinity’s violations of +Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, which require +every issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission information, documents, and annual and quarterly reports as the Commission may +require, and mandate that periodic reports contain such further material information as may be +necessary to make the required statements not misleading. +38. As a result of the conduct described above, Enloe caused Trinity’s violations of +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 reflect their transactions and +dispositions of their assets. +39. As a result of the conduct described above, Enloe caused Trinity’s violations of +Section 13(b)(2)(B) of the Exchange Act, which require all reporting companies to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles; and prohibit persons from knowingly circumventing +or knowingly failing to implement a system of internal accounting controls, knowingly falsifying +any book, record, or account, and directly or indirectly falsifying or causing to be falsified any +book, record, or account. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent Enloe cease and desist from committing or causing any violations and any future +violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), +13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-14, +13b2-1, and 13b2-2 thereunder. + 11 +B. Pursuant to Section 8A(f) of the Securities Act and Section 21C(f) of the Exchange +Act, Respondent Enloe is prohibited for a period of 5 years from acting as an officer or director of +an 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 20 days of the entry of this Order, pay a civil money +penalty in the amount of $250,000.00 to the Securities and Exchange Commission. The +Commission may distribute civil money penalties collected in this proceeding if, in its discretion, +the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section +308(a) of the Sarbanes-Oxley Act of 2002, as amended. The Commission will hold funds paid +pursuant to this paragraph in an account at the United States Treasury pending a decision whether +the Commission, in its discretion, will seek to distribute funds or, subject to Exchange Act Section +21F(g)(3), transfer them to the general fund of the United States Treasury. If payment is not made +by the date required by this Order, the balance of the civil penalty, plus any additional interest +accrued pursuant to 31 U.S.C. 3717, shall be due and payable immediately, at the discretion of the +Commission staff, without further application. 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 +William C. Enloe as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Tom Krysa, Division of +Enforcement, Securities and Exchange Commission, 1961 Stout Street, Suite 1700, Denver, +CO 80294-1961. + +D. Regardless of whether any such Fair Fund distribution is made, amounts ordered +to be paid as civil money penalties pursuant to this Order shall be treated as penalties paid to the +government for all purposes, including all tax purposes. To preserve the deterrent effect of the +civil penalty, Respondent agrees that in any Related Investor Action, he shall not argue that he is +entitled to, nor shall he benefit by, offset or reduction of any award of compensatory damages by +the amount of any part of Respondent’s payment of a civil penalty in this action ("Penalty + 12 +Offset"). If the court in any Related Investor Action grants such a Penalty Offset, Respondent +agrees that he shall, within 30 days after entry of a final order granting the Penalty Offset, notify +the Commission's counsel in this action and pay the amount of the Penalty Offset to the +Securities and Exchange Commission. Such a payment shall not be deemed an additional civil +penalty and shall not be deemed to change the amount of the civil penalty imposed in this +proceeding. For purposes of this paragraph, a "Related Investor Action" means a private +damages action brought against Respondent by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. +V. + +IT IS FURTHER ORDERED that, solely for purposes of exceptions to discharge set forth +in Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a debt +for the violation by Respondent of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3708.pdf b/raw/aaer/2015/AAER-3708.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7167621abbcfe92ae417d2f737ad2da0512e741e --- /dev/null +++ b/raw/aaer/2015/AAER-3708.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:fa066b7262550650629aef54066ae9948dfe7cccea006dcd029b5d289935fb29 +size 197163 diff --git a/raw/aaer/2015/AAER-3708.txt b/raw/aaer/2015/AAER-3708.txt new file mode 100644 index 0000000000000000000000000000000000000000..f21d18b64766d6772eec9f803f0295a684d0c446 --- /dev/null +++ b/raw/aaer/2015/AAER-3708.txt @@ -0,0 +1,313 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75999 / September 28, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3708 / September 28, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16839 + + +In the Matter of + +Daniel R. Bartholomew and +Karl I. Hjelvik, + +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 AND NOTICE OF +HEARING + +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 Daniel R. Bartholomew and Karl I. Hjelvik +(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, 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 and Notice of Hearing (“Order”), as set forth +below. + 2 +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: +Summary + As the New Mexico economy declined during the financial crisis, Trinity Capital +Corporation and its wholly-owned subsidiary, Los Alamos National Bank (collectively, “Trinity” +or “the Bank”), experienced an increase in problem loans and a decrease in the collateral values +supporting its loan portfolio and other real estate owned (“OREO”). In response, certain former +members of the Bank’s management caused the Bank to engage in false and misleading +accounting and reporting that concealed the Bank’s delinquencies and declining collateral values +and to hide the true nature of its loan and OREO portfolio. This conduct resulted in the Bank +materially misstating its provision for loan losses and its allowance for loan and lease losses +(“ALLL”), included in quarterly and annual filings with the Commission during 2010, 2011 and +the first two quarters of 2012. This conduct by certain former members of the Bank’s +management was aided by the Bank’s deficient internal accounting controls over loan and OREO +accounting, as well as the circumventing internal accounting controls by certain employees and +former members of management. + While serving as the Bank’s Chief Financial Officer, Daniel Bartholomew failed to +implement adequate internal controls over, among other areas, impaired loan loss calculations, +troubled debt restructurings (“TDRs”), subsequent events, OREO, and appraisals. In some +instances, Bartholomew was also a cause of Trinity’s false books and records and the submission +of inaccurate reports because he was on notice of certain transactions that failed to comply with +generally accepted accounting principles (“GAAP”), but he failed to correct the accounting errors. + While serving as the Bank’s head of Internal Audit, Karl Hjelvik was directly responsible +for testing the Bank’s internal accounting controls and compliance with GAAP. When Hjelvik +became aware of issues in the way in which loans were accounted for under the direction of the +Bank’s management, he failed to report his concerns to the Bank’s audit committee, and in some +instances, he failed to take action to remedy inaccurate reports and books and records as required +by the Bank’s policies and procedures. Hjelvik also failed to ensure that effective internal controls +were in place over impaired loan loss calculations, TDRs, subsequent events, OREO, and +appraisals. +Respondents +1. Daniel Bartholomew is a 49-year-old resident of Los Alamos, New Mexico. +Bartholomew served as the Bank’s chief financial officer (“CFO”) from 2003 until September +2014. He has never been a certified public accountant. + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + 3 +2. Karl Hjelvik is a 53-year-old resident of Los Alamos, New Mexico. Hjelvik has +served as the Bank’s head of internal audit since 1997 and has held the title of Vice President of +Internal Audit since 2007. Hjelvik has never been a certified public accountant. +Related Entity +3. Trinity Capital Corporation is a New Mexico corporation headquartered in Los +Alamos, New Mexico. Trinity is the holding company of Los Alamos National Bank, a national +banking organization with $1.4 billion in assets. Trinity’s common stock is registered with the +Commission pursuant to Section 12(g) of the Exchange Act; however, its stock is not listed on any +automated quotation system or securities exchange and no firm makes a market in its stock. In +2010, Trinity issued common stock under a registration statement filed on Form S-8 (Registration +No. 333-126980, filed July 28, 2005). In 2012, Trinity awarded Restricted Stock Units to certain +personnel under the same registration statement. The registration statement incorporated by +reference subsequent filings, including Trinity’s 2010 Forms 10-Q and 10-K, 2011 Forms 10-Q +and 10-K, and 2012 Forms 10-Q. +Facts +4. During 2010, 2011 and the first two quarters of 2012 (the “Relevant Periods”), +Trinity failed to properly account for the Bank’s loan portfolio and failed to properly account for +its OREO in 2011. As a result, the Bank filed inaccurate periodic reports with the Commission in +2010, 2011, and the first two quarters of 2012. +5. On December 12, 2014, Trinity filed its Form 10-K for the year ended December +31, 2013, which included the restatement of Trinity’s consolidated financial data for the year ended +December 31, 2011 and the quarterly periods ended March 31, 2012 and June 30, 2012, and the +restated, unaudited, selected consolidated financial data for the year ended December 31, 2010. +According to its restatement, Trinity’s provision for loan losses was understated by $6.8 million +(25%) in 2010, $22.3 million (73%) in 2011, and $4.5 million (68%) in the first quarter of 2012. +Trinity overstated its provision for loan losses for the second quarter of 2012 by $2.3 million +(31%). Additionally, in 2011, Trinity’s OREO losses were understated by $364,000 (10%). The +restatement also noted that these failures were caused in part by the override of controls by certain +former members of management because of Trinity’s insufficient internal accounting controls, +including controls in the loan department, internal audit, and loan accounting. The restatement +also identified material weaknesses in Trinity’s internal control over financial reporting. +6. Certain former members of the Bank’s management, directly and through +instructions to lower-level employees, caused the Bank to materially misstate its ALLL and loan +loss provision by: (1) failing to downgrade troubled loans; (2) failing to identify loans as +individually impaired – including hundreds of TDRs; (3) failing to measure the impairment on +impaired loans properly; and (4) making various misrepresentations to the Respondents and other +third parties. In 2011, certain former members of the Bank’s management also caused the Bank to +improperly value its OREO. + 4 +7. In furtherance of the scheme, and to avoid downgrading loans to special mention or +substandard, certain former members of the Bank’s management established a practice, followed +by loan department employees, of using a variety of “extend and pretend” tactics to ignore and +hide a borrower’s troubled financial situation, such as extending additional credit to troubled +borrowers so that interest payments could be made and borrowers would remain off the past due +list; instructing employees to keep certain borrowers “off the radar” of the Office of the +Comptroller of the Currency (“OCC”) and other third parties; and delaying, ignoring, and +improperly rejecting appraisals. The scheme was motivated, at least in part, by a desire to have the +Bank released from a Formal Agreement with the OCC, which was in place from January 2010 to +April 2012. +8. Hjelvik and the internal audit department he headed were directly responsible for +ensuring: that risk was assessed, monitored and managed; that internal accounting controls existed +and functioned properly; that GAAP was followed; that an effective internal audit program was +developed and maintained; that audit results were reported to the audit committee each quarter; and +that internal audit’s independence was maintained. However, the Bank’s internal audit department +was not independent from management, internal controls either did not exist or did not function +properly, GAAP was not always followed, an effective internal audit program was not maintained, +and the Bank’s audit committee was not always provided with complete and independent audit +findings. The Bank’s internal audit department also lacked a formalized risk assessment process +and, as a result, did not sufficiently consider risks in financial reporting in establishing audit +procedures. +9. During the Relevant Periods, the Bank lacked sufficient internal accounting +controls for the periodic review of loans to ensure loans were accurately graded and to identify +troubled and impaired loans. Bartholomew and Hjelvik reviewed all internal control flow charts +annually and were aware that they lacked sufficient controls over identification of loans for +impairment and collateral fair value determination. Bartholomew and Hjelvik also repeatedly saw +quarterly grade change reports that indicated loans were not being downgraded timely. +10. In one specific instance, Hjelvik informed management within the loan department +that a loan should be impaired; however, the loan department refused to impair the loan and +Hjelvik never reported the incorrect loan classification to the audit committee or outside auditors. +In another example, a borrower’s loans were downgraded from pass to substandard by the internal +audit department in late March 2011, were then upgraded to pass at the direction of former +members of management in early April 2011, and were then again downgraded to substandard in +May 2011 when the borrower appeared on a list of loans to be reviewed by a third party. Other +than flagging these loans for testing by the third party reviewer, Hjelvik did not report the loan +department’s attempted override of internal controls or bank policies to the audit committee though +Hjelvik was required by the Bank’s policies and procedures to report such problems to the audit +committee, and once a year was asked by the audit committee in executive session to report his +concerns. +11. In response to another red flag, Bartholomew took no action when he was “dis- +invited” from attending loan department meetings where problem loans were discussed, even +though he suspected that he was dis-invited because he thought the loan department wanted to keep + 5 +information from the accounting department. Hjelvik was also aware that senior members of the +accounting department were dis-invited from these meetings but took no action in response. +12. The Bank also lacked sufficient internal accounting controls over the use of +overdraft loans and the analysis of TDRs. For example, the Bank’s internal loan approval and +credit review documents failed to require an analysis of whether a loan or a modification was a +TDR. Bartholomew and Hjelvik were both aware that the Bank might not be identifying all TDRs +and that the Bank’s systems were not able to run reports that would identify TDRs. Similarly, in +some instances, feedback and working papers from independent, third-party loan reviews indicated +that a TDR analysis should be performed on specific loans; however, there were no controls in +place to confirm that this feedback was reviewed, noted, and acted upon. Bartholomew and +Hjelvik were aware that none of Trinity’s internal control flow charts addressed TDRs and they +failed to take action to put sufficient controls in place. +13. The Bank failed to devise and maintain internal accounting controls sufficient to +provide reasonable assurances that its accounting for impaired loans was in conformity with +GAAP. Bartholomew, Hjelvik, and loan department personnel involved in calculating and +reviewing the impaired loan loss calculations did not possess sufficient accounting expertise. As a +result, errors occurred in the calculation of impaired loan losses by the loan department that were +not remediated by Bartholomew or Hjelvik during their review of the calculations. For example, +Bartholomew and Hjelvik were aware of loans that relied upon stale appraisals and collateral +values improperly based on “as-stabilized” valuations. They were also aware of other indications +of value – including listing agreements and negotiated sales prices – that suggested fair value was +substantially below the Bank’s dated appraised value used for its impairment calculation. +Nevertheless, Bartholomew and Hjelvik failed to take action to ensure that the impairment +measurements considered updated and accurate “as-is” values or to notify the audit committee of +any concerns. Further, in one example, neither of them followed up to ensure that an appraisal was +being handled properly when they were made aware that the appraisal had been deleted out of a +Bank database. +14. The Bank also lacked sufficient processes and controls over appraisals. While the +appraisal process was to be separate and independent from the loan department, in practice, loan +department employees were charged with determining when appraisals would be ordered on +classified loans and OREO properties. Further, at the direction of certain former members of the +Bank’s management and loan department, appraisals were sometimes not ordered timely, +delayed, or ordered without the standard request for an “as-is” fair value. Neither the internal +audit nor accounting departments were automatically notified when appraisals were received, +which meant that they were not always aware of appraisals relevant to impairment measurements +or OREO write downs. During the Relevant Periods, Bartholomew and Hjelvik were both aware +of these appraisal irregularities in connection with loans and yet they took no action to increase +controls over the appraisal process. +15. Additionally, appraisals received in the subsequent event period were not always +considered, as required by GAAP, in the Bank’s loan and OREO impairment accounting. +Bartholomew and Hjelvik were aware of this by at least 2009 when the Bank’s outside auditor +found a material accounting error. They were also aware of instances of the loan department + 6 +failing to properly account for subsequent events throughout 2010 and 2011. Nonetheless, +Bartholomew and Hjelvik failed to implement controls to adequately address this issue and, +throughout the Relevant Periods, the Bank’s internal audit and accounting departments continued +to stumble across appraisals received in the subsequent event period that had not been considered +in the Bank’s accounting. +16. Bartholomew and Hjelvik were also aware that sufficient controls were lacking +over the Bank’s processes and computerized systems that housed appraisals and loan information. +Controls were inadequate to ensure all received appraisals were preserved in the Bank’s +database. Numerous employees, including loan officers, had edit rights to these systems allowing +them to alter or delete data about loans, appraisals, collateral values, and customers. Because of +these internal control weaknesses, employees could delete appraisals or change collateral values +without documenting why the alterations were made. When appraisals and collateral values were +deleted, the result was that information was not made available to the OCC and other third parties, +as well as other Bank employees. +17. Bartholomew signed Trinity’s 10-K and 10-Q filings, including certifications, as +well as management representation letters to the outside auditors that included representations on +GAAP, internal controls, and any suspected fraud. Hjelvik signed Trinity’s 2011 internal control +representation letter to the external auditor and signed sub-certifications to Trinity’s 2010 Form 10- +K, 2011 Form 10-K, and the 2012 first quarter 10-Q, knowing that their purpose was to bring up +issues that could affect the filings. Notwithstanding the facts described above, Bartholomew and +Hjelvik signed these representations, while also failing to adequately address concerns raised by +Bank employees about how certain significant loans were being risk rated and accounted for by the +Bank. +Violations +18. As a result of the conduct described above, Bartholomew and Hjelvik were a cause +of Trinity’s violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 +thereunder, which require every issuer of a security registered pursuant to Section 12 of the +Exchange Act to file with the Commission information, documents, and annual and quarterly +reports as the Commission may require, and mandate that periodic reports contain such further +material information as may be necessary to make the required statements not misleading. +19. As a result of the conduct described above, Bartholomew and Hjelvik were a cause +of Trinity’s violations of 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 +reflect their transactions and dispositions of their assets. +20. As a result of the conduct described above, Bartholomew and Hjelvik were a cause +of Trinity’s violations of Section 13(b)(2)(B) of the Exchange Act, which requires all reporting +companies to devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that transactions are recorded as necessary to permit preparation of financial +statements in accordance with generally accepted accounting principles; and prohibit persons from +knowingly circumventing or knowingly failing to implement a system of internal accounting + 7 +controls, knowingly falsifying any book, record, or account, and directly or indirectly falsifying or +causing to be falsified any book, record, or account. +IV. + Respondents acknowledge that the Commission is not at this time imposing a civil penalty +based upon their agreement to cooperate in a related enforcement action. However, pursuant to +this Order, Respondents agree to additional proceedings in this proceeding to determine what, if +any, civil penalties pursuant to Section 21B(a) of the Exchange Act against Respondents are in +the public interest. In connection with such additional proceedings: (a) Respondents agree that +they will be precluded from arguing that they did not violate the federal securities laws described +in this Order; (b) Respondents agree that they may not challenge the validity of this Order; (c) +solely for the purposes of such additional proceedings, the findings of the Order shall be +accepted as and deemed true by the hearing officer; and (d) the hearing officer may determine +the issues raised in the additional proceedings on the basis of affidavits, declarations, excerpts of +sworn deposition or investigative testimony, and documentary evidence. +V. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondents Bartholomew and +Hjelvik cease and desist from committing or causing any violations and any future violations of +Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and +13a-13 thereunder. +B. IT IS FURTHER ORDERED pursuant to Rule 100(c) of the Commission’s Rules +of Practice, 17 C.F.R. § 201.100(c), in the interest of justice and without prejudice to any party, +that a public hearing for the purpose of taking evidence on the questions set forth in Section IV +hereof shall be convened at a time and place to be fixed, and before an Administrative Law +Judge to be designated by further order as provided by Rule 110 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.110, following the entry of a final judgment against the last remaining +defendant(s) in Securities and Exchange Commission v. Jill D. Cook and Mark C. Pierce, Civil +Action No. 15-cv-00864 (D.N.M., filed September 28, 2015 (the “Related Actions”). +If Respondents fail to appear at a hearing after being duly notified, Respondents may be +deemed in default and the proceedings may be determined against them upon consideration of +this Order, the allegations of which may be deemed to be true as provided by Rules 155(a), +221(f), and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.221(f), +and 201.310. +The Order shall be served forthwith upon Respondents personally or by certified mail. + 8 +C. IT IS FURTHER ORDERED pursuant to Rule 100(c) of the Commission’s Rules +of Practice, 17 C.F.R. § 201.100(c), in the interest of justice and without prejudice to any party, +that the Administrative Law Judge shall issue an initial decision no later than 120 days from the +date of the entry of a final judgment in the Related Actions. + +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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3709.txt b/raw/aaer/2015/AAER-3709.txt new file mode 100644 index 0000000000000000000000000000000000000000..1f9e1b3b0048425761f8c73164c06c274171340d --- /dev/null +++ b/raw/aaer/2015/AAER-3709.txt @@ -0,0 +1,1377 @@ + + + + + + + + + + + + + + + + SEC.gov | Michael J. Moore, CPA and Moore & Associates Chartered + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/517386","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Michael J. Moore, CPA and Moore & Associates Chartered + + + + + + + + + + + + Michael J. Moore, CPA and Moore & Associates Chartered + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 23372 / September 30, 2015 + Accounting and Auditing Enforcement Release No. 3709 / September 30, 2015 Securities and Exchange Commission v. Michael J. Moore , Civil Action No. 2:15-cv-01865 (D. Nev.) + + SEC Charges Las Vegas-Based Accountant with Violating SEC and PCAOB Orders + + + + On September 29, 2015, the Securities and Exchange Commission filed a complaint in the U.S. District Court for the District of Nevada against Michael J. Moore. Moore, formerly a certified public accountant, is a resident of Las Vegas, Nevada. + + The SEC alleged in its complaint that Moore violated two regulatory orders: + + The first order, issued by the SEC on October 6, 2009, permanently suspended Moore from appearing or practicing before the SEC as an accountant. Moore violated the SEC order when he performed accounting work for two public companies, Cytta Corp. and Monkey Rock Group, Inc., for the periods from February 2010 through September 2014 and June 2011 through January 2012, respectively. + + The second order, issued by the Public Company Accounting Oversight Board ("PCAOB") on August 27, 2009, barred Moore from being associated with any PCAOB registered public accounting firm. Moore violated the PCAOB order by performing accounting work for Monkey Rock, which was an "issuer" under Section 2(a)(7) of the Sarbanes-Oxley Act of 2002 ("SOX"). By engaging in this conduct, Moore violated SOX Section 105(c)(7)(B), which prohibits any person who is suspended or barred by the PCAOB from being associated with a registered public accounting firm from willfully becoming or remaining associated with any issuer in an accountancy capacity. + + The SEC's complaint seeks a district court order directing that Moore comply with the SEC order, a permanent injunction prohibiting future violations by Moore of SOX Section 105(c)(7)(B), an order that Moore disgorge all ill-gotten gains he obtained as a result of his violations plus prejudgment interest thereon, and imposition of a civil penalty. + + The SEC's investigation was conducted by Janet Moser of the Los Angeles Regional Office and supervised by Victoria Levin. Karen Matteson will lead the SEC's litigation. + + For additional information see Securities and Exchange Commission v. Michael J. Moore and Moore & Associates Chartered , Civil Action No. 2:09-cv-01637-LDG-GWF (D. Nev.) and Litigation Release No. 21189A (Aug. 27, 2009); and In the Matter of Michael J. Moore, CPA and Moore & Associates Chartered , SEC AP File No. 3-13640, 2009 SEC LEXIS 3714 (Oct. 6, 2009). + + + + + +   + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3710.pdf b/raw/aaer/2015/AAER-3710.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ee5f0950a86a5489601b9f0b7972697305025f47 --- /dev/null +++ b/raw/aaer/2015/AAER-3710.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e0ea9fbc58c5474e3fd49752677407d5ad2abef9ab634326e2b07b559eba5a02 +size 309328 diff --git a/raw/aaer/2015/AAER-3710.txt b/raw/aaer/2015/AAER-3710.txt new file mode 100644 index 0000000000000000000000000000000000000000..6d21497d04e8db841604bc13c6eb88ee329cb502 --- /dev/null +++ b/raw/aaer/2015/AAER-3710.txt @@ -0,0 +1,427 @@ + + + `UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76065 / October 1, 2015 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3710 / October 1, 2015 +ADMINISTRATIVE PROCEEDING +File No. 3-16879 + + +In the Matter of + +GRANT THORNTON +INDIA LLP + +Respondent. +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + +I. +The Securities and Exchange Commission (“Commission” or “SEC”) deems it appropriate +that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant +to Sections 4C(a)(2)1 and 21C2 of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule + +1 Section 4C(a)(2) provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege of +appearing or practicing before the Commission in any way, if that person is found . . . to have engaged in unethical or +improper professional conduct. +2 Section 21C provides, in relevant part, that: +If the Commission finds…that any person…has violated…any provision of this title, or any rule or regulation +thereunder, the Commission may…enter an order requiring such person, and any other person that …was…a cause of +the violation…to cease and desist from committing or causing such violation and any future violation of the same +provision, rule, or regulation. + +2 + +102(e)(1)(ii)3 of the Commission’s Rules of Practice against Grant Thornton India LLP (“GT +India” or “Respondent”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. +III. + On the basis of this Order and Respondent’s Offer, the Commission finds4 that: +A. SUMMARY + +1. This matter arises out of violations of the auditor independence rules by GT India. +The violations occurred in connection with two partners from Grant Thornton Mauritius (“GT +Mauritius”) who, through an entity co-owned by them, incorporated a Mauritius-based subsidiary +of GT India’s issuer audit client, served on the board of directors of that subsidiary, and performed +prohibited non-audit services for that subsidiary. GT India’s violations occurred for that issuer +audit client’s fiscal year ended March 31, 2013. + +B. RESPONDENT +2. GT India, with offices located throughout India, is an accounting and advisory firm +and a member firm of Grant Thornton International Ltd. GT India is registered with the Public +Company Accounting Oversight Board (“PCAOB”). +C. OTHER RELEVANT ENTITIES +3. GT Mauritius is an accounting and advisory firm and a member firm of Grant +Thornton International Ltd. GT Mauritius is not registered with the PCAOB. + +3 Rule 102(e)(1)(ii) provides, in pertinent part, that: +The Commission may censure a person or deny, temporarily or permanently, the privil ege of appearing or practicing +before it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. +4 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other person +or entity in this or any other proceeding. + +3 + +4. Grant Thornton International Ltd. (“GT International”), incorporated in London, +United Kingdom, is the world's sixth largest professional services network of independent +accounting and consulting member firms. GT International member firms provide assurance, tax +and advisory services to privately held businesses, public interest entities, and public sector +entities in over 125 countries. +5. Anex Management Services Limited (“Anex”) is a Mauritius company that was +created in 1994 and operates in Mauritius. Anex creates, structures, licenses, administers, and +manages Mauritius-based corporations for non-domestic corporate groups by providing, for +example, resident directors as required by Mauritius law. During the relevant time, Anex was +owned by two partners of GT Mauritius. +6. At all relevant times, Client A had shares registered with the Commission pursuant +to Section 12(b) of the Exchange Act and filed annual reports on Form 20-F with the Commission. +D. FACTS +7. In early 2012, Client A began restructuring itself in preparation of a planned initial +public offering to be registered with the Commission. On February 15, 2012, it engaged GT India +to audit the financial statements of Client A’s core operating company for each of the three years +ended March 31, 2010, 2011, and 2012. On February 20, 2012, Client A incorporated what would +become a public holding company. +8. On June 15, 2012, GT India completed its audit of Client A’s financial statements, +which at the time was not a Commission registrant. GT India issued an audit report dated June 15, +2012 with an unqualified opinion for each of the three fiscal year ended March 31, 2012. About +one month later, a Client A employee asked an associate tax director from GT India to recommend +a company that could incorporate a Mauritius-based subsidiary as a final step in Client A’s +restructuring. The associate tax director of GT India, who was also a member of the audit +engagement team, contacted a partner of GT Mauritius seeking a recommendation. Shortly +following this discussion, Client A retained Anex, a corporate services company located in +Mauritius, to incorporate and manage its new Mauritius subsidiary. +9. On August 16, 2012, Anex incorporated Client A’s Mauritius subsidiary. Because +Mauritius law required that board of directors of Mauritius corporations have at least two resident +directors, Anex appointed its co-owners, who were, and continue to be, GT Mauritius partners, to +the board of Client A’s Mauritius subsidiary. As directors, the two GT Mauritius partners had +signatory authority over the bank accounts of Client A’s Mauritius subsidiary, were authorized +agents of the company, and were responsible for signing any audited statutory financial +statements. +10. On August 29, 2012, Client A filed a registration statement with the Commission +on Form F-1, which included GT India’s audit report of June 15, 2012. About six weeks later, on +October 15, 2012, Client A completed its initial public offering and moved $100 million in +offering proceeds to Client A’s Mauritius subsidiary to purchase a controlling interest in Client +A’s operating company. + +4 + +11. GT India subsequently audited Client A’s 2013 financial statements for its fiscal +year ended March 31, 2013, and GT India issued its audit report dated June 13, 2013. Client A +included that audit report in its annual report on Form 20-F, which was filed with the Commission +on June 13, 2013. That audit report stated that Respondent GT India had “conducted [its] audit in +accordance with the standards of the Public Company Accounting Oversight Board (United +States).” However, GT India was not independent because (1) partners of GT Mauritius sat on the +board of directors of Client A’s Mauritius subsidiary when Respondent audited Client A’s +publicly-held parent; and (2) GT Mauritius’ related party, Anex, provided prohibited non-audit +services to the audit client of Respondent. For its 2013 audit of Client A’s financial statements, +GT India received total audit fees of $128,905. +12. As early as 2006, GT International required member firms proposing to audit a +Commission registrant to submit an International Relationship Check (“IRC”)5 for circulation to +GT International member firms in countries where the proposed client had related entities. The +purpose of the IRC was to determine whether the member firm or its network firms in the other +countries had any existing relationship with a corporate group of the proposed audit client. GT +International defined “network firm” to include “(a) a firm that is part of a larger structure and that +(i) uses a name in its firm name that is common to the larger structure; or (ii) shares significant +professional resources with other firms in the larger structure; or (iii) shares profits or costs with +other firms within the larger structure,” or (b) an entity that controls, is controlled by, or is under +common control with the firm through ownership, management, or other means.” Under this +definition, the Mauritius corporate services company fell within the definition of a network firm of +GT Mauritius, as it was under common control through the two GT Mauritius partners. +13. In addition, GT International’s global audit manual required its member firms to +obtain annual independence confirmation letters in connection with auditing work. Specifically, +the manual provided: “To assist in maintaining our independence, an independence letter must +also be obtained from [GT International] member firms in countries where Commission audit +clients have subsidiaries or operating units, even if a [GT International] member firm does not +audit the subsidiary or operating unit in that country.” +14. On December 31, 2012, during the course of Client A’s 2013 audit, GT India sent +an IRC to GT International for circulation to relevant GT International member firms. The IRC +asked about independence or potential conflicts concerning GT India’s audit of Client A. GT India +specifically referenced, among other names to be examined, the two GT Mauritius partners, who + +5 At all relevant times, GT International required its member firms with audit clients whose securities were registered +with the Commission to employ IRCs, which are conflict-of-interest and independence checks. According to GT +International, its IRC process is +designed to check for the existence of relationships in order to identify potential conflicts of interest and/or +threats to independence. These IRCs take the form of emails sent to member firms [by Gr ant Thornton +International, at the request of the member firm auditing the client] asking about the existence of client, +vendor or business relationships. +The emails included GT International forms on which the firm proposing to audit an entity included na mes of +individuals and entities related to the entity, and a form on which the responding firm would identify reportable +relationships. + +5 + +were listed on the IRC as directors of Client A’s Mauritius subsidiary. GT International circulated +the IRC to a number of its member firms, including GT Mauritius, on January 25, 2013. +15. Three days later, a GT Mauritius employee incorrectly responded to the IRC +stating, “[w]e have no relationships to report.”, despite the fact that the two GT Mauritius partners +were acting as directors of Client A’s subsidiary in Mauritius and Anex was performing other +prohibited non-audit services to that subsidiary. GT India thereafter, in reliance on GT Mauritius +response to the IRC, audited Client A’s financial statements for fiscal year ended March 31, 2013, +and issued an unqualified audit report dated June 13, 2013. Client A included that audit report in +its annual report on Form 20-F, which was filed with the Commission on June 13, 2013. Although +GT India had sent GT International an IRC at the end of calendar year 2012, it did not +simultaneously request from GT Mauritius the annual independence confirmation, as required by +GT International compliance control procedures governing the independence and conflict check +process. This confirmation sought the same information on independence as that requested by the +IRC. GT Mauritius, including the two partners who were acting as directors on Client A’s +subsidiary, did not participate in GT India’s audit. +E. VIOLATIONS +16. The Supreme Court has observed that “[p]ublic faith in the reliability of a +corporation’s financial statements depends upon the public perception of the outside auditor as an +independent professional.” U.S. v. Arthur Young, 465 U.S. 805, 819 n.15 (1984). To insure such +independence, Rule 2-02(b)(1) of Regulation S-X requires each accountant’s report to state +“whether the audit was made in accordance with generally accepted auditing standards” +(“GAAS”). GAAS, in turn, require auditors to maintain strict independence—both in fact and +appearance—from their audit clients.6 For purposes of the independence rules, Rule 2-01(f)(2) of +Regulation S-X defines an accounting firm to include its associated entities. +17. The objective of Rule 2-01 of Regulation S-X is to ensure that auditors are qualified +and independent of their Commission audit clients7—both in fact and in appearance—throughout +the audit and professional engagement period.8 The rule sets forth a non-exhaustive list of + +6 The Commission has stated that for audit reports issued on or after May 24, 2004, the reference in Rule 2-02(b)(1) to +“generally accepted auditing standards” means the standards of the PCAOB and the applicable Commission +regulations, both of which require an auditor to be independent of its client. See, “Commission Guidance Regarding +the Public Company Accounting Oversight Board’s Auditing and Related Professional Practice Standard No. 1,” +Exchange Act Rel. No. 49708, 82 SEC Docket 3060 (May 14, 2004). See, also, PCAOB Rule 3520 (“A registered +public accounting firm and its associated persons must be independent of the firm’s audit client throughout the audit +and professional engagement period.”); and PCAOB Auditing Standards, Independence, AU § 220. +7 With certain exceptions that are not relevant here, “audit client” is defined as “the entity whose financial statements +or other information is [sic] being audited, reviewed, or attested and any affiliates, of the audit client.” 17 C.F.R. § +210-2.01(f)(6) (emphasis added). In turn, “affiliate” is defined to include “[a]n entity that has control over the audit +client, over which the audit client has control, or which is under common control with the audit client, including the +client’s parents and subsidiaries. . . .” 17 C.F.R. § 210-2.01(f)(4)(i). +8 Audit and professional engagement period includes both the periods co vered by any financial statements being +audited and the period of the engagements to audit the financial statements or to prepare a report filed with the +Commission. This period ends when the audit client or the accountant notifies the Commission that the client is no +longer that accountant’s audit client.17 C.F.R. § 210-2.01(f)(5). + +6 + +non-audit services which an auditor cannot provide to its audit clients and be considered +independent. See 17 C.F.R. § 210-2.01(c)(4)(i)-(x). Among other things, it prohibits an auditor +from providing bookkeeping services, payroll services, appraisal or valuation services, internal +audit outsourcing services, legal services, expert services, and broker-dealer, investment adviser, +or investment bank services. Id. It also prohibits an auditor from designing and implementing +financial information systems or performing human resources or management functions for its +audit clients. See 17 C.F.R. § 210-2.01(c)(4)(ii), (vi) and (vii). Rule 2-01(c)(4)(viii) further +prohibits the auditor from having custody of the assets of the audit client. +18. Rule 2-01(c)(2) of Regulation S-X provides that an auditor is not independent of its +audit client if “a current partner, principal, shareholder, or professional employee of the +accounting firm is employed by the audit client or serves as a member of the board of directors or +similar management or governing body of the audit client.” Rule 2-01(c)(4)(vi) of Regulation S-X +also provides that an auditor is not independent of its audit client if the auditor is “[a]cting, +temporarily or permanently, as a director, officer, or employee of an audit client, or performing +any decision-making, supervisory, or ongoing monitoring function for the audit client.” 17 C.F.R. +§ 210-2.01(c)(4)(vi). Similarly, Preliminary Note 2 to Rule 2-01 of Regulation S-X makes clear +that, in applying the general standard of auditor independence set forth in Rule 2-01(b), the +Commission considers, among three other principles, whether a relationship or service “results in +the accountant acting as management or an employee of the audit client.” 17 C.F.R. § 210-2.01, +Preliminary Note 2. +19. PCAOB Standards require auditors to be independent of their audit clients. To +affirm that one’s audit was conducted in accordance with PCAOB Standards when one was not +independent (because of a prohibited employment relationship with or provision of prohibited +non-audit services to an audit client) is a direct violation of Rule 2-02(b)(1) of Regulation S-X. +Such an independence violation also constitutes (i) improper professional conduct under Rule +102(e) of the Commission’s Rules of Practice and Section 4C of the Exchange Act and (ii) causing +violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder because the filing fails +to include financial statements audited by an independent accountant. +20. The financial statements Client A filed with the Commission in its Form 20-F on +June 13, 2013, included GT India’s audit report dated June 13, 2013, which stated, “[w]e +conducted our audits in accordance with the standards of the Public Company Accounting +Oversight Board (United States).” The 2013 audit was not conducted in accordance with PCAOB +standards because these standards require auditor independence and GT India was not independent +during the audit and professional engagement period. GT India was not independent because (1) +partners of GT Mauritius sat on the board of directors of Client A’s Mauritius subsidiary when +Respondent audited Client A’s publicly-held parent; and (2) GT Mauritius’ related party, Anex, +provided prohibited non-audit services to the audit client of Respondent. As a consequence, GT +India violated Rule 2-02(b)(1) of Regulation S-X and caused Client A to violate Section 13(a) of +the Exchange Act and Rule 13a-1 thereunder. Respondent’s conduct also constituted improper +professional conduct pursuant to Section 4C(a)(c) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rule of Practice. +21. Section 13(a) of the Exchange Act requires, among other things, every issuer of a +security registered pursuant to Section 12 of the Exchange Act to file with the Commission annual + +7 + +reports audited by independent public accountants. Rule 13a-1 under the Exchange Act provides +that each such registrant “shall file an annual report on the appropriate form authorized or +prescribed therefor for each fiscal year.” Item 8 (“Financial Statements and Supplementary Data”) +of Form 10-K, in turn, requires an issuer filing an annual report on that Form to “[f]urnish financial +statements meeting the requirements of Regulation S-X.” Rules 3-01 and 3-02 of Regulation S-X +require the filing of “audited” balance sheets and “audited” statements of income and cash flows, +and Rule 1-02(d) of Regulation S-X provides that an “audit” is “an examination of the financial +statements by an independent accountant in accordance with generally accepted auditing +standards.” Foreign private issuers with securities registered pursuant to Section 12 of the +Exchange Act are required to file their annual reports on Form 20-F. Item 17(a) of Form 20-F +requires registrants to furnish financial statements for the same fiscal years and accountants’ +certificates that would be required to be furnished if the registration statement were on Form 10 or +the annual report on Form 10-K. +22. The annual report Client A filed with the Commission on Form 20-F for its fiscal +year ended March 31, 2013, included financial statements audited by GT India. As set forth above, +however, at the time Client A filed its annual report, it did not include financial statements that had +been audited by an independent accountant because GT India’s independence with regard to Client +A was impaired. Therefore, in filing the Form 20-F, Client A violated Section 13(a) of the +Exchange Act and Rule 13a-1 promulgated thereunder, and GT India caused Client A’s violations +of those provisions. +23. Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, as codified in Section +4C(a)(2) of the Exchange Act, allows the Commission to censure a person, or deny such person, +temporarily or permanently, the privilege of appearing or practicing before the Commission, if it +finds that such person has engaged in “improper professional conduct.” For accountants, the +definition of “improper professional conduct” includes: +1. “Intentional or knowing conduct, including reckless conduct, that results in a +violation of applicable professional standards.” Exchange Act Section 4C(b)(1), +Rule 102(e)(1)(iv)(A); or +2. Either of the following two types of negligent conduct: + +(A) A single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted; or + +(B) Repeated instances of unreasonable conduct, each resulting in a +violation of applicable professional standards that indicate a lack of competence to +practice before the Commission.9 + +9 In October 1998, the Commission amended its definition of “improper professional conduct” to include these two +negligence standards, noting that “a negligent auditor can do just as much harm to the Commission's processes as one +who acts with an improper motive.” See, Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 Fed. +Reg. 57,164, 57,167 (October 26, 1998)(codified at 17 C.F.R. Part 201). + + +8 + + +Exchange Act Section 4C(b)(2). +The Commission has defined the “highly unreasonable” standard as: + +an intermediate standard, higher than ordinary negligence but lower than the traditional +definition of recklessness used in cases brought under Section 10(b) of the Exchange Act +and Rule 10b-5 thereunder. The highly unreasonable standard is an objective standard. +The conduct at issue is measured by the degree of the departure from professional +standards and not the intent of the accountant. + +See, Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 Fed. Reg. 57,164, +57,168 (October 26, 1998)(codified at 17 C.F.R. Part 201). In addition, the standard does not +depend on the impact on financial statements; rather, the “proper focus should be on the conduct +itself, rather than on the risk of harm.” Amendment to Rule 102(e), 63 Fed. Reg. 57,168. Thus, the +Commission has found negligent conduct where an auditor, when it knew or should have known +that independence was implicated, failed to gather all the salient relevant facts pertinent to the +independence determination. KPMG Peat Marwick LLP, Lit. Release. No. 34-43862, 74 SEC +Docket 357, 377-79 (January 19, 2001). + +24. Importantly, in determining what constitutes “highly unreasonable conduct,” the +Commission has specifically addressed auditor independence issues, noting, “[b]ecause of the +importance of an accountant’s independence to the integrity of the financial reporting system, the +Commission has concluded that circumstances that raise questions about an accountant’s +independence always merit heightened scrutiny. Therefore, if an accountant acts highly +unreasonably with respect to an independence issue, that accountant has engaged in "improper +professional conduct.” See, Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 +Fed. Reg. 57,164, 57,168 (October 26, 1998)(codified at 17 C.F.R. Part 201). + +25. In issuing its audit report on Client A’s 2013 financial statements, GT India +represented that “[w]e conducted our audits in accordance with the standards of the Public +Company Accounting Oversight Board (United States).” GT India was not independent of Client +A. GT India’s reliance on GT Mauritius’s incorrect assertion in the IRC that GT Mauritius “[had] +no relationships to report” constituted a single instance of highly unreasonable conduct that +resulted in a violation of applicable professional standards. As a result, GT India violated the +applicable professional standards as defined by Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. +F. RESPONDENT’S REMEDIAL EFFORTS + +26. In determining to accept Respondent’s Offer, the Commission has considered +remedial acts undertaken by Respondent as well as the cooperation Respondent has afforded the +Commission staff. Since these matters emerged, Respondent has undertaken firm-specific actions +to improve compliance with GT International’s revised independence compliance requirements. +Respondent, among other things, has imposed training and certification requirements for their +employees; has reviewed all former and present audit clients that were Commission registrants; + +9 + +has taken steps to prevent and detect possible future violations; and has implemented audit tools +designed to ensure compliance with SEC independence rules. + +G. FINDINGS +27. Based on the foregoing, the Commission finds that Respondent: (a) violated Rule +2-02(b)(1) of Regulation S-X; (b) caused violations of Exchange Act Section 13(a) and Exchange +Act Rule 13a-1 by Client A; and (c) engaged in improper professional conduct pursuant to +Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Respondent GT India shall cease and desist from committing or causing any +violations and any future violations of Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the +Exchange Act, and Rule 13a-1 promulgated thereunder. +B. Respondent GT India is hereby censured. +C. Respondent GT India shall, within thirty (30) days of the issuance of this Order, +pay disgorgement of $128,905 in audit fees, prejudgment interest of $8,977, and a civil money +penalty in the amount of $50,000, for a total of $187,882, to the 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 on the disgorgement and +prejudgment interest, additional interest shall accrue pursuant to Commission Rule of Practice +600. If timely payment is not made on the civil money penalties, 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 Commission website at +http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 + +10 + +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying GT +India 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 simultaneously sent to Gerald W. Hodgkins, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., +N.E., Washington, DC 20549. + To preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related +Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. +By the Commission. + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3711.pdf b/raw/aaer/2015/AAER-3711.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d3649997f1fd4fd9ee96f700a4db756a4c480940 --- /dev/null +++ b/raw/aaer/2015/AAER-3711.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:625572d5a3be828a3f2ce1e49016e527035441ca624d5b2c6bc5e36f18d06be2 +size 268620 diff --git a/raw/aaer/2015/AAER-3711.txt b/raw/aaer/2015/AAER-3711.txt new file mode 100644 index 0000000000000000000000000000000000000000..75dd17c50a35f89a4695807d23333693687bd462 --- /dev/null +++ b/raw/aaer/2015/AAER-3711.txt @@ -0,0 +1,437 @@ +1 + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76066 / October 1, 2015 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3711 / October 1, 2015 +ADMINISTRATIVE PROCEEDING +File No. 3-16880 + + +In the Matter of + +GRANT THORNTON +AUDIT PTY LIMITED + +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + + +I. +The Securities and Exchange Commission (“Commission” or “SEC”) deems it +appropriate that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Sections 4C(a)(2)1 and 21C2 of the Securities Exchange Act of 1934 + +1 Section 4C(a)(2) provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege of +appearing or practicing before the Commission in any way, if that person is found . . . to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct. + +2 Section 21C provides, in relevant part, that: + +If the Commission finds…that any person…has violated…any provision of this title, or any rule or regulation +thereunder, the Commission may…enter an order requiring such person, and any other person that …was…a cause +of the violation…to cease and desist from committing or causing such violation and any future violation of the same +provision, rule, or regulation. +2 + +(“Exchange Act”) and Rule 102(e)(1)(ii)3 of the Commission’s Rules of Practice against Grant +Thornton Audit Pty Limited ("Respondent GT Australia/Audit” or “Respondent”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as +set forth below. +III. +On the basis of this Order and Respondent’s Offer, the Commission finds4 that: +A. SUMMARY +1. This matter arises out of violations of the auditor independence rules by +Respondent GT Australia/Audit. The violations occurred in connection with two Grant Thornton +Mauritius (“GT Mauritius”) partners serving on the board of directors of a Mauritius-based +subsidiary of Respondent’s audit client, and their performance of prohibited non-audit services +for that subsidiary. Respondent’s violations occurred for the fiscal years ended June 30, 2008, +2009, 2010, and 2011. + +B. RESPONDENT +2. Respondent GT Australia/Audit is an audit firm with its principal office in Sydney +Australia. Respondent is a related entity to Grant Thornton Australia Limited, which is a +member firm of Grant Thornton International Ltd. Respondent, through its relationship with +Grant Thornton Australia Limited, is legally bound by the rules applying to members of Grant +Thornton International Ltd. GT Australia/Audit is registered with the PCAOB. + + + +3 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing +before it . . . to any person who is found . . . to be lacking in character or integrity or to have engaged in unethical or +improper professional conduct. + +4 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. +3 + +C. OTHER RELEVANT ENTITIES +3. GT Mauritius is an accounting and advisory firm and a member firm of Grant +Thornton International Ltd. GT Mauritius is not registered with the PCAOB. +4. Grant Thornton International Ltd. (“GT International”), incorporated in London, +United Kingdom, is the world's sixth largest professional services network of independent +accounting and consulting member firms. GT International member firms provide assurance, tax +and advisory services to privately held businesses, public interest entities, and public sector +entities in over 125 countries. +5. Anex Management Services Limited (“Anex”) is a Mauritius company that was +created in 1994 and operates in Mauritius. Anex creates, structures, licenses, administers, and +manages Mauritius-based corporations for non-domestic corporate groups by providing, for +example, resident directors as required by Mauritius law. During the relevant time, Anex was +owned by two partners of GT Mauritius. +6. Beginning on November 8, 2010, Client A had shares registered with the +Commission and, until July 2012, its shares traded on the NASDAQ Global Market. Client A +filed an initial registration statement on Form F-1 and Annual Reports on Form 20-F with the +Commission. +D. FACTS +7. Client A was founded as a private Australian company in November 2005, and in +May 2006, its securities began trading on the Australia Stock Exchange (ASX). At that time, a +former GT International member firm in Australia served as Client A’s outside auditor. By late +2006, Client A’s finance director asked a partner of the former GT International member firm to +recommend a company that would incorporate a wholly-owned subsidiary in Mauritius. Client +A wanted to restructure its corporate group by creating a new “mezzanine” subsidiary to own its +operating company, which would enable it to avail itself of favorable tax laws in Mauritius. In +early July 2006, Client A was put in touch with Anex, which was then owned by two partners of +GT Mauritius, a member firm of GT International. +8. In or about September 2006, Client A executed a services agreement with Anex. +On September 8, 2006, Anex incorporated a wholly-owned subsidiary in Mauritius as a holding +company of Client A. Because Mauritius law required that the board of directors of Mauritius +corporations have at least two resident directors, Anex appointed its co-owners, both of whom +were, and continue to be, GT Mauritius partners, to the board of Client A’s Mauritius subsidiary. +As directors, the two GT Mauritius partners had signatory authority over the bank accounts of +Client A’s subsidiary and provided management representations in connection with the +Australian-based statutory audits of the company. The two GT Mauritius partners also +maintained Client A’s subsidiary registered office and agent and its stock and minutes books, all +of which were prohibited non-audit services under the Commission’s auditor independence rules. +In total, Client A paid Anex $78,545 for these services. +9. On November 26, 2009, Respondent GT Australia/Audit became Client A’s +auditor. The former GT International member firm that served as Client A’s outside auditor had +4 + +left the GT network before Client A’s audit for the year ending in June 30, 2007, and there was +no affiliation or continuity of engagements between Client A’s former auditor and Respondent +GT Australia/Audit. The audit work papers that Respondent GT Australia/Audit obtained from +Client A’s former auditor did not disclose the referral or the relationship between GT Mauritius, +Anex, and Client A. GT Mauritius, including the two partners who were acting as directors of +Client A’s subsidiary, did not participate in Respondent GT Australia/Audit’s audit. + +10. On November 8, 2010, Client A filed with the Commission an initial registration +statement on Form F-1, and on April 20, 2011, Client A became listed on NASDAQ. The Form +F-1 filing included Client A’s consolidated financial statements for each of its three fiscal years +ended June 30, 2008, 2009 and 2010, which had been audited by Respondent. Client A +thereafter filed an annual report on Form 20-F with the Commission on December 28, 2011, for +fiscal year ended June 30, 2011. These filings included Respondent GT Australia/Audit’s audit +reports, which stated that Respondent GT Australia/Audit had “conducted [its] audit in +accordance with the standards of the Public Company Accounting Oversight Board (United +States).” However, GT Australia/Audit was not independent because (1) partners of GT +Mauritius sat on the board of directors of Client A’s Mauritius subsidiary when Respondent +audited Client A’s publicly-held parent; and (2) GT Mauritius’ related party, Anex, provided +prohibited non-audit services to the audit client of Respondent. Client A paid GT +Australia/Audit total audit fees of $88,683 for the audits of its financial statements for the four +fiscal years ended through 2011. GT Audit resigned as Client A’s auditor in November 2012. + +11. As early as 2006, GT International required member firms proposing to audit a +Commission registrant to submit an International Relationship Check (“IRC”)5 for circulation to +GT International member firms in countries where the proposed client had related entities. The +purpose of the IRC was to determine whether the member firm or its network firms in the other +countries had any existing relationship with a corporate group of the proposed audit client. GT +International defined “network firm” to include “(a) a firm that is part of a larger structure and +that (i) uses a name in its firm name that is common to the larger structure; or (ii) shares +significant professional resources with other firms in the larger structure; or (iii) shares profits or +costs with other firms within the larger structure,” or (b) an entity that controls, is controlled by, +or is under common control with the firm through ownership, management, or other means.” +Under this definition, Anex fell within the definition of a network firm of GT Mauritius, as it +was under common control through the two GT Mauritius partners. + +5 At all relevant times, GT International required its member firms with audit clients whose securities were +registered with the Commission to employ IRCs, which are conflict-of-interest and independence checks. +According to GT International, its IRC process is + +designed to check for the existence of relationships in order to identify potential conflicts of interest and/o r +threats to independence. These IRCs take the form of emails sent to member firms [by Grant Thornton +International, at the request of the member firm auditing the client] asking about the existence of client, +vendor or business relationships. + +The emails included GT International forms on which the firm proposing to audit an entity included names of +individuals and entities related to the entity, and a form on which the responding firm would identify reportable +relationships. +5 + +12. In addition, GT International’s global audit manual required its member firms to +obtain annual independence confirmation letters in connection with auditing work. Specifically, +the manual provided: “To assist in maintaining our independence, an independence letter must +also be obtained from [GT International] member firms in countries where Commission audit +clients have subsidiaries or operating units, even if a [GT International] member firm does not +audit the subsidiary or operating unit in that country.” +13. With regard to the 2008, 2009, 2010 and 2011 audits of Client A, Respondent GT +Australia/Audit failed to follow required independence compliance checks for GT Mauritius, +including the IRC process and annual independence confirmations, although Respondent did +send annual independence confirmations to GT member firms in the countries where a +supporting audit was required. Respondent did not make efforts over the course of the +performance of these audits to learn whether an independence violation was implicated by Client +A’s corporate presence in Mauritius or the activities of GT Mauritius’ partners. + +E. VIOLATIONS +14. The Supreme Court has observed that “[p]ublic faith in the reliability of a +corporation’s financial statements depends upon the public perception of the outside auditor as +an independent professional.” U.S. v. Arthur Young, 465 U.S. 805, 819 n.15 (1984). To insure +such independence, Rule 2-02(b)(1) of Regulation S-X requires each accountant’s report to state +“whether the audit was made in accordance with generally accepted auditing standards” +(“GAAS”). GAAS, in turn, require auditors to maintain strict independence—both in fact and +appearance—from their audit clients.6 For purposes of the independence rules, Rule 2-01(f)(2) +of Regulation S-X defines an accounting firm to include its associated entities. +15. The objective of Rule 2-01 of Regulation S-X is to ensure that auditors are +qualified and independent of their Commission audit clients7—both in fact and in appearance— +throughout the audit and professional engagement period.8 The rule sets forth a non-exhaustive +list of non-audit services which an auditor cannot provide to its audit clients and be considered +independent. See 17 C.F.R. § 210-2.01(c)(4)(i)-(x). Among other things, it prohibits an auditor + +6 The Commission has stated that for audit reports issued on or after May 24, 2004, the reference in Rule 2 -02(b)(1) +to “generally accepted auditing standards” means the standards of the PCAOB and the applicable Commission +regulations, both of which require an auditor to be independent of its client. See, “Commission Guidance Regarding +the Public Company Accounting Oversight Board’s Auditing and Related Professional Practice Standard No. 1,” +Exchange Act Rel. No. 49708, 82 SEC Docket 3060 (May 14, 2004). See, also, PCAOB Rule 3520 (“A registered +public accounting firm and its associated persons must be independent of the firm’s audit client throughout the audit +and professional engagement period.”); and PCAOB Auditing Standards, Independence, AU § 220. + +7 With certain exceptions that are not relevant here, “audit client” is defined as “the entity whose financial +statements or other information is [sic] being audited, reviewed, or attested and any affiliates, of the audit client.” 17 +C.F.R. § 210-2.01(f)(6) (emphasis added). In turn, “affiliate” is defined to include “[a]n entity that has control over +the audit client, over which the audit client has control, or which is under common control with the audit client, +including the client’s parents and subsidiaries. . . .” 17 C.F.R. § 210 -2.01(f)(4)(i). + +8 Audit and professional engagement period includes both the periods covered by any financial statements being +audited and the period of the engagements to audit the financial statements or to prepare a report filed with the +Commission. This period ends when the audit client or the accountant notifies the Commission that the client is no +longer that accountant’s audit client.17 C.F.R. § 210-2.01(f)(5). +6 + +from providing bookkeeping services, payroll services, appraisal or valuation services, internal +audit outsourcing services, legal services, expert services, and broker-dealer, investment adviser, +or investment bank services. Id. It also prohibits an auditor from designing and implementing +financial information systems or performing human resources or management functions for its +audit clients. See 17 C.F.R. § 210-2.01(c)(4)(ii), (vi) and (vii). Rule 2-01(c)(4)(viii) further +prohibits the auditor from having custody of the assets of the audit client. +16. Rule 2-01(c)(2) of Regulation S-X provides that an auditor is not independent of +its audit client if “a current partner, principal, shareholder, or professional employee of the +accounting firm is employed by the audit client or serves as a member of the board of directors +or similar management or governing body of the audit client.” Rule 2-01(c)(4)(vi) of Regulation +S-X also provides that an auditor is not independent of its audit client if the auditor is “[a]cting, +temporarily or permanently, as a director, officer, or employee of an audit client, or performing +any decision-making, supervisory, or ongoing monitoring function for the audit client.” 17 +C.F.R. § 210-2.01(c)(4)(vi). Similarly, Preliminary Note 2 to Rule 2-01 of Regulation S-X +makes clear that, in applying the general standard of auditor independence set forth in Rule 2- +01(b), the Commission considers, among three other principles, whether a relationship or service +“results in the accountant acting as management or an employee of the audit client.” 17 C.F.R. § +210-2.01, Preliminary Note 2. +17. PCAOB Standards require auditors to be independent of their audit clients. To +affirm that one’s audit was conducted in accordance with PCAOB Standards when one was not +independent (because of a prohibited employment relationship with or provision of prohibited +non-audit services to an audit client) is a direct violation of Rule 2-02(b)(1) of Regulation S-X. +Such an independence violation also constitutes (i) improper professional conduct under Rule +102(e) of the Commission’s Rules of Practice and Section 4C of the Exchange Act and (ii) +causing violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder because the +filing fails to include financial statements audited by an independent accountant. +18. Client A included its consolidated financial statements for three fiscal years ended +June 30, 2008, 2009 and 2010 in its Form F-1 filed with the Commission on November 8, 2010. +Client A also included GT Australia/Audit’s audit report in its Annual Report on Form 20-F filed +on December 28, 2011. In those audit reports, GT Australia/Audit stated that, “We conducted +our audits in accordance with the standards of the Public Company Accounting Oversight Board +(United States).” However, the audits were not conducted in accordance with PCAOB standards +because these standards require auditor independence and GT Australia/Audit was not +independent during the audit and professional engagement period. GT Australia/Audit was not +independent because (1) partners of GT Mauritius sat on the board of directors of Client A’s +Mauritius subsidiary when Respondent audited Client A’s publicly-held parent; and (2) GT +Mauritius’ related party, Anex, provided prohibited non-audit services to the audit client of +Respondent. As a consequence, GT Australia/Audit violated Rule 2-02(b)(1) of Regulation S-X +and caused Client A to violate Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. +Respondent’s conduct also constituted improper professional conduct pursuant to Section +4C(a)(c) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rule of Practice. + +19. Section 13(a) of the Exchange Act requires, among other things, every issuer of a +security registered pursuant to Section 12 of the Exchange Act to file with the Commission +7 + +annual reports audited by independent public accountants. Rule 13a-1 under the Exchange Act +provides that each such registrant “shall file an annual report on the appropriate form authorized +or prescribed therefor for each fiscal year.” Item 8 (“Financial Statements and Supplementary +Data”) of Form 10-K, in turn, requires an issuer filing an annual report on that Form to “[f]urnish +financial statements meeting the requirements of Regulation S-X.” Rules 3-01 and 3-02 of +Regulation S-X require the filing of “audited” balance sheets and “audited” statements of income +and cash flows, and Rule 1-02(d) of Regulation S-X provides that an “audit” is “an examination +of the financial statements by an independent accountant in accordance with generally accepted +auditing standards.” Foreign private issuers with securities registered pursuant to Section 12 of +the Exchange Act are required to file their annual reports on Form 20-F. Item 17(a) of Form 20- +F requires registrants to furnish financial statements for the same fiscal years and accountants’ +certificates that would be required to be furnished if the registration statement were on Form 10 +or the annual report on Form 10-K. +20. The registration statement on Form F-1 and annual report on Form 20-F that +Client A filed with the Commission included financial statements audited by Respondent GT +Australia/Audit for its four fiscal years ended June 30, 2011. As set forth above, however, at the +time Client A filed its registration statement and annual reports, it did not include financial +statements that had been examined by an independent accountant because Respondent’s +independence with regard to Client A was impaired. Therefore, Client A violated Section 13(a) +of the Exchange Act and Rule 13a-1 promulgated thereunder, and GT Australia/Audit caused +Client A’s violations of those provisions. +21. Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, as codified in Section +4C(a)(2) of the Exchange Act, allows the Commission to censure a person, or deny such person, +temporarily or permanently, the privilege of appearing or practicing before the Commission, if it +finds that such person has engaged in “improper professional conduct.” For accountants, the +definition of “improper professional conduct” includes: +1. “Intentional or knowing conduct, including reckless conduct, that results in a +violation of applicable professional standards.” Exchange Act Section 4C(b)(1), +Rule 102(e)(1)(iv)(A); or +2. Either of the following two types of negligent conduct: + +(A) A single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted; or + +(B) Repeated instances of unreasonable conduct, each resulting in a +violation of applicable professional standards that indicate a lack of competence +to practice before the Commission.9 + + +9 In October 1998, the Commission amended its definition of “improper professional conduct” to include thes e two +negligence standards, noting that “a negligent auditor can do just as much harm to the Commission's processes as +one who acts with an improper motive.” See, Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 +Fed. Reg. 57,164, 57,167 (October 26, 1998)(codified at 17 C.F.R. Part 201). +8 + +Exchange Act Section 4C(b)(2). +The Commission has defined the “highly unreasonable” standard as: + +an intermediate standard, higher than ordinary negligence but lower than the traditional +definition of recklessness used in cases brought under Section 10(b) of the Exchange Act +and Rule 10b-5 thereunder. The highly unreasonable standard is an objective standard. +The conduct at issue is measured by the degree of the departure from professional +standards and not the intent of the accountant. + +See, Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 Fed. Reg. 57,164, +57,168 (October 26, 1998)(codified at 17 C.F.R. Part 201). In addition, the standard does not +depend on the impact on financial statements; rather, the “proper focus should be on the conduct +itself, rather than on the risk of harm.” Amendment to Rule 102(e), 63 Fed. Reg. 57,168. Thus, +the Commission has found negligent conduct where an auditor, when it knew or should have +known that independence was implicated, failed to gather all the salient relevant facts pertinent +to the independence determination. KPMG Peat Marwick LLP, Lit. Release. No. 34-43862, 74 +SEC Docket 357, 377-79 (January 19, 2001). + +22. Importantly, in determining what constitutes “highly unreasonable conduct,” the +Commission has specifically addressed auditor independence issues, noting, “[b]ecause of the +importance of an accountant’s independence to the integrity of the financial reporting system, the +Commission has concluded that circumstances that raise questions about an accountant’s +independence always merit heightened scrutiny. Therefore, if an accountant acts highly +unreasonably with respect to an independence issue, that accountant has engaged in "improper +professional conduct.” See, Amendment to Rule 102(e) of the Commission’s Rules of Practice, +63 Fed. Reg. 57,164, 57,168 (October 26, 1998)(codified at 17 C.F.R. Part 201). +23. In issuing its multiple audit reports on Client A’s financial statements, +Respondent GT Australia/Audit represented that “[w]e conducted our audits in accordance with +the standards of the Public Company Accounting Oversight Board (United States).” However, +GT Australia/Audit was not independent of Client A at the time it issued its audit reports. As a +result, GT Australia/Audit’s conduct constituted a single instance of highly unreasonable conduct +and/or multiple instances of highly unreasonable conduct and violated the applicable +professional standards as defined by Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice. + +F. RESPONDENT’S REMEDIAL EFFORTS + +24. In determining to accept Respondent’s Offer, the Commission has considered +remedial acts undertaken by Respondent GT Australia/Audit and the cooperation the Respondent +afforded the Commission staff in the investigation, including by promptly self-reporting the +violations. Since these matters arose, Respondent GT Australia/Audit has undertaken firm- +specific actions to implement GT International’s revised compliance requirements. Respondent, +among other things, has imposed training requirements for their firm members. Respondent has +reviewed all former and present audit clients that were Commission registrants and has taken +steps to detect possible future violations. Respondent has also implemented an audit tool +9 + +designed to ensure compliance with U.S. audit rules. Finally, Respondent now requires positive +annual independence confirmations to cover the international operations of all public interest +entities, not just Commission registrants. +G. FINDINGS +25. Based on the foregoing, the Commission finds that Respondent: (a) violated Rule +2-02(b)(1) of Regulation S-X; (b) caused violations of Exchange Act Section 13(a) and +Exchange Act Rule 13a-1 by Client A; and (c) engaged in improper professional conduct +pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the Exchange Act, +and Rule 13a-1 promulgated thereunder. +B. Respondent is hereby censured. +C. Respondent shall, within ten (10) days of the issuance of this Order, pay +disgorgement of $88,683 in audit fees, prejudgment interest of $13,520, and a civil money +penalty in the amount of $75,000, for a total of $177,203, 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 on the disgorgement and +prejudgment interest, additional interest shall accrue pursuant to Commission Rule of Practice +600. If timely payment is not made on the civil money penalties, 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 Commission website at +http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +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 GT +Australia/Audit 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 simultaneously sent to Gerald W. +Hodgkins, Associate Director, Division of Enforcement, Securities and Exchange Commission, +100 F St., N.E., Washington, DC 20549. + To preserve the deterrent effect of the civil penalty, Respondent agrees that in any +Related Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or +reduction of any award of compensatory damages by the amount of any part of Respondent’s +payment of a civil penalty in this action ("Penalty Offset"). If the court in any Related Investor +Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of +a final order granting the Penalty Offset, notify the Commission's counsel in this action and pay +the amount of the Penalty Offset to the Securities and Exchange Commission. Such a payment +shall not be deemed an additional civil penalty and shall not be deemed to change the amount of +the civil penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor +Action" means a private damages action brought against Respondent by or on behalf of one or +more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. +By the Commission. + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3713.pdf b/raw/aaer/2015/AAER-3713.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e23202b8a07faed709ae5e7e75374984bb3d2cee --- /dev/null +++ b/raw/aaer/2015/AAER-3713.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:5b1d366cb4d0f90f85c6e472eff52a8328a092f3f5f72123e46bf0c51de8cfa4 +size 378746 diff --git a/raw/aaer/2015/AAER-3713.txt b/raw/aaer/2015/AAER-3713.txt new file mode 100644 index 0000000000000000000000000000000000000000..ccdea16d826bc9c4e95ca4b611e3a7643e710331 --- /dev/null +++ b/raw/aaer/2015/AAER-3713.txt @@ -0,0 +1,551 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76074 / October 5, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3713 / October 5, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16882 + + +In the Matter of + +Home Loan Servicing Solutions, Ltd. + +Respondent. + +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 public +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) against Home Loan Servicing Solutions, Ltd. +(“HLSS”) (“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, +Pursuant to Section 21C of the Exchange Act of 1934, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This matter involves two sets of misstatements made by HLSS from 2012 to 2014, +one concerning related party transactions and the other concerning valuation of company assets. +First, HLSS inaccurately disclosed that it had policies governing conflicts of interest inherent in +related party transactions, which included the recusal of its Chairman of the Board (the “Chairman”) +from negotiating and approving transactions with related parties such as Ocwen Financial Corp. +(“Ocwen”), for which the Chairman also served as Executive Chairman. Second, HLSS’s +erroneous valuations of its primary asset, contributed to HLSS misstating its financial results for +the years 2012 and 2013 and the first quarter of 2014. These misstatements resulted from an +internal accounting controls failure that allowed the company to adopt a valuation methodology +that did not conform to U.S. Generally Accepted Accounting Principles (“GAAP”). + +2. In its Forms 10-K and 10-KA for the year 2013, HLSS disclosed in the 1A “Risk +Factors” section that it had “adopted policies, procedures and practices to avoid potential conflicts +with respect to [its] dealings with [Ocwen and other related entities], including [the Chairman] +recusing himself from negotiations regarding, and approvals of, transactions with these entities.” In +the “Business and Related Transactions” section of two 14A proxy statements filed in 2013 and +2014 and incorporated in the Part III Item 10 Section headed “Directors, Executive Officers and +Corporate Governance” of its Forms 10-K for the years 2012 and 2013, HLSS likewise disclosed, +“Due to the nature of [the Chairman’s] obligations to each of the [related entities], he recuses +himself from decisions pertaining to related transactions.” The purpose of these disclosures was to +assure investors that HLSS was safeguarding against potential conflicts due to the Chairman’s role +as Chairman of Ocwen and other related entities as well as HLSS. Because of HLSS’s unique +relationship with Ocwen, from which HLSS purchased all of its assets of significance and to which +it provided services, the potential for conflicts was a major concern for investors. + +3. Contrary to its public disclosures, HLSS had no written policies or procedures +concerning recusals for related party transactions. And, although the Chairman had a practice of +recusing himself from certain negotiations and approvals of related party transactions, that practice +was inconsistent and ad hoc. As a result, HLSS failed to devise and maintain its disclosed internal +accounting controls to prevent potential conflicts of interest in its related party transactions. Due to +these control failures, the Chairman approved many transactions between HLSS and Ocwen in both +his HLSS- and Ocwen-related capacities. Also, due to other internal accounting control + +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 +deficiencies, for three transactions in late 2013 and early 2014, HLSS had no documentation of +approvals. + +4. Separately, HLSS misstated its net income for the years 2012 and 2013 and the first +quarter of 2014 by adopting an accounting methodology that did not conform to GAAP relating to +the valuation of HLSS’s most significant asset – rights to mortgage servicing rights (“Rights to +MSRs”) purchased from Ocwen. HLSS publicly disclosed that it valued these Rights to MSRs at +fair value; however, it assigned them a value that was equivalent to their carrying value, and not to +its best estimate of fair value, so long as the price reflected in the carrying value was within 5 +percent of the price reflected in a fair value estimate provided by a third party. The Chairman +warned HLSS senior management that this valuation methodology would inevitably result in +differences between the carrying value and the third party fair value estimate that, while within 5 +percent, were material to HLSS’s financial statements. Despite this warning, HLSS’s management +and its Audit Committee failed to adequately review whether this valuation methodology complied +with GAAP. + +Respondent + +5. HLSS is a Cayman Islands corporation with its principal executive offices in the +Cayman Islands. HLSS’s common stock became registered with the Commission pursuant to +Section 12(b) of the Exchange Act in February 2012 and, from that date until approximately April +2015, traded on the NASDAQ Global Market. HLSS was founded by its Chairman in 2010 and +conducted an initial public offering in February 2012. The Chairman owned 100 percent of HLSS’s +ordinary shares of common stock prior to the initial public offering, 5 percent after the offering, and +approximately 1 percent between 2013 and 2014. + +Other Relevant Entity + +6. Ocwen is a Florida corporation with its principal place of business in Atlanta, +Georgia. Ocwen’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. Between 2012 and 2014, HLSS’s +Chairman served as Ocwen’s Executive Chairman and owned approximately 13 percent of Ocwen’s +common stock. + +Background + +A. HLSS’s Related Party Transactions + +HLSS’s Relationship with Ocwen + +7. Ocwen is a servicer of mortgages that have been securitized and are owned by +residential mortgage-backed securities trusts. As one of its obligations as a mortgage servicer, +Ocwen advances funds to the trusts to cover payments missed by borrowers. + + + 4 +8. Ocwen’s Executive Chairman sought to make Ocwen “capital-light” by creating +HLSS and making it responsible for funding Ocwen’s servicer advances. HLSS was to purchase +Ocwen’s mortgage servicing rights (“MSRs”), and thereby receive the future servicing fees owed to +Ocwen in connection with those MSRs and, as a result of that purchase, would be responsible for +funding servicer advances. As a part of this arrangement, HLSS would retain Ocwen as the +subservicer for all mortgages underlying the Rights to MSRs purchased by HLSS. In addition to the +Chairman, certain managers and members of the board of directors at Ocwen became executives +and board members at HLSS. + +9. Due to difficulties encountered with transferring title to the MSRs to HLSS, Ocwen +retained title and HLSS agreed to purchase the Rights to the MSRs. On March 5, 2012, HLSS +executed a master purchase agreement with Ocwen and completed an initial purchase of Rights to +MSRs on mortgages with an unpaid principal balance (“UPB”) of $15.2 billion. Simultaneous with +the purchase, HLSS entered into a master subservicing agreement with Ocwen for these +mortgages. Under this agreement, Ocwen serviced the mortgages, collected the servicing fees +from borrowers and remitted the fees to HLSS. From the total servicing fees remitted, HLSS paid +Ocwen a base fee for its services and a performance fee when Ocwen met certain targets for +advance levels. Because of his role at Ocwen, the Chairman recused himself from negotiating and +voting on the approval of the master agreements and initial purchase. + +HLSS’s Control Breakdowns Relating to Related Party Transactions + +10. There were no written policies or procedures governing when an officer or director +with a conflict of interest was required to recuse himself from negotiating or approving a related +party transaction. While the Chairman routinely recused himself from negotiations with Ocwen +and recused himself from approvals of transactions in certain instances, including the master +purchase and subservicing agreements and the initial purchase of Rights to MSRs, HLSS personnel +never discussed the guidelines under which such recusal would be appropriate. This caused a +number of control deficiencies. + +11. First, the responsibility for determining whether recusal was appropriate was left +largely to the person with the conflict of interest. There was no meaningful oversight of that +person’s determination. + +12. Second, HLSS personnel lacked a clear understanding of when recusals were +required. Although HLSS stated that it had “adopted policies, procedures and practices to avoid +potential conflicts” present in related party transactions, several individuals within the company +believed that recusals were needed only for significant transactions with related parties. Because +there was never a discussion of the guidelines governing recusals, HLSS personnel never considered +whether that belief was consistent with the company’s public disclosures. Also, HLSS personnel +had conflicting understandings of what types of transactions could qualify as significant, and they +never attempted to reconcile these conflicting understandings. In addition, the Chairman believed +that the need to approve transactions in the Cayman Islands for tax reasons may have been grounds + + 5 +for not recusing himself. HLSS’s disclosures, however, do not include this exception, and this +belief was not given sufficient consideration internally. + +13. Due to these control deficiencies, the practice at HLSS for recusals was not +consistent with its public disclosures. + +HLSS’s Chairman Approved Transactions with Ocwen + +14. After Ocwen and HLSS executed the master purchase and subservicing agreements, +HLSS disclosed that it anticipated future growth through subsequent acquisitions of rights to +Ocwen’s MSRs. Accordingly, HLSS purchased additional Rights to MSRs from Ocwen through +nine transactions (the “Flow Transactions”) during 2012 and 2013. As HLSS’s only asset of +significance were Rights to MSRs purchased from Ocwen, these transactions were fundamental to +its business. + +15. While HLSS and Ocwen based the purchase price for the Rights to MSRs for each +Flow Transaction on an appraisal by a third party valuation firm, other terms varied. For example, +for each Flow Transaction, HLSS and Ocwen negotiated HLSS’s retained fees, which were the +servicing fees retained by HLSS from those collected and remitted to it by Ocwen after payment of +the base and performance fees owed back to Ocwen. The retained servicing fee for each Flow +Transaction was based on the agreed-upon advance target for Ocwen and other assumptions that +were jointly set by HLSS and Ocwen such as the prepayment rate on the underlying loan balances, +financing cost and advance borrowing rate. + +16. HLSS personnel submitted proposals for these transactions to the Credit +Committee for approval. Approval by the HLSS Credit Committee was necessary for a Flow +Transaction to be approved by the HLSS Board of Directors and ultimately consummated. The +Credit Committee was comprised of senior managers and directors appointed by HLSS’s Board of +Directors. The role of HLSS’s Credit Committee, according to its charter, was to provide direction +and oversight over all matters concerning HLSS’s finance, investment, treasury and financial risk +management. In addition to his other roles, the Chairman was a member of HLSS’s Credit +Committee and was also a member of Ocwen’s Credit Committee, which performed an analogous +role. + +17. The routine process for the Credit Committee to review and approve transactions +was to circulate a memorandum that presented analysis of the proposed price of the Rights to +MSRs, the retained fees and the varying underlying assumptions. The memoranda circulated +typically included a signature page to indicate approval by each of the committee members. The +committee members either executed the signature pages or indicated their approval of the +transactions by email. + +18. In 2012, HLSS entered into five Flow Transactions with Ocwen totaling +approximately $67.5 billion in UPB. The Chairman did not participate in the negotiations but +approved all of these transactions in his capacity as a member of the HLSS Credit Committee. + + 6 + +19. In 2013, HLSS entered into four Flow Transactions with Ocwen totaling +approximately $120 billion UPB. The Chairman recused himself from the first transaction but then +approved the second one. Even when the Chairman recused himself, he still received the Credit +Committee memorandum because, according to him, “I’m interested in valuation [and] I still +thought I had the right to say, ‘No, this isn’t going to happen.’” + +20. When the Chairman reviewed and approved these transactions, he typically did the +same on the Ocwen side of the transactions either through Ocwen’s Credit Committee or its +Executive Committee which acted on behalf of the Board when it was not in session. + +21. In 2014, the Chairman approved another type of transaction between Ocwen and +HLSS concerning early buy-out loans, which are delinquent loans eligible for purchase by the +mortgage servicer. In this transaction, HLSS purchased $672 million that comprised the most +delinquent portion of a portfolio of early buy-out loans that Ocwen recently had purchased. In a +February 2014 email addressed to members of both HLSS and Ocwen senior management, the +Chairman approved this purchase on the condition that it did not trigger losses for HLSS. + +HLSS Failure to Document Credit Committee Approvals + +22. As to the latter two of the four Flow Transactions between HLSS and Ocwen in +2013, HLSS was unable to locate final executed Credit Committee memoranda or approving emails. +Contemporaneous emails for the last of these transactions in October 2013, however, show a request +to schedule a phone call for the Credit Committee to discuss the analysis contained in the +memorandum and a subsequent modification of the retained servicing fee based on a change to an +underlying assumption. + +23. Documentation of HLSS’s Credit Committee approval process again broke down in +February 2014 in connection with the early buy-out loan purchase agreement between HLSS and +Ocwen. HLSS was unable to locate any Credit Committee approvals for this transaction. + +B. Improper Valuation of Rights to MSRs + +24. HLSS’s quarterly and annual filings with the Commission stated that its financial +statements were prepared in accordance with GAAP. These filings also stated that HLSS recorded +the Rights to MSRs that it purchased from Ocwen at fair value. + +25. FASB Financial Accounting Standards Codification Topic 820 (“ASC 820”) – Fair +Value Measurements and Disclosures defines fair value as the price that would be received to sell +an asset or paid to transfer a liability in an orderly transaction between market participants at the +measurement date. Because Rights to MSRs are not frequently bought or sold, there rarely are +observable market prices for them. Rights to MSRs are therefore considered to be a Level 3 asset +in the fair value hierarchy, which are assets that do not have observable inputs for a fair value +measurement. While Level 3 assets are more difficult to value, the fair value measurement + + 7 +objective remains the same, that is, an exit price from the perspective of a market participant that +holds the asset. + +26. HLSS retained a third party with expertise in valuing MSRs to calculate the fair +value of its Rights to MSRs. Each quarter, the third party valuation firm performed an analysis of +the Rights to MSRs and provided HLSS with a valuation report. The valuation reports included an +estimate of fair value based on inputs that affected the fair value of the MSRs, such as then-current +prepayment rates, pre-tax discount rates, and costs to service. This estimate was represented as a +specific price that was reflected in basis points.2 Multiplying this best-point estimate by the UPB +for HLSS’s Rights to MSRs would provide a fair value measurement for those Rights to MSRs. In +a prefatory note, the valuation reports stated that a sale of the Rights to MSRs in an orderly market +should not differ by more than 7.5, or in some instances 10, basis points from the best-point +estimate provided. + +27. In addition to the fair value measurement provided in the valuation report, HLSS +independently determined the carrying value of its Rights to MSRs. As part of this determination, +HLSS calculated an “Inception BPS,” also reflected in basis points, by dividing the UPB of the +mortgages underlying the MSRs as of the date of their acquisition by HLSS’s purchase price of the +Rights to MSRs. Over time, the UPB of the mortgages generally decreased as borrowers paid down +their mortgages. At the end of each quarter, HLSS calculated the carrying value for the Rights to +MSRs by multiplying the Inception BPS by the amount of the UPB as of the end of the quarter. +This amortization was driven entirely by the decline in size of the mortgages’ UPB and did not +consider any of the various factors that would also affect a fair value measurement. + +HLSS’s Valuation Methodology + +28. Because the value of the MSRs for which HLSS had obtained the rights historically +had been fairly stable, HLSS developed a valuation methodology that used the carrying value of +the Rights to MSRs as the presumptive fair value measurement. This methodology was reviewed +by HLSS’s external auditors. For each reporting date, HLSS compared the carrying value of its +Rights to MSRs (as calculated above) to the third party valuation report’s best-point estimate and +would record an adjustment to the value of the Rights to MSRs, which HLSS disclosed reflected +fair value, only if there was a variation in price of at least 5 percent. + +29. To illustrate, the third party valuation firm provided a report with a valuation date +of November 29, 2013 estimating the price of HLSS’s Rights to MSRs, which had underlying +mortgages with an UPB of approximately $159.56 billion, at 37.08 basis points. Multiplying the +UPB by the estimated price, the third party valued the Rights to these MSRs at approximately $592 +million. Under HLSS’s valuation methodology, HLSS would apply 5 percent bands around the +third party valuation firm’s best-point estimate of 37.08 basis points, which would create a range +from 35.23 basis points (5 percent below) to 38.93 basis points (5 percent above), and would report + +2 A basis point is one hundredth of one percent. + + 8 +the carrying value of its Rights to MSRs as their fair value so long as the carrying value was within +the range of values created by the 5 percent bands. In other words, so long as HLSS’s carrying +value was within approximately $562 million (35.23 basis points multiplied by the UPB) and +approximately $621 million (38.93 basis points multiplied by the UPB), it would report the +carrying value as fair value. Based on HLSS’s financial results for the fourth quarter of 2013, this +approximately $56 million range was equivalent to 75 percent of its total revenues and 148 percent +of its net income. + +30. The valuation of Rights to MSRs was listed as a “Critical Accounting Policy” in +HLSS’s quarterly and annual filings and was highly important to investors. In fact, HLSS +repeatedly emphasized the stability of its valuations and its limited asset valuation risk at investor +presentations, in press releases, and during earnings calls. + +HLSS’s Internal Accounting Controls Deficiencies Relating to Valuation + +31. Neither HLSS’s management nor its Audit Committee adequately reviewed or +considered HLSS’s valuation methodology for the Rights to MSRs. + +32. Before HLSS implemented the valuation methodology, the Chairman perceived a +problem with it. Because the 5 percent bands created a very large range in terms of dollars, HLSS +easily could have had a difference between the carrying value of the Rights to MSRs and their best- +point estimate that was both material to the company’s reported results and still within the 5 percent +bands. Consequently, the Chairman concluded “the math would never work” and expressed his +concerns to a member of HLSS senior management. The Chairman explained to this member of +senior management, “if you have a 5 percent change in the asset, you’re going to blow through [the +threshold for materiality] so fast, it’s almost a fait accompli at that particular point.” To the +Chairman, this problem was apparent from the beginning. As he later commented on the lack of +appreciation on this point, “when you launch a ship . . . , the ship is going to hit the water, [so] don’t +expect the hull to not get wet.” + +33. The Chairman’s concerns were not shared with the rest of HLSS senior management +before, during, or after the implementation of the valuation methodology. + +34. The Audit Committee of HLSS’s Board of Directors also failed to give sufficient +consideration to the valuation methodology. The Audit Committee’s charter provides that it shall: + +(j) Review with management, the Company’s +independent auditors and the director of the Company’s internal +auditing department, the following: + +(i) critical accounting policies and such other +accounting policies of the Company as are deemed appropriate +for review by the Committee prior to any interim or year‐end +filings with the SEC or other regulatory body, including any + + 9 +financial reporting issues which could have a material impact on +the Company’s financial statements . . . . + +35. HLSS’s Audit Committee did not review the valuation methodology with HLSS’s +external auditors, had no discussions of substance concerning the development of the valuation +methodology with HLSS management, were not provided any documentation explaining the +valuation methodology, and were not apprised of the Chairman’s concerns. As a result, the Audit +Committee did not consider whether the valuation methodology was an appropriate fair value +measurement under GAAP, nor did it consider whether the valuation methodology could result in a +variance between the third party valuation firm’s best-point estimate and the carrying value that +was material to HLSS’s reported results. + +HLSS Applied Its Valuation Methodology and Then Restated Its Financials + +36. The best-point estimate in the valuation reports fluctuated from quarter to quarter; +however, under its valuation methodology, HLSS did not make any adjustment to the fair value of +its Rights to MSRs because the Inception BPS used to calculate carrying value did not differ by 5 +percent or more from the best-point estimate. + +37. HLSS revisited the use of the valuation methodology in 2014 and, with the +involvement of its external auditors, determined that, while the carrying value is within the 5 +percent band, the carrying value was not a fair value measurement under GAAP. Management, +therefore, determined that HLSS was required to restate the value of its Rights to MSRs to the best- +point estimate of fair value provided in the valuation reports. + +38. In August 2014, HLSS restated its Forms 10-K for the years 2012 and 2013 and +Form 10-Q for the quarter ended March 31, 2014 as a result of this required adjustment and an +unrelated data input error.3 At the time of the restatement, HLSS disclosed that it concluded the +methodology it historically used to assess the value of its Rights to MSRs constituted a departure +from GAAP. As per the chart below, HLSS’s improper accounting resulted in material errors to +HLSS’s reported results in quarterly and annual filings and in earnings releases filed on Form 8-K. + +3 This data input error related to a subset of the Rights to MSRs as of the fourth quarter of +2013 and the first quarter of 2014. The impact of the data error was $5.9 million and +$9.3 million as of December 31, 2013 and March 31, 2014, respectively. + + 10 +Dollars in thousands + +Net Income as +Restated ($) +Adjustment +Relating to +Accounting +Error ($) +Adjustment +as a % of +Restated Net +Income +1Q 14 + +64,360 + +11,386 18% +FY 2013 + +117,657 + +(4,137) -4% +4Q 13 + +6,580 + +(27,617) -420% +3Q 13 + +39,166 + +4,243 11% +2Q 13 + +43,826 + +15,940 36% +1Q 13 + +28,085 + +3,297 12% +FY 2012 + +19,617 + +(7,254) -37% +4Q 12 + +7,326 + +(7,020) -96% +3Q 12 + +5,438 + +(1,134) -21% +2Q 12 + +5,901 + +1,242 21% +1Q 12 + +952 + +(342) -36% + +C. Violations + +39. As a result of the conduct described above, HLSS violated Section 13(a) of the +Exchange Act, Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which require issuers to file +true, accurate, and complete annual, quarterly and current reports with the Commission. + +40. As a result of the conduct described above, HLSS violated Section 13(b)(2)(A) of +the Exchange Act, which requires public companies to “make and keep books, records, and +accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions +of the assets of the issuer.” + +41. As a result of the conduct described above, HLSS violated Section 13(b)(2)(B) of +the Exchange Act, which requires public companies to “devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that . . . (ii) transactions are recorded + + 11 +as necessary (I) to permit preparation of financial statements in conformity with generally accepted +accounting principles or any other criteria applicable to such statements, and (II) to maintain +accountability for assets.” + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, pursuant to Section 21C of the Exchange Act of 1934 it is hereby ORDERED +that: + + A. Respondent HLSS cease and desist from committing or causing any violations and +any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules +12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $1,500,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C § 3717. + +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 HLSS 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 + + 12 +to Michael J. Osnato, Chief, Complex Financial Instruments Unit, Division of +Enforcement, Securities and Exchange Commission, Brookfield Place, 200 Vesey +Street, Suite 400, New York, NY, 10281. + + +By the Commission. + + + + Brent J. Fields + Secretary + + + + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3714.pdf b/raw/aaer/2015/AAER-3714.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b743e5a9865a362bc40a5ab482725bf4679fca26 --- /dev/null +++ b/raw/aaer/2015/AAER-3714.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:363e1a5b0588efd152383e8022f5d92b95a995704fc8ad9e393224436d76618f +size 131376 diff --git a/raw/aaer/2015/AAER-3714.txt b/raw/aaer/2015/AAER-3714.txt new file mode 100644 index 0000000000000000000000000000000000000000..e1d6f3dc589a9e0595736cb35364f732332567f3 --- /dev/null +++ b/raw/aaer/2015/AAER-3714.txt @@ -0,0 +1,492 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9960 / October 9, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76125 / October 9, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3714 / October 9, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16213 + + +In the Matter of + +DAVID G. DERRICK, Sr., + +Respondent. + +ORDER MAKING FINDINGS AND +IMPOSING 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 + +I. + +On October 24, 2014, the Securities and Exchange Commission (“Commission”) issued the +Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of +1933 and Section 21C of the Securities Exchange Act of 1934 against David G. Derrick, Sr. +(“Derrick” or “Respondent”). + +II. + +Respondent has submitted an Offer of Settlement (“Offer”) which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or in which the Commission is a party, and without +admitting or denying the findings contained in the Order, 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 Making Findings +and Imposing 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 set forth below. + + 2 +III. +On the basis of this Order and the Offer of Respondent, the Commission finds1 that: + A. RESPONDENT +1. David G. Derrick, Sr. (“Derrick”) served as Chairman of the Board and Chief +Executive Officer (“CEO”) of SecureAlert, Inc. (now known as Track Group) from February 2001 +until June 30, 2011. Derrick, 62 years old, is a resident of Farmington, Utah. + + B. OTHER RELEVANT ENTITY AND INDIVIDUAL + 2. SecureAlert, Inc., now known as Track Group and formerly known as RemoteMDx, +Inc. (“SecureAlert”), incorporated in Utah in 1995, markets and sells tracking technology devices in +the area of adult probation and parole. SecureAlert’s principal place of business is in Sandy, Utah. +SecureAlert’s common stock is registered with the Commission pursuant to Section 12(g) of the +Exchange Act and trades on the OTC Bulletin Board. SecureAlert files periodic reports, including +Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange Act and +related rules thereunder. + +3. James J. Dalton, Jr. (“Dalton”) served as a Director of SecureAlert from 2001 to +November 2, 2009 and was President from August 2003 to June 19, 2008. Dalton, 72 years old, is a +resident of Park City, Utah. +C. BACKGROUND + + 4. In 2007, SecureAlert sold its product through a distributorship system, whereby +distributors were given specific territories in which to market SecureAlert product. SecureAlert had +been struggling for years and was making a substantial effort to boost sales and revenues. + +Undisclosed Personal Guarantees by Derrick and Dalton + + 5. On September 20, 2007, just prior to the end of the fiscal year on September 30, +2007, SecureAlert entered into an Exclusive Distribution Agreement (“Distribution Agreement”) +with a large investor (“Distributor”). The Distribution Agreement called for Distributor to purchase +2,000 devices at $500 each for a total of $1 million, with payment due in six months. + + 6. Derrick negotiated the Distribution Agreement on behalf of SecureAlert. Prior to +executing the agreement, Distributor informed Derrick and Dalton that he would not pay for any +product and would not subject himself to liability for purchasing product if he was unable to sell it. +Dalton does not recall that either Derrick or Distributor told him whether Distributor had sold any +SecureAlert product to end user customers but Distributor told Derrick or Dalton that Distibutor +was engaging in significant efforts to leverage his business and personal connections to, among +other things, establish a sales infrastructure to sell SecureAlert product. Derrick, Dalton and + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + + 3 +Distributor knew this was a new technology application and that the possibility of product failure +existed. + +7. Distributor further informed Derrick that he did not need any product at the time +because he did not yet have customers. Derrick insisted that Distributor accept shipment of the +2,000 units from SecureAlert, and Derrick and Dalton agreed that Distributor would not have to +pay for product that Distributor was not able to sell. To document this, the Distribution Agreement +gave Distributor a right of return and reimbursement for any unused units in the event the contract +was terminated for any reason. + +8. To further protect himself from liability, Distributor also required Derrick and +Dalton to personally guarantee that they would pay for any unused units under the Distribution +Agreement if Distributor was not satisfied with the devices or the business arrangement for any +reason. Derrick and Dalton signed a letter dated September 20, 2007 to that effect. Derrick and +Dalton did not disclose the personal guarantee to other Board members or employees of +SecureAlert, nor did they disclose it to SecureAlert’s independent auditor or outside securities +counsel. Distributor accepted the 2,000 units but did not pay for any product at the time. + +9. On December 13, 2007, near the end of the following quarter, Derrick and Dalton +requested a purchase order from Distributor to purchase an additional 2,000 devices from +SecureAlert at $500 each for a total of $1 million, with payment due in six months. Dalton does +not recall Derrick or Distributor at the time of the second purchase order, telling Dalton that +Distributor had not yet sold any of the first 2,000 units or any additional devices that would be +requested by a purchase order. Distributor informed Derrick he did not need any more devices, but +Derrick insisted on the purchase order and that Distributor accept shipment of the devices. Derrick +and Dalton again agreed to provide a personal guarantee that they would pay for any unused units. +Derrick and Dalton did not disclose this agreement to other Board members or employees of +SecureAlert, nor did they disclose it to SecureAlert’s independent auditor or outside securities +counsel. Distributor accepted the second 2,000 units but did not pay for any product at the time. + + 10. Derrick and Dalton knew or were reckless in not knowing that the personal +guarantees were material related-party agreements that should have been disclosed and should +have been considered in SecureAlert’s financial statements. + +11. SecureAlert filed its Form 10-KSB for the fiscal year ended September 30, 2007 +(“2007 Form 10-KSB”) on January 15, 2008. The financial statements reported $1 million in +revenue for the September 20, 2007 transaction with Distributor. The $1 million was also recorded +as an accounts receivable due in six months, on or around March 20, 2007. Derrick signed +certifications for the 2007 Form 10-KSB as CEO. The 2007 Form 10-KSB did not disclose the +personal guarantee and did not consider the personal guarantee in its accounting treatment of the +$1 million purported sale in September 2007. + + 12. The $1 million in reported revenue for the September 2007 transaction represented +29% of product revenues and 12% of total revenues for fiscal year 2007 and represented a gross +profit of $254,000. SecureAlert reported a gross loss of $404,000 for the year. Without gross + + 4 +profits from the $1 million “sale” to Distributor at year-end, the gross loss would have been 63% +greater. + +13. SecureAlert filed its Form 10-QSB for the period ended December 31, 2007 +(“December 31, 2007 Form 10-QSB”) on February 14, 2008. The December 31, 2007 Form 10- +QSB reported $1 million in revenue for the December 2007 transaction with Distributor. The $1 +million was also recorded as an accounts receivable due in six months, on or around June 13, 2008. +Derrick signed certifications for the December 31, 2007 Form 10-QSB. The December 31, 2007 +Form 10-QSB did not disclose the personal guarantee that Distributor would not be liable for +unsold product and did not consider this personal guarantee in its accounting treatment of the $1 +million purported sale in December 2007. + +14. On March 13, 2008, staff in the Commission’s Division of Corporation Finance +(“Corp Fin Staff”) issued a comment letter (“March 13 Comment Letter”) with regard to +SecureAlert’s 2007 Form 10-KSB and its December 31, 2007 Form 10-QSB. The March 13 +Comment Letter included a question as to why the year-end accounts receivable balance was more +than half of SecureAlert’s revenue for the year. + +Undisclosed Personal Financing of Transactions by Derrick and Dalton + +15. Soon after receiving Corp Fin Staff’s comment letter, payment for the first $1 +million purported sale to Distributor became due, on or around March 20, 2008. In the meantime, +Distributor had learned that many of the devices shipped to him were defective or damaged. +Distributor had not sold any devices at that point, and he refused to pay for defective devices or +devices he had not sold. Derrick attempted to arrange financing to pay the accounts receivable +due, in an apparent attempt to conceal the fact that revenue should not have been recognized in the +transaction. In this way, SecureAlert’s accounting records would reflect the $1 million accounts +receivable as fully paid at or around the due date. + +16. Derrick reached out to a third party financing entity (“Third Party”), with which he +had previously done business. Third Party agreed to make the payment for the accounts receivable +to SecureAlert. However, Third Party would not provide funding because of the risk, so Derrick +and Dalton provided their own personal funds, through their entity, to finance the transaction. + + 17. The Third Party transaction was documented with a promissory note dated March +26, 2008, in which Distributor promised to pay Third Party $1 million plus interest by March 31, +2009. Distributor signed the promissory note, but Derrick and Distributor agreed that the +transaction was executed on paper only and that Distributor had no obligation to pay $1 million to +Third Party. Derrick and Distributor also agreed that Distributor would not be liable for any +interest due under the note. Dalton was made aware of the agreement between Derrick and +Distributor. Derrick and Dalton did not disclose to Distributor that they provided the $1 million in +funds to Third Party. + + 18. Derrick and Dalton sent $1 million of their personal funds to Third Party on March +31, 2008. Third Party, in turn, sent the funds to SecureAlert to satisfy the $1 million accounts +receivable due in March 2008. + + 5 + +19. The accounts receivable for the December 2007 $1 million purported sale to +Distributor became due on or around June 13, 2008. Again, Distributor had not yet sold any +devices, so he refused to pay for devices that were defective or unsold. Derrick again approached +Third Party, which agreed to make the second payment for the accounts receivable to SecureAlert +if Derrick and Dalton again provided the funds. + + 20. The second Third Party transaction was documented with a promissory note dated +September 16, 2008, in which Distributor promised to pay Third Party $1 million plus interest by +September 16, 2009. Distributor signed the promissory note, but again Derrick and Distributor +agreed that this transaction was executed on paper only and that Distributor had no obligation to +pay the $1 million to Third Party. Derrick and Distributor also agreed that Distributor would not +be liable for any interest due under the note. Dalton was made aware of the agreements. Derrick +and Dalton did not disclose to Distributor that they provided the second $1 million in funds to +Third Party. + + 21. Derrick and Dalton sent $1 million of their personal funds to Third Party on +September 12, 2008. This time, Third Party wired the money to Distributor, who in turn forwarded +$1 million to SecureAlert on September 25, 2008, just prior to the end of fiscal year 2008. The $1 +million was used to pay the $1 million accounts receivable due in June 2008. + + 22. Derrick and Dalton did not disclose their personal financing of the Third Party +transactions to other Board members or employees of SecureAlert, nor did they disclose it to +SecureAlert’s independent auditor or outside securities counsel. + +Comment Process with Corp Fin Staff + + 23. From March to June 2008, SecureAlert engaged in the comment process with Corp +Fin Staff. On April 28, 2008, SecureAlert filed a response to the staff’s March 13, 2008 comment +letter, and discussed SecureAlert’s revenue recognition policies. The letter was signed by Derrick +and represented that SecureAlert only recognized revenue if the following conditions were met: +persuasive evidence of an arrangement exists, title passes to the customer and the customer +cannot return the devices, prices are fixed or determinable, and collection is reasonably assured. + + 24. SecureAlert also made the following separate representations about revenue +recognition in its April 28, 2008 response: (1) “Distributors do not have general rights of return;” +(2) “Generally, title and risk of loss pass to the buyer upon delivery of the devices;” (3) “The +distributors do not have general rights of return for these devices.” + + 25. The statements related to revenue recognition were false in the case of Distributor +because Derrick and Dalton had made assurances to Distributor that he would not be liable for any +unsold devices and that Distributor could return devices at any time for any reason. + + 26. In the April 28, 2008 response and a response to additional staff comments filed on +May 14, 2008, SecureAlert represented that it had collected 100% of the accounts receivable due +from Distributor for the first $1 million purported sale. The responses did not disclose that + + 6 +Distributor did not pay the receivable. The responses did not disclose that Derrick and Dalton +actually paid the receivable with their own personal funds through a third party. The responses did +not disclose that Derrick and Dalton had agreements with Distributor that he was not liable to pay +for any devices he did not sell. + + 27. During the comment process, SecureAlert reviewed the Distribution Agreement. +SecureAlert, in consultation with its independent auditor and outside securities counsel, determined +that the provision in the Distribution Agreement allowing Distributor a right to return product did +not allow for revenue to be recognized. Therefore, SecureAlert informed Corp Fin Staff that it +would restate the $1 million initially recorded as revenue from the purported sale in September +2007 to “deferred revenue.” + + 28. On May 6, 2008, SecureAlert filed a Form 8-K announcing a restatement of the +financial statements, including the deferral of the $1 million in revenue from the September 2007 +contract with Gonzalez. The Form 8-K contained no disclosure of the personal guarantees or the +personal financing of the $1 million “sale.” + + 29. To avoid future issues with revenue recognition, SecureAlert amended the +Distribution Agreement in April 2008 (“Amended Distribution Agreement”) to remove +Distributor’s unilateral right to return product. SecureAlert determined that under the Amended +Distribution Agreement, revenue from sales to Distributor could be recognized immediately if they +met the required revenue recognition conditions, including that title passes to the customer and the +customer cannot return devices. Based on this determination, SecureAlert concluded it did not +need to restate revenue from the December 2007 purported sale to Distributor. Derrick and Dalton +did not disclose their side agreement that Distributor could return unused or unsold product for any +reason and that Distributor would not be liable for any product it did not use. + +SecureAlert Files Materially Misstated Periodic Reports with the Commission + + 30. On June 18, 2008, SecureAlert filed an amended Form 10-QSB/A for the period +ended December 31, 2007 (“December 2007 Form 10-QSB/A”). The $1 million in revenue for the +second purported sale to Distributor in December 2007 was not restated and remained in the +financials as revenue. Derrick signed certifications as CEO for the December 2007 Form 10- +QSB/A. + + 31. On June 19, 2008, SecureAlert filed an amended Form 10-KSB/A (“2007 Form 10- +KSB/A”). The 2007 Form 10-KSB/A restated the $1 million revenue from the first purported sale +in September 2007 as “deferred revenue.” The Distribution Agreement was attached as an exhibit +to the filing; however, the personal guarantee and the personal financing arrangements were not +disclosed. Derrick signed certifications as CEO for the 2007 Forms 10-KSB/A and 10-QSB/A. +32. On August 15, 2008, SecureAlert filed its Form 10-Q for the period ended June 30, +2008 (“June 2008 Form 10-Q”). Because of the Amended Distribution Agreement, SecureAlert +determined it could now recognize revenue from the September 2007 $1 million purported sale to +Distributor. Derrick signed certifications as CEO for the June 2008 Form 10-Q. + + 7 + 33. On December 26, 2008, SecureAlert filed its Form 10-K for the fiscal year ended +September 30, 2008 (“2008 Form 10-K). The entire $2 million for the September and December +2007 purported sales was reported as revenue in the year-end financial statements. The $2 million +in reported revenue made up 78% of SecureAlert’s product revenues and 16% of all revenues for +fiscal year 2008. Derrick signed certifications as CEO for the 2008 Form 10-K. +34. The materially misstated financial statements continued to be reported in +SecureAlert’s filings through the end of fiscal year 2009. The filings included Forms 10-Q for the +periods ended December 31, 2008, March 31, 2009, and June 30, 2009. The Form 10-K for the +fiscal year ended September 30, 2009 (“2009 Form 10-K”) was the last report to contain the +misstated financial statements and was filed on January 13, 2010. Derrick signed certifications as +CEO for each of the quarterly reports filed during fiscal year 2009 and the 2009 Form 10-K. + 35. Derrick made misrepresentations to SecureAlert’s independent auditor during the +yearly audit and quarterly review periods for each of the relevant periods. For each period, he +signed a management representation letter to the auditor, representing, among other things, that: +financial statements were fairly presented in conformity with GAAP along with all related +disclosures, that he had no knowledge of any fraud or suspected fraud, and that all related party +transactions had been properly recorded or disclosed. These representations were false in light of +the undisclosed personal guarantees and personal related-party financing of transactions. + +Assignment of Third Party Promissory Notes to Derrick and Dalton Entity + + 36. By June 2009, SecureAlert and its distributors continued to struggle. There were +still problems with technology and defective units and Distributor had sold little, if any, of the $2 +million in product purportedly sold to him in September and December 2007. The $2 million +owed to Third Party had not been paid. The first $1 million was three months overdue, and +Derrick knew that Distributor would not pay. Although Third Party had not provided any funds for +the transactions, Third Party desired to remove the large, stale accounts receivables from Third +Party’s balance sheet. Therefore, Derrick devised a plan to arrange additional transactions, which +served to cover up the personal financing arrangements and the personal guarantees. + + 37. In June 2009, Derrick formed an entity called JBD Management, LLC (“JBD”). +JBD was owned by Derrick (47.5%), Dalton (47.5%) and Third Party (5%). Derrick arranged for +Third Party to assign its interest in the March 2008 $1 million promissory note and the September +2008 $1 million promissory note to JBD. The assignment involved a series of transactions and +documents executed in July 2009. Interest due on the notes had previously been paid to Third +Party by Derrick and Dalton. +38. The end result was that, on paper, Distributor appeared to owe $2 million to JBD. +Derrick and Dalton did not disclose that Distributor was not obligated to pay the $2 million to JBD, +nor did they disclose that funds for the Third Party transactions had been personally provided by +Derrick and Dalton. + 39. In addition, Derrick and Dalton executed and signed a second undisclosed side +agreement, dated July 13, 2009, to personally guarantee the re-purchase of any unused product in +Distributor’s possession by December 31, 2010. This personal guarantee apparently documented + + 8 +the agreement that Distributor would not be liable for the 2,000 units purportedly sold to him in +December 2007, and he would not have to make payments on the financing arrangement, which +were to come due in September 2009, if Distributor did not need or sell devices. Derrick and +Dalton did not disclose this personal guarantee to other Board members or employees of +SecureAlert, nor did they disclose it to SecureAlert’s independent auditor or outside securities +counsel. + 40. During the relevant period, Derrick and Dalton solicited investments in SecureAlert +and obtained money or property, including money for the sale of SecureAlert stock, by means of +the material misstatements and omissions contained in the company’s financial statements and the +non-disclosure of their personal guarantees and material related-party transactions. During that +time period, SecureAlert was engaged in offering and selling its securities in private offerings and +via Forms S-8. SecureAlert issued 23,927,219 shares of common stock to a number of private +parties for prices ranging from $0.20 to $1.00 and a total of $8,307,914.00. In addition, on August +26, 2008 and March 9, 2009, SecureAlert filed Forms S-8 to register shares for sales or awards of +stock to employees. The August 26, 2008 Form S-8 incorporated by reference SecureAlert’s +materially false financial statements found in SecureAlert’s 2007 Form 10-KSB. The March 9, +2009 Form S-8 incorporated by reference SecureAlert’s materially false financial statements found +in SecureAlert’s 2008 Form 10-K. Derrick’s and Dalton’s actions also constituted a transaction, +practice, or course of business which operated as a fraud or deceit in the offer or sale of +SecureAlert securities. +Internal Control Deficiencies + 41. During the relevant period, Derrick and Dalton knowingly failed to implement a +system of internal accounting controls for SecureAlert and directly or indirectly caused to be +falsified SecureAlert’s books, records, and accounts. + 42. Through their conduct, Derrick and Dalton caused SecureAlert’s books and +records to be inaccurate and caused SecureAlert to fail to devise or maintain a system of sufficient +internal accounting controls. +Discovery of Undisclosed Personal Guarantees and Personal Financing + 43. In or around spring of 2011, Distributor and Derrick discussed the issue of +obligation under the Third Party transactions. For the first time, Derrick admitted to Distributor +that he and Dalton had provided the financing for the Third Party transactions. Over the next +several months, Distributor had discussions with the Board regarding the situation. The Board +ultimately asked for Derrick’s resignation, which he provided on June 30, 2011. + 44. After Derrick left SecureAlert, the Board authorized an internal investigation into +Derrick’s business dealings, including transactions with Distributor and Third Party. SecureAlert +and Derrick jointly self-reported the possible violations. Later, the results of the internal +investigation were provided to Commission Enforcement Staff. After initiation of the internal +investigation, SecureAlert implemented a number of internal control procedures to prevent future +violations of the federal securities laws. + + 9 +Reclassification of Revenues + 45. After learning of the personal guarantees and personal financing arrangements by +Derrick and Dalton, SecureAlert, with the help of its independent auditor, concluded it should +reclassify the $2 million for the Distributor transactions as capital contributions. SecureAlert +determined that the transactions should be treated as capital contributions because JBD was +ultimately issued stock for the $2 million that Derrick and Dalton paid to finance the transactions. +This was pursuant to the assignment of the Third Party notes to JBD and subsequent transactions +involving SecureAlert and Distributor. +46. The reclassification was made in the second quarter of fiscal year 2012 and reported +in SecureAlert’s Form 10-Q for the period ended March 31, 2012, which was filed on May 17, +2012. For that period, SecureAlert’s 2008 statement of operations was no longer presented in its +filings. As a result, the reclassification was made directly between SecureAlert’s accumulated +deficit and additional paid-in capital. At the time, SecureAlert’s balance sheet reflected $249 +million in additional paid-in capital and an accumulated deficit of $234 million. +47. As a result of the conduct described above, Derrick violated Section 17(a) of the +Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit +fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of +securities. +48. As a result of the conduct described above, Derrick violated Exchange Act Rule +13a-14, which requires the principal executive officer to sign and certify annual and quarterly +reports. +49. As a result of the conduct described above, Derrick violated Section 13(b)(5) of the +Exchange Act, which prohibits any person from knowingly circumventing or failing to implement +a system of internal accounting controls and Rule 13b2-1 thereunder, which prohibits the direct or +indirect falsification of an issuer’s books, records, or accounts. +50. As a result of the conduct described above, Derrick violated Exchange Act Rule +13b2-2, which prohibits directors or officers of an issuer to make or cause to made materially false +or misleading statements or omissions to an accountant in connection with any audit, review, or +examination of the financial statements of the issuer. +51. As a result of the conduct described above, Derrick caused violations of Section +13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, which require the +filing of annual and quarterly reports that do not contain material misstatements or omissions. +52. As a result of the conduct described above, Derrick caused violations of Section +13(b)(2)(A) of the Exchange Act, which requires Section 12 registrants to make and keep books, +records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the issuer and Section 13(b)(2)(B) of the Exchange Act, which +requires Section 12 registrants to devise and maintain a system of sufficient internal accounting +controls. + + + 10 +IV. + +On the basis of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent’s offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, Derrick shall cease and desist from committing or causing violations, and any future +violations, of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and (B), +and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1, and +13b2-2 thereunder; +B. Derrick be, and hereby is, prohibited from acting as an officer or director of any +issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. +§ 78l] or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § +78o(d)]; and +C. Derrick shall pay civil penalties of $232,500 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury subject to Exchange +Act Section 21F(g)(3). Payment shall be made in the following installments: Within 14 days of +the entry of the Order, Derrick shall make a first payment of $130,000. Derrick shall pay the +remaining amount of $102,500 no later than February 28, 2016. If any payment is not made by +the date the payment is required by the 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 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 +David G. Derrick, Sr. 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 Karen + + 11 +Martinez, Regional Director, Salt Lake Regional Office, Securities and Exchange Commission, +351 South West Temple, Suite 6.100, Salt Lake City, Utah 84101. + +Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondent’s payment of a +civil penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants +such a Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final +order granting the Penalty Offset, notify the Commission's counsel in this action and pay the +amount of the Penalty Offset to the Securities and Exchange Commission. Such a payment +shall not be deemed an additional civil penalty and shall not be deemed to change the amount +of the civil penalty imposed in this proceeding. For purposes of this paragraph, a "Related +Investor Action" means a private damages action brought against Respondent by or on behalf +of one or more investors based on substantially the same facts as alleged in the Order instituted +by the Commission in this proceeding. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. +§523(a)(19). + +By the Commission. + +Brent J. Fields +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3715.pdf b/raw/aaer/2015/AAER-3715.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5456e6dab2a14dee9fa7c310a2bf8cb07865a37c --- /dev/null +++ b/raw/aaer/2015/AAER-3715.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:2e629fe4ce5493a440a23cb6d50b5fe28734be3bc76bf88e1030243ffb1bfe00 +size 148310 diff --git a/raw/aaer/2015/AAER-3715.txt b/raw/aaer/2015/AAER-3715.txt new file mode 100644 index 0000000000000000000000000000000000000000..3881b2eb057e590f5fa1920726a123e141959894 --- /dev/null +++ b/raw/aaer/2015/AAER-3715.txt @@ -0,0 +1,120 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76250 / October 23, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3715 / October 23, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16919 + + : + : + : +In the Matter of : ORDER INSTITUTING + : ADMINISTRATIVE PROCEEDINGS + : PURSUANT TO RULE 102(e) OF THE + ARTHUR F. KNAPP, Jr., CPA : COMMISSION’S RULES OF + : PRACTICE, MAKING FINDINGS, AND + : IMPOSING REMEDIAL SANCTIONS + Respondent. : + : +____________________________________ : + + +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 Arthur +F. Knapp, Jr. (“Respondent” or “Knapp”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice. 1 + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Knapp, age 66, was licensed to practice as a Certified Public Accountant in +Pennsylvania starting in 1973, until he allowed that license to lapse in approximately 1980. He +joined OCZ Technology Group, Inc. (“OCZ”) in November 2005 and served as the Chief Financial +Officer (“CFO”) until March 2009 and from October 2010 through March 2013. From March 2009 +until October 2010 he was OCZ’s Vice President of Finance. + + 2. OCZ was, at all relevant times, a Delaware corporation with its principal place of +business in San Jose, California. OCZ sold computer memory storage and power supply devices +primarily to distributors, e-tailers, and original equipment manufacturers. The common stock of +OCZ had been registered under Section 12(g) of the Securities Exchange Act of 1934 (“Exchange +Act”) since November 29, 2009. As of April 2010, OCZ’s common stock was registered with the +Commission pursuant to Section 12(b) of the Exchange Act and listed on the NASDAQ Capital +Market. OCZ’s stock was delisted from NASDAQ as of March 6, 2014, causing OCZ’s Section +12(b) registration to be terminated and its Section 12(g) registration to be revived. On April 16, +2015, the Commission issued an Order Instituting Proceedings, Making Findings and Revoking +Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934. + +3. On October 13, 2015, a final judgment was entered by consent against Knapp, +permanently enjoining him from future violations of Sections 17(a)(2) and (3) of the Securities Act +of 1933 (“Securities Act”), Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13a-14 +thereunder, and permanently enjoining him from aiding and abetting violations of Sections 13(a), +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 +thereunder, in the civil action entitled Securities and Exchange Commission v. Knapp, Civil Action +Number 5:15-cv-04598, in the United States District Court for the Northern District of California. +Knapp was also ordered to pay $92,107 in disgorgement of profits gained resulting from his +conduct plus $7,893 in prejudgment interest, and a $30,000 civil money penalty. + + 4. The Commission’s complaint alleges, among other things, that Knapp, as CFO, had +responsibility for OCZ’s internal accounting controls and that he instituted or maintained several + 3 +policies and practices that caused OCZ to record transactions in a manner that was not in +accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and caused OCZ to +report materially inflated revenues and/or gross profits. These policies included (1) reclassifying +costs of goods sold as research and development expenses, without sufficient basis to do so; (2) +failing to capitalize labor and overhead costs in OCZ’s inventory costs; (3) recognizing revenues +upon product shipment, rather than upon delivery of the product to OCZ’s customers; and (4) +understating OCZ’s accruals for product returns. Knapp also failed to implement sufficient +internal accounting controls to prevent OCZ from misclassifying sales discounts as marketing +expenses, among other things. Knapp signed and certified OCZ’s annual reports on Form 10-K +and quarterly reports on Form 10-Q relating to the periods from the second quarter of fiscal 2011 +ending August 31, 2010 through the first quarter of fiscal 2013 ending May 31, 2012, which +contained materially misstated financial results. Knapp also signed current reports on Form 8-K +and registration statements that included or incorporated materially misstated financial results. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Knapp’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that, Knapp is suspended +from appearing or practicing before the Commission as an accountant. + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3717.pdf b/raw/aaer/2015/AAER-3717.pdf new file mode 100644 index 0000000000000000000000000000000000000000..6035156601d36b0a8b26bb03c773c55b73d5c69c --- /dev/null +++ b/raw/aaer/2015/AAER-3717.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:fe6df810e859aef2ca7c8f0730eee8c5d9deebfe759b236081ad026b15871e87 +size 314747 diff --git a/raw/aaer/2015/AAER-3718.pdf b/raw/aaer/2015/AAER-3718.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2296e372826122a656bf25e0fccfedfd8823d2d2 --- /dev/null +++ b/raw/aaer/2015/AAER-3718.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:7dce3b60d2e342c338f0de4d75aeb6f1ca920a61eb568cc80eb2cb3a3b116c27 +size 371176 diff --git a/raw/aaer/2015/AAER-3718.txt b/raw/aaer/2015/AAER-3718.txt new file mode 100644 index 0000000000000000000000000000000000000000..619226ce5b8aff1c6f53ae1844d5e2835d7d4fd1 --- /dev/null +++ b/raw/aaer/2015/AAER-3718.txt @@ -0,0 +1,1768 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76536 / December 2, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3718 / December 2, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16976 + + + + +In the Matter of + +Grant Thornton, LLP, + +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice 2 against Grant Thornton, LLP (“Grant +Thornton” or “Respondent”). + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (2) . . . to have engaged in unethical or +improper professional conduct. +2 Rule 102(e)(1) provides, in relevant part: +The Commission may censure a person . . . who is found . . . +* * * +(ii) to have engaged in unethical or improper professional conduct. + + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) that the Commission has determined to accept. Respondent admits the +facts set forth in Sections III.B, C, and E through F below, acknowledges that its conduct in the +course of its Assisted Living Concepts, Inc. and Broadwind Energy, Inc. engagements violated the +federal securities laws, admits the Commission’s jurisdiction over it and the subject matter of +these proceedings, and consents to the entry of this Order Instituting Public Administrative and +Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act +of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing +Remedial Sanctions and a Cease-and-Desist Order (the “Order”), as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + +1. This matter involves improper professional conduct by Grant Thornton while +serving as the auditor of two clients of Grant Thornton’s Wisconsin practice: Assisted Living +Concepts, Inc. (“ALC”), a publicly traded senior living company, and Broadwind Energy, Inc. +(“Broadwind”), a publicly traded alternative energy company. During the course of its +engagements, Grant Thornton repeatedly violated professional standards while ignoring repeated +red flags and fraud risks that allowed ALC and Broadwind to file numerous reports with the +Commission that were materially false and misleading. + +* * * +(iv) with respect to persons licensed to practice as accountants, “improper +professional conduct” under Rule 102(e)(1)(ii) means: +* * * +(B) either of the following two types of negligent conduct: +(1) A single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted. +(2) Repeated instances of unreasonable conduct, each resulting in a +violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission. +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 +2. For the ALC engagement, for more than three years and under the leadership of two +engagement partners, Grant Thornton failed to identify a fraud perpetrated by ALC’s CEO and +CFO. That long-running fraud was designed to mask ALC’s defaults on certain occupancy and +revenue covenants that had significant financial consequences for ALC in the event of non- +compliance. As a result of the fraud and Grant Thornton’s failed audits, for three years ALC +falsely represented to its investors that it was meeting the covenants and avoiding the serious +ramifications of the defaults. +3. For the Broadwind engagement, Grant Thornton’s failure to exercise due +professional care and skepticism contributed to Broadwind improperly omitting from its financial +statements that it had sustained a $58 million impairment charge caused by the severe deterioration +of customer relationships for two of Broadwind’s most important customers. Grant Thornton’s +failures also contributed to Broadwind conducting a public offering for its stock which concealed +this impairment charge from investors. Grant Thornton’s negligence further contributed to +Broadwind filing multiple financial statements which materially overstated revenue to +Broadwind’s investors. +4. Grant Thornton’s failed ALC and Broadwind engagements were indicative of +systemic quality issues and failures to adhere to professional standards on engagements of clients +of Grant Thornton’s Wisconsin practice. In particular, Grant Thornton had received numerous +warnings of quality issues involving the managing partner of the Wisconsin practice. Despite these +warnings, Grant Thornton allowed that managing partner to continue to audit public companies, +including ALC and Broadwind, and failed to take the appropriate remedial steps that could have +stopped ALC’s and Broadwind’s repeated false and misleading statements to their investors. +B. RESPONDENT + +5. Grant Thornton is an Illinois limited liability partnership and a PCAOB-registered +public accounting firm with its headquarters in Chicago, Illinois. The conduct at issue occurred in +the course of audits and reviews of clients of Grant Thornton’s Wisconsin practice. + +C. RELEVANT GRANT THORNTON PROFESSIONALS + +6. Melissa K. Koeppel (“Koeppel”), age 54, is a Certified Public Accountant +(“CPA”) licensed to practice in Wisconsin. Koeppel served as the managing partner of Grant +Thornton’s Wisconsin practice from 2008 through April 2011. Koeppel served as the Grant +Thornton engagement partner on, and had final audit responsibility over, the ALC engagements +from 2006 through 2010 and the Broadwind engagements from 2007 through the second quarter of +2010. Since 2012, Koeppel has been employed by Grant Thornton as a managing director, outside +the audit-services practice. +7. Jeffrey J. Robinson (“Robinson”), age 63, is a CPA licensed to practice in Illinois +and Wisconsin. Robinson served as the managing partner of Grant Thornton’s Wisconsin practice +from April 2011 through July 2015, when he retired. Robinson served as the Grant Thornton +engagement partner on, and had final audit responsibility over, the ALC engagements from 2011 + +4 +through the first quarter of 2013, when ALC terminated its relationship with Grant Thornton upon +ALC’s acquisition by another company. +D. OTHER RELEVANT ENTITIES +8. 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. In February 2013, ALC agreed to be sold to a global private equity firm. In July +2013, when the sale was completed, ALC’s stock ceased trading on the NYSE. +9. Broadwind is an alternative energy company incorporated in Delaware and +headquartered in Cicero, Illinois. In October 2007, Broadwind purchased Brad Foote Gear Works, +Inc. (“Brad Foote”) to provide gear systems for the wind turbine and other energy industries. +Broadwind’s common stock was quoted on the OTC Bulletin Board until April 9, 2009, when its +common stock began trading on the NASDAQ Global Select Market. Broadwind’s common stock +is registered with the Commission pursuant to Section 12(b) of the Exchange Act. On February 5, +2015, the Commission filed a settled action in the Northern District of Illinois against Broadwind +and its former CEO and CFO for Broadwind’s failure to record and disclose a $58 million +impairment charge prior to a public offering in January 2010. The SEC also charged Broadwind +and its officers with violations arising from accelerated revenue recognition practices and +inadequate disclosures ahead of the offering. Broadwind consented to a judgment enjoining it +from violating Section 17(a)(2) of the Securities Act and Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder and imposing a +civil penalty of $1 million. The former CEO and CFO also consented to a judgement that enjoined +them from future securities laws violations, and imposed disgorgement, prejudgment interest, and +civil penalties. The district court entered the proposed judgments associated with the settlement on +February 11, 2015. See SEC v. Broadwind Energy, Inc., et al., Case No. 15-cv-1142 (N.D. Ill.). +E. GRANT THORNTON’S AUDITS AND REVIEWS OF ALC +1. ALC and the Ventas Lease + +10. During the relevant time period, ALC operated more than 200 senior living +residences in the United States, totaling more than 9,000 units. On January 1, 2008, ALC +purchased the operations of eight assisted living facilities for a total of 540 units in Alabama, +Florida, Georgia, and South Carolina (the “Ventas facilities”) and simultaneously entered into a +lease with Ventas, Inc. (“Ventas”), a publicly traded real estate investment trust (“REIT”) and the +owner of the facilities, to operate the facilities (the “Ventas lease”). +11. The Ventas lease contained financial covenants (the “financial covenants”), which +required that ALC maintain certain quarterly and trailing twelve-month occupancy percentages and +coverage ratios, both at each facility and at the portfolio level. The lease defined “coverage ratio” +as cash flow divided by rent payments. The Ventas lease required ALC to demonstrate its +compliance with the financial covenants on a quarterly basis by providing Ventas, within 45 days +of the end of each quarter: (1) facility financial statements prepared in accordance with general + +5 +accepted accounting principles (“GAAP”); (2) schedules documenting compliance with the +financial covenants; and (3) an officer’s certificate, signed by an ALC executive, attesting to the +completeness and accuracy of such information. +12. The lease provided that if 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 accelerated rent equal to the net present value of the unpaid rent for the remaining term +of the lease. ALC disclosed the net present value of its unpaid rent, as of its 2009, 2010, and 2011 +fiscal year-end, to have been approximately $24.9 million, $20.9 million and $16.7 million +respectively. The lease also 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. Other provisions of the lease required ALC to use the Ventas +facilities solely for their primary intended use and in a manner consistent with their operation as +healthcare facilities. +2. ALC’s Fraudulent Scheme to Hide the Covenant Defaults +13. Beginning in 2008, shortly after ALC entered the Ventas lease, occupancy at the +Ventas facilities declined sharply. As a result of the occupancy declines, from at least the first +quarter of 2009 through the fourth quarter of 2011, ALC failed, by a significant margin, many of +the occupancy and coverage ratio covenants contained in the Ventas lease. Nevertheless, in each +Form 10-K and 10-Q ALC filed during that period, ALC falsely represented that it was in +compliance with the Ventas lease financial covenants. ALC also disclosed that non-compliance +with the financial covenants could result in a “material adverse impact” on ALC. Moreover, +beginning with the second quarter of 2011, ALC falsely represented in its 2011 Forms 10-K and +10-Q that “it did not believe that there is a reasonably likely degree of risk of breach of the +[Ventas] covenants.” ALC included this additional disclosure in response to a comment letter +received from the Commission’s Division of Corporation Finance. +14. To hide ALC’s failure to comply with the covenants from Ventas, ALC’s CEO, +Laurie Bebo, and CFO, John Buono, directed ALC accounting personnel to include in the covenant +calculations between 49 and 103 fabricated occupants for every day from July 2009 through +December 2011.4 To establish the number of fabricated occupants to be included in the covenant + +4 On December 3, 2014, the Commission instituted public administrative and cease and desist +proceedings against Bebo and Buono, alleging violations of the antifraud, books and records, +internal controls, reporting, and other provisions of the Exchange Act. In the Matter of Laurie +Bebo and John Buono, CPA, Exchange Act. Release No. 73722. On January 29, 2015, the +Commission entered an Order accepting Buono’s offer of settlement, finding that he violated +each securities law provision alleged against him, imposing a $100,000 civil penalty, and barring +Buono from practicing before the Commission as an accountant or serving as an officer or +director of a public company. Exchange Act Release No. 74177. On October 2, 2015, following +a four-week evidentiary hearing, an Administrative Law Judge issued an Initial Decision making +findings against Bebo. Initial Decision Release No. 893. + + +6 +calculations, ALC accounting personnel, at Bebo’s and Buono’s direction, reverse-engineered the +requisite number of additional occupants needed to meet the covenants each quarter. ALC +accounting personnel also prepared monthly journal entries to record revenue associated with the +fabricated occupants which: (1) credited the fabricated occupant revenue to the individual Ventas +facilities; and (2) debited revenue in the same amount in a corporate revenue account.5 Shortly +after the end of each quarter, ALC provided Ventas with covenant calculations which included the +fabricated occupants in the occupancy covenant calculations and the revenue associated with the +fabricated occupants in the coverage ratio calculations and thus falsely showed that ALC was +meeting the covenants. +15. Bebo and Buono told Grant Thornton that Ventas had agreed that ALC could +include in the covenant calculations ALC employees who travelled to and stayed at the Ventas +facilities for business purposes.6 However, in actuality, no such agreement existed and Ventas was +never told that any ALC employees were being included in the covenant calculations. Even if +Ventas had agreed that ALC could include in the covenant calculations employees who actually +stayed at the Ventas facilities, given that only a small number of ALC employees actually did so, +ALC would still have missed the covenants by significant margins. +16. In the third quarter of 2009, Grant Thornton asked ALC to identify the employees +included in the covenant calculations. In response, Bebo created and provided Grant Thornton +with a list identifying the employees and their associated lengths of stay at the Ventas facilities. +Bebo would subsequently prepare and/or approve such a list for Grant Thornton for every quarter +through the fourth quarter of 2011. However, given the small number of ALC employees that +actually stayed at the Ventas facilities and the large number of fabricated occupants necessary to +meet the covenants, Bebo chose to include on the list: (1) her family members and friends; (2) +family members (including the seven-year old nephew) of another ALC executive; (3) employees +who did not travel to, let alone stay at, the facilities; (4) employees of the Ventas facilities, who +lived nearby and did not stay overnight at those facilities; (5) employees who had been terminated +by ALC or employees who ALC anticipated hiring but who had not yet started; (6) various ALC +employees as occupants of multiple Ventas facilities for the same time period; and (7) other +individuals who were neither ALC employees nor residents of the Ventas facilities. ALC did not +disclose any of this to Ventas. +17. The fraudulent scheme unraveled in the spring of 2012. In April 2012, Ventas, +which was still unaware of ALC’s use of employees in the covenant calculations, filed a lawsuit +against ALC resulting from ALC’s unrelated failure to meet state regulatory requirements. The + + +5 As a result, ALC eliminated in consolidation the revenue associated with the fabricated +occupants, and such revenue was not reported in its Commission filings. In addition, ALC did +not include the fabricated occupants in the occupancy numbers reported in its Commission +filings. + +6 ALC’s practice of including in the covenant calculations employees or other non-residents is +sometimes referred to hereafter as “the employee adjustment.” + +7 +following day, Bebo sent Ventas a settlement proposal pursuant to which Ventas would release +ALC from liability for all claims including those arising from ALC including employees in the +covenant calculations. The settlement proposal was the first time Ventas learned that ALC was +including employees in the covenant calculations. On May 9, 2012, Ventas issued a notice of +default in which it accused ALC of fraud based on the employee adjustment. +18. In the meantime, on May 2, 2012, one of ALC’s accounting personnel filed a +whistleblower complaint with the audit committee of ALC’s Board of Directors. The complaint +described the employee adjustment as a “sham” and disclosed that ALC had included in the +covenant calculations: (1) employees who did not travel to the Ventas facilities; (2) certain +employees at multiple facilities on the same day; and (3) Bebo’s parents, husband, and a family +friend. ALC immediately initiated an internal investigation, and Bebo was terminated shortly +thereafter, purportedly for reasons unrelated to the employee adjustment. +19. In June 2012, ALC and Ventas settled their lawsuit. 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 appraisals only valued the purchased +facilities at $62.8 million. Thus, in its second quarter 2012 interim financial statements, ALC +included as an expense $37.2 million for “lease termination and settlement” and also wrote off the +entirety of the remaining operating lease intangible assets associated with the Ventas facilities, +which totaled approximately $8.96 million. +20. Grant Thornton issued audit reports containing unqualified opinions on ALC’s +2009, 2010 and 2011 financial statements. Each of those financial statements falsely disclosed that +ALC was in compliance with the financial covenants. Those audit reports and financial statements +were included in ALC’s Form 10-K Commission filings. +3. In Connection with the 2009, 2010, and 2011 ALC Engagements, Grant +Thornton Was Aware of Numerous Risks and Red Flags Related to ALC’s +Covenant Calculation Practices + +21. ALC was one of the larger clients for Grant Thornton’s Wisconsin practice. +a. The 2009 Engagement +22. By the beginning of Grant Thornton’s 2009 engagement, Koeppel and other +members of the engagement team were aware that occupancy at the Ventas facilities had declined +and that ALC was close to defaulting on the financial covenants. For this reason, in connection +with its planning meeting for the first quarter 2009 review, the ALC engagement team focused on +the financial covenants. The planning meeting agenda, which Koeppel reviewed, indicated that the +Ventas covenant calculations were an area to which the engagement team should “devote special +attention” and that the engagement team should “look closely” at ALC’s covenant calculations. +23. Three weeks later, in late April 2009, ALC accounting personnel sent a Grant +Thornton junior engagement team member ALC’s calculations of the occupancy and coverage + +8 +ratio covenants for the quarter and underlying support for the numbers used in the covenant +calculations. Shortly thereafter, the engagement team member noticed discrepancies for six of the +eight Ventas facilities between the occupancy figures used in the covenant calculations and the +underlying support. As a result, he sent an email to ALC accounting personnel asking for an +explanation for the discrepancies. +24. In response, ALC accounting personnel emailed Grant Thornton a spreadsheet +known as an “occupancy recon” which listed for each of the Ventas facilities for each month +during the quarter: (1) the actual occupancy of the facilities; and (2) the number of ALC +“employees” which were added to the actual occupancy numbers for purposes of the covenant +calculations. The occupancy recon revealed that ALC was adding a total of 24 “employees” into +the occupancy calculations for every day in the quarter. A review of the information contained +therein would have shown that ALC failed certain occupancy covenants without the inclusion of +employees. +25. ALC accounting personnel also provided the junior engagement team member with +purported “support” for the employee adjustment, which was a February 4, 2009 email from Bebo +to a Ventas employee (the “February 4 email”). However, the February 4 email made no mention +of the financial covenants, and merely mentioned that ALC may rent rooms at the Ventas facilities +to certain of its employees “in the ordinary course of business.” The junior engagement team +member elevated the issue to Grant Thornton’s engagement manager, yet Grant Thornton did not +receive any additional support from ALC. The engagement team told Koeppel about the employee +adjustment and described it as unusual, but told Koeppel that the team had reviewed +documentation which the team believed evidenced an agreement with Ventas. However, Koeppel +never reviewed that documentation nor attempted to learn other details about it. +26. Grant Thornton did not perform additional procedures, such as seeking +confirmation from Ventas that it had agreed to the use of employees in the covenant calculations. +In fact, Grant Thornton would never seek confirmation from Ventas that it had agreed to the use of +employees in the covenant calculations. Had Grant Thornton done so, it would have confirmed +that Ventas never agreed to the employee adjustment. +27. Grant Thornton’s workpapers for the first quarter of 2009 do not contain the +February 4 email or reference ALC’s inclusion of employees in the covenant calculations. The +workpapers do reflect that Grant Thornton determined that ALC passed the covenant calculations +based on the adjusted numbers contained in the occupancy recons. +28. ALC’s management representation letter to Grant Thornton for the first quarter of +2009 and every quarterly review and audit in fiscal year 2009, 2010 and 2011 contained a +representation that ALC had complied with all aspects of contractual agreements that would have a +material effect on the financial statements in the event of noncompliance. +29. In the course of Grant Thornton’s second quarter 2009 review, a Grant Thornton +summer intern was tasked with performing the procedures with respect to ALC’s compliance with +the Ventas lease covenants under the supervision of an audit senior. The intern reviewed an +occupancy recon showing that ALC was including approximately 23 employees in the covenant + +9 +calculations for every day of the quarter. The intern then prepared a note to the workpapers +referencing the employee adjustment, which included language from the February 4 email, and +stated: +The employee adjustment relates to extra rooms at each facility not currently +occupied by ALC residents. The rooms are subleased through ALC to improve the +overall performance of each facility…Since the units are subleased, an adjustment +is needed to show ALC occupancy and for Ventas testing. +Koeppel signed off on this workpaper, even though she knew there were no formal sublease +agreements for any employee-occupied rooms. +30. For the third quarter of 2009, Grant Thornton reviewed occupancy recons showing +that ALC had included 45, 65 and 75 employees for each day of July, August and September +respectively. At Koeppel’s request, the occupancy recons now included a list showing the names +of the ALC employees purportedly staying at each Ventas facility, and the attendant length of their +purported stay. This information would be contained in each subsequent occupancy recon, which +showed employees staying at the facilities for every day of each month they were listed as an +occupant. Koeppel never instructed the engagement team to perform additional procedures related +to the list of names to determine whether the list of employees, or the length of the employees’ +purported stays, was accurate or appropriate. Moreover, Koeppel never asked the engagement +team what procedures, if any, the team was performing with respect to the list of names. Had +Koeppel, or later Robinson, asked the engagement team to perform substantive procedures on the +list of names, Grant Thornton would have discovered that the list was fraudulent. +31. As part of its third quarter review, Grant Thornton, requested that ALC include in +its representation letter the representation that ALC had “calculated the [Ventas] lease covenants in +accordance with the corresponding lease agreement and the lessor’s instructions.” The +engagement team wanted this representation included in part because it was concerned about the +employee adjustment. In response, ALC modified the requested representation, and included the +following in its representation letter: “We have calculated the [Ventas] lease covenants in +accordance with the corresponding lease agreement and as understood by us after conferring with +the lessor.” (Emphasis added). Grant Thornton’s workpapers do not contain an explanation for the +modification in the language. +32. Grant Thornton’s workpapers for the third quarter 2009 review observed that one of +the Ventas facilities had unexpected or unusual revenue trends in that changes in revenue could not +be explained by corresponding changes in occupancy. The workpapers addressing these trends +noted that a Grant Thornton junior engagement team member had spoken with ALC personnel +who explained that: (a) ALC employees were staying at the Ventas facilities per an agreement +with Ventas; and (b) that such employees “pay rent and increase revenue,” but are not counted +toward ALC’s company-wide occupancy numbers. This notation in the workpapers, which +Koeppel reviewed, conflicted with her understanding that ALC employees included in the +covenant calculations did not pay rent. + +10 +33. In the course of Grant Thornton’s 2009 year end audit, Koeppel reviewed risk +assessment workpapers that she understood referred to risks associated with the Ventas financial +covenants. +34. In connection with that audit, and in the subsequent 2010 and 2011 audits, Grant +Thornton documented that ALC was using “unusual” journal entries in connection with the +employee adjustment. Those journal entries recorded “negative revenue” in a corporate revenue +account to offset $1.2 million in non-GAAP revenue on the financial statements of the Ventas +facilities associated with the employees included in the covenant calculations. The result of the +offsetting revenue meant that the employee revenue reported to Ventas was eliminated from ALC’s +consolidated financial statements. Koeppel, and later Robinson, was aware of these unusual entries +yet never instructed the engagement team to perform additional testing on the employee +adjustment. +35. Also in connection with the 2009 year end audit, the Grant Thornton engagement +team planned on conducting site visits to five Ventas facilities in Georgia and one in South +Carolina to, among other things, verify facility occupancy figures, physically inspect the houses +and the assets therein, make fraud inquiries with facility employees and review documentation that +was maintained at the facilities. However, ALC requested that the engagement team choose other +site visit locations in lieu of the Georgia facilities, and Koeppel acquiesced to ALC’s request. +36. Koeppel also reviewed a workpaper detailing ALC’s monthly revenues for each of +its facilities. That workpaper also indicated the occupancy rates for each facility. The workpaper +showed that the occupancy rate for seven of the eight Ventas facilities fell far short of the rates +required by the lease covenants. +37. In the course of the 2009 year end audit, Grant Thornton reviewed occupancy +recons showing that ALC was including 103 employees in the covenant calculations for each day +of the fourth quarter, yet failed to mention the employee adjustment in the covenant calculation +workpapers. Nevertheless, Koeppel signed off on those workpapers. In addition, Koeppel +determined that a representation specific to the use of employees in the covenant calculations, such +as the one included in the third quarter 2009 letter, was no longer necessary for ALC’s +representation letter. No such representation was included in the representation letters for any +subsequent ALC audits and reviews in the relevant period. +b. The 2010 Engagement +38. In connection with its planning meeting for the first quarter 2010 review, Grant +Thornton again focused on the financial covenants. The planning meeting agenda, which Koeppel +reviewed, noted that the Ventas covenant calculations were an area to which the engagement team +should “devote special attention” and that the engagement team should “make sure we are testing +the [Ventas] lease covenant calculations.” +39. For the first and second quarter 2010 reviews, Grant Thornton reviewed occupancy +recons showing that ALC included 103 employees in the covenant calculations each day from +January through May, and included 90 employees each day in June. + +11 +40. By the time Grant Thornton was conducting field work for the third quarter 2010 +review, Grant Thornton national professional standards and risk management personnel had +become aware of negative quality indicators with respect to Koeppel, who was placed on a +November 2010 monitoring list for partners with such negative indicators. Grant Thornton placed +Koeppel on this list because, among other things, her audit clients had restated their financial +statements or interim financial information four times in the preceding two years. The Public +Company Accounting Oversight Board (“PCAOB”), in its 2008 inspection report, had also found +deficiencies on one of Koeppel’s engagements because Grant Thornton had failed to gather +sufficient audit evidence. +41. One of the restatements that led to Koeppel’s inclusion on the partner monitoring +list involved Grant Thornton’s audit client, Koss Corporation (“Koss”). In June 2010, Koss +restated its financial statements for the preceding two fiscal years because one of its vice presidents +had embezzled $31.5 million from 2005 through 2009 and would plead guilty to criminal charges +based on the misconduct. Koeppel was the engagement partner for the Koss audit for three of the +four years of the embezzlement. In July 2012, Grant Thornton, without admitting any liability, +paid $8.5 million to settle a malpractice case filed by Koss. +42. By November of 2010, Grant Thornton’s National Professional Practice Director +for the Midwest region (“NPPD”) became aware of negative audit quality indicators with respect +to Koeppel as a result of an ongoing PCAOB inspection. Although the NPPD did not know that +Koeppel had been placed on the partner monitoring list, he was informed by others in the firm that +Koeppel had a number of negative audit quality indicators. The NPPD also became aware of +observations by other Grant Thornton partners that the Wisconsin practice, for which Koeppel was +the managing partner, had “gotten off the tracks from a methodology perspective.” +43. By the fall of 2010, Grant Thornton had removed Koeppel from all of her other +public company engagements,7 but decided to allow her to continue as the engagement partner for +the 2010 ALC audit. +44. Following the completion of the second quarter 2010 review, the audit manager +assigned to the ALC engagement team resigned. During the planning stages for the third quarter +review, Grant Thornton assigned a new engagement manager (the “Engagement Manager”) to be +co-engagement manager on the ALC engagement. During the third quarter 2010 review, Koeppel +became aware that the other Grant Thornton auditor assigned to be the co-manager of the ALC +engagement was removed from the engagement. Koeppel knew that this left the Engagement +Manager as the only manager on the ALC engagement. +45. The Engagement Manager’s assignment as the sole engagement manager for the +ALC engagement contravened Grant Thornton policy, which required that lead managers and +partners on public company audit engagements be “SEC designated” to ensure that those + +7 Grant Thornton removed Koeppel from the remainder of her audit and review engagements, +including private company engagements, after completing her work on financial statements or +interim financial information for years or quarters ending December 31, 2010. + +12 +individuals had the appropriate level of experience and understanding about Commission +requirements. To obtain such a designation, an auditor was required to spend 200 hours on public +company engagements in a prescribed time period and complete certain continuing professional +education courses. +46. Koeppel knew that the Engagement Manager was not SEC designated due to the +Engagement Manager having spent insufficient time on public company engagements. Koeppel +also knew that the other Grant Thornton auditor assigned to be the co-manager of the ALC +engagement, who was SEC designated, was removed from the engagement. Koeppel knew that +this left the Engagement Manager, despite her lack of SEC designation, as the only manager on the +ALC engagement. +47. On October 22, 2010, shortly after the Engagement Manager started working on the +ALC engagement, one of her subordinates brought the issue of the inclusion of employees in the +covenant calculations to the Engagement Manager’s attention. The email the Engagement +Manager received stated: +You will also see that the only way some of the houses are passing [the +occupancy] covenant is by having these [employee] adjustments. In prior +quarters, as well as again this quarter, we have asked for support for these +[employee] adjustments but they haven’t [been] able to provide any. In +prior quarters I have also asked if they have any support (letters, emails, etc. +from [Ventas]) to show that [Ventas] is aware that ALC is adding in +[employees] and is okay with it. They have nothing. [the Engagement +Manager’s predecessor manager] said that all we can do then is rep it. . . +Since you are new to the job, I wanted to bring this to your attention and +make sure you are comfortable with this as well. Is there anything else we +should do with this? + +48. A few days later, an engagement team member emailed the Engagement Manager a +copy of the Ventas lease and noted that she could not locate any provisions that defined +“occupancy.” The Engagement Manager responded that she also could not find any such +provisions and intended to contact ALC accounting personnel who prepared the covenant +calculations for additional information. The Engagement Manager believed it was necessary to +speak to ALC accounting personnel because ALC’s inclusion of employees did not comport with +the traditional definition of “occupancy” for assisted living facilities. +49. The Engagement Manager then spoke with the ALC accountant who prepared the +occupancy recons. Based on this conversation, the Engagement Manager believed that ALC was +possibly providing Ventas with the occupancy recons and that this allowed Ventas to discern that +ALC was including employees in the covenant calculations. In an email documenting her +conversation with the ALC accountant, the Engagement Manager wrote that the accountant “did +say he gives [Ventas] the more detailed spreadsheet that we have, so he thinks if they had a problem +with it, they would have said something.” She added: +If I can get John [Buono] to confirm this, then I think we can document that + +13 +they receive [the occupancy recon], have opportunity to disagree, etc. I’d +still like it in the rep letter too then. But at least I feel more comfortable that +they see the detail. + +50. The Engagement Manager then attempted to contact Buono, who was unavailable. +The Engagement Manager left Buono a voicemail inquiring about ALC’s use of employees in the +covenant calculations. In that voicemail, the Engagement Manager noted that based on her +conversation with the ALC accountant, she believed that “maybe” Ventas received the occupancy +recons showing ALC’s inclusion of employees. The Engagement Manager did not ask anyone at +Grant Thornton to review the materials ALC sent to Ventas, which would have shown that Ventas +was not receiving information showing ALC’s use of employees. Grant Thornton would not +perform such a review until the year end 2011 audit. +51. After leaving Buono the voicemail, the Engagement Manager spoke with Koeppel. +Koeppel indicated to the Engagement Manager that Koeppel was aware that ALC had been +including employees in the covenant calculations for the previous six quarters and that Koeppel +was comfortable with the practice. Following this conversation, the Engagement Manager emailed +Buono and told him to ignore the voicemail. +52. The Engagement Manager also suggested to Koeppel that ALC include in its +representation letter a representation relating to ALC’s use of employees in the covenant +calculations, but Koeppel determined that such a representation was unnecessary. +53. Thus, the Engagement Manager was dissuaded by Koeppel from following either of +the Engagement Manager’s recommendations – speaking with Buono and obtaining additional +representations – for obtaining support for ALC’s use of employees in the covenant calculations. +54. In the course of the third quarter 2010 review, Grant Thornton for the first time +included copies of the occupancy recons (without the employee names) in its workpapers. Those +materials, which Koeppel and the Engagement Manager reviewed, showed that ALC was +including between 68 and 72 employees in the Ventas covenant calculations for each day of the +quarter. +55. Grant Thornton also included two notes in the workpapers regarding ALC’s use of +employees in the covenant calculation. In the first note, Grant Thornton indicated that, as a result +of the employee adjustment, the occupancy figures used in the covenant calculations differed from +the figures provided in ALC’s internal occupancy reports. In the second note, Grant Thornton +explained that the difference was, in part, the result of the employee adjustment and wrote that: +“The employee adjustment relates to extra rooms at each facility that are not currently occupied by +ALC residents, but are set aside for ALC employees to improve the overall performance of each +facility.” The note also contained the incorrect observation that Ventas was receiving the +occupancy recons showing the number of included employees, and had the opportunity to disagree +with ALC’s practices. +56. In addition, Grant Thornton included the Ventas lease covenants in its Summary of +Significant Matters (“the SSM”) for the third quarter 2010 review. Grant Thornton prepared the + +14 +SSM to highlight to engagement partners and engagement quality reviewers, among others, +important issues and questions encountered during the audit or review. In the SSM, Grant +Thornton mistakenly noted that it had “confirmed” with Buono that Ventas received the occupancy +recon. The SSM also noted that Grant Thornton was not able to “specifically test” ALC’s use of +employees in the covenant calculations, that Grant Thornton accordingly needed to rely on ALC’s +representations about its covenant practices, and that such a representation was included in ALC’s +representation letter. +57. Both Koeppel and the Engagement Manager reviewed the SSM. The Engagement +Manager knew or should have known that the SSM incorrectly noted that Buono had represented +that Ventas received the occupancy recons. +58. In advance of Grant Thornton’s third quarter 2010 meeting with ALC’s audit +committee, the Engagement Manager added the Ventas covenants as a written agenda item for +Grant Thornton’s presentation to the committee. However, Koeppel removed the agenda item +from Grant Thornton’s presentation. +59. In planning for the year end 2010 audit, Grant Thornton scheduled site visits to the +Ventas facilities after Koeppel and the Engagement Manager determined that those facilities were +at higher risk for inaccurate occupancy reporting because of the Ventas lease covenant +requirements and because ALC was barely passing the covenants. However, Grant Thornton’s +workpapers documenting its site visits to the Ventas facility do not reference any steps to validate +the inclusion of employees in the covenant calculations. In fact, the Grant Thornton engagement +team member who performed the site visit testing was unaware of the employee adjustment. Had +Grant Thornton asked, employees who worked at the Ventas facilities would likely have told the +Grant Thornton engagement team that only a handful of employees were staying at the facilities at +any given time and that no rooms were being set aside or reserved at their facilities for employee +use. Despite identifying the Ventas facilities as posing a higher risk, Koeppel failed to sign off on +the results of the site visit procedures performed. Koeppel also failed to direct the site visit team to +obtain support for ALC’s use of employees in the covenant calculations, and failed to follow-up +with the team to see if any such support had been obtained. +60. In the course of the year end 2010 audit, the Engagement Manager received a +spreadsheet which showed the number of employees ALC included in the covenant calculations +for each month during 2009 and 2010. One hour after receiving this information, the Engagement +Manager sent an email to her subordinate, in which the Engagement Manager wrote: +2009 is quite odd-how do they suddenly have 70 employees staying here +one month? Did we discuss this with them last year (i.e. how were they +tracking these before)? Also, they go from 70, then down to 24, then back +up. This seems very odd. . . . Not sure how accurate this is. + +Nevertheless, the Engagement Manager failed to make any inquiries to ALC regarding her +concerns or document her concerns in the workpapers. + + +15 +61. Grant Thornton’s workpapers for the 2010 year end audit included the occupancy +recons, which showed that ALC included 61 employees in the covenant calculations for each day +of the fourth quarter. The workpapers also noted that ALC would fail the occupancy covenants +without the inclusion of employees. Both Koeppel and the Engagement Manager reviewed these +workpapers. +62. For the 2010 year end audit, a Grant Thornton engagement team member suggested +to Koeppel and the Engagement Manager that ALC’s representation letter should contain a specific +representation relating to ALC’s use of employees in the covenant calculations. Koeppel +responded, consistent with her view the prior quarter, by determining that the suggested +representation was not necessary. + c. The 2011 Engagement +63. Robinson replaced Koeppel as the ALC engagement partner beginning with the +first quarter 2011 review. With the exception of the third quarter 2011 review, Grant Thornton +continued to staff the Engagement Manager as the manager on the ALC engagement. Prior to the +2011 year end audit, Grant Thornton approved the Engagement Manager’s application for SEC +designation, even though the Engagement Manager had still not completed the amount of public +company engagement hours required under firm policy. In approving the application, Grant +Thornton demanded that the NPPD continue to perform a detailed review in connection with the +year end audit. +64. When Robinson assumed responsibility for the ALC engagement, the engagement +team advised Robinson that ALC was including employees in its covenant calculations. After this +was brought to Robinson’s attention, he discussed the issue with Buono during an introductory +lunch. Buono told Robinson that there was “an exchange of letters” that allowed ALC to use +employees to meet the covenants. However, Robinson never obtained any such documentation. +65. During the first quarter 2011 ALC review, the Engagement Manager, as she had +done with Robinson, brought the Ventas covenants to the attention of Grant Thornton’s +engagement quality reviewer (the “EQR”), who had joined the ALC engagement as the +engagement quality reviewer on the 2010 audit. In the course of doing so, she sent an email +informing the EQR that ALC was very close to missing the covenants. +66. In the course of the first quarter 2011 review, Grant Thornton learned that ALC had +provided information showing that it failed one of the Ventas lease occupancy covenants. In +reality, ALC had mistakenly included an insufficient number of employees to meet the covenant at +issue. After Grant Thornton raised the failed covenant with ALC, ALC provided Grant Thornton +with revised covenant calculations in which ALC added employees in order to pass all of the +covenants. +67. In the following days, a Grant Thornton engagement team member emailed the +Engagement Manager to apprise the Engagement Manager of her concerns that ALC had added +employees after initially failing a covenant. The engagement team member also proposed that the +Engagement Manager request from Buono a letter confirming Ventas’s agreement to allow + +16 +employees to be included in the covenant calculations. When the engagement team member spoke +with the Engagement Manager, the Engagement Manager shared her assessment that ALC’s use of +new employees to remedy a covenant failure was “odd.” However, Grant Thornton did not request +additional support from ALC. When a second junior engagement team member learned that Grant +Thornton had not followed up with Buono on obtaining a letter concerning the employee +adjustment, he wrote an email to the first engagement team member observing that: “I don’t think +we’re ever going to get this mystery letter.” +68. ALC’s workpapers for the first quarter 2011 review included the occupancy recons, +which showed that ALC included between 60 and 65 employees in the covenant calculations for +each day of the quarter. The workpapers also noted that ALC would fail the occupancy covenants +without the inclusion of employees. Both Robinson and the Engagement Manager reviewed these +workpapers. In a separate section of the workpaper, Grant Thornton noted that ALC had failed the +occupancy covenant for one of the facilities in the first draft of the covenant calculations but +explained that Buono had “found” additional employees which allowed ALC to pass. +69. The SSM for the first quarter 2011 review again identified the Ventas covenants as +a significant matter. The relevant paragraph was substantially similar to the paragraph in the third +quarter 2010 SSM except that it omitted the reference to Buono’s representation that Ventas was +receiving occupancy recons. Robinson, the EQR, and the Engagement Manager each reviewed +this SSM. +70. At Robinson’s request, Grant Thornton sent ALC a proposed representation letter +for the first quarter 2011 review which contained a specific representation relating to the inclusion +of employees in the covenant calculations. However, when Buono requested that Grant Thornton +remove this representation, Robinson and the Engagement Manager acquiesced. +71. In the course of its second quarter 2011 review, Grant Thornton learned that ALC +had received a comment letter from the Commission’s Division of Corporation Finance relating to +ALC’s 2010 Form 10-K, which requested, among other things, that ALC disclose its performance +relative to the Ventas covenants if it remained at “risk of non-compliance.” Grant Thornton +reviewed ALC’s proposed response to the comment letter, in which ALC wrote that it did “not +believe that it has a reasonably likely degree of risk of breach of the [Ventas] covenants” and that it +would add such a disclosure to its subsequent Commission filings. ALC in fact added such a +disclosure to its Commission filings beginning with its second quarter 2011 Form 10-Q. Grant +Thornton did not suggest any revisions to ALC’s final response letter or to ALC’s additional +disclosure in its Commission filings. +72. ALC’s workpapers for the second and third quarter 2011 reviews included the +occupancy recons, which showed that ALC included between 73 and 88 employees in the covenant +calculations for each day of the quarter. The workpapers again noted that ALC would fail the +occupancy covenants without the inclusion of employees. +73. The SSM for the second and third quarter 2011 reviews contained identical +paragraphs as the first quarter 2011 SSM with respect to the Ventas covenants. Robinson, the +Engagement Manager, and the EQR reviewed both SSMs. + +17 +74. In preparation for the 2011 year end audit, Grant Thornton again recognized the +risk associated with the financial covenants. The planning meeting agenda for the audit included +an item identifying areas where “ALC management could perpetrate and conceal fraudulent +financial reporting.” The agenda identified “occupancy (affecting covenants and bonuses)” as one +such area for potential fraud. Robinson, the EQR, and the Engagement Manager reviewed this +agenda. +75. During the 2011 audit, Grant Thornton for the first time requested a copy of the +quarterly covenant calculations that ALC sent to Ventas. Grant Thornton made this request after +the Engagement Manager reviewed the fourth quarter 2011 occupancy recon and saw that 50 +percent of the available units at one of the Ventas facilities and 25 percent of the available units at +another facility were purportedly occupied by ALC employees. +76. In response to Grant Thornton’s request, ALC provided copies of the quarterly +materials it sent to Ventas. Those materials, like all of the earlier covenant information ALC had +provided to Ventas, did not contain any information indicating that employees were being included +in the covenant calculations or the number of such employees. +77. A Grant Thornton engagement team member emailed the materials to the +Engagement Manager and wrote: “The excel document [sent to Ventas] is exactly what we receive +[in the occupancy recons], except they exclude the tab where they add employees (as we had kind +of expected)” (emphasis added). The Engagement Manager responded to the email by writing that +“I just don’t know how comfortable I am with this.” the Engagement Manager wrote that she +called Buono to seek an explanation, but left a voicemail when Buono did not answer. The +engagement team member then forwarded the Engagement Manager’s email to a junior team +member, but not the Engagement Manager, writing: “I wish I could be on this call . . .” The junior +engagement team member responded: “Holly s---.” +78. Buono did not return the Engagement Manager’s call. In the meantime, the +engagement team continued to be concerned about the employee adjustment. The day after leaving +the voicemail for Buono, the Engagement Manager emailed Robinson and noted that the Ventas +covenant calculations were still an “open item” because: (1) ALC wasn’t sending Ventas the +employee occupancy information that Grant Thornton had been reviewing; and (2) she wanted to +question Buono on why so many of the occupants at two Ventas facilities were ALC employees. +79. Eight days after the Engagement Manager left the voicemail, Buono still had not +returned her call. The Engagement Manager then left another voicemail for Buono in which she +said that she wanted to discuss the Ventas covenants because the numbers for the quarter looked +“odd.” Four days later, when Buono still had not returned her calls, the Engagement Manager +emailed Robinson to ask whether they should speak with the Chairman of ALC’s Audit Committee +because Buono “still hasn’t responded to my questions with my concerns about how they are +‘meeting’ these covenants.” +80. In the meantime, both Robinson and the Engagement Manager again suggested +adding a representation to ALC’s representation letter that specifically addressed the Ventas +covenants, and Grant Thornton included such a representation in the draft letter it sent to ALC. + +18 +81. Eleven days after the Engagement Manager’s initial voicemail to Buono, the two +finally spoke. On the call, the Engagement Manager failed to raise her concerns that ALC +employees represented 50% of the occupancy of one Ventas facility and 25% of the occupancy of +another facility. Rather, Buono requested that Grant Thornton remove the Ventas covenant +representation contained in the draft representation letter Grant Thornton had sent to ALC. +82. In response, the Engagement Manager asked Buono to provide some evidence that +Ventas knew that ALC was including employees in the covenant calculations. Buono then +described to the Engagement Manager: (1) a conference call with Ventas in 2009 during which +Buono claimed that Ventas was notified about the inclusion of employees in the covenant +calculations; and (2) an email from Bebo to Ventas confirming such conversation. The +conversation ended with the Engagement Manager requesting a copy of the email. +83. Shortly after the conversation, Buono sent the Engagement Manager via email a +copy of the February 4 email, which contained no mention of the Ventas covenants. The +Engagement Manager also provided a copy of the February 4 email to Robinson. One minute after +receiving the February 4 email from Buono, the Engagement Manager responded to Buono that +she would remove the Ventas covenant specific representation from the final representation letter. +The Engagement Manager did not consult with Robinson before removing the representation. +However, in a subsequent conversation with Robinson, the Engagement Manager described the +sequence of events and Robinson indicated his agreement with her decisions. +84. Grant Thornton’s 2011 audit workpapers included the occupancy recons, which +showed that ALC included 92 employees in the covenant calculations for each day of the fourth +quarter. The workpapers also contained a notation that the revenue associated with the employee +occupants allowed ALC to satisfy the coverage ratio covenants. Other workpapers, which +Robinson and the Engagement Manager reviewed, also contained the incorrect observation +contained in prior workpapers that Ventas received quarterly information showing the number of +employees ALC included in the covenant calculations. +85. As was the case for 2009 and 2010, Grant Thornton issued an audit report that +included an unqualified opinion on ALC’s 2011 financial statements. + 4. The 2012 Engagement +86. During the reviews of ALC’s interim financial statements for the first and second +quarters of 2012, Robinson, the EQR, the Engagement Manager and the NPPD received additional +information which indicated the impropriety of ALC’s inclusion of employees in the covenant +calculations. Grant Thornton did not withdraw its audit opinions on ALC’s prior period financial +statements. +87. In the course of its first quarter 2012 review, Grant Thornton learned that Ventas +had issued notices of default to ALC as a result of ALC receiving license revocations at certain of +the Ventas facilities. On April 24, 2012, the Engagement Manager emailed Robinson to express +her concerns regarding ALC’s efforts to resolve its disputes with Ventas, which included ALC +offering Ventas $15 million to terminate the lease. The Engagement Manager wrote: + +19 +Ventas may not realize the full extent to which occupancy has dropped. +Although they are getting close to a deal on the properties now, what +happens when Ventas finds out occupancy is actually much lower than +expected as ALC has been filling with employees. This is going to happen +when they enter the properties. I wonder if Ventas might ask for more then +because they may see it as the properties having depreciated more. + +88. On April 26, 2012, when the efforts to settle the license revocation issues collapsed, +Ventas sued ALC in federal court. ALC and Ventas would ultimately settle that litigation, after +Ventas learned that ALC was including employees in the covenant calculations, with ALC +purchasing the Ventas facilities for $37 million more than the facilities’ appraised value. +89. In May 2012, Robinson, the EQR, the Engagement Manager and the NPPD learned +that a whistleblower had submitted a complaint to ALC’s Audit Committee relating to the +inclusion of employees in the covenant calculations and that ALC’s Audit Committee had retained +a prominent law firm to conduct an internal investigation of the allegations. While Grant Thornton +was not provided with a copy of the whistleblower complaint until December 2012, ALC’s law +firm described the whistleblower’s allegations to Robinson and the Engagement Manager during a +meeting on May 14, 2012. In its workpapers, Grant Thornton noted that the whistleblower had +alleged that the employees included in the covenant calculations were not performing any services +at the Ventas facilities or even leaving ALC headquarters. The workpapers also noted the +whistleblower’s disclosure that the employee numbers were reverse engineered to meet the +covenants. Robinson, the EQR, and the Engagement Manager prepared or reviewed these +workpapers. +90. On May 11, 2012, Robinson received an email from the Chairman of ALC’s Audit +Committee attaching notices of default which ALC had received from Ventas. In one of those +notices, Ventas asserted that ALC had committed fraud by including employees in the covenant +calculations. In the cover email, ALC’s Audit Committee chair indicated that ALC management +was not authorized to speak with Grant Thornton about the matters being investigated by the law +firm retained by ALC’s Audit Committee. +91. In the course of Grant Thornton’s second quarter 2012 review, the Engagement +Manager prepared workpapers to explain the accounting for ALC’s purchase of the Ventas +facilities, which indicated that ALC had paid Ventas $37 million in excess of the appraised value +of those facilities “for damages as a result of occupancy rates falling significantly below required +covenant occupancy rates.” Robinson, the EQR, the NPPD and other members of Grant +Thornton’s professional standards group reviewed these workpapers. +F. GRANT THORNTON’S AUDIT AND REVIEW OF BROADWIND + 1. Background on the Recording of Intangible Assets +92. GAAP typically does not permit the recognition of intangible assets, such as +customer relationships, as independent assets on a company’s balance sheet. An exception to this +general rule is intangible assets purchased in connection with a business combination. In that + +20 +context, GAAP requires the consideration for an acquisition to be allocated across the tangible and +intangible assets, with the remainder recorded as goodwill. +93. In connection with the Brad Foote acquisition in October 2007, Broadwind +recorded amortizable intangible assets of $76 million and goodwill of $26 million. Nearly the +entire $76 million intangible asset related to Brad Foote’s contracts with its two most significant +customers, Customer 1 and Customer 2, which were recorded at $62 million and $13 million, +respectively. To establish the intangible asset value, management relied on a valuation conducted +by an appraisal firm, Appraisal Firm 1. Appraisal Firm 1’s valuation depended in substantial part +on the forecasted net cash flows derived from the Customer 1 and 2 contracts over ten- and nine- +year periods, respectively. Appraisal Firm 1 calculated those net cash flows from forecasts and +estimated growth rates provided by senior managers at Broadwind. The net sales forecasts +reflected management’s anticipation of aggressive growth. +94. Once established, an amortizable intangible asset is subject to periodic impairment +testing. According to Accounting Standards Codification (“ASC”) 360, originally promulgated as +Financial Accounting Standard (“FAS”) 144, an intangible asset is impaired when the carrying +amount of the asset exceeds its fair value. A company is required to make this determination +“whenever events or changes in circumstance indicate that its carrying amount may not be +recoverable.” One such “triggering event” is “a current-period operating or cash flow loss +combined with a history of operating or cash flow losses or a projection or forecast that +demonstrates continuing losses associated with the use of a long-lived asset (or asset group).” +Other examples of such triggering events include “a significant adverse change in the extent or +manner in which a long-lived asset (or asset group) is being used or in its physical condition” or “a +significant adverse change in legal factors or in the business climate that could affect the value of a +long-lived asset (or asset group), including an adverse action or assessment by a regulator.” +Broadwind purported to follow the accounting principles established by FAS 144. + 2. The Decline of Broadwind’s Customer Relationships +95. Beginning in late 2008, Customers 1 and 2 significantly reduced actual and +forecasted orders, causing substantial declines in Brad Foote’s projected revenue associated with +those relationships. Broadwind reacted to the downturn by planning or implementing numerous +initiatives to rationalize the business, including decreasing headcount, returning machines to +equipment suppliers, altering production schedules, and withholding investments in additional +capacity. +96. Throughout the first quarter of 2009, the declines in Customer 1 and 2’s revenues +and forecasts worsened, falling more than 66% and 71% from the original forecast used to value +the customer relationships. In response, Brad Foote took steps to restructure its workforce and +operations, laying off more than 200 employees and senior staff through at least three workforce +reductions, and reducing its material orders from suppliers. Brad Foote aggressively sought +business from other non-wind customers to replace the significant declines and correct the +underutilization of its capacity. + +21 +97. In early 2009, as its financial condition worsened, Broadwind received early +indications of potential impairment while preparing its 2008 annual report. During its 2008 +financial statement audit, Broadwind retained Appraisal Firm 1 to test its goodwill and intangible +assets for potential impairment. In March 2009, Appraisal Firm 1 informed Broadwind that it had +calculated a $15 million impairment charge associated with the Customer 1 contract. Appraisal +Firm 1 subsequently modified its calculations, which resulted in no impairment. Although the +Company ultimately did not disclose a charge in its 2008 Form 10-K, following consultation with +Grant Thornton, Appraisal Firm 1’s preliminary result placed Broadwind’s management on further +notice of the potential for impairment. +98. During the second quarter of 2009, the Customer 1 and 2 relationships deteriorated +more precipitously. At a special board meeting convened on June 9, 2009, Brad Foote +management reported that Brad Foote would produce no more than $85 million in sales for 2009, +compared to $120 million in previously anticipated sales. Management also reported that 2009 +revenue forecasts for Customer 1 had decreased to $30 million and that the 2009 revenue forecasts +for Customer 2 had declined to $15 million. In connection with a “massive and sudden schedule” +reduction imposed by Customer 1 and other developments, Broadwind and Brad Foote began +developing a “life without Customer 1” business plan, and several members of management +expressed the desire to exit the relationship. +99. For Brad Foote as a whole, second quarter 2009 revenue fell 31% against the +second quarter of 2008 and 24% compared to the first quarter of 2009, and its gross margin turned +negative. As in previous months, Brad Foote continued its efforts to redirect sales from Customers +1 and 2 to new customers and implemented additional workforce reductions. +100. In the third quarter of 2009, Brad Foote’s actual and forecasted revenue continued +to decline. Specifically, year-to-date revenues from Customer 1 and Customer 2 through +September 30, 2009 declined 42% and 25%, respectively, compared to the same period ending +September 30, 2008. +101. On July 29, 2009, Broadwind’s CEO provided the Board a “rationalization update” +that described the precipitous decline and the restructuring that management was taking to respond +to weak performance. During the meeting, Brad Foote management presented a financial forecast +for Brad Foote showing that the expectation for Brad Foote sales for 2009 had declined by +$49 million, or 41% to a newly revised forecast of $71 million. Brad Foote management also +projected net income of negative $16 million for the year. During a portion of the presentation +discussing “risks to [the] income statement,” Broadwind management identified “continued loss of +volume” and “impairment at subsidiaries.” +102. The declines in actual and forecasted results were not limited to 2009. Revenue +forecasts for future years also declined. For instance, on July 30, 2009, Customer 1 submitted a +2010 forecast that was only 13% of the $125 million 2010 projection used to establish the +acquisition value of the Customer 1 contract. +103. Around this same time, Brad Foote management informed the Board that Brad +Foote would generate revenues of $30 million from Customer 2 in 2010, $41 million in 2011, and + +22 +$54 million in 2012. On average, those forecasts represented a 70% decline from the comparable +period forecasts originally used to value the Customer 2 contract. +104. A board meeting was scheduled for October 1, 2009 to determine whether the +Board should sever its relationship with Customer 1. At that meeting, the Board decided not to +terminate Broadwind’s relationship with Customer 1. However, Broadwind continued to budget +for and anticipate impairment in several documents and communications through December 2009. + 3. Broadwind’s Misrepresentations and Omissions in Its Commission Filings +105. As a result of these developments, by the third quarter of 2009, the intangible assets +associated with the Customer 1 and 2 relationships met the triggering event tests established by +FAS 144, and these assets were impaired. Consequently, Broadwind materially overstated its +intangible assets and understated a material impairment charge in its Form 10-Q for the third +quarter of 2009, which was filed on November 2, 2009. +106. Given the declines in its business and other developments, Broadwind resolved in +October 2009 to raise additional capital through a public offering of its stock. In anticipation of the +offering that ultimately proceeded in January 2010, Broadwind filed a registration statement with +the Commission. The registration statement was initially filed on October 30, 2009 and was +amended various times between November 6, 2009 and January 14, 2010. The registration +statement ultimately went effective on January 14, 2010. All versions of Broadwind’s registration +statement included the interim financial statements that had been included in the Forms 10-Q filed +through the end of the third quarter, September 30, 2009, and expressly incorporated prior reports +by reference. +107. As was the case with the third-quarter Form 10-Q, Broadwind’s registration +statement was incomplete and misleading. By incorporating third-quarter interim financial +statements that did not report the impairment charge, Broadwind failed to disclose that its +intangible assets already had been substantially impaired. Failing to disclose the impairment +allowed Broadwind to proceed with an offering that was critical to its financial survival and to give +the misleading impression that its business was stronger than actual and predicted results +established. +108. Less than two weeks after the completion of the offering, on February 2, 2010, +Appraisal Firm 2 informed Broadwind’s management of its preliminary finding of impairment. +109. Approximately one month later, Broadwind disclosed the impairment in its 2009 +Form 10-K and earnings release, filed on March 12, 2010. Broadwind disclosed a $58 million +charge to intangible assets and full impairment of its goodwill related to Brad Foote in the amount +of $24 million. Described by the Board as “significant,” the charge reduced the value assigned to +customer contracts by 94%. Of the $58 million intangible impairment charge, $56 million directly +related to the declining value of the Customer 1 and 2 relationships. Largely as a result of the +charge, Broadwind’s operating loss for the year increased from $28 million to $110 million on +reported revenues of $198 million. + +23 +110. Following the revelation of the charge, Broadwind’s stock declined 21%, from a +closing price of $5.68 on March 11, 2010 to a closing price of $4.47 on March 12, 2010, on +increased volume. On the next trading day, March 15, 2010, the price fell another 8% from the +March 11, 2010 price to $4.11, for a total decline of 29%. In contrast, the broader market, as +reflected by the Nasdaq Composite Index, was essentially unchanged for these two days. The +charge also was significant because it signaled serious weaknesses in Broadwind’s long-term +prospects, particularly with two of the industry’s largest players. +111. Because Broadwind did not recognize impairment as a third-quarter event, its Form +10-K for 2009 misstated third and fourth-quarter results. In the Form 10-K, Broadwind +inaccurately attributed the impairment charge to fourth-quarter events when the events that resulted +in the impairment were present during the third quarter. +4. Grant Thornton’s Early Warnings of Potential Impairment +112. In inspection reports issued beginning in 2007, PCAOB notified Grant Thornton of +several impairment audit deficiencies in other engagements. Further, in its 2008 and 2009 +inspection reports, PCAOB notified Grant Thornton of issues regarding the effectiveness of Grant +Thornton’s firmwide quality controls with respect to (1) professional skepticism, (2) engagement +supervision, and (3) impairment procedures. +113. As Broadwind’s auditor, Grant Thornton learned of the decline in sales and volume +that began in late 2008, as well as the restructuring steps undertaken by Broadwind to address the +declines, through its audit work. For instance, Grant Thornton reviewed Broadwind’s board and +committee materials in connection with each of its reviews and audits. Grant Thornton’s work +papers also noted various negative developments through its review of financial metrics and +conversation with accounting personnel and others at Broadwind. +114. In addition, because it reviewed and analyzed Appraisal Firm 1’s work during the +2008 annual audit in early 2009, Grant Thornton also received the early indications of potential +impairment identified by Appraisal Firm 1. Although Broadwind ultimately did not disclose an +impairment charge in its 2008 Form 10-K, the preliminary result placed Broadwind and Grant +Thornton on notice of the potential for impairment. +115. During the quarterly review for the period ending March 31, 2009, Grant Thornton +asked management to prepare a memorandum documenting its consideration of triggering events +that could indicate impairment of the intangible assets associated with the Customer 1 and 2 +relationships. Management’s memorandum to Grant Thornton recited the standard for impairment, +noted the recent downturns, but summarily concluded that no triggering events had occurred. +116. Grant Thornton also requested a similar assessment for the second quarter of 2009. +Management’s memorandum again noted key customers’ intentions to scale back orders, but +summarily concluded these declines simply represented a delay in the timing of revenues and +associated cash flows. With respect to the second quarter 2009 assessment, the senior manager for +the Grant Thornton engagement team wrote the following to Koeppel: + +24 +The problem is that the ability to forecast has been suspect with this group +and whether or not the sales are suspended or eliminated is the question . . . +their position is suspended which is how they get to no impairment. I think +this meets adequate documentation at an interim date and not sure we are +going to get a better product. Please let me know if you disagree and +whether or not we should have more expansive forecasting to illustrate the +expected revenues from these customers that have pushed out. +117. Despite these concerns, Koeppel failed to direct the engagement team to obtain +more expansive forecasting from Broadwind, or to perform any additional procedures, during the +second-quarter review. The Grant Thornton review file similarly included no documentation of +any additional forecasting by Broadwind or additional procedures performed. +5. Grant Thornton Learns of Broadwind’s Expectation of Impairment + +118. In August 2009, after the continued deterioration of the Customer 1 and 2 customer +relationships, Broadwind management shared with Grant Thornton its expectation that its +intangible assets would be substantially impaired. Specifically, Grant Thornton received internal +budgeted balance sheets and income statements for 2010 and other documents reflecting +management’s assumption that the entire Customer 1 contract intangible asset would be impaired +by December 31, 2009. Several of these documents specifically identified an expected impairment +charge of $48 million to be recorded in the fourth quarter. +119. After being informed on September 9, 2009 of management’s expectation, Koeppel +wrote to the senior manager: “Guess they see the writing on the wall for [Brad Foote]—seems like +we need a triggering event?!?!?” One day later, the senior manager summarized for Koeppel a +discussion with Broadwind’s Chief Accounting Officer (“CAO”) and Controller: +The impairment has not been booked or determined, but they believe a +Customer 1 triggering event is a week or two away and is based on a +customer retention decision at the board level . . . [the CAO] feels they are +slanting the board materials to keep Customer 1, but are not incorporating +the true costs of the customer relationship which would potentially paint a +different light. +120. Grant Thornton incorporated management’s expectation in its planning for the +third-quarter review and year-end audit of Broadwind’s 2009 financial statements. On +September 29, 2009, Broadwind and Grant Thornton met to plan the upcoming annual audit. +Agenda and notes drafted by Grant Thornton in preparation for the meeting reflect “expected +impairment,” “loss of Customer 1 . . . FAS 144 writeoff,” and the need “to get started as soon as +possible.” Relatedly, a client meeting agenda listed “impairment analysis” as a topic of discussion. +Attachments to the agenda included other references to impairment and an estimated $48 million +charge. A few days after the audit planning meeting, on October 4, 2009, Grant Thornton +forwarded Broadwind’s Controller guidance on impairment disclosures “as a follow up to [their] +discussion regarding potential impairment.” + +25 +6. Grant Thornton’s Failed Review of Broadwind’s Third-Quarter +Impairment Assessment + +121. Broadwind’s third quarter ended on September 30, 2009. As discussed above, in +early October 2009, Broadwind decided to raise additional capital through a follow-on offering of +its stock, referred to as a “re-IPO,” and began to prepare a registration statement. The Grant +Thornton engagement team was aware that Broadwind was embarking upon an offering and +understood that the offering was critical to Broadwind’s financial survival. Grant Thornton also +understood that Broadwind’s CEO planned to participate in the offering by selling shares that he +personally owned. Broadwind originally planned to complete the offering in late November 2009. +122. Grant Thornton’s quarterly review of Broadwind’s third-quarter interim financial +statements began on October 21, 2009. On or about October 27, 2009, immediately before a +planned filing of a registration statement, Grant Thornton learned that Broadwind’s management +had decided not to file the registration statement due to the withdrawal of the lead underwriter. +After being informed by Broadwind’s CFO that there were “underwriting issues at the last +minute,” Koeppel conveyed her understanding to the senior manager and manager that +“impairment may be an issue/concern—they want to highlight it may occur—[the CAO’s] and my +concern is it starts to look like you should have already recorded it then—details, details!” +123. In connection with the third-quarter review, on or about October 29, 2009, despite +prior communications of an expected impairment, Broadwind management once again prepared an +impairment assessment for Grant Thornton that concluded that no triggering event had occurred. +In the assessment, Broadwind incorporated a comparative table of year-to-date revenues by +customer that reflected substantial revenue declines. Management summarily characterized these +declines as temporary and asserted that long-term volumes had not been materially changed. +However, management offered no specific evidence to support its view that orders would return to +the volumes forecasted in 2007, and other facts contradicted its assertion. Based on this +unsupported and incorrect conclusion, Broadwind failed to disclose a significant impairment +charge in its Form 10-Q filed on November 2, 2009, opting instead for a generalized risk disclosure +of the possibility of such a charge. Management’s assessment was incorporated into a Grant +Thornton working paper that was reviewed and approved by Koeppel and others on the +engagement team. +124. Notwithstanding the awareness of a significant likelihood that the Customer 1 and 2 +contracts were impaired, and despite lingering uncertainty about management’s forecasting ability, +Koeppel and others on the engagement team accepted management’s unsupported assertion that +the reduced orders only represented a temporary deferral of sales that would be recovered over the +life of the supply agreement. Grant Thornton noted in its workpapers, which Koeppel reviewed: +GT notes that although volumes are below those projected by mgmt during +the 2008 integrated audit, management does not believe that this is a +triggering event due to the following. (i) BFGW continues to have long- +term contracts with [Customer 1 and 2]. For example, the Customer 1 +contract contains automatic renewals, termination provisions, etc. Current +discussions with Customer 1 indicate increased future activity. (ii) These are + +26 +long-term relationships with an estimated useful life of 9 [Customer 2] and +10 [Customer 1] years. Thus, it is reasonable to assume that short-term +reductions in volume will be made up over the longer term. Management +does not believe, and GT concurs, that a short-term decrease from budgeted +activity qualifies as a triggering event and such analysis does not seem to be +supported by FAS 144. +125. Even though multiple facts known to Koeppel and the engagement team did not +align with management’s conclusion, and Grant Thornton knew that Broadwind was pursuing an +offering, Grant Thornton did not perform any procedures to determine whether the order +reductions were other than temporary. On the contrary, the review documentation noted that Grant +Thornton simply “assume[d]” that these reductions were temporary. Among other things, Grant +Thornton did not ask Broadwind to provide detailed information about Customer 1 and 2 volume +expectations beyond 2009, which was available to management at the time. Grant Thornton’s files +do not include any documentation indicating how Koeppel or the engagement team determined the +reasonableness and consistency of Broadwind’s response in light of the results of other review +procedures and their knowledge of the business. +126. In fact, Broadwind’s response conflicted with longer-term forecasts presented to the +Board as early as July 2009, which were available to Grant Thornton. Koeppel’s experience with +Broadwind since 2007 provided her with an understanding of Brad Foote’s operations to recognize +that Brad Foote required longer-term forecasts from Customer 1 and 2 to manage its material +requirements and production schedule. Consequently, she should have known that 2010 volume +forecasts were available at the time of the third-quarter triggering event assessment. +127. Further, during Grant Thornton’s review of Broadwind’s third-quarter impairment +assessment memorandum, Grant Thornton’s professional standards partner (the “PSP”) assigned to +the Broadwind engagement provided comments to Koeppel and the manager. The PSP had been +assigned by Grant Thornton to monitor the Broadwind engagement as a result of Grant Thornton’s +designation of the engagement as high risk. In a communication to the engagement team about +Broadwind’s impairment assessment, the PSP wrote the following: “Are the revenues consistent +with the projections used for their last impairment analysis? If they are significantly declined than +that, then you would have a trigger you may need to revisit. They don’t address this here. Also +need GT conclusion & view on impairment in the files.” Although the team’s own third-quarter +revenue analytics working papers demonstrated that the revenues were not consistent with the +projections used for Broadwind’s last impairment analysis, the engagement team did not revisit the +triggers for an impairment analysis. The manager responded to the PSP simply that management +viewed the contracts as long term, such that a short-term decrease from budget would not qualify +as a triggering event. +7. Grant Thornton Defers to Broadwind in Its Comfort Letter + +128. Broadwind’s third-quarter 2009 interim financial statements were incorporated into +its registration statement for the public offering in January 2010. In connection with the offering, +Grant Thornton was retained to provide a comfort letter to investment bankers and reviewed draft +registration statements and impairment disclosures. As Grant Thornton performed its procedures, + +27 +Koeppel and the engagement team learned that the Commission’s Division of Corporation Finance +had questioned Broadwind’s impairment disclosures. As part of its review of Broadwind’s +registration statement, the Division of Corporation Finance issued Broadwind a comment letter in +late November 2009. In response to comments questioning the Company’s impairment +disclosures, Broadwind added more detail to its description of its significant accounting policies in +its MD&A and the notes to consolidated interim financial statements. However, the additional +language simply provided more detail about the testing process and did not alter the substance of +Broadwind’s disclosures regarding impairment or the risk of impairment. +129. Following this expanded process disclosure, Koeppel and the senior manager +defended the quality of Broadwind’s disclosures surrounding impairment in email exchanges with +the PSP. The PSP voiced serious reservations to the engagement team about the impairment +disclosures and emphasized the company’s obligation to provide an early warning to investors if it +believed an impairment charge was reasonably possible. The PSP specifically cautioned Koeppel +that “[w]e can’t just turn a blind eye if we believe there is a good possibility they will have +impairment.” Koeppel and the senior manager addressed the PSP’s concerns by obtaining a +representation from management that impairment testing was in process but had not yet been +completed. Grant Thornton’s comfort letter expressly cautioned that it had not performed any +procedures surrounding impairment of intangible assets with respect to the period from October to +November 2009, deferring instead to its “inquiry of management.” +8. Grant Thornton Negligently Audits Management’s Allocation of +Impairment Charge to the Fourth Quarter + +130. In the course of its year end audit of Broadwind, Grant Thornton’s workpapers +failed to differentiate the fourth-quarter declines from comparable declines that occurred in prior +periods. At the urging of the PSP just days prior to audit signoff, the engagement team considered +whether the impairment charge should be recorded in the fourth quarter of 2009 or some earlier +period. The resulting audit file memorandum, which Koeppel reviewed, relied on selected sales +metrics to demonstrate a purported deterioration in the fourth quarter of 2009. In the +memorandum, Grant Thornton reasoned that: (1) the fourth quarter 2009 revenue decline from +fourth quarter 2008 (65%) and from third quarter 2009 (32%) was significant; and (2) prior to the +fourth quarter, actual and forecasted revenue amounts related to the reporting unit were consistent +with previous expectations. +131. Grant Thornton’s observation that, prior to the fourth quarter, actual revenues were +consistent with the prior year’s forecasted revenues was incorrect and was contradicted by the +engagement team’s own revenue analytics documentation in each of the first three quarters of +2009. The team’s third-quarter review impairment workpapers also acknowledged this +underperformance by stating “that, although volumes are below those projected by [management] +during the 2008 integrated audit, management does not believe that this is a triggering event.” In +fact, Brad Foote’s actual quarterly revenues in 2009 failed to meet the forecasted revenues used in +the fiscal year 2008 impairment analysis by significant margins. Moreover, Grant Thornton’s +reasoning applied with equal force to prior quarters in 2009, and these declines were documented +by Grant Thornton each quarter in its revenue analytics working papers. In the second and third +quarters, Brad Foote realized comparable declines in revenue. Second quarter 2009 revenue fell + +28 +31% against second quarter 2008 and 24% compared to first quarter 2009. Third quarter 2009 +revenue fell 49% compared to third quarter 2008 and 19% compared to second quarter 2009. +132. The engagement team’s memorandum on this issue failed to discuss whether or +how it considered the significant sales declines that had occurred in the third quarter in concluding +the company was correct in recording the impairment charge as a fourth-quarter event. Further, the +team’s inclusion of the inaccurate statement that actual revenues were consistent with prior-year +projections reinforced the company’s incorrect allocation of the impairment charge to the fourth +quarter. Koeppel and Grant Thornton sought only evidence to corroborate management’s +conclusion while disregarding evidence from their own prior work that contradicted management’s +conclusion. +133. Around the same time that the PSP had asked the engagement team to evaluate the +timing of the impairment charge, Koeppel provided Broadwind’s CFO with comments on +Broadwind’s draft earnings release to be issued in connection with the filing of Broadwind’s 2009 +Form 10-K. The CFO’s draft had attributed the impairment charge to “reduced wind gearing +purchases under key customer contracts beginning in late 2008.” (emphasis added). Koeppel +urged the CFO to reevaluate the language in the release. Koeppel wrote: “We view the following +reference to 2008 as problematic as it may suggest that you should have taken the impairment +charge earlier . . . Suggest that you expand the sentence to focus on Q4 events which drove this +assessment.” Koeppel proposed these revisions to the press release prior to the engagement team’s +drafting of the memorandum purporting to document its consideration of the charge’s timing. +9. Grant Thornton’s Failure to Detect Broadwind’s Overstatement of +Revenue +a. Grant Thornton Identifies Revenue Recognition Risks + +134. In the course of the 2009 year end audit, Koeppel and Grant Thornton identified the +risk of material misstatement due to fraud in the area of revenue recognition at Broadwind’s most +significant subsidiary, Brad Foote, as a specific risk. Audit planning documentation identified the +risk that “sales include fraudulent transactions” as “high” and “reasonably possible.” Planning +documentation further noted “possible incentive to play with earnings especially at the BFGW +level (there are monthly sales targets included in their loan covenants).” More generally, Grant +Thornton had identified the Broadwind engagement as a high-risk audit. This conclusion was +influenced in part by Broadwind’s prior disclosures of material weaknesses in controls over +revenue recognition and other controls in earlier periods. + b. Overstatement of Revenue by Broadwind +135. This risk in fact materialized. The deterioration in customer relationships that +produced the impairment charge also compromised Brad Foote’s ability to meet monthly debt +covenants associated with its primary credit facility. To avoid default and other negative +consequences, Brad Foote personnel accelerated revenue to meet its covenants until Broadwind +could raise funds to retire the credit facility through the offering in January 2010. Broadwind +failed to disclose this practice and its effect on future revenue in the registration statement used in + +29 +the offering. In addition, as a result of the transactions, Broadwind reported $4 million of +improperly recognized revenue for the third and fourth quarters of 2009, including certain bill-and- +hold transactions entered with Customer 2. This revenue was material to Broadwind’s financial +results. +136. The Customer 2 bill-and-hold transactions had their genesis in a broader “pull- +ahead agreement” between Customer 2 and Brad Foote. In response to forecast reductions in early +2009, Brad Foote personnel approached Customer 2 about pulling $6 million of orders, consisting +of 150 sets of gear boxes, from 2010 into 2009 “to ensure [Brad Foote’s] future compliance with +debt covenants” and its ability to continue supplying gearboxes to Customer 2. Brad Foote’s +proposal was not requested by Customer 2 or tied to any commercial need on the part of Customer +2 beyond the survival of a critical supplier. The 150 sets were to be pulled from requirements that +were scheduled to ship in 2010 and would not be consumed until the first half of 2010. Because +Customer 2 had no need for the sets and would carry the 150 sets as excess inventory, Brad Foote +proposed “to cover Customer 2’s carrying and storage costs through deflation in 2010.” In +addition, because the long-term agreement with Customer 2 provided for an annual reduction in +prices paid by Customer 2, Brad Foote agreed to accept 2010 prices for the parts. Brad Foote +committed that it would not ship the products to Customer 2 if it were able to identify new business +from other customers. After initially refusing the request, Customer 2 agreed to provide $3 million +of support. Customer 2 scheduled the 75 sets to be delivered from late August 2009 through +November 2009. Brad Foote’s delivery of these sets caused significant disruption at Customer 2, +given its lack of need for the parts until 2010. Brad Foote paid Customer 2 the carrying cost and +the price reduction through a 1.5% discount that was spread over shipments that occurred in 2010. +137. As a result of the pull-ahead agreement, by October 2009, Customer 2 exceeded its +ability to store the excess inventory. Consequently, Customer 2 approached Brad Foote about +storing the remaining gear sets through a bill-and-hold arrangement. On October 31, 2009, Brad +Foote agreed and entered into a bill-and-hold arrangement with respect to 30 gear sets totaling +$1,247,160. The gears were not shipped to Customer 2, but instead were supposed to be +segregated and maintained onsite at Brad Foote. Customer 2 required Brad Foote to segregate the +product and provide evidence of completion and periodically inspect the product on site. +Notwithstanding these efforts, Brad Foote failed to segregate the product consistently. The +transaction failed to meet the criteria to recognize revenue under a bill-and-hold arrangement. See +In the Matter of Stewart Parness, Accounting and Auditing Enforcement Rel. No. 108 (Aug. 5, +1986), Staff Accounting Bulletin 104, Revenue Recognition. +138. On November 30, 2009, Brad Foote placed 30 sets into a bill-and-hold arrangement +similar to the one entered with Customer 2 in October 2009. Fifteen of these 30 sets completed the +pull-ahead arrangement with Customer 2, and Brad Foote documented Customer 2’s request +through the same email authorizing delivery in October 2009. The other half corresponded to an +additional 15 sets not formally ordered by Customer 2 until December 2009. In total, Brad Foote +recognized $1,194,471 of revenue associated with these 30 sets. As with the October 2009 +shipment, Broadwind failed to produce evidence of Customer 2’s substantial business purpose for +the arrangement and failed to comply with other requirements of a proper bill-and-hold +arrangement. + +30 + c. Grant Thornton’s Audit of the Bill-and-Hold Arrangement +139. Grant Thornton never learned the details of the bill-and-hold arrangement. During +the 2009 year end audit, Grant Thornton identified the October 2009 transaction as a transaction +for further review. However, the engagement team’s testing of this transaction was limited to +obtaining a summary of its terms from management. The summary failed to identify several +aspects of the transaction critical to its proper accounting, including, among other things, the price +discount and the inventory carrying cost. For example, interviews with Brad Foote personnel, +review of documents associated with the transaction, or confirming the terms directly with +Customer 2 could have revealed that the bill-and-hold arrangement was the product of a large-scale +pull-ahead agreement and had no independent business purpose. +140. More broadly, prior to the conclusion of the audit, management identified multiple +problematic transactions at Brad Foote designed to meet monthly revenue covenants during a +pending offering. These transactions included improperly recorded bill-and-hold transactions that +should have raised additional questions about the October 2009 transaction with Customer 2. The +engagement team did not document how it altered the nature, timing, or extent of its audit +procedures in a manner that addressed this risk. +141. Koeppel participated in the audit planning process and fraud brainstorming +discussion, signed off on the audit working papers in which the identified risks were documented, +and signed off on working papers concluding that the Customer 2 bill-and-hold transaction met +applicable revenue recognition criteria. + d. Retention of Supporting Documentation in the Audit File +142. As discussed above, Broadwind identified and corrected certain transactions in +which it had improperly recognized revenue through an internal review conducted by management +from late 2009 to early 2010. A report of the internal review provided to Grant Thornton and +referenced in its working papers identified multiple instances of improper revenue recognition, +which included backdated letters, side agreements, unauthorized bill-and-hold transactions, and a +directive not to record a credit memo. These transactions contributed to an overstatement of +revenue that enabled Brad Foote to barely meet its debt covenants in the months leading to a +critical stock offering. However, the engagement team did not retain a copy of the report or +supporting documentation for the questionable transactions in the audit file. +G. VIOLATIONS +RULE 102(e) AND SECTION 4C OF THE EXCHANGE ACT +143. Grant Thornton’s 2009, 2010, and 2011 audits of ALC, and its 2009 third quarter +review and year end audit of Broadwind were deficient and not performed in accordance with +PCAOB standards.8 Section 4C(b) and Rule 102(e)(1)(iv) define improper professional conduct + +8 References to auditing standards in this Order are to PCAOB standards in effect at the time the +audit work was performed. For example, the PCAOB risk assessment standards (AS 8-15) + + +31 +with respect to persons licensed to practice as accountants. Pursuant to these provisions, +“improper professional conduct” includes two types of negligent conduct: (1) a single instance +of highly unreasonable conduct that results in a violation of professional standards in +circumstances in which an accountant knows, or should know, that heightened scrutiny is +warranted; or (2) repeated instances of unreasonable conduct, each resulting in violations of +professional standards, that indicate a lack of competence. + +144. As set forth above, Grant Thornton knew, or should have known, that the Ventas +financial covenant calculations were an area in which heightened scrutiny was warranted in +connection with the 2009, 2010 and 2011 audits of ALC. Moreover, Grant Thornton knew or +should have known facts that called into question ALC’s claims that it was meeting the Ventas +lease covenants by virtue of an agreement with Ventas to include employees and other non- +residents in the covenant calculations. Throughout the 2009, 2010, and 2011 audits and reviews, +Grant Thornton was aware of repeated red flags surrounding ALC’s practice of meeting the +covenants by treating employees and other non-residents as occupants of the Ventas facilities. In +light of these red flags, Grant Thornton failed to take reasonable steps to verify that an agreement +with Ventas existed or that the employees ALC claimed to be occupants of the facilities were in +fact staying there. Had Grant Thornton taken such measures, it could have exposed and put an end +to ALC’s fraud. Instead, Grant Thornton issued audit reports in 2009, 2010, and 2011containing +unqualified opinions that were filed with ALC’s financial statements in the Form 10-Ks. In those +reports, Grant Thornton inaccurately stated that the audit had been conducted in accordance with +PCAOB standards and that ALC’s financial statements presented fairly, in all material respects, the +company’s position and results in conformity with accounting principles generally accepted in the +United States of America. + +145. Further, in the course of its 2009 third quarter review of Broadwind, Grant +Thornton knew, or should have known, that Broadwind’s financial statements omitted a $58 +million impairment charge associated with its deteriorated customer relationships for Brad +Foote’s two most important customers. Additionally, in the course of its 2009 year end audit of +Broadwind, Grant Thornton knew or should have known that Broadwind’s impairment charge +was not a fourth-quarter event and that Broadwind’s third and fourth quarter financial statements +materially overstated revenue. + +Failure to Properly Plan the Audit (AU §§ 311 and 312, AS 8, AS 9) + +146. PCAOB standards require an auditor to consider the nature, extent and timing of +work to be performed in planning the audit and prepare a written audit program which sets forth in +reasonable detail the audit procedures necessary to accomplish the audit objectives. (AU § +311.05). Auditors must also consider audit risk and materiality in planning the audit and designing +audit procedures. (AU § 312.12). Auditors additionally must plan the audit so that audit risk will +be limited to a low level appropriate for expressing an opinion on the financial statements. (AU § + +became effective for audits of fiscal years beginning on or after December 15, 2010 (i.e., the +2011 audit of ALC) and superseded AU §§ 311, 312, 326, among others. + +32 +312.13). Auditors are also required to consider significant risk of material misstatement of the +financial statements in: (1) determining the nature, timing or extent of procedures; (2) assigning +staff; and (3) requiring appropriate levels of supervision. (AU § 312.17). In planning an audit, +auditors must also design procedures to obtain reasonable assurance of detecting misstatements +that the auditor believes could be material. (AU § 312.25, AS 8.3). + +147. PCAOB standards also require auditors to properly plan their audits and develop +and document an audit plan that includes a description of, among other things: (1) the planned +nature, timing and extent of substantive procedures; and (2) other planned audit procedures +required to be performed so that the engagement complies with PCAOB standards. (AS 9.4, AS +9.10). + +148. As a result of Grant Thornton’s conduct described above, Grant Thornton failed +to properly plan its 2009, 2010 and 2011 audits of ALC. + +Failure to exercise due professional care and professional skepticism (AU +§§ 230, 316, 722, and AS 13) + +149. PCAOB standards require auditors to exercise due professional care in the +planning and performance of the audit and the preparation of the report. (AU § 230.01). +Auditors must maintain an attitude of professional skepticism, which includes “a questioning +mind and a critical assessment of audit evidence.” (AU § 230.07, AS 13.7). In addition, the +auditor should “consider the competency and sufficiency of the evidence. Since evidence is +gathered and evaluated throughout the audit, professional skepticism should be exercised +throughout the audit process.” (AU § 230.08). In exercising professional skepticism, an auditor +should not be satisfied with less than persuasive evidence because of a belief that management is +honest. (AU §§ 230.09 and 316.13). Further, auditors should: (1) perform an ongoing questioning +of whether the information and evidence obtained suggests that a material misstatement due to +fraud has occurred; and (2) conduct the engagement with a mindset that recognizes that a material +misstatement due to fraud could be present, regardless of past experience with the entity and the +auditors’ belief about management’s honesty and integrity. (AU § 316.13). Auditors should also +exercise due professional care and professional skepticism in the course of reviews of interim +financial information. (AU § 722.01). + +150. As a result of Grant Thornton’s conduct described above, Grant Thornton failed +to exercise due professional care and professional skepticism in its 2009, 2010 and 2011 audits +of ALC and its 2009 third quarter review and year end audit of Broadwind. + +Failure to obtain sufficient evidence (AU §§ 326 and 333, AS 13, 14 and 15) +151. PCAOB standards required auditors to obtain sufficient competent evidential matter +(for the 2009 Broadwind audit and the 2009 and 2010 ALC audits) and sufficient appropriate audit +evidence (for the 2011 ALC audit) to afford a reasonable basis for an opinion with respect to the +financial statements under audit. (AU § 326.22, AS 15.4). Auditors must be thorough in their +search for evidential matter and unbiased in its evaluation and consider relevant evidential matter + +33 +regardless of whether it corroborates or contradicts assertions in the financial statements. (AU § +326.25, AS 15.2 and 15.29). + +152. PCAOB standards also provide that management representations “are not a +substitute for the application of th[e] auditing procedures necessary to afford a reasonable basis +for an opinion regarding the financial statements under audit,” that “the auditor obtains written +representations from management to complement other auditing procedures,” and that “[i]n +exercising professional skepticism, the auditor should not be satisfied with less than persuasive +evidence because of a belief that management is honest.” (AU §§ 333.02, 333.03, 230.09). +Auditors must also: (1) obtain corroboration for management’s explanation regarding significant +unusual or unexpected transactions, events, amounts or relationships; and (2) perform procedures if +management’s responses to the auditor’s inquiries appear to be implausible, inconsistent with other +audit evidence, imprecise or not at a sufficient level of detail to be useful. (AS 14.8). + +153. Auditors should also design and perform audit procedures in a manner that +addresses the assessed risks of material misstatement for each relevant assertion of each significant +account and disclosure. (AS 13.8). In designing such audit procedures, auditors should obtain +more persuasive audit evidence the higher the auditor’s assessment of risk. (AS 13.9). Auditors +should also perform substantive procedures, including tests of details, for significant risks, and the +evidence auditors obtain from substantive procedures should increase as the assessed risk of +material misstatement increases. (AS 13.11, AS 13.37). + +154. As a result of Grant Thornton’s conduct described above, Grant Thornton failed to +obtain sufficient evidence supporting assertions in ALC’s 2009, 2010 and 2011 Form 10-K +financial statements that ALC was in compliance with the Ventas lease covenants. In the course of +its 2009 year end audit of Broadwind, Grant Thornton also failed to obtain sufficient evidence +supporting the conclusion that the impairment was a fourth-quarter event and that the Customer 2 +bill and hold transaction met the applicable revenue recognition criteria. + +Failure to Properly Supervise the Engagement Team (AU § 311 and AS 10) + +155. PCAOB standards note that audit “assistants,” including firm personnel other than +the auditor with final responsibility for the audit, are to be “properly supervised.” (AU §§ 311.01 +and 311.02). Those standards further require that assistants be informed of their responsibilities +and the objectives of procedures assigned to them, and that the work of assistants be reviewed to +determine whether it was adequately performed. (AU §§ 311.12, 311.13, and AS 10.5). + +156. As a result of Grant Thornton’s conduct described above, Grant Thornton failed to +properly supervise the engagement team on its 2009, 2010 and 2011 ALC engagements. + +Failure to Make Additional Inquires or Perform Additional Procedures in the +Course of Reviewing Interim Financial Information (AU § 722) + +157. PCAOB standards provide: + + +34 +If, in performing a review of interim financial information, the accountant +becomes aware of information that leads him or her to believe that the +interim financial information may not be in conformity with generally +accepted accounting principles in all material respects, the accountant +should make additional inquiries or perform other procedures that the +accountant considers appropriate to provide a basis for communicating +whether he or she is aware of any material modifications that should be +made to the interim financial information. +(AU § 722.22). + +158. As a result of Grant Thornton’s conduct described above, Grant Thornton violated +AU § 722.22 when it failed to make appropriate additional inquires or perform other procedures +in the course of its third quarter 2009 review of Broadwind’s impairment assessment. +Failure to Prepare Required Documentation (AS 3) + +159. PCAOB standards mandate that an auditor’s documentation contain sufficient +information to enable an experienced auditor, having no previous connection to the engagement to: +(1) understand the nature, timing, extent and results of the procedures performed, evidence +obtained and conclusions reached; and (2) determine who performed the work and the date such +work was completed as well as the person who reviewed the work and the date of such review. +(AS 3.1, 3.6). Auditors are also required to document significant findings and issues, including the +actions taken to address them and the basis for the conclusions reached. (AS 3.12). + +160. As a result of Grant Thornton’s conduct described above, Grant Thornton failed to +obtain required audit documentation on its 2009, 2010 and 2011 audits of ALC and its 2009 year +end audit of Broadwind. + +Failure to Perform Adequate Personnel Management (QC 20 and 40) + +161. PCAOB Quality Control Standards require an auditing firm to establish policies +and procedures which provide the firm with reasonable assurance that (a) those hired possess the +appropriate characteristics to enable them to perform competently and (b) work is assigned to +personnel having the degree of technical training and proficiency required in the circumstances. +(QC 20.13 and QC 40.2). + +162. As a result of Grant Thornton’s conduct described above, Grant Thornton violated +QC 20.13 and QC 40.2 in staffing the ALC engagements. + +Finding + +163. As a result of the conduct described above, the Commission finds that Grant +Thornton engaged in improper professional conduct within the meaning of Sections 4C(a)(2) and +4C(b)(2) of the Exchange Act and Rules 102(e)(1)(ii) and 102(e)(1)(iv)(B) of the Commission’s +Rules of Practice. Grant Thornton’s conduct in the 2009, 2010, and 2011 audits of ALC, and its + +35 +2009 third quarter review and year end audit of Broadwind involved repeated instances of +unreasonable conduct, each resulting in violations of PCAOB standards and indicating a lack of +competence, and also satisfies the standard of highly unreasonable conduct resulting in violations +of PCAOB standards in circumstances in which heightened scrutiny was warranted. + +GRANT THORNTON WAS A CAUSE OF VIOLATIONS OF SECTION 13(a) OF +THE EXCHANGE ACT AND RULES 13a-1 AND 13a-13 THEREUNDER + +164. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +that every issuer of a security registered pursuant to Section 12 of the Exchange Act file with the +Commission annual and quarterly reports (i.e., Forms 10-K and 10-Q) as the Commission may +require. The obligation to file such reports embodies the requirement that they be true and +correct. + +165. ALC’s annual reports on Form 10-K for fiscal years 2009, 2010 and 2011 +included audit reports from Grant Thornton that stated its audits of ALC’s financial statements +were conducted “in accordance with the standards of the Public Company Accounting Oversight +Board” and that ALC’s financial statements presented fairly, in all material respects, the +company’s position and results. Broadwind’s 2009 Form 10-K contained a similar representation +by Grant Thornton. These statements were materially misleading. As a result of Grant +Thornton’s above-described conduct, Grant Thornton’s 2009, 2010 and 2011 audits of ALC and +2009 audit of Broadwind were not conducted in accordance with PCAOB standards and the +financial statements included in ALC’s 2009, 2010 and 2011 Forms 10-K were materially +misstated because, among other things, they incorrectly represented that ALC was in compliance +with the Ventas lease financial covenants. As for Broadwind, its Form 10-Q for the third quarter +of 2009 materially overstated its intangible assets and understated a material impairment charge, +and its 2009 10-K misstated revenue and incorrectly described its $58 million impairment charge +as a fourth quarter event. At a minimum, Grant Thornton knew or should have known that its +unreasonable conduct would contribute to ALC’s filing of inaccurate 2009, 2010 and 2011 +Forms 10-K and Broadwind’s filing of an inaccurate third quarter 2009 Form 10-Q and 2009 +Form 10-K. + +166. As a result of the conduct described above, the Commission finds that Grant +Thornton was a cause of ALC’s violations of Section 13(a) of the Exchange Act and Rule 13a-1 +thereunder and Broadwind’s violations of Section 13(a) of the Exchange Act and Rules 13a-1 +and 13a-13 thereunder. + +H. UNDERTAKINGS +167. Grant Thornton’s Review. Within 120 days after the entry of this Order, Grant +Thornton shall perform and complete a review and evaluation (“Grant Thornton’s Review”) of the +sufficiency and adequacy of Grant Thornton’s quality controls, including its policies and +procedures for audits and interim reviews regarding the following (hereinafter referred to as “Grant +Thornton’s Policies”): + +36 +a) the exercise of due professional care and professional skepticism (as set forth in +AU 230); + +b) auditing estimates (as set forth in AU 342 and AS 14), including, but not limited +to: +(i) considering the relevance, reliability, and sufficiency of the factors +and data used in forming the assumptions underlying estimates; and +(ii) evaluating the results of procedures performed, including whether +the evidence obtained supports or contradicts the estimates included +in the financial statements; +c) appropriately responding to the risk of material misstatement related to potential +impairment, including through the performance of procedures to resolve +inconsistencies in the evidence obtained (as set forth in AS 13 and AS 15); +d) assessing the risk of fraud, including the risk of fraud involving management +override of controls, and appropriately responding to identified fraud risks (as +set forth in AU 316, AS 12, AS 13 and AS 14); +e) evaluation of evidence obtained concerning matters that are the subject of +written representations from management in order to consider the reliability of +the representation made and whether reliance on management’s representations +is appropriate and justified (as set forth in AU 333); +f) obtaining sufficient appropriate audit evidence (as set forth in AS 15); +g) effective supervision by engagement partners and managers, including review +of work performed by the engagement team (as set forth in AS 10); +h) consultations with local, regional or national office technical oversight +professionals; +i) appropriate resolution of concerns or disagreements in views among an +engagement team regarding conclusions (i.e., accounting and auditing) reached +in connection with an audit (as set forth in AS 10); +j) audit documentation, including risk assessment procedures and responses, +significant findings and resulting actions, work paper sign-off, archiving, and +dating (as set forth in AS 3); +k) compliance with the requirements for engagement quality reviewers (as set +forth in AS 7); +l) obtaining reasonable assurance (as set forth in QC 20 and QC 40) that + +37 +i) the engagement partner and other individuals assisting the +engagement partner in supervising the engagement possess the +competencies that are necessary and appropriate in the individual +circumstances, and + +ii) work is assigned to personnel having the degree of technical training +and proficiency required in the circumstances; + +m) the identification, monitoring and remediation of audit partners with negative +quality indicators, including the development and implementation of corrective +actions (as set forth in QC 30); and +n) reporting, evaluation, and compensation of professional practice personnel (as +set forth in QC 20 and QC 40). +Grant Thornton’s Review shall assess the forgoing areas to determine whether Grant Thornton’s +Policies are adequate and sufficient to provide reasonable assurance of compliance with all +relevant Commission regulations and PCAOB standards and rules. +168. Grant Thornton Report. Within 60 days of completing the Grant Thornton Review, +Grant Thornton shall deliver to the Commission staff a detailed written report (“Grant Thornton +Report”) summarizing its review and changes to Grant Thornton’s Policies, if any, to provide +reasonable assurance of compliance with all relevant Commission regulations and PCAOB +standards and rules. The Grant Thornton Report shall identify the undertaking, provide written +evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests for further +evidence of compliance, and Grant Thornton agrees to provide such evidence. +169. Independent Consultant’s Review. Grant Thornton has undertaken to retain, within +180 days after the entry of this Order, an independent consultant (“Independent Consultant”), not +unacceptable to the Commission staff. Grant Thornton shall provide to the Commission staff a +copy of the engagement letter detailing the scope of the Independent Consultant’s responsibilities. +The Independent Consultant’s compensation and expenses shall be borne exclusively by Grant +Thornton. Grant Thornton shall deliver to the Independent Consultant the Grant Thornton Report +at the same time as Grant Thornton provides such report to the Commission staff as specified in +paragraph 168 above. Grant Thornton shall require that the Independent Consultant perform a +review (the “IC Review”) of Grant Thornton’s Policies to determine whether Grant Thornton’s +Policies are adequate and sufficient to provide reasonable assurance of compliance with all +relevant Commission regulations and PCAOB standards and rules. Grant Thornton shall cooperate +fully with the Independent Consultant and shall provide reasonable access to firm personnel, +information, and records as the Independent Consultant may reasonably request for the IC Review +(including training materials pertaining to the undertaking in paragraph 173), subject to Grant +Thornton’s right to withhold from disclosure any information or records protected by any +applicable protection or privilege such as the attorney-client privilege or the attorney work product +doctrine. + +38 +170. Independent Consultant’s Report. After the IC Review is completed, but no later +than ninety days after receiving the Grant Thornton Report, the Independent Consultant shall issue +a detailed written report (the “IC Report”) to Grant Thornton: (a) summarizing the IC Review; and +(b) making recommendations, where appropriate, reasonably designed to ensure that Grant +Thornton’s Policies are adequate and sufficient to provide reasonable assurance of compliance +with all relevant Commission regulations and PCAOB standards and rules. Grant Thornton shall +require the Independent Consultant to provide a copy of the IC Report to the Commission staff and +the PCAOB staff when the IC Report is issued. +171. Grant Thornton shall adopt, as soon as practicable, all recommendations of the +Independent Consultant in the IC Report. Provided, however, that within thirty days of issuance of +the IC Report, Grant Thornton may advise the Independent Consultant in writing of any +recommendation that it considers to be unnecessary, outside the scope of this Order, unduly +burdensome, or impractical. Grant Thornton need not adopt any such recommendation at that +time, but instead may propose in writing to the Independent Consultant and the Commission staff +an alternative policy or procedure designed to achieve the same objective or purpose. Grant +Thornton and the Independent Consultant shall engage in good-faith negotiations in an effort to +reach agreement on any recommendations objected to by Grant Thornton. In the event that the +Independent Consultant and Grant Thornton are unable to agree on an alternative proposal within +sixty days, Grant Thornton shall abide by the determinations of the Independent Consultant. +172. Certification by Grant Thornton’s CEO. Within sixty days of issuance of the IC +Report, but not sooner than thirty days after a copy of the IC Report is provided to the Commission +staff, Grant Thornton’s chief executive officer (“CEO”) must certify to the Commission staff in +writing that (i) Grant Thornton has adopted and has implemented or will implement all +recommendations of the Independent Consultant, if any; and (ii) the Independent Consultant agrees +with Grant Thornton’s adoption and implementation of the recommendations. To the extent that +Grant Thornton has not implemented all recommendations of the Independent Consultant within +sixty days of issuance of the IC Report, Grant Thornton’s CEO must certify to the Commission +staff in writing, thirty days after their implementation, that (i) Grant Thornton has adopted and has +implemented all recommendations of the Independent Consultant; and (ii) the Independent +Consultant agrees that the recommendations have been adequately adopted and implemented by +Grant Thornton. The certifications by Grant Thornton’s CEO 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 Grant Thornton agrees to provide such evidence. +173. Training. Prior to November 30, 2016, Grant Thornton shall require each audit +professional serving public company audits to complete successfully a minimum of 32 hours of +audit-related training. The audit-related training shall cover the topics specified in Paragraph 167. +However, the following topics should be accorded the training hours noted below: +a) At least 8 hours shall be devoted to the importance of exercising due care and +professional skepticism in evaluating audit evidence; + +39 +b) At least 4 hours shall be devoted to procedures and techniques used in auditing +estimates; +c) At least 4 hours shall be devoted to the auditor’s responsibilities with respect to +reviews of interim financial information, specifically focusing on circumstances +where extended procedures are appropriate (as discussed in AU § 722.22); +d) At least 8 hours shall be devoted to fraud-detection training. The training shall +include techniques in detecting and responding to possible fraud in the course of +public company audits by audit clients or by employees, officers or directors of +audit clients. Particular attention should be focused on the auditor’s +consideration of the impact of audit findings on the assessment of fraud risks as +discussed in AS 14 (Par. 28-29), as well as the documentation requirements +outlined in AU § 316.83. Such training will also include the auditor’s +responsibilities under Section 10A of the Exchange Act; and +e) At least 4 hours shall be devoted to appropriate reliance on management +representations. +174. To ensure the independence of the Independent Consultant, Grant Thornton: (1) +shall not have the authority to terminate the Independent Consultant or substitute another +independent compliance consultant for the initial Independent Consultant, without the prior written +approval of the Commission staff; and (2) shall compensate the Independent Consultant and +persons engaged to assist the Independent Consultant for services rendered pursuant to this Order +at their reasonable and customary rates. +175. Grant Thornton shall require the Independent Consultant to enter into an agreement +that provides that, for the period of engagement and for a period of two years from completion of +the engagement, the Independent Consultant shall not enter into any employment, consultant, +attorney-client, auditing or other professional relationship with Grant Thornton, or any of its +present or former affiliates, directors, officers, employees, or agents acting in their capacity as +such. The agreement shall also provide that the Independent Consultant will require that any firm +with which he/she is affiliated or of which he/she is a member, and any person engaged to assist +the Independent Consultant in performance of his/her duties under this Order shall not, without +prior written consent of the Division of Enforcement, enter into any employment, consultant, +attorney-client, auditing or other professional relationship with Grant Thornton, or any of its +present or former affiliates, directors, officers, employees, or agents acting in their capacity as such +for the period of the engagement and for a period of two years after the engagement. +176. Grant Thornton shall not be in, and shall not have an attorney-client relationship +with the Independent Consultant and shall not seek to invoke the attorney-client privilege or any +other doctrine or privilege to prevent the Independent Consultant from transmitting any +information, reports, or documents to Commission staff. +177. Grant Thornton shall inform its audit professionals of the terms of the Order within +ten business days after entry of the Order. + +40 +178. By December 31, 2016, Grant Thornton’s CEO shall certify, in writing, compliance +with the undertakings set forth in paragraphs 173 and 177. 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 Grant Thornton agrees to provide such evidence. +179. Annual Certifications. With respect to each of the calendar year periods 2017 and +2018, Grant Thornton’s National Managing Partner, Audit Risk Management (“Managing +Partner”) shall certify that Grant Thornton has assessed whether Grant Thornton’s Policies are +adequate and sufficient to provide reasonable assurance of compliance with all relevant +Commission regulations and PCAOB standards and rules by, among other things, testing the firm’s +implementation of Grant Thornton’s Policies during the twelve (12) months preceding the +certification (“Annual Certification”). The Annual Certification shall describe the nature and +scope of Grant Thornton’s testing. The Annual Certification shall represent that the Managing +Partner has reviewed and evaluated the firm’s assessment and testing process and that, based on +belief and after reasonable inquiry, the Managing Partner believes that Grant Thornton’s Policies +are adequate and sufficient to provide reasonable assurance of compliance with all relevant +Commission regulations and PCAOB standards and rules. If the Managing Partner cannot +represent that Grant Thornton’s Policies are adequate and sufficient, then the Managing Partner +shall describe in reasonable detail the reasons for the inability to so certify. The Managing Partner +shall provide the Annual Certifications to the Commission’s staff within sixty days of the end of +the annual period. Grant Thornton shall preserve and retain all documentation regarding the +Managing Partner’s Annual Certification for seven (7) years and will make it available to the staffs +of the Commission or the PCAOB upon request. +180. All reports and certifications mentioned in these undertakings shall be submitted to +Robert Burson, Associate Regional Director, Division of Enforcement, Securities and Exchange +Commission, 175 W. Jackson Blvd., Suite 900, Chicago, IL 60604, with a copy to the Office of +Chief Counsel of the Enforcement Division. +181. 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. +182. In determining whether to accept Grant Thornton’s Offer, the Commission has +considered these undertakings. Grant Thornton agrees that if the Division of Enforcement believes +that Grant Thornton has not satisfied these undertakings, it may petition the Commission to reopen +the matter to determine whether additional sanctions are appropriate. + +41 +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in the Respondent’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Grant Thornton shall cease and +desist from committing or causing any violations and any future violations of Section 13(a) of +the Exchange Act and Rules 13a-1and 13a-13 thereunder. + +B. Grant Thornton is censured. + +C. Grant Thornton shall comply with the undertakings enumerated in Section H +above. + +D. Grant Thornton shall within 14 days of the entry of this Order, pay disgorgement +of $1,305,396, which represents profits gained as a result of the conduct described herein and +prejudgment interest of $231,174.19, to the Commission for transfer to the general fund of the +United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not +made, additional interest shall accrue pursuant to SEC Rule of Practice 600. + +E. Grant Thornton shall pay a civil penalty of $3 million to the Commission within 14 +days of the entry of this Order for transfer to the general fund of the United States Treasury, subject +to Exchange Act Section 21F(g)(3). If timely payment is not made additional interest shall accrue +pursuant to 31 U.S.C. 3717. + +F. Payments ordered in paragraphs D and E above 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 + +42 + +Payments by check or money order must be accompanied by a cover letter identifying +Grant Thornton 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, Chicago +Regional Office, Securities and Exchange Commission, 175 West Jackson, Suite 900, Chicago, IL +60604. + + + + +By the Commission. + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3719.pdf b/raw/aaer/2015/AAER-3719.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c9f63238030a49a4f3f45937c969fa6b71f8d572 --- /dev/null +++ b/raw/aaer/2015/AAER-3719.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c74f7cc1beb9432809706524a3b7c6eb9122f5393d13a5b2229c9e6fb3a4dd8b +size 351598 diff --git a/raw/aaer/2015/AAER-3719.txt b/raw/aaer/2015/AAER-3719.txt new file mode 100644 index 0000000000000000000000000000000000000000..74b1235002c845d5fa01cc48806d5793d5fd766f --- /dev/null +++ b/raw/aaer/2015/AAER-3719.txt @@ -0,0 +1,1667 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76537 / December 2, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3719 / December 2, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16977 + + + +In the Matter of + +Melissa K. Koeppel, CPA, and +Jeffrey J. Robinson, CPA, + +Respondents. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule +102(e)(1)(ii) of the Commission ’s Rules of Practice2 against Melissa K. Koeppel , CPA +(“Koeppel”) and Jeffrey J. Robinson, CPA (“Robinson”) (collectively, “Respondents”). + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (2) . . . to have engaged in unethical or +improper professional conduct. +2 Rule 102(e)(1) provides, in relevant part: +The Commission may censure a person or deny, temporarily or permanently, the +privilege of appearing or practicing before it in any way to any person who is +found . . . +* * * +(ii) to have engaged in unethical or improper professional conduct. + + +2 + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) that the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which is admitted, and except as provided herein in Section V, Respondents +consent to the entry of this Order Instituting Public Administrative and Cease-and-Desist +Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (the “Order”), as set forth below. + + III. + +On the basis of this Order and Respondent’s Offers, the Commission finds3 that: + +A. SUMMARY + +1. This matter involves improper professional conduct by (a) Koeppel while serving +as the engagement partner for two clients of Grant Thornton, LLP (“Grant Thornton): Assisted +Living Concepts, Inc. (“ALC”), a publicly traded senior living company, and Broadwind Energy, +Inc. (“Broadwind”), a publicly traded alternative energy company; (b) Robinson while later +serving as the engagement partner for ALC. During the course of those engagements, Koeppel +and Robinson repeatedly violated professional standards while ignoring numerous red flags and + +* * * +(iv) with respect to persons licensed to practice as accountants, “improper +professional conduct” under Rule 102(e)(1)(ii) means: +* * * +(B) either of the following two types of negligent conduct: +(1) A single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted. +(2) Repeated instances of unreasonable conduct, each resulting in a +violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission. +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + +3 +fraud risks that allowed ALC and Broadwind to file numerous reports with the Commission that +were materially false and misleading. +2. For the ALC engagement, for more than three years, Koeppel and Robinson failed +to identify a fraud perpetrated by ALC’s CEO and CFO. That long-running fraud was designed to +mask ALC’s defaults on certain occupancy and revenue covenants that had significant financial +consequences for ALC in the event of non-compliance. As a result of the fraud and the failed +audits, for three years ALC falsely represented to its investors that it was meeting the covenants +and avoiding the serious ramifications of the defaults. +3. For the Broadwind engagement, Koeppel’s failure to exercise due professional care +and skepticism contributed to Broadwind improperly omitting from its financial statements that it +had sustained a $58 million impairment charge caused by the severe deterioration of customer +relationships for two of Broadwind’s most important customers. Koeppel’s failures also +contributed to Broadwind conducting a public offering for its stock which concealed this +impairment charge from investors. Koeppel’s negligence further contributed to Broadwind filing +multiple financial statements which materially overstated revenue to Broadwind’s investors. +B. RESPONDENTS + +4. Koeppel, age 54, is a Certified Public Accountant (“CPA”) licensed to practice in +Wisconsin. Koeppel served as the managing partner of Grant Thornton’s Wisconsin practice from +2008 through April 2011. Koeppel served as the Grant Thornton engagement partner on, and had +final audit responsibility over, the ALC engagements from 2006 through 2010 and the Broadwind +engagements from 2007 through the second quarter of 2010. Since 2012, Koeppel has been +employed by Grant Thornton as a managing director, outside the audit-services practice. +5. Robinson, age 63, is a CPA licensed to practice in Illinois and Wisconsin. +Robinson served as the managing partner of Grant Thornton’s Wisconsin practice from April 2011 +through July 2015, when he retired. Robinson served as the Grant Thornton engagement partner +on, and had final audit responsibility over, the ALC engagements from 2011 through the first +quarter of 2013, when ALC terminated its relationship with Grant Thornton upon ALC’s +acquisition by another company. +C. OTHER RELEVANT ENTITIES +6. Grant Thornton is an Illinois limited liability partnership and a PCAOB-registered +public accounting firm with its headquarters in Chicago, Illinois. The conduct at issue occurred in +the course of audits and reviews of clients of Grant Thornton’s Wisconsin practice. +7. 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. In February 2013, ALC agreed to be sold to a global private equity firm. In July +2013, when the sale was completed, ALC’s stock ceased trading on the NYSE. + + +4 +8. Broadwind is an alternative energy company incorporated in Delaware and +headquartered in Cicero, Illinois. In October 2007, Broadwind purchased Brad Foote Gear Works, +Inc. (“Brad Foote”) to provide gear systems for the wind turbine and other energy industries. +Broadwind’s common stock was quoted on the OTC Bulletin Board until April 9, 2009, when its +common stock began trading on the NASDAQ Global Select Market. Broadwind’s common stock +is registered with the Commission pursuant to Section 12(b) of the Exchange Act. On February 5, +2015, the Commission filed a settled action in the Northern District of Illinois against Broadwind +and its former CEO and CFO for Broadwind’s failure to record and disclose a $58 million +impairment charge prior to a public offering in January 2010. The SEC also charged Broadwind +and its officers with violations arising from accelerated revenue recognition practices and +inadequate disclosures ahead of the offering. Broadwind consented to a judgment enjoining it +from violating Section 17(a)(2) of the Securities Act and Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder and imposing a +civil penalty of $1 million. The former CEO and CFO also consented to a judgement that enjoined +them from future securities laws violations, and imposed disgorgement, prejudgment interest, and +civil penalties. The district court entered the proposed judgments associated with the settlement on +February 11, 2015. See SEC v. Broadwind Energy, Inc., et al., Case No. 15-cv-1142 (N.D. Ill.). +D. THE AUDITS AND REVIEWS OF ALC +1. ALC and the Ventas Lease + +9. During the relevant time period, ALC operated more than 200 senior living +residences in the United States, totaling more than 9,000 units. On January 1, 2008, ALC +purchased the operations of eight assisted living facilities for a total of 540 units in Alabama, +Florida, Georgia, and South Carolina (the “Ventas facilities”) and simultaneously entered into a +lease with Ventas, Inc. (“Ventas”), a publicly traded real estate investment trust (“REIT”) and the +owner of the facilities, to operate the facilities (the “Ventas lease”). +10. The Ventas lease contained financial covenants (the “financial covenants”), which +required that ALC maintain certain quarterly and trailing twelve-month occupancy percentages and +coverage ratios, both at each facility and at the portfolio level. The lease defined “coverage ratio” +as cash flow divided by rent payments. The Ventas lease required ALC to demonstrate its +compliance with the financial covenants on a quarterly basis by providing Ventas, within 45 days +of the end of each quarter: (1) facility financial statements prepared in accordance with general +accepted accounting principles (“GAAP”); (2) schedules documenting compliance with the +financial covenants; and (3) an officer’s certificate, signed by an ALC executive, attesting to the +completeness and accuracy of such information. +11. The lease provided that if 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 accelerated rent equal to the net present value of the unpaid rent for the remaining term +of the lease. ALC disclosed the net present value of its unpaid rent, as of its 2009, 2010, and 2011 +fiscal year-end, to have been approximately $24.9 million, $20.9 million and $16.7 million +respectively. The lease also provided that it could only be modified by a writing signed by + + +5 +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. Other provisions of the lease required ALC to use the Ventas +facilities solely for their primary intended use and in a manner consistent with their operation as +healthcare facilities. +2. ALC’s Fraudulent Scheme to Hide the Covenant Defaults +12. Beginning in 2008, shortly after ALC entered the Ventas lease, occupancy at the +Ventas facilities declined sharply. As a result of the occupancy declines, from at least the first +quarter of 2009 through the fourth quarter of 2011, ALC failed, by a significant margin, many of +the occupancy and coverage ratio covenants contained in the Ventas lease. Nevertheless, in each +Form 10-K and 10-Q ALC filed during that period, ALC falsely represented that it was in +compliance with the Ventas lease financial covenants. ALC also disclosed that non-compliance +with the financial covenants could result in a “material adverse impact” on ALC. Moreover, +beginning with the second quarter of 2011, ALC falsely represented in its 2011 Forms 10-K and +10-Q that “it did not believe that there is a reasonably likely degree of risk of breach of the +[Ventas] covenants.” ALC included this additional disclosure in response to a comment letter +received from the Commission’s Division of Corporation Finance. +13. To hide ALC’s failure to comply with the covenants from Ventas, ALC’s CEO, +Laurie Bebo, and CFO, John Buono, directed ALC accounting personnel to include in the covenant +calculations between 49 and 103 fabricated occupants for every day from July 2009 through +December 2011.4 To establish the number of fabricated occupants to be included in the covenant +calculations, ALC accounting personnel, at Bebo’s and Buono’s direction, reverse-engineered the +requisite number of additional occupants needed to meet the covenants each quarter. ALC +accounting personnel also prepared monthly journal entries to record revenue associated with the +fabricated occupants which: (1) credited the fabricated occupant revenue to the individual Ventas +facilities; and (2) debited revenue in the same amount in a corporate revenue account.5 Shortly + +4 On December 3, 2014, the Commission instituted public administrative and cease and desist +proceedings against Bebo and Buono, alleging violations of the antifraud, books and records, +internal controls, reporting, and other provisions of the Exchange Act. In the Matter of Laurie +Bebo and John Buono, CPA, Exchange Act. Release No. 73722. On January 29, 2015, the +Commission entered an Order accepting Buono’s offer of settlement, finding that he violated +each securities law provision alleged against him, imposing a $100,000 civil penalty, and barring +Buono from practicing before the Commission as an accountant or serving as an officer or +director of a public company. Exchange Act Release No. 74177. On October 2, 2015, following +a four-week evidentiary hearing, an Administrative Law Judge issued an Initial Decision making +findings against Bebo. Initial Decision Release No. 893. + +5 As a result, ALC eliminated in consolidation the revenue associated with the fabricated +occupants, and such revenue was not reported in its Commission filings. In addition, ALC did +not include the fabricated occupants in the occupancy numbers reported in its Commission +filings. + + +6 +after the end of each quarter, ALC provided Ventas with covenant calculations which included the +fabricated occupants in the occupancy covenant calculations and the revenue associated with the +fabricated occupants in the coverage ratio calculations and thus falsely showed that ALC was +meeting the covenants. +14. Bebo and Buono told Grant Thornton that Ventas had agreed that ALC could +include in the covenant calculations ALC employees who travelled to and stayed at the Ventas +facilities for business purposes.6 However, in actuality, no such agreement existed and Ventas was +never told that any ALC employees were being included in the covenant calculations. Even if +Ventas had agreed that ALC could include in the covenant calculations employees who actually +stayed at the Ventas facilities, given that only a small number of ALC employees actually did so, +ALC would still have missed the covenants by significant margins. +15. In the third quarter of 2009, Grant Thornton asked ALC to identify the employees +included in the covenant calculations. In response, Bebo created and provided Grant Thornton +with a list identifying the employees and their associated lengths of stay at the Ventas facilities. +Bebo would subsequently prepare and/or approve such a list for Grant Thornton for every quarter +through the fourth quarter of 2011. However, given the small number of ALC employees that +actually stayed at the Ventas facilities and the large number of fabricated occupants necessary to +meet the covenants, Bebo chose to include on the list: (1) her family members and friends; (2) +family members (including the seven-year old nephew) of another ALC executive; (3) employees +who did not travel to, let alone stay at, the facilities; (4) employees of the Ventas facilities, who +lived nearby and did not stay overnight at those facilities; (5) employees who had been terminated +by ALC or employees who ALC anticipated hiring but who had not yet started; (6) various ALC +employees as occupants of multiple Ventas facilities for the same time period; and (7) other +individuals who were neither ALC employees nor residents of the Ventas facilities. ALC did not +disclose any of this to Ventas. +16. The fraudulent scheme unraveled in the spring of 2012. In April 2012, Ventas, +which was still unaware of ALC’s use of employees in the covenant calculations, filed a lawsuit +against ALC resulting from ALC’s unrelated failure to meet state regulatory requirements. The +following day, Bebo sent Ventas a settlement proposal pursuant to which Ventas would release +ALC from liability for all claims including those arising from ALC including employees in the +covenant calculations. The settlement proposal was the first time Ventas learned that ALC was +including employees in the covenant calculations. On May 9, 2012, Ventas issued a notice of +default in which it accused ALC of fraud based on the employee adjustment. +17. In the meantime, on May 2, 2012, one of ALC’s accounting personnel filed a +whistleblower complaint with the audit committee of ALC’s Board of Directors. The complaint +described the employee adjustment as a “sham” and disclosed that ALC had included in the +covenant calculations: (1) employees who did not travel to the Ventas facilities; (2) certain + + +6 ALC’s practice of including in the covenant calculations employees or other non-residents is +sometimes referred to hereafter as “the employee adjustment.” + + +7 +employees at multiple facilities on the same day; and (3) Bebo’s parents, husband, and a family +friend. ALC immediately initiated an internal investigation, and Bebo was terminated shortly +thereafter, purportedly for reasons unrelated to the employee adjustment. +18. In June 2012, ALC and Ventas settled their lawsuit. 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 appraisals only valued the purchased +facilities at $62.8 million. Thus, in its second quarter 2012 interim financial statements, ALC +included as an expense $37.2 million for “lease termination and settlement” and also wrote off the +entirety of the remaining operating lease intangible assets associated with the Ventas facilities, +which totaled approximately $8.96 million. +19. Grant Thornton issued audit reports containing unqualified opinions on ALC’s +2009, 2010 and 2011 financial statements. Each of those financial statements falsely disclosed that +ALC was in compliance with the financial covenants. Those audit reports and financial statements +were included in ALC’s Form 10-K Commission filings. +3. In Connection with the 2009, 2010, and 2011 ALC Engagements, Koeppel +and Robinson Were Aware of Numerous Risks and Red Flags Related to +ALC’s Covenant Calculation Practices + +20. ALC was one of the larger clients for Grant Thornton’s Wisconsin practice. +a. The 2009 Engagement +21. By the beginning of Grant Thornton’s 2009 engagement, Koeppel and other +members of the engagement team were aware that occupancy at the Ventas facilities had declined +and that ALC was close to defaulting on the financial covenants. For this reason, in connection +with its planning meeting for the first quarter 2009 review, the ALC engagement team focused on +the financial covenants. The planning meeting agenda, which Koeppel reviewed, indicated that the +Ventas covenant calculations were an area to which the engagement team should “devote special +attention” and that the engagement team should “look closely” at ALC’s covenant calculations. +22. Three weeks later, in late April 2009, ALC accounting personnel sent a Grant +Thornton junior engagement team member ALC’s calculations of the occupancy and coverage +ratio covenants for the quarter and underlying support for the numbers used in the covenant +calculations. Shortly thereafter, the engagement team member noticed discrepancies for six of the +eight Ventas facilities between the occupancy figures used in the covenant calculations and the +underlying support. As a result, he sent an email to ALC accounting personnel asking for an +explanation for the discrepancies. +23. In response, ALC accounting personnel emailed Grant Thornton a spreadsheet +known as an “occupancy recon” which listed for each of the Ventas facilities for each month +during the quarter: (1) the actual occupancy of the facilities; and (2) the number of ALC + + +8 +“employees” which were added to the actual occupancy numbers for purposes of the covenant +calculations. The occupancy recon revealed that ALC was adding a total of 24 “employees” into +the occupancy calculations for every day in the quarter. A review of the information contained +therein would have shown that ALC failed certain occupancy covenants without the inclusion of +employees. +24. ALC accounting personnel also provided the junior engagement team member with +purported “support” for the employee adjustment, which was a February 4, 2009 email from Bebo +to a Ventas employee (the “February 4 email”). However, the February 4 email made no mention +of the financial covenants, and merely mentioned that ALC may rent rooms at the Ventas facilities +to certain of its employees “in the ordinary course of business.” The junior engagement team +member elevated the issue to Grant Thornton’s engagement manager, yet Grant Thornton did not +receive any additional support from ALC. The engagement team told Koeppel about the employee +adjustment and described it as unusual, but told Koeppel that the team had reviewed +documentation which the team believed evidenced an agreement with Ventas. However, Koeppel +never reviewed that documentation nor attempted to learn other details about it. +25. Grant Thornton did not perform additional procedures, such as seeking +confirmation from Ventas that it had agreed to the use of employees in the covenant calculations. +In fact, Grant Thornton would never seek confirmation from Ventas that it had agreed to the use of +employees in the covenant calculations. Had Grant Thornton done so, it would have confirmed +that Ventas never agreed to the employee adjustment. +26. Grant Thornton’s workpapers for the first quarter of 2009 do not contain the +February 4 email or reference ALC’s inclusion of employees in the covenant calculations. The +workpapers do reflect that Grant Thornton determined that ALC passed the covenant calculations +based on the adjusted numbers contained in the occupancy recons. +27. ALC’s management representation letter to Grant Thornton for the first quarter of +2009 and every quarterly review and audit in fiscal year 2009, 2010 and 2011 contained a +representation that ALC had complied with all aspects of contractual agreements that would have a +material effect on the financial statements in the event of noncompliance. +28. In the course of Grant Thornton’s second quarter 2009 review, a Grant Thornton +summer intern was tasked with performing the procedures with respect to ALC’s compliance with +the Ventas lease covenants under the supervision of an audit senior. The intern reviewed an +occupancy recon showing that ALC was including approximately 23 employees in the covenant +calculations for every day of the quarter. The intern then prepared a note to the workpapers +referencing the employee adjustment, which included language from the February 4 email, and +stated: +The employee adjustment relates to extra rooms at each facility not currently +occupied by ALC residents. The rooms are subleased through ALC to improve the +overall performance of each facility…Since the units are subleased, an adjustment +is needed to show ALC occupancy and for Ventas testing. + + +9 +Koeppel signed off on this workpaper, even though she knew there were no formal sublease +agreements for any employee-occupied rooms. +29. For the third quarter of 2009, Grant Thornton reviewed occupancy recons showing +that ALC had included 45, 65 and 75 employees for each day of July, August and September +respectively. At Koeppel’s request, the occupancy recons now included a list showing the names +of the ALC employees purportedly staying at each Ventas facility, and the attendant length of their +purported stay. This information would be contained in each subsequent occupancy recon, which +showed employees staying at the facilities for every day of each month they were listed as an +occupant. Koeppel never instructed the engagement team to perform additional procedures related +to the list of names to determine whether the list of employees, or the length of the employees’ +purported stays, was accurate or appropriate. Moreover, Koeppel never asked the engagement +team what procedures, if any, the team was performing with respect to the list of names. Had +Koeppel, or later Robinson, asked the engagement team to perform substantive procedures on the +list of names, Grant Thornton would have discovered that the list was fraudulent. +30. As part of its third quarter review, Grant Thornton, requested that ALC include in +its representation letter the representation that ALC had “calculated the [Ventas] lease covenants in +accordance with the corresponding lease agreement and the lessor’s instructions.” The +engagement team wanted this representation included in part because it was concerned about the +employee adjustment. In response, ALC modified the requested representation, and included the +following in its representation letter: “We have calculated the [Ventas] lease covenants in +accordance with the corresponding lease agreement and as understood by us after conferring with +the lessor.” (Emphasis added). Grant Thornton’s workpapers do not contain an explanation for the +modification in the language. +31. Grant Thornton’s workpapers for the third quarter 2009 review observed that one of +the Ventas facilities had unexpected or unusual revenue trends in that changes in revenue could not +be explained by corresponding changes in occupancy. The workpapers addressing these trends +noted that a Grant Thornton junior engagement team member had spoken with ALC personnel +who explained that: (a) ALC employees were staying at the Ventas facilities per an agreement +with Ventas; and (b) that such employees “pay rent and increase revenue,” but are not counted +toward ALC’s company-wide occupancy numbers. This notation in the workpapers, which +Koeppel reviewed, conflicted with her understanding that ALC employees included in the +covenant calculations did not pay rent. +32. In the course of Grant Thornton’s 2009 year end audit, Koeppel reviewed risk +assessment workpapers that she understood referred to risks associated with the Ventas financial +covenants. +33. In connection with that audit, and in the subsequent 2010 and 2011 audits, Grant +Thornton documented that ALC was using “unusual” journal entries in connection with the +employee adjustment. Those journal entries recorded “negative revenue” in a corporate revenue +account to offset $1.2 million in non-GAAP revenue on the financial statements of the Ventas +facilities associated with the employees included in the covenant calculations. The result of the + + +10 +offsetting revenue meant that the employee revenue reported to Ventas was eliminated from ALC’s +consolidated financial statements. Koeppel, and later Robinson, was aware of these unusual entries +yet never instructed the engagement team to perform additional testing on the employee +adjustment. +34. Also in connection with the 2009 year end audit, the Grant Thornton engagement +team planned on conducting site visits to five Ventas facilities in Georgia and one in South +Carolina to, among other things, verify facility occupancy figures, physically inspect the houses +and the assets therein, make fraud inquiries with facility employees and review documentation that +was maintained at the facilities. However, ALC requested that the engagement team choose other +site visit locations in lieu of the Georgia facilities, and Koeppel acquiesced to ALC’s request. +35. Koeppel also reviewed a workpaper detailing ALC’s monthly revenues for each of +its facilities. That workpaper also indicated the occupancy rates for each facility. The workpaper +showed that the occupancy rate for seven of the eight Ventas facilities fell far short of the rates +required by the lease covenants. +36. In the course of the 2009 year end audit, Grant Thornton reviewed occupancy +recons showing that ALC was including 103 employees in the covenant calculations for each day +of the fourth quarter, yet failed to mention the employee adjustment in the covenant calculation +workpapers. Nevertheless, Koeppel signed off on those workpapers. In addition, Koeppel +determined that a representation specific to the use of employees in the covenant calculations, such +as the one included in the third quarter 2009 letter, was no longer necessary for ALC’s +representation letter. No such representation was included in the representation letters for any +subsequent ALC audits and reviews in the relevant period. +b. The 2010 Engagement +37. In connection with its planning meeting for the first quarter 2010 review, Grant +Thornton again focused on the financial covenants. The planning meeting agenda, which Koeppel +reviewed, noted that the Ventas covenant calculations were an area to which the engagement team +should “devote special attention” and that the engagement team should “make sure we are testing +the [Ventas] lease covenant calculations.” +38. For the first and second quarter 2010 reviews, Grant Thornton reviewed occupancy +recons showing that ALC included 103 employees in the covenant calculations each day from +January through May, and included 90 employees each day in June. +39. By the time Grant Thornton was conducting field work for the third quarter 2010 +review, Grant Thornton national professional standards and risk management personnel had +become aware of negative quality indicators with respect to Koeppel, who was placed on a +November 2010 monitoring list for partners with such negative indicators. Grant Thornton placed +Koeppel on this list because, among other things, her audit clients had restated their financial +statements or interim financial information four times in the preceding two years. The Public +Company Accounting Oversight Board (“PCAOB”), in its 2008 inspection report, had also found + + +11 +deficiencies on one of Koeppel’s engagements because Grant Thornton had failed to gather +sufficient audit evidence. +40. One of the restatements that led to Koeppel’s inclusion on the partner monitoring +list involved Grant Thornton’s audit client, Koss Corporation (“Koss”). In June 2010, Koss +restated its financial statements for the preceding two fiscal years because one of its vice presidents +had embezzled $31.5 million from 2005 through 2009 and would plead guilty to criminal charges +based on the misconduct. Koeppel was the engagement partner for the Koss audit for three of the +four years of the embezzlement. In July 2012, Grant Thornton, without admitting any liability, +paid $8.5 million to settle a malpractice case filed by Koss. +41. By November of 2010, Grant Thornton’s National Professional Practice Director +for the Midwest region (“NPPD”) became aware of negative audit quality indicators with respect +to Koeppel as a result of an ongoing PCAOB inspection. Although the NPPD did not know that +Koeppel had been placed on the partner monitoring list, he was informed by others in the firm that +Koeppel had a number of negative audit quality indicators. The NPPD also became aware of +observations by other Grant Thornton partners that the Wisconsin practice, for which Koeppel was +the managing partner, had “gotten off the tracks from a methodology perspective.” +42. By the fall of 2010, Grant Thornton had removed Koeppel from all of her other +public company engagements,7 but decided to allow her to continue as the engagement partner for +the 2010 ALC audit. +43. Following the completion of the second quarter 2010 review, the audit manager +assigned to the ALC engagement team resigned. During the planning stages for the third quarter +review, Grant Thornton assigned a new engagement manager (the “Engagement Manager”) to be +co-engagement manager on the ALC engagement. During the third quarter 2010 review, Koeppel +became aware that the other Grant Thornton auditor assigned to be the co-manager of the ALC +engagement was removed from the engagement. Koeppel knew that this left the Engagement +Manager as the only manager on the ALC engagement. +44. The Engagement Manager’s assignment as the sole engagement manager for the +ALC engagement contravened Grant Thornton policy, which required that lead managers and +partners on public company audit engagements be “SEC designated” to ensure that those +individuals had the appropriate level of experience and understanding about Commission +requirements. To obtain such a designation, an auditor was required to spend 200 hours on public +company engagements in a prescribed time period and complete certain continuing professional +education courses. +45. Koeppel knew that the Engagement Manager was not SEC designated due to the +Engagement Manager having spent insufficient time on public company engagements. Koeppel + +7 Grant Thornton removed Koeppel from the remainder of her audit and review engagements, +including private company engagements, after completing her work on financial statements or +interim financial information for years or quarters ending December 31, 2010. + + +12 +also knew that the other Grant Thornton auditor assigned to be the co-manager of the ALC +engagement, who was SEC designated, was removed from the engagement. Koeppel knew that +this left the Engagement Manager, despite her lack of SEC designation, as the only manager on the +ALC engagement. +46. On October 22, 2010, shortly after the Engagement Manager started working on the +ALC engagement, one of her subordinates brought the issue of the inclusion of employees in the +covenant calculations to the Engagement Manager’s attention. The email the Engagement +Manager received stated: +You will also see that the only way some of the houses are passing [the +occupancy] covenant is by having these [employee] adjustments. In prior +quarters, as well as again this quarter, we have asked for support for these +[employee] adjustments but they haven’t [been] able to provide any. In +prior quarters I have also asked if they have any support (letters, emails, etc. +from [Ventas]) to show that [Ventas] is aware that ALC is adding in +[employees] and is okay with it. They have nothing. [the Engagement +Manager’s predecessor manager] said that all we can do then is rep it. . . +Since you are new to the job, I wanted to bring this to your attention and +make sure you are comfortable with this as well. Is there anything else we +should do with this? + +47. A few days later, an engagement team member emailed the Engagement Manager a +copy of the Ventas lease and noted that she could not locate any provisions that defined +“occupancy.” The Engagement Manager responded that she also could not find any such +provisions and intended to contact ALC accounting personnel who prepared the covenant +calculations for additional information. The Engagement Manager believed it was necessary to +speak to ALC accounting personnel because ALC’s inclusion of employees did not comport with +the traditional definition of “occupancy” for assisted living facilities. +48. The Engagement Manager then spoke with the ALC accountant who prepared the +occupancy recons. Based on this conversation, the Engagement Manager believed that ALC was +possibly providing Ventas with the occupancy recons and that this allowed Ventas to discern that +ALC was including employees in the covenant calculations. In an email documenting her +conversation with the ALC accountant, the Engagement Manager wrote that the accountant “did +say he gives [Ventas] the more detailed spreadsheet that we have, so he thinks if they had a problem +with it, they would have said something.” She added: +If I can get John [Buono] to confirm this, then I think we can document that +they receive [the occupancy recon], have opportunity to disagree, etc. I’d +still like it in the rep letter too then. But at least I feel more comfortable that +they see the detail. + +49. The Engagement Manager then attempted to contact Buono, who was unavailable. +The Engagement Manager left Buono a voicemail inquiring about ALC’s use of employees in the + + +13 +covenant calculations. In that voicemail, the Engagement Manager noted that based on her +conversation with the ALC accountant, she believed that “maybe” Ventas received the occupancy +recons showing ALC’s inclusion of employees. The Engagement Manager did not ask anyone at +Grant Thornton to review the materials ALC sent to Ventas, which would have shown that Ventas +was not receiving information showing ALC’s use of employees. Grant Thornton would not +perform such a review until the year end 2011 audit. +50. After leaving Buono the voicemail, the Engagement Manager spoke with Koeppel. +Koeppel indicated to the Engagement Manager that Koeppel was aware that ALC had been +including employees in the covenant calculations for the previous six quarters and that Koeppel +was comfortable with the practice. Following this conversation, the Engagement Manager emailed +Buono and told him to ignore the voicemail. +51. The Engagement Manager also suggested to Koeppel that ALC include in its +representation letter a representation relating to ALC’s use of employees in the covenant +calculations, but Koeppel determined that such a representation was unnecessary. +52. Thus, the Engagement Manager was dissuaded by Koeppel from following either of +the Engagement Manager’s recommendations – speaking with Buono and obtaining additional +representations – for obtaining support for ALC’s use of employees in the covenant calculations. +53. In the course of the third quarter 2010 review, Grant Thornton for the first time +included copies of the occupancy recons (without the employee names) in its workpapers. Those +materials, which Koeppel and the Engagement Manager reviewed, showed that ALC was +including between 68 and 72 employees in the Ventas covenant calculations for each day of the +quarter. +54. Grant Thornton also included two notes in the workpapers regarding ALC’s use of +employees in the covenant calculation. In the first note, Grant Thornton indicated that, as a result +of the employee adjustment, the occupancy figures used in the covenant calculations differed from +the figures provided in ALC’s internal occupancy reports. In the second note, Grant Thornton +explained that the difference was, in part, the result of the employee adjustment and wrote that: +“The employee adjustment relates to extra rooms at each facility that are not currently occupied by +ALC residents, but are set aside for ALC employees to improve the overall performance of each +facility.” The note also contained the incorrect observation that Ventas was receiving the +occupancy recons showing the number of included employees, and had the opportunity to disagree +with ALC’s practices. +55. In addition, Grant Thornton included the Ventas lease covenants in its Summary of +Significant Matters (“the SSM”) for the third quarter 2010 review. Grant Thornton prepared the +SSM to highlight to engagement partners and engagement quality reviewers, among others, +important issues and questions encountered during the audit or review. In the SSM, Grant +Thornton mistakenly noted that it had “confirmed” with Buono that Ventas received the occupancy +recon. The SSM also noted that Grant Thornton was not able to “specifically test” ALC’s use of +employees in the covenant calculations, that Grant Thornton accordingly needed to rely on ALC’s + + +14 +representations about its covenant practices, and that such a representation was included in ALC’s +representation letter. +56. Both Koeppel and the Engagement Manager reviewed the SSM. The Engagement +Manager knew or should have known that the SSM incorrectly noted that Buono had represented +that Ventas received the occupancy recons. +57. In advance of Grant Thornton’s third quarter 2010 meeting with ALC’s audit +committee, the Engagement Manager added the Ventas covenants as a written agenda item for +Grant Thornton’s presentation to the committee. However, Koeppel removed the agenda item +from Grant Thornton’s presentation. +58. In planning for the year end 2010 audit, Grant Thornton scheduled site visits to the +Ventas facilities after Koeppel and the Engagement Manager determined that those facilities were +at higher risk for inaccurate occupancy reporting because of the Ventas lease covenant +requirements and because ALC was barely passing the covenants. However, Grant Thornton’s +workpapers documenting its site visits to the Ventas facility do not reference any steps to validate +the inclusion of employees in the covenant calculations. In fact, the Grant Thornton engagement +team member who performed the site visit testing was unaware of the employee adjustment. Had +Grant Thornton asked, employees who worked at the Ventas facilities would likely have told the +Grant Thornton engagement team that only a handful of employees were staying at the facilities at +any given time and that no rooms were being set aside or reserved at their facilities for employee +use. Despite identifying the Ventas facilities as posing a higher risk, Koeppel failed to sign off on +the results of the site visit procedures performed. Koeppel also failed to direct the site visit team to +obtain support for ALC’s use of employees in the covenant calculations, and failed to follow-up +with the team to see if any such support had been obtained. +59. In the course of the year end 2010 audit, the Engagement Manager received a +spreadsheet which showed the number of employees ALC included in the covenant calculations +for each month during 2009 and 2010. One hour after receiving this information, the Engagement +Manager sent an email to her subordinate, in which the Engagement Manager wrote: +2009 is quite odd-how do they suddenly have 70 employees staying here +one month? Did we discuss this with them last year (i.e. how were they +tracking these before)? Also, they go from 70, then down to 24, then back +up. This seems very odd. . . . Not sure how accurate this is. + +Nevertheless, the Engagement Manager failed to make any inquiries to ALC regarding her +concerns or document her concerns in the workpapers. + +60. Grant Thornton’s workpapers for the 2010 year end audit included the occupancy +recons, which showed that ALC included 61 employees in the covenant calculations for each day +of the fourth quarter. The workpapers also noted that ALC would fail the occupancy covenants +without the inclusion of employees. Both Koeppel and the Engagement Manager reviewed these +workpapers. + + +15 +61. For the 2010 year end audit, a Grant Thornton engagement team member suggested +to Koeppel and the Engagement Manager that ALC’s representation letter should contain a specific +representation relating to ALC’s use of employees in the covenant calculations. Koeppel +responded, consistent with her view the prior quarter, by determining that the suggested +representation was not necessary. + c. The 2011 Engagement +62. Robinson replaced Koeppel as the ALC engagement partner beginning with the +first quarter 2011 review. With the exception of the third quarter 2011 review, Grant Thornton +continued to staff the Engagement Manager as the manager on the ALC engagement. Prior to the +2011 year end audit, Grant Thornton approved the Engagement Manager’s application for SEC +designation, even though the Engagement Manager had still not completed the amount of public +company engagement hours required under firm policy. In approving the application, Grant +Thornton demanded that the NPPD continue to perform a detailed review in connection with the +year end audit. +63. When Robinson assumed responsibility for the ALC engagement, the engagement +team advised Robinson that ALC was including employees in its covenant calculations. After this +was brought to Robinson’s attention, he discussed the issue with Buono during an introductory +lunch. Buono told Robinson that there was “an exchange of letters” that allowed ALC to use +employees to meet the covenants. However, Robinson never obtained any such documentation. +64. During the first quarter 2011 ALC review, the Engagement Manager, as she had +done with Robinson, brought the Ventas covenants to the attention of Grant Thornton’s +engagement quality reviewer (the “EQR”), who had joined the ALC engagement as the +engagement quality reviewer on the 2010 audit. In the course of doing so, she sent an email +informing the EQR that ALC was very close to missing the covenants. +65. In the course of the first quarter 2011 review, Grant Thornton learned that ALC had +provided information showing that it failed one of the Ventas lease occupancy covenants. In +reality, ALC had mistakenly included an insufficient number of employees to meet the covenant at +issue. After Grant Thornton raised the failed covenant with ALC, ALC provided Grant Thornton +with revised covenant calculations in which ALC added employees in order to pass all of the +covenants. +66. In the following days, a Grant Thornton engagement team member emailed the +Engagement Manager to apprise the Engagement Manager of her concerns that ALC had added +employees after initially failing a covenant. The engagement team member also proposed that the +Engagement Manager request from Buono a letter confirming Ventas’s agreement to allow +employees to be included in the covenant calculations. When the engagement team member spoke +with the Engagement Manager, the Engagement Manager shared her assessment that ALC’s use of +new employees to remedy a covenant failure was “odd.” However, Grant Thornton did not request +additional support from ALC. When a second junior engagement team member learned that Grant +Thornton had not followed up with Buono on obtaining a letter concerning the employee + + +16 +adjustment, he wrote an email to the first engagement team member observing that: “I don’t think +we’re ever going to get this mystery letter.” +67. ALC’s workpapers for the first quarter 2011 review included the occupancy recons, +which showed that ALC included between 60 and 65 employees in the covenant calculations for +each day of the quarter. The workpapers also noted that ALC would fail the occupancy covenants +without the inclusion of employees. Both Robinson and the Engagement Manager reviewed these +workpapers. In a separate section of the workpaper, Grant Thornton noted that ALC had failed the +occupancy covenant for one of the facilities in the first draft of the covenant calculations but +explained that Buono had “found” additional employees which allowed ALC to pass. +68. The SSM for the first quarter 2011 review again identified the Ventas covenants as +a significant matter. The relevant paragraph was substantially similar to the paragraph in the third +quarter 2010 SSM except that it omitted the reference to Buono’s representation that Ventas was +receiving occupancy recons. Robinson, the EQR, and the Engagement Manager each reviewed +this SSM. +69. At Robinson’s request, Grant Thornton sent ALC a proposed representation letter +for the first quarter 2011 review which contained a specific representation relating to the inclusion +of employees in the covenant calculations. However, when Buono requested that Grant Thornton +remove this representation, Robinson and the Engagement Manager acquiesced. +70. In the course of its second quarter 2011 review, Grant Thornton learned that ALC +had received a comment letter from the Commission’s Division of Corporation Finance relating to +ALC’s 2010 Form 10-K, which requested, among other things, that ALC disclose its performance +relative to the Ventas covenants if it remained at “risk of non-compliance.” Grant Thornton +reviewed ALC’s proposed response to the comment letter, in which ALC wrote that it did “not +believe that it has a reasonably likely degree of risk of breach of the [Ventas] covenants” and that it +would add such a disclosure to its subsequent Commission filings. ALC in fact added such a +disclosure to its Commission filings beginning with its second quarter 2011 Form 10-Q. Grant +Thornton did not suggest any revisions to ALC’s final response letter or to ALC’s additional +disclosure in its Commission filings. +71. ALC’s workpapers for the second and third quarter 2011 reviews included the +occupancy recons, which showed that ALC included between 73 and 88 employees in the covenant +calculations for each day of the quarter. The workpapers again noted that ALC would fail the +occupancy covenants without the inclusion of employees. +72. The SSM for the second and third quarter 2011 reviews contained identical +paragraphs as the first quarter 2011 SSM with respect to the Ventas covenants. Robinson, the +Engagement Manager, and the EQR reviewed both SSMs. +73. In preparation for the 2011 year end audit, Grant Thornton again recognized the +risk associated with the financial covenants. The planning meeting agenda for the audit included +an item identifying areas where “ALC management could perpetrate and conceal fraudulent + + +17 +financial reporting.” The agenda identified “occupancy (affecting covenants and bonuses)” as one +such area for potential fraud. Robinson, the EQR, and the Engagement Manager reviewed this +agenda. +74. During the 2011 audit, Grant Thornton for the first time requested a copy of the +quarterly covenant calculations that ALC sent to Ventas. Grant Thornton made this request after +the Engagement Manager reviewed the fourth quarter 2011 occupancy recon and saw that 50 +percent of the available units at one of the Ventas facilities and 25 percent of the available units at +another facility were purportedly occupied by ALC employees. +75. In response to Grant Thornton’s request, ALC provided copies of the quarterly +materials it sent to Ventas. Those materials, like all of the earlier covenant information ALC had +provided to Ventas, did not contain any information indicating that employees were being included +in the covenant calculations or the number of such employees. +76. A Grant Thornton engagement team member emailed the materials to the +Engagement Manager and wrote: “The excel document [sent to Ventas] is exactly what we receive +[in the occupancy recons], except they exclude the tab where they add employees (as we had kind +of expected)” (emphasis added). The Engagement Manager responded to the email by writing that +“I just don’t know how comfortable I am with this.” the Engagement Manager wrote that she +called Buono to seek an explanation, but left a voicemail when Buono did not answer. The +engagement team member then forwarded the Engagement Manager’s email to a junior team +member, but not the Engagement Manager, writing: “I wish I could be on this call . . .” The junior +engagement team member responded: “Holly s---.” +77. Buono did not return the Engagement Manager’s call. In the meantime, the +engagement team continued to be concerned about the employee adjustment. The day after leaving +the voicemail for Buono, the Engagement Manager emailed Robinson and noted that the Ventas +covenant calculations were still an “open item” because: (1) ALC wasn’t sending Ventas the +employee occupancy information that Grant Thornton had been reviewing; and (2) she wanted to +question Buono on why so many of the occupants at two Ventas facilities were ALC employees. +78. Eight days after the Engagement Manager left the voicemail, Buono still had not +returned her call. The Engagement Manager then left another voicemail for Buono in which she +said that she wanted to discuss the Ventas covenants because the numbers for the quarter looked +“odd.” Four days later, when Buono still had not returned her calls, the Engagement Manager +emailed Robinson to ask whether they should speak with the Chairman of ALC’s Audit Committee +because Buono “still hasn’t responded to my questions with my concerns about how they are +‘meeting’ these covenants.” +79. In the meantime, both Robinson and the Engagement Manager again suggested +adding a representation to ALC’s representation letter that specifically addressed the Ventas +covenants, and Grant Thornton included such a representation in the draft letter it sent to ALC. + + +18 +80. Eleven days after the Engagement Manager’s initial voicemail to Buono, the two +finally spoke. On the call, the Engagement Manager failed to raise her concerns that ALC +employees represented 50% of the occupancy of one Ventas facility and 25% of the occupancy of +another facility. Rather, Buono requested that Grant Thornton remove the Ventas covenant +representation contained in the draft representation letter Grant Thornton had sent to ALC. +81. In response, the Engagement Manager asked Buono to provide some evidence that +Ventas knew that ALC was including employees in the covenant calculations. Buono then +described to the Engagement Manager: (1) a conference call with Ventas in 2009 during which +Buono claimed that Ventas was notified about the inclusion of employees in the covenant +calculations; and (2) an email from Bebo to Ventas confirming such conversation. The +conversation ended with the Engagement Manager requesting a copy of the email. +82. Shortly after the conversation, Buono sent the Engagement Manager via email a +copy of the February 4 email, which contained no mention of the Ventas covenants. The +Engagement Manager also provided a copy of the February 4 email to Robinson. One minute after +receiving the February 4 email from Buono, the Engagement Manager responded to Buono that +she would remove the Ventas covenant specific representation from the final representation letter. +The Engagement Manager did not consult with Robinson before removing the representation. +However, in a subsequent conversation with Robinson, the Engagement Manager described the +sequence of events and Robinson indicated his agreement with her decisions. +83. Grant Thornton’s 2011 audit workpapers included the occupancy recons, which +showed that ALC included 92 employees in the covenant calculations for each day of the fourth +quarter. The workpapers also contained a notation that the revenue associated with the employee +occupants allowed ALC to satisfy the coverage ratio covenants. Other workpapers, which +Robinson and the Engagement Manager reviewed, also contained the incorrect observation +contained in prior workpapers that Ventas received quarterly information showing the number of +employees ALC included in the covenant calculations. +84. As was the case for 2009 and 2010, Grant Thornton issued an audit report that +included an unqualified opinion on ALC’s 2011 financial statements. + 4. The 2012 Engagement +85. During the reviews of ALC’s interim financial statements for the first and second +quarters of 2012, Robinson, the EQR, the Engagement Manager and the NPPD received additional +information which indicated the impropriety of ALC’s inclusion of employees in the covenant +calculations. Grant Thornton did not withdraw its audit opinions on ALC’s prior period financial +statements. +86. In the course of its first quarter 2012 review, Grant Thornton learned that Ventas +had issued notices of default to ALC as a result of ALC receiving license revocations at certain of +the Ventas facilities. On April 24, 2012, the Engagement Manager emailed Robinson to express + + +19 +her concerns regarding ALC’s efforts to resolve its disputes with Ventas, which included ALC +offering Ventas $15 million to terminate the lease. The Engagement Manager wrote: +Ventas may not realize the full extent to which occupancy has dropped. +Although they are getting close to a deal on the properties now, what +happens when Ventas finds out occupancy is actually much lower than +expected as ALC has been filling with employees. This is going to happen +when they enter the properties. I wonder if Ventas might ask for more then +because they may see it as the properties having depreciated more. + +87. On April 26, 2012, when the efforts to settle the license revocation issues collapsed, +Ventas sued ALC in federal court. ALC and Ventas would ultimately settle that litigation, after +Ventas learned that ALC was including employees in the covenant calculations, with ALC +purchasing the Ventas facilities for $37 million more than the facilities’ appraised value. +88. In May 2012, Robinson, the EQR, the Engagement Manager and the NPPD learned +that a whistleblower had submitted a complaint to ALC’s Audit Committee relating to the +inclusion of employees in the covenant calculations and that ALC’s Audit Committee had retained +a prominent law firm to conduct an internal investigation of the allegations. While Grant Thornton +was not provided with a copy of the whistleblower complaint until December 2012, ALC’s law +firm described the whistleblower’s allegations to Robinson and the Engagement Manager during a +meeting on May 14, 2012. In its workpapers, Grant Thornton noted that the whistleblower had +alleged that the employees included in the covenant calculations were not performing any services +at the Ventas facilities or even leaving ALC headquarters. The workpapers also noted the +whistleblower’s disclosure that the employee numbers were reverse engineered to meet the +covenants. Robinson, the EQR, and the Engagement Manager prepared or reviewed these +workpapers. +89. On May 11, 2012, Robinson received an email from the Chairman of ALC’s Audit +Committee attaching notices of default which ALC had received from Ventas. In one of those +notices, Ventas asserted that ALC had committed fraud by including employees in the covenant +calculations. In the cover email, ALC’s Audit Committee chair indicated that ALC management +was not authorized to speak with Grant Thornton about the matters being investigated by the law +firm retained by ALC’s Audit Committee. +90. In the course of Grant Thornton’s second quarter 2012 review, the Engagement +Manager prepared workpapers to explain the accounting for ALC’s purchase of the Ventas +facilities, which indicated that ALC had paid Ventas $37 million in excess of the appraised value +of those facilities “for damages as a result of occupancy rates falling significantly below required +covenant occupancy rates.” Robinson, the EQR, the NPPD and other members of Grant +Thornton’s professional standards group reviewed these workpapers. + + + + +20 +F. KOEPPEL’S AUDIT AND REVIEW OF BROADWIND + 1. Background on the Recording of Intangible Assets +91. GAAP typically does not permit the recognition of intangible assets, such as +customer relationships, as independent assets on a company’s balance sheet. An exception to this +general rule is intangible assets purchased in connection with a business combination. In that +context, GAAP requires the consideration for an acquisition to be allocated across the tangible and +intangible assets, with the remainder recorded as goodwill. +92. In connection with the Brad Foote acquisition in October 2007, Broadwind +recorded amortizable intangible assets of $76 million and goodwill of $26 million. Nearly the +entire $76 million intangible asset related to Brad Foote’s contracts with its two most significant +customers, Customer 1 and Customer 2, which were recorded at $62 million and $13 million, +respectively. To establish the intangible asset value, management relied on a valuation conducted +by an appraisal firm, Appraisal Firm 1. Appraisal Firm 1’s valuation depended in substantial part +on the forecasted net cash flows derived from the Customer 1 and 2 contracts over ten- and nine- +year periods, respectively. Appraisal Firm 1 calculated those net cash flows from forecasts and +estimated growth rates provided by senior managers at Broadwind. The net sales forecasts +reflected management’s anticipation of aggressive growth. +93. Once established, an amortizable intangible asset is subject to periodic impairment +testing. According to Accounting Standards Codification (“ASC”) 360, originally promulgated as +Financial Accounting Standard (“FAS”) 144, an intangible asset is impaired when the carrying +amount of the asset exceeds its fair value. A company is required to make this determination +“whenever events or changes in circumstance indicate that its carrying amount may not be +recoverable.” One such “triggering event” is “a current-period operating or cash flow loss +combined with a history of operating or cash flow losses or a projection or forecast that +demonstrates continuing losses associated with the use of a long-lived asset (or asset group).” +Other examples of such triggering events include “a significant adverse change in the extent or +manner in which a long-lived asset (or asset group) is being used or in its physical condition” or “a +significant adverse change in legal factors or in the business climate that could affect the value of a +long-lived asset (or asset group), including an adverse action or assessment by a regulator.” +Broadwind purported to follow the accounting principles established by FAS 144. + 2. The Decline of Broadwind’s Customer Relationships +94. Beginning in late 2008, Customers 1 and 2 significantly reduced actual and +forecasted orders, causing substantial declines in Brad Foote’s projected revenue associated with +those relationships. Broadwind reacted to the downturn by planning or implementing numerous +initiatives to rationalize the business, including decreasing headcount, returning machines to +equipment suppliers, altering production schedules, and withholding investments in additional +capacity. + + +21 +95. Throughout the first quarter of 2009, the declines in Customer 1 and 2’s revenues +and forecasts worsened, falling more than 66% and 71% from the original forecast used to value +the customer relationships. In response, Brad Foote took steps to restructure its workforce and +operations, laying off more than 200 employees and senior staff through at least three workforce +reductions, and reducing its material orders from suppliers. Brad Foote aggressively sought +business from other non-wind customers to replace the significant declines and correct the +underutilization of its capacity. +96. In early 2009, as its financial condition worsened, Broadwind received early +indications of potential impairment while preparing its 2008 annual report. During its 2008 +financial statement audit, Broadwind retained Appraisal Firm 1 to test its goodwill and intangible +assets for potential impairment. In March 2009, Appraisal Firm 1 informed Broadwind that it had +calculated a $15 million impairment charge associated with the Customer 1 contract. Appraisal +Firm 1 subsequently modified its calculations, which resulted in no impairment. Although the +Company ultimately did not disclose a charge in its 2008 Form 10-K, following consultation with +Grant Thornton, Appraisal Firm 1’s preliminary result placed Broadwind’s management on further +notice of the potential for impairment. +97. During the second quarter of 2009, the Customer 1 and 2 relationships deteriorated +more precipitously. At a special board meeting convened on June 9, 2009, Brad Foote +management reported that Brad Foote would produce no more than $85 million in sales for 2009, +compared to $120 million in previously anticipated sales. Management also reported that 2009 +revenue forecasts for Customer 1 had decreased to $30 million and that the 2009 revenue forecasts +for Customer 2 had declined to $15 million. In connection with a “massive and sudden schedule” +reduction imposed by Customer 1 and other developments, Broadwind and Brad Foote began +developing a “life without Customer 1” business plan, and several members of management +expressed the desire to exit the relationship. +98. For Brad Foote as a whole, second quarter 2009 revenue fell 31% against the +second quarter of 2008 and 24% compared to the first quarter of 2009, and its gross margin turned +negative. As in previous months, Brad Foote continued its efforts to redirect sales from Customers +1 and 2 to new customers and implemented additional workforce reductions. +99. In the third quarter of 2009, Brad Foote’s actual and forecasted revenue continued +to decline. Specifically, year-to-date revenues from Customer 1 and Customer 2 through +September 30, 2009 declined 42% and 25%, respectively, compared to the same period ending +September 30, 2008. +100. On July 29, 2009, Broadwind’s CEO provided the Board a “rationalization update” +that described the precipitous decline and the restructuring that management was taking to respond +to weak performance. During the meeting, Brad Foote management presented a financial forecast +for Brad Foote showing that the expectation for Brad Foote sales for 2009 had declined by +$49 million, or 41% to a newly revised forecast of $71 million. Brad Foote management also +projected net income of negative $16 million for the year. During a portion of the presentation + + +22 +discussing “risks to [the] income statement,” Broadwind management identified “continued loss of +volume” and “impairment at subsidiaries.” +101. The declines in actual and forecasted results were not limited to 2009. Revenue +forecasts for future years also declined. For instance, on July 30, 2009, Customer 1 submitted a +2010 forecast that was only 13% of the $125 million 2010 projection used to establish the +acquisition value of the Customer 1 contract. +102. Around this same time, Brad Foote management informed the Board that Brad +Foote would generate revenues of $30 million from Customer 2 in 2010, $41 million in 2011, and +$54 million in 2012. On average, those forecasts represented a 70% decline from the comparable +period forecasts originally used to value the Customer 2 contract. +103. A board meeting was scheduled for October 1, 2009 to determine whether the +Board should sever its relationship with Customer 1. At that meeting, the Board decided not to +terminate Broadwind’s relationship with Customer 1. However, Broadwind continued to budget +for and anticipate impairment in several documents and communications through December 2009. + 3. Broadwind’s Misrepresentations and Omissions in Its Commission Filings +104. As a result of these developments, by the third quarter of 2009, the intangible assets +associated with the Customer 1 and 2 relationships met the triggering event tests established by +FAS 144, and these assets were impaired. Consequently, Broadwind materially overstated its +intangible assets and understated a material impairment charge in its Form 10-Q for the third +quarter of 2009, which was filed on November 2, 2009. +105. Given the declines in its business and other developments, Broadwind resolved in +October 2009 to raise additional capital through a public offering of its stock. In anticipation of the +offering that ultimately proceeded in January 2010, Broadwind filed a registration statement with +the Commission. The registration statement was initially filed on October 30, 2009 and was +amended various times between November 6, 2009 and January 14, 2010. The registration +statement ultimately went effective on January 14, 2010. All versions of Broadwind’s registration +statement included the interim financial statements that had been included in the Forms 10-Q filed +through the end of the third quarter, September 30, 2009, and expressly incorporated prior reports +by reference. +106. As was the case with the third-quarter Form 10-Q, Broadwind’s registration +statement was incomplete and misleading. By incorporating third-quarter interim financial +statements that did not report the impairment charge, Broadwind failed to disclose that its +intangible assets already had been substantially impaired. Failing to disclose the impairment +allowed Broadwind to proceed with an offering that was critical to its financial survival and to give +the misleading impression that its business was stronger than actual and predicted results +established. +107. Less than two weeks after the completion of the offering, on February 2, 2010, +Appraisal Firm 2 informed Broadwind’s management of its preliminary finding of impairment. + + +23 +108. Approximately one month later, Broadwind disclosed the impairment in its 2009 +Form 10-K and earnings release, filed on March 12, 2010. Broadwind disclosed a $58 million +charge to intangible assets and full impairment of its goodwill related to Brad Foote in the amount +of $24 million. Described by the Board as “significant,” the charge reduced the value assigned to +customer contracts by 94%. Of the $58 million intangible impairment charge, $56 million directly +related to the declining value of the Customer 1 and 2 relationships. Largely as a result of the +charge, Broadwind’s operating loss for the year increased from $28 million to $110 million on +reported revenues of $198 million. +109. Following the revelation of the charge, Broadwind’s stock declined 21%, from a +closing price of $5.68 on March 11, 2010 to a closing price of $4.47 on March 12, 2010, on +increased volume. On the next trading day, March 15, 2010, the price fell another 8% from the +March 11, 2010 price to $4.11, for a total decline of 29%. In contrast, the broader market, as +reflected by the Nasdaq Composite Index, was essentially unchanged for these two days. The +charge also was significant because it signaled serious weaknesses in Broadwind’s long-term +prospects, particularly with two of the industry’s largest players. +110. Because Broadwind did not recognize impairment as a third-quarter event, its Form +10-K for 2009 misstated third and fourth-quarter results. In the Form 10-K, Broadwind +inaccurately attributed the impairment charge to fourth-quarter events when the events that resulted +in the impairment were present during the third quarter. +4. Koeppel’s Early Warnings of Potential Impairment +111. In inspection reports issued beginning in 2007, PCAOB notified Grant Thornton of +several impairment audit deficiencies in other engagements. Further, in its 2008 and 2009 +inspection reports, PCAOB notified Grant Thornton of issues regarding the effectiveness of Grant +Thornton’s firmwide quality controls with respect to (1) professional skepticism, (2) engagement +supervision, and (3) impairment procedures. +112. As Broadwind’s auditor, Grant Thornton learned of the decline in sales and volume +that began in late 2008, as well as the restructuring steps undertaken by Broadwind to address the +declines, through its audit work. For instance, Grant Thornton reviewed Broadwind’s board and +committee materials in connection with each of its reviews and audits. Grant Thornton’s work +papers also noted various negative developments through its review of financial metrics and +conversation with accounting personnel and others at Broadwind. +113. In addition, because it reviewed and analyzed Appraisal Firm 1’s work during the +2008 annual audit in early 2009, Grant Thornton also received the early indications of potential +impairment identified by Appraisal Firm 1. Although Broadwind ultimately did not disclose an +impairment charge in its 2008 Form 10-K, the preliminary result placed Broadwind and Grant +Thornton on notice of the potential for impairment. +114. During the quarterly review for the period ending March 31, 2009, Grant Thornton +asked management to prepare a memorandum documenting its consideration of triggering events + + +24 +that could indicate impairment of the intangible assets associated with the Customer 1 and 2 +relationships. Management’s memorandum to Grant Thornton recited the standard for impairment, +noted the recent downturns, but summarily concluded that no triggering events had occurred. +115. Grant Thornton also requested a similar assessment for the second quarter of 2009. +Management’s memorandum again noted key customers’ intentions to scale back orders, but +summarily concluded these declines simply represented a delay in the timing of revenues and +associated cash flows. With respect to the second quarter 2009 assessment, the senior manager for +the Grant Thornton engagement team wrote the following to Koeppel: +The problem is that the ability to forecast has been suspect with this group +and whether or not the sales are suspended or eliminated is the question . . . +their position is suspended which is how they get to no impairment. I think +this meets adequate documentation at an interim date and not sure we are +going to get a better product. Please let me know if you disagree and +whether or not we should have more expansive forecasting to illustrate the +expected revenues from these customers that have pushed out. +116. Despite these concerns, Koeppel failed to direct the engagement team to obtain +more expansive forecasting from Broadwind, or to perform any additional procedures, during the +second-quarter review. The Grant Thornton review file similarly included no documentation of +any additional forecasting by Broadwind or additional procedures performed. +5. Koeppel Learns of Broadwind’s Expectation of Impairment + +117. In August 2009, after the continued deterioration of the Customer 1 and 2 customer +relationships, Broadwind management shared with Grant Thornton its expectation that its +intangible assets would be substantially impaired. Specifically, Grant Thornton received internal +budgeted balance sheets and income statements for 2010 and other documents reflecting +management’s assumption that the entire Customer 1 contract intangible asset would be impaired +by December 31, 2009. Several of these documents specifically identified an expected impairment +charge of $48 million to be recorded in the fourth quarter. +118. After being informed on September 9, 2009 of management’s expectation, Koeppel +wrote to the senior manager: “Guess they see the writing on the wall for [Brad Foote]—seems like +we need a triggering event?!?!?” One day later, the senior manager summarized for Koeppel a +discussion with Broadwind’s Chief Accounting Officer (“CAO”) and Controller: +The impairment has not been booked or determined, but they believe a +Customer 1 triggering event is a week or two away and is based on a +customer retention decision at the board level . . . [the CAO] feels they are +slanting the board materials to keep Customer 1, but are not incorporating +the true costs of the customer relationship which would potentially paint a +different light. + + +25 +119. Grant Thornton incorporated management’s expectation in its planning for the +third-quarter review and year-end audit of Broadwind’s 2009 financial statements. On +September 29, 2009, Broadwind and Grant Thornton met to plan the upcoming annual audit. +Agenda and notes drafted by Grant Thornton in preparation for the meeting reflect “expected +impairment,” “loss of Customer 1 . . . FAS 144 writeoff,” and the need “to get started as soon as +possible.” Relatedly, a client meeting agenda listed “impairment analysis” as a topic of discussion. +Attachments to the agenda included other references to impairment and an estimated $48 million +charge. A few days after the audit planning meeting, on October 4, 2009, Grant Thornton +forwarded Broadwind’s Controller guidance on impairment disclosures “as a follow up to [their] +discussion regarding potential impairment.” +6. Koeppel’s Failed Review of Broadwind’s Third-Quarter Impairment +Assessment + +120. Broadwind’s third quarter ended on September 30, 2009. As discussed above, in +early October 2009, Broadwind decided to raise additional capital through a follow-on offering of +its stock, referred to as a “re-IPO,” and began to prepare a registration statement. The Grant +Thornton engagement team was aware that Broadwind was embarking upon an offering and +understood that the offering was critical to Broadwind’s financial survival. Grant Thornton also +understood that Broadwind’s CEO planned to participate in the offering by selling shares that he +personally owned. Broadwind originally planned to complete the offering in late November 2009. +121. Grant Thornton’s quarterly review of Broadwind’s third-quarter interim financial +statements began on October 21, 2009. On or about October 27, 2009, immediately before a +planned filing of a registration statement, Grant Thornton learned that Broadwind’s management +had decided not to file the registration statement due to the withdrawal of the lead underwriter. +After being informed by Broadwind’s CFO that there were “underwriting issues at the last +minute,” Koeppel conveyed her understanding to the senior manager and manager that +“impairment may be an issue/concern—they want to highlight it may occur—[the CAO’s] and my +concern is it starts to look like you should have already recorded it then—details, details!” +122. In connection with the third-quarter review, on or about October 29, 2009, despite +prior communications of an expected impairment, Broadwind management once again prepared an +impairment assessment for Grant Thornton that concluded that no triggering event had occurred. +In the assessment, Broadwind incorporated a comparative table of year-to-date revenues by +customer that reflected substantial revenue declines. Management summarily characterized these +declines as temporary and asserted that long-term volumes had not been materially changed. +However, management offered no specific evidence to support its view that orders would return to +the volumes forecasted in 2007, and other facts contradicted its assertion. Based on this +unsupported and incorrect conclusion, Broadwind failed to disclose a significant impairment +charge in its Form 10-Q filed on November 2, 2009, opting instead for a generalized risk disclosure +of the possibility of such a charge. Management’s assessment was incorporated into a Grant +Thornton working paper that was reviewed and approved by Koeppel and others on the +engagement team. + + +26 +123. Notwithstanding the awareness of a significant likelihood that the Customer 1 and 2 +contracts were impaired, and despite lingering uncertainty about management’s forecasting ability, +Koeppel and others on the engagement team accepted management’s unsupported assertion that +the reduced orders only represented a temporary deferral of sales that would be recovered over the +life of the supply agreement. Grant Thornton noted in its workpapers, which Koeppel reviewed: +GT notes that although volumes are below those projected by mgmt during +the 2008 integrated audit, management does not believe that this is a +triggering event due to the following. (i) BFGW continues to have long- +term contracts with [Customer 1 and 2]. For example, the Customer 1 +contract contains automatic renewals, termination provisions, etc. Current +discussions with Customer 1 indicate increased future activity. (ii) These are +long-term relationships with an estimated useful life of 9 [Customer 2] and +10 [Customer 1] years. Thus, it is reasonable to assume that short-term +reductions in volume will be made up over the longer term. Management +does not believe, and GT concurs, that a short-term decrease from budgeted +activity qualifies as a triggering event and such analysis does not seem to be +supported by FAS 144. +124. Even though multiple facts known to Koeppel and the engagement team did not +align with management’s conclusion, and Grant Thornton knew that Broadwind was pursuing an +offering, Grant Thornton did not perform any procedures to determine whether the order +reductions were other than temporary. On the contrary, the review documentation noted that Grant +Thornton simply “assume[d]” that these reductions were temporary. Among other things, Grant +Thornton did not ask Broadwind to provide detailed information about Customer 1 and 2 volume +expectations beyond 2009, which was available to management at the time. Grant Thornton’s files +do not include any documentation indicating how Koeppel or the engagement team determined the +reasonableness and consistency of Broadwind’s response in light of the results of other review +procedures and their knowledge of the business. +125. In fact, Broadwind’s response conflicted with longer-term forecasts presented to the +Board as early as July 2009, which were available to Grant Thornton. Koeppel’s experience with +Broadwind since 2007 provided her with an understanding of Brad Foote’s operations to recognize +that Brad Foote required longer-term forecasts from Customer 1 and 2 to manage its material +requirements and production schedule. Consequently, she should have known that 2010 volume +forecasts were available at the time of the third-quarter triggering event assessment. +126. Further, during Grant Thornton’s review of Broadwind’s third-quarter impairment +assessment memorandum, Grant Thornton’s professional standards partner (the “PSP”) assigned to +the Broadwind engagement provided comments to Koeppel and the manager. The PSP had been +assigned by Grant Thornton to monitor the Broadwind engagement as a result of Grant Thornton’s +designation of the engagement as high risk. In a communication to the engagement team about +Broadwind’s impairment assessment, the PSP wrote the following: “Are the revenues consistent +with the projections used for their last impairment analysis? If they are significantly declined than +that, then you would have a trigger you may need to revisit. They don’t address this here. Also + + +27 +need GT conclusion & view on impairment in the files.” Although the team’s own third-quarter +revenue analytics working papers demonstrated that the revenues were not consistent with the +projections used for Broadwind’s last impairment analysis, the engagement team did not revisit the +triggers for an impairment analysis. The manager responded to the PSP simply that management +viewed the contracts as long term, such that a short-term decrease from budget would not qualify +as a triggering event. +7. Koeppel Defers to Broadwind in Grant Thornton’s Comfort Letter + +127. Broadwind’s third-quarter 2009 interim financial statements were incorporated into +its registration statement for the public offering in January 2010. In connection with the offering, +Grant Thornton was retained to provide a comfort letter to investment bankers and reviewed draft +registration statements and impairment disclosures. As Grant Thornton performed its procedures, +Koeppel and the engagement team learned that the Commission’s Division of Corporation Finance +had questioned Broadwind’s impairment disclosures. As part of its review of Broadwind’s +registration statement, the Division of Corporation Finance issued Broadwind a comment letter in +late November 2009. In response to comments questioning the Company’s impairment +disclosures, Broadwind added more detail to its description of its significant accounting policies in +its MD&A and the notes to consolidated interim financial statements. However, the additional +language simply provided more detail about the testing process and did not alter the substance of +Broadwind’s disclosures regarding impairment or the risk of impairment. +128. Following this expanded process disclosure, Koeppel and the senior manager +defended the quality of Broadwind’s disclosures surrounding impairment in email exchanges with +the PSP. The PSP voiced serious reservations to the engagement team about the impairment +disclosures and emphasized the company’s obligation to provide an early warning to investors if it +believed an impairment charge was reasonably possible. The PSP specifically cautioned Koeppel +that “[w]e can’t just turn a blind eye if we believe there is a good possibility they will have +impairment.” Koeppel and the senior manager addressed the PSP’s concerns by obtaining a +representation from management that impairment testing was in process but had not yet been +completed. Grant Thornton’s comfort letter expressly cautioned that it had not performed any +procedures surrounding impairment of intangible assets with respect to the period from October to +November 2009, deferring instead to its “inquiry of management.” +8. Koeppel Negligently Audits Management’s Allocation of Impairment +Charge to the Fourth Quarter + +129. In the course of its year end audit of Broadwind, Grant Thornton’s workpapers +failed to differentiate the fourth-quarter declines from comparable declines that occurred in prior +periods. At the urging of the PSP just days prior to audit signoff, the engagement team considered +whether the impairment charge should be recorded in the fourth quarter of 2009 or some earlier +period. The resulting audit file memorandum, which Koeppel reviewed, relied on selected sales +metrics to demonstrate a purported deterioration in the fourth quarter of 2009. In the +memorandum, Grant Thornton reasoned that: (1) the fourth quarter 2009 revenue decline from +fourth quarter 2008 (65%) and from third quarter 2009 (32%) was significant; and (2) prior to the + + +28 +fourth quarter, actual and forecasted revenue amounts related to the reporting unit were consistent +with previous expectations. +130. Grant Thornton’s observation that, prior to the fourth quarter, actual revenues were +consistent with the prior year’s forecasted revenues was incorrect and was contradicted by the +engagement team’s own revenue analytics documentation in each of the first three quarters of +2009. The team’s third-quarter review impairment workpapers also acknowledged this +underperformance by stating “that, although volumes are below those projected by [management] +during the 2008 integrated audit, management does not believe that this is a triggering event.” In +fact, Brad Foote’s actual quarterly revenues in 2009 failed to meet the forecasted revenues used in +the fiscal year 2008 impairment analysis by significant margins. Moreover, Grant Thornton’s +reasoning applied with equal force to prior quarters in 2009, and these declines were documented +by Grant Thornton each quarter in its revenue analytics working papers. In the second and third +quarters, Brad Foote realized comparable declines in revenue. Second quarter 2009 revenue fell +31% against second quarter 2008 and 24% compared to first quarter 2009. Third quarter 2009 +revenue fell 49% compared to third quarter 2008 and 19% compared to second quarter 2009. +131. The engagement team’s memorandum on this issue failed to discuss whether or +how it considered the significant sales declines that had occurred in the third quarter in concluding +the company was correct in recording the impairment charge as a fourth-quarter event. Further, the +team’s inclusion of the inaccurate statement that actual revenues were consistent with prior-year +projections reinforced the company’s incorrect allocation of the impairment charge to the fourth +quarter. Koeppel and Grant Thornton sought only evidence to corroborate management’s +conclusion while disregarding evidence from their own prior work that contradicted management’s +conclusion. +132. Around the same time that the PSP had asked the engagement team to evaluate the +timing of the impairment charge, Koeppel provided Broadwind’s CFO with comments on +Broadwind’s draft earnings release to be issued in connection with the filing of Broadwind’s 2009 +Form 10-K. The CFO’s draft had attributed the impairment charge to “reduced wind gearing +purchases under key customer contracts beginning in late 2008.” (emphasis added). Koeppel +urged the CFO to reevaluate the language in the release. Koeppel wrote: “We view the following +reference to 2008 as problematic as it may suggest that you should have taken the impairment +charge earlier . . . Suggest that you expand the sentence to focus on Q4 events which drove this +assessment.” Koeppel proposed these revisions to the press release prior to the engagement team’s +drafting of the memorandum purporting to document its consideration of the charge’s timing. +9. Koeppel’s Failure to Detect Broadwind’s Overstatement of Revenue +a. Koeppel Identifies Revenue Recognition Risks + +133. In the course of the 2009 year end audit, Koeppel and Grant Thornton identified the +risk of material misstatement due to fraud in the area of revenue recognition at Broadwind’s most +significant subsidiary, Brad Foote, as a specific risk. Audit planning documentation identified the +risk that “sales include fraudulent transactions” as “high” and “reasonably possible.” Planning + + +29 +documentation further noted “possible incentive to play with earnings especially at the BFGW +level (there are monthly sales targets included in their loan covenants).” More generally, Grant +Thornton had identified the Broadwind engagement as a high-risk audit. This conclusion was +influenced in part by Broadwind’s prior disclosures of material weaknesses in controls over +revenue recognition and other controls in earlier periods. + b. Overstatement of Revenue by Broadwind +134. This risk in fact materialized. The deterioration in customer relationships that +produced the impairment charge also compromised Brad Foote’s ability to meet monthly debt +covenants associated with its primary credit facility. To avoid default and other negative +consequences, Brad Foote personnel accelerated revenue to meet its covenants until Broadwind +could raise funds to retire the credit facility through the offering in January 2010. Broadwind +failed to disclose this practice and its effect on future revenue in the registration statement used in +the offering. In addition, as a result of the transactions, Broadwind reported $4 million of +improperly recognized revenue for the third and fourth quarters of 2009, including certain bill-and- +hold transactions entered with Customer 2. This revenue was material to Broadwind’s financial +results. +135. The Customer 2 bill-and-hold transactions had their genesis in a broader “pull- +ahead agreement” between Customer 2 and Brad Foote. In response to forecast reductions in early +2009, Brad Foote personnel approached Customer 2 about pulling $6 million of orders, consisting +of 150 sets of gear boxes, from 2010 into 2009 “to ensure [Brad Foote’s] future compliance with +debt covenants” and its ability to continue supplying gearboxes to Customer 2. Brad Foote’s +proposal was not requested by Customer 2 or tied to any commercial need on the part of Customer +2 beyond the survival of a critical supplier. The 150 sets were to be pulled from requirements that +were scheduled to ship in 2010 and would not be consumed until the first half of 2010. Because +Customer 2 had no need for the sets and would carry the 150 sets as excess inventory, Brad Foote +proposed “to cover Customer 2’s carrying and storage costs through deflation in 2010.” In +addition, because the long-term agreement with Customer 2 provided for an annual reduction in +prices paid by Customer 2, Brad Foote agreed to accept 2010 prices for the parts. Brad Foote +committed that it would not ship the products to Customer 2 if it were able to identify new business +from other customers. After initially refusing the request, Customer 2 agreed to provide $3 million +of support. Customer 2 scheduled the 75 sets to be delivered from late August 2009 through +November 2009. Brad Foote’s delivery of these sets caused significant disruption at Customer 2, +given its lack of need for the parts until 2010. Brad Foote paid Customer 2 the carrying cost and +the price reduction through a 1.5% discount that was spread over shipments that occurred in 2010. +136. As a result of the pull-ahead agreement, by October 2009, Customer 2 exceeded its +ability to store the excess inventory. Consequently, Customer 2 approached Brad Foote about +storing the remaining gear sets through a bill-and-hold arrangement. On October 31, 2009, Brad +Foote agreed and entered into a bill-and-hold arrangement with respect to 30 gear sets totaling +$1,247,160. The gears were not shipped to Customer 2, but instead were supposed to be +segregated and maintained onsite at Brad Foote. Customer 2 required Brad Foote to segregate the +product and provide evidence of completion and periodically inspect the product on site. + + +30 +Notwithstanding these efforts, Brad Foote failed to segregate the product consistently. The +transaction failed to meet the criteria to recognize revenue under a bill-and-hold arrangement. See +In the Matter of Stewart Parness, Accounting and Auditing Enforcement Rel. No. 108 (Aug. 5, +1986), Staff Accounting Bulletin 104, Revenue Recognition. +137. On November 30, 2009, Brad Foote placed 30 sets into a bill-and-hold arrangement +similar to the one entered with Customer 2 in October 2009. Fifteen of these 30 sets completed the +pull-ahead arrangement with Customer 2, and Brad Foote documented Customer 2’s request +through the same email authorizing delivery in October 2009. The other half corresponded to an +additional 15 sets not formally ordered by Customer 2 until December 2009. In total, Brad Foote +recognized $1,194,471 of revenue associated with these 30 sets. As with the October 2009 +shipment, Broadwind failed to produce evidence of Customer 2’s substantial business purpose for +the arrangement and failed to comply with other requirements of a proper bill-and-hold +arrangement. + c. Koeppel’s Audit of the Bill-and-Hold Arrangement +138. Grant Thornton never learned the details of the bill-and-hold arrangement. During +the 2009 year end audit, Grant Thornton identified the October 2009 transaction as a transaction +for further review. However, the engagement team’s testing of this transaction was limited to +obtaining a summary of its terms from management. The summary failed to identify several +aspects of the transaction critical to its proper accounting, including, among other things, the price +discount and the inventory carrying cost. For example, interviews with Brad Foote personnel, +review of documents associated with the transaction, or confirming the terms directly with +Customer 2 could have revealed that the bill-and-hold arrangement was the product of a large-scale +pull-ahead agreement and had no independent business purpose. +139. More broadly, prior to the conclusion of the audit, management identified multiple +problematic transactions at Brad Foote designed to meet monthly revenue covenants during a +pending offering. These transactions included improperly recorded bill-and-hold transactions that +should have raised additional questions about the October 2009 transaction with Customer 2. The +engagement team did not document how it altered the nature, timing, or extent of its audit +procedures in a manner that addressed this risk. +140. Koeppel participated in the audit planning process and fraud brainstorming +discussion, signed off on the audit working papers in which the identified risks were documented, +and signed off on working papers concluding that the Customer 2 bill-and-hold transaction met +applicable revenue recognition criteria. + d. Retention of Supporting Documentation in the Audit File +141. As discussed above, Broadwind identified and corrected certain transactions in +which it had improperly recognized revenue through an internal review conducted by management +from late 2009 to early 2010. A report of the internal review provided to Grant Thornton and +referenced in its working papers identified multiple instances of improper revenue recognition, + + +31 +which included backdated letters, side agreements, unauthorized bill-and-hold transactions, and a +directive not to record a credit memo. These transactions contributed to an overstatement of +revenue that enabled Brad Foote to barely meet its debt covenants in the months leading to a +critical stock offering. However, the engagement team did not retain a copy of the report or +supporting documentation for the questionable transactions in the audit file. +E. VIOLATIONS +RULE 102(e) AND SECTION 4C OF THE EXCHANGE ACT +142. The 2009, 2010, and 2011 audits of ALC, and third quarter review and year end +audit of Broadwind were deficient and not performed in accordance with PCAOB standards.8 +Section 4C(b) and Rule 102(e)(1)(iv) define improper professional conduct with respect to +persons licensed to practice as accountants. Pursuant to these provisions, “improper professional +conduct” includes two types of negligent conduct: (1) a single instance of highly unreasonable +conduct that results in a violation of professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted; or (2) repeated +instances of unreasonable conduct, each resulting in violations of professional standards, that +indicate a lack of competence. + +143. As set forth above, Koeppel and Robinson knew, or should have known, that the +Ventas financial covenant calculations were an area in which heightened scrutiny was warranted in +connection with the 2009, 2010 and 2011 audits of ALC. Moreover, Koeppel and Robinson knew +or should have known facts that called into question ALC’s claims that it was meeting the Ventas +lease covenants by virtue of an agreement with Ventas to include employees and other non- +residents in the covenant calculations. Throughout the 2009, 2010, and 2011 audits and reviews, +Koeppel and Robinson were aware of repeated red flags surrounding ALC’s practice of meeting +the covenants by treating employees and other non-residents as occupants of the Ventas facilities. +In light of these red flags, Koeppel and Robinson failed to take reasonable steps to verify that an +agreement with Ventas existed or that the employees ALC claimed to be occupants of the facilities +were in fact staying there. Had Koeppel and Robinson taken such measures, they could have +exposed and put an end to ALC’s fraud. Instead, Grant Thornton issued audit reports in 2009, +2010, and 2011containing unqualified opinions that were filed with ALC’s financial statements in +the Form 10-Ks. In those reports, Grant Thornton inaccurately stated that the audit had been +conducted in accordance with PCAOB standards and that ALC’s financial statements presented +fairly, in all material respects, the company’s position and results in conformity with accounting +principles generally accepted in the United States of America. + + +8 References to auditing standards in this Order are to PCAOB standards in effect at the time the +audit work was performed. For example, the PCAOB risk assessment standards (AS 8-15) +became effective for audits of fiscal years beginning on or after December 15, 2010 (i.e., the +2011 audit of ALC) and superseded AU §§ 311, 312, 326, among others. + + +32 +144. Further, in the course of Grant Thornton’s 2009 third quarter review of +Broadwind, Koeppel knew, or should have known, that Broadwind’s financial statements +omitted a $58 million impairment charge associated with its deteriorated customer relationships +for Brad Foote’s two most important customers. Additionally, in the course of the 2009 year end +audit of Broadwind, Koeppel knew or should have known that Broadwind’s impairment charge +was not a fourth-quarter event and that Broadwind’s third and fourth quarter financial statements +materially overstated revenue. + +Failure to Properly Plan the Audit (AU §§ 311 and 312, AS 8, AS 9) + +145. PCAOB standards require an auditor to consider the nature, extent and timing of +work to be performed in planning the audit and prepare a written audit program which sets forth in +reasonable detail the audit procedures necessary to accomplish the audit objectives. (AU § +311.05). Auditors must also consider audit risk and materiality in planning the audit and designing +audit procedures. (AU § 312.12). Auditors additionally must plan the audit so that audit risk will +be limited to a low level appropriate for expressing an opinion on the financial statements. (AU § +312.13). Auditors are also required to consider significant risk of material misstatement of the +financial statements in: (1) determining the nature, timing or extent of procedures; (2) assigning +staff; and (3) requiring appropriate levels of supervision. (AU § 312.17). In planning an audit, +auditors must also design procedures to obtain reasonable assurance of detecting misstatements +that the auditor believes could be material. (AU § 312.25, AS 8.3). + +146. PCAOB standards also require auditors to properly plan their audits and develop +and document an audit plan that includes a description of, among other things: (1) the planned +nature, timing and extent of substantive procedures; and (2) other planned audit procedures +required to be performed so that the engagement complies with PCAOB standards. (AS 9.4, AS +9.10). + +147. As a result of their conduct described above, Koeppel and Robinson failed to +properly plan the 2009, 2010 and 2011 audits of ALC. + +Failure to exercise due professional care and professional skepticism (AU +§§ 230, 316, 722, and AS 13) + +148. PCAOB standards require auditors to exercise due professional care in the +planning and performance of the audit and the preparation of the report. (AU § 230.01). +Auditors must maintain an attitude of professional skepticism, which includes “a questioning +mind and a critical assessment of audit evidence.” (AU § 230.07, AS 13.7). In addition, the +auditor should “consider the competency and sufficiency of the evidence. Since evidence is +gathered and evaluated throughout the audit, professional skepticism should be exercised +throughout the audit process.” (AU § 230.08). In exercising professional skepticism, an auditor +should not be satisfied with less than persuasive evidence because of a belief that management is +honest. (AU §§ 230.09 and 316.13). Further, auditors should: (1) perform an ongoing questioning +of whether the information and evidence obtained suggests that a material misstatement due to + + +33 +fraud has occurred; and (2) conduct the engagement with a mindset that recognizes that a material +misstatement due to fraud could be present, regardless of past experience with the entity and the +auditors’ belief about management’s honesty and integrity. (AU § 316.13). Auditors should also +exercise due professional care and professional skepticism in the course of reviews of interim +financial information. (AU § 722.01). + +149. As a result of their conduct described above, Koeppel and Robinson failed to +exercise due professional care and professional skepticism in the 2009, 2010 and 2011 audits of +ALC, and Koeppel failed to exercise due professional care and professional skepticism in the +2009 third quarter review and year end audit of Broadwind. + +Failure to obtain sufficient evidence (AU §§ 326 and 333, AS 13, 14 and 15) +150. PCAOB standards required auditors to obtain sufficient competent evidential matter +(for the 2009 Broadwind audit and the 2009 and 2010 ALC audits) and sufficient appropriate audit +evidence (for the 2011 ALC audit) to afford a reasonable basis for an opinion with respect to the +financial statements under audit. (AU § 326.22, AS 15.4). Auditors must be thorough in their +search for evidential matter and unbiased in its evaluation and consider relevant evidential matter +regardless of whether it corroborates or contradicts assertions in the financial statements. (AU § +326.25, AS 15.2 and 15.29). + +151. PCAOB standards also provide that management representations “are not a +substitute for the application of th[e] auditing procedures necessary to afford a reasonable basis +for an opinion regarding the financial statements under audit,” that “the auditor obtains written +representations from management to complement other auditing procedures,” and that “[i]n +exercising professional skepticism, the auditor should not be satisfied with less than persuasive +evidence because of a belief that management is honest.” (AU §§ 333.02, 333.03, 230.09). +Auditors must also: (1) obtain corroboration for management’s explanation regarding significant +unusual or unexpected transactions, events, amounts or relationships; and (2) perform procedures if +management’s responses to the auditor’s inquiries appear to be implausible, inconsistent with other +audit evidence, imprecise or not at a sufficient level of detail to be useful. (AS 14.8). + +152. Auditors should also design and perform audit procedures in a manner that +addresses the assessed risks of material misstatement for each relevant assertion of each significant +account and disclosure. (AS 13.8). In designing such audit procedures, auditors should obtain +more persuasive audit evidence the higher the auditor’s assessment of risk. (AS 13.9). Auditors +should also perform substantive procedures, including tests of details, for significant risks, and the +evidence auditors obtain from substantive procedures should increase as the assessed risk of +material misstatement increases. (AS 13.11, AS 13.37). + +153. As a result of their conduct described above, Koeppel and Robinson failed to +obtain sufficient evidence supporting assertions in ALC’s 2009, 2010 and 2011 Form 10-K +financial statements that ALC was in compliance with the Ventas lease covenants. In the course of +the 2009 year end audit of Broadwind, Koeppel also failed to obtain sufficient evidence supporting + + +34 +the conclusion that the impairment was a fourth-quarter event and that the Customer 2 bill and hold +transaction met the applicable revenue recognition criteria. + +Failure to Properly Supervise the Engagement Team (AU § 311 and AS 10) + +154. PCAOB standards note that audit “assistants,” including firm personnel other than +the auditor with final responsibility for the audit, are to be “properly supervised.” (AU §§ 311.01 +and 311.02). Those standards further require that assistants be informed of their responsibilities +and the objectives of procedures assigned to them, and that the work of assistants be reviewed to +determine whether it was adequately performed. (AU §§ 311.12, 311.13, and AS 10.5). + +155. As a result of their conduct described above, Koeppel and Robinson failed to +properly supervise the engagement team on the 2009, 2010 and 2011 ALC engagements. + +Failure to Make Additional Inquires or Perform Additional Procedures in the +Course of Reviewing Interim Financial Information (AU § 722) + +156. PCAOB standards provide: + +If, in performing a review of interim financial information, the accountant +becomes aware of information that leads him or her to believe that the +interim financial information may not be in conformity with generally +accepted accounting principles in all material respects, the accountant +should make additional inquiries or perform other procedures that the +accountant considers appropriate to provide a basis for communicating +whether he or she is aware of any material modifications that should be +made to the interim financial information. +(AU § 722.22). + +157. As a result of Koeppel’s conduct described above, Koeppel violated AU § 722.22 +when she failed to make appropriate additional inquires or perform other procedures in the +course of the third quarter 2009 review of Broadwind’s impairment assessment. +Failure to Prepare Required Documentation (AS 3) + +158. PCAOB standards mandate that an auditor’s documentation contain sufficient +information to enable an experienced auditor, having no previous connection to the engagement to: +(1) understand the nature, timing, extent and results of the procedures performed, evidence +obtained and conclusions reached; and (2) determine who performed the work and the date such +work was completed as well as the person who reviewed the work and the date of such review. +(AS 3.1, 3.6). Auditors are also required to document significant findings and issues, including the +actions taken to address them and the basis for the conclusions reached. (AS 3.12). + + + +35 +159. As a result of their conduct described above, Koeppel and Robinson failed to obtain +required audit documentation on the 2009, 2010 and 2011 audits of ALC, and Koeppel failed to +obtain required audit documentation on the 2009 year end audit of Broadwind. + +Finding + +160. As a result of the conduct described above, the Commission finds that Koeppel +and Robinson engaged in improper professional conduct within the meaning of Sections 4C(a)(2) +and 4C(b)(2) of the Exchange Act and Rules 102(e)(1)(ii) and 102(e)(1)(iv)(B) of the +Commission’s Rules of Practice. Koeppel’s conduct in the 2009 and 2010 audits of ALC and +2009 third quarter review and year end audit of Broadwind, and Robinson’s conduct in the 2011 +audit of ALC, involved repeated instances of unreasonable conduct, each resulting in violations of +PCAOB standards and indicating a lack of competence, and also satisfies the standard of highly +unreasonable conduct resulting in violations of PCAOB standards in circumstances in which +heightened scrutiny was warranted. + +KOEPPEL AND ROBINSON WERE CAUSES OF VIOLATIONS OF +SECTION 13(a) OF THE EXCHANGE ACT AND RULE 13a-1 THEREUNDER, +AND KOEPPEL ALSO CAUSED A VIOLATION OF EXCHANGE ACT RULE 13a-13 + +161. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +that every issuer of a security registered pursuant to Section 12 of the Exchange Act file with the +Commission annual and quarterly reports (i.e., Forms 10-K and 10-Q) as the Commission may +require. The obligation to file such reports embodies the requirement that they be true and +correct. + +162. ALC’s annual reports on Form 10-K for fiscal years 2009, 2010 and 2011 +included audit reports from Grant Thornton that stated its audits of ALC’s financial statements +were conducted “in accordance with the standards of the Public Company Accounting Oversight +Board” and that ALC’s financial statements presented fairly, in all material respects, the +company’s position and results. Broadwind’s 2009 Form 10-K contained a similar representation +by Grant Thornton. These statements were materially misleading. As a result of Koeppel’s and +Robinson’s above-described conduct, Grant Thornton’s 2009, 2010 and 2011 audits of ALC and +2009 audit of Broadwind were not conducted in accordance with PCAOB standards and the +financial statements included in ALC’s 2009, 2010 and 2011 Forms 10-K were materially +misstated because, among other things, they incorrectly represented that ALC was in compliance +with the Ventas lease financial covenants. As for Broadwind, its Form 10-Q for the third quarter +of 2009 materially overstated its intangible assets and understated a material impairment charge, +and its 2009 10-K misstated revenue and incorrectly described its $58 million impairment charge +as a fourth quarter event. At a minimum, Koeppel knew or should have known that her +unreasonable conduct would contribute to ALC’s filing of inaccurate 2009 and 2010 Forms 10-K +and Broadwind’s filing of an inaccurate third quarter 2009 Form 10-Q and 2009 Form 10-K, and +Robinson knew or should have known that his unreasonable conduct would contribute to ALC’s +filing of an inaccurate 2011 Forms 10-K. + + +36 + +163. As a result of the conduct described above, the Commission finds that Koeppel +was a cause of ALC’s violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder +and Broadwind’s violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +thereunder, and that Robinson was a cause of ALC’s violations of Section 13(a) of the Exchange +Act and Rule 13a-1 thereunder. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in Respondents’ Offers. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Pursuant to Section 21C of the Exchange Act, Koeppel shall cease and desist from +committing or causing any violations and any future violations and any future violations of +Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, and Robinson shall +cease and desist from committing or causing any violations and any future violations and any +future violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. + +B. Koeppel is denied the privilege of appearing or practicing before the Commission +as an accountant. +1. After five years from the date of this Order, Koeppel 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: +a. 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 +Koeppel’s work in his 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 acceptable manner, as long as she practices +before the Commission in this capacity; and/or +b. an independent accountant. Such an application must satisfy the +Commission that: +(1) Koeppel, or the public accounting firm with which she is associated, is +registered with the PCAOB in accordance with the Sarbanes-Oxley Act +of 2002, and such registration continues to be effective; +(2) Koeppel, or the registered public accounting firm with which she is +associated, has been inspected by the PCAOB and that inspection did + + +37 +not identify any criticisms of or potential defects in his or the firm’s +quality control system that would indicate that Koeppel will not receive +appropriate supervision; +(3) Koeppel, 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 +(4) Koeppel acknowledges her responsibility, as long as Koeppel 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, engagement quality review, and quality control standards. +2. The Commission will consider an application by Koeppel to resume +appearing or practicing before the Commission provided that her CPA license is current +and she 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 Koeppel’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. +C. Robinson is denied the privilege of appearing or practicing before the +Commission as an accountant. +1. After two years from the date of this Order, Robinson 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: +a. 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 +Robinson’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 +b. an independent accountant. Such an application must satisfy the +Commission that: +(1) Robinson, 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; + + +38 +(2) Robinson, 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 his or the firm’s +quality control system that would indicate that Robinson will not +receive appropriate supervision; +(3) Robinson, 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 +(4) Robinson acknowledges his responsibility, as long as Robinson 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, engagement quality review, and quality control standards. +2. The Commission will consider an application by Robinson 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 Robinson’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. +D. Respondents shall each, within 14 days of the entry of this Order, pay the civil +money penalties indicated below to the Commission for transfer to the general fund of the United +States Treasury, subject to Exchange Act Section 21F(g)(3): + +(i) $10,000 for Koeppel; and +(ii) $2,500 for Robinson. + +If timely payment is not made additional interest shall accrue pursuant to 31 U.S.C. 3717. +Payments ordered in this paragraph must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + +39 +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Koeppel or Robinson 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, +Associate Regional Director, Chicago Regional Office, Securities and Exchange Commission, 175 +W. Jackson Blvd, Suite 900, Chicago, IL 60604. + + V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondents, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondents under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondents of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + +By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3720.txt b/raw/aaer/2015/AAER-3720.txt new file mode 100644 index 0000000000000000000000000000000000000000..e1ca450edcbfe1dccdd629959e8a32ea0f47a1e8 --- /dev/null +++ b/raw/aaer/2015/AAER-3720.txt @@ -0,0 +1,1372 @@ + + + + + + + + + + + + + + + + SEC.gov | Jeffrey K. Skilling et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/517636","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Jeffrey K. Skilling et al. + + + + + + + + + + + + Jeffrey K. Skilling et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 23422 / December 8, 2015 + Accounting and Auditing Enforcement Release No. 3720 / December 8, 2015 + Securities and Exchange Commission v. Jeffrey K. Skilling et al. , Civil Action No. 4-00284 + + Court Grants Summary Judgment To Conclude Civil Case Against Former Enron CEO + + + The Securities and Exchange Commission has obtained a summary judgment against former Enron president, COO, and CEO Jeffrey K. Skilling to conclude its civil case that was stayed by the court starting in 2004 until the outcome of criminal proceedings and appeals. + + The Honorable Judge Melinda Harmon of the United States District Court for the Southern District of Texas issued an order finding that as a result of the collateral estoppel effect of Skilling's criminal convictions and Skilling's statement of non-opposition to the SEC's motion for summary judgment, Skilling committed and was liable for each claim alleged against him in the SEC's complaint filed in July 2004. The court permanently enjoined Skilling from violating Sections 10(b) and 13(b)(5) of the Securities and Exchange Act of 1934 and Rules 10b-5, 13b2-1, and 13b2-2 thereunder and from aiding and abetting violations of Exchange Act Sections 13(a) and 13(b)(2)(A) and Rules 12b-20 and 13a-1 thereunder. The court permanently barred Skilling from serving as an officer or director of a publicly held company. + + Skilling was first convicted in May 2006 of one count of conspiracy to commit securities and wire fraud, twelve counts of securities fraud, five counts of false statements to auditors, and one count of insider trading. He was sentenced to 292 months in prison and assessed $45 million in restitution. Following several criminal appeals, Skilling later reached a criminal sentencing agreement in May 2013 that included, among other things, Skilling's waiver of challenges to his convictions and sentence, and his agreement to forfeit certain property. Skilling was re-sentenced to 168 months in prison and three years of supervised release, and ordered to pay approximately $42 million in restitution to the Enron Fair Fund for victims of the fraud, an amount the government collected from the seizure and liquidation of his assets. + + The Commission acknowledges the assistance of the U.S. Department of Justice Enron Task Force. For additional information, see Litigation Release No. 18776 (July 8, 2004). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3721.pdf b/raw/aaer/2015/AAER-3721.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4b295fed3b5158c9f6a3dc43614b9b86a76f1bca --- /dev/null +++ b/raw/aaer/2015/AAER-3721.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4781e19b451c5f6edfc412f083dc1b06312c7b4fc3854a1a647a930b864f6b2e +size 296408 diff --git a/raw/aaer/2015/AAER-3722.pdf b/raw/aaer/2015/AAER-3722.pdf new file mode 100644 index 0000000000000000000000000000000000000000..de218e78df01bb4dc6f5216ae7504140f1a3556e --- /dev/null +++ b/raw/aaer/2015/AAER-3722.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:7d3a6637b26cd5f5b54221f9ac39bf17778e0c12267d5914e3c855d918d8d4b6 +size 265869 diff --git a/raw/aaer/2015/AAER-3723.pdf b/raw/aaer/2015/AAER-3723.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a1c4830909d6e1f1909c6b2be1a9081462766d9b --- /dev/null +++ b/raw/aaer/2015/AAER-3723.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:782f7f2097077e6f943f94cddbe34d82b9b9afa0c60ea6b19fa2a67bc68c88e2 +size 204267 diff --git a/raw/aaer/2015/AAER-3723.txt b/raw/aaer/2015/AAER-3723.txt new file mode 100644 index 0000000000000000000000000000000000000000..b9b1cf29a36dc45ad6b36fbcfed6f627d6f8b424 --- /dev/null +++ b/raw/aaer/2015/AAER-3723.txt @@ -0,0 +1,555 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76609 / December 10, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3723 / December 10, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16995 + + + +In the Matter of + +RICHARD CONFESSORE, +CPA + +Respondent. + + + +ORDER INSTITUTING ADMINISTRATIVE +AND CEASE-AND-DESIST PROCEEDINGS, +PURSUANT TO SECTIONS 4C AND 21C OF +THE SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Richard +Confessore (“Confessore”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of +1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and Rule 102(e)(1)(iii) of the Commission’s Rules +of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondent consents to the entry of this +Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 4C and +21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of +Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + +Confessore violated the auditor independence rules for 7 audit and review engagements of +three public company clients in 2012-2013 on account of employment, business, or financial +relationships either he or his partners had with those three clients. In 2012, Confessore was the +engagement quality review partner for DKM Certified Public Accountants, Inc.’s (“DKM’s”) audits +or interim reviews of annual and quarterly financial statements of Issuer A and Issuer B. At the +same time he performed this work, he worked for Issuer A’s and B’s Chief Financial Officer +(“CFO”), Peter Messineo, at Messineo’s own audit firm, Messineo & Co., CPAs, LLC (“Messineo +& Co.”). + + Near the end of 2012, Messineo resigned as CFO of Issuer A and Issuer B and became a +shareholder and partner at DKM. Despite Messineo joining DKM, Confessore continued in 2013 to +conduct engagement quality reviews of financial statements of Issuer A and Issuer B for DKM even +though: (1) the companies’ former CFO was now his partner at DKM and in a position to influence +the audits and reviews, and (2) Messineo had been CFO during the audit periods covered by his +review. In addition, in 2013 when Confessore performed the engagement quality reviews for DKM + + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or willfully aided +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 +of Issuer A and Issuer B, he knew that Messineo -- his partner at DKM -- had a direct financial +relationship with both Issuer A and Issuer B. Messineo owned stock in both companies. + +Lastly, in 2013, DKM audited Issuer C’s annual financial statement covering the period +from April 1, 2011 – March 31, 2012. Confessore participated in the audit despite having served as +Issuer C’s CFO during the audit period. + +Performing these audits and reviews for Issuer A, Issuer B, and Issuer C violated the +independence rules of the Federal securities laws and the rules and regulations thereunder. +Confessore also caused Issuer A, Issuer B, and Issuer C to file false or misleading reports with the +Commission in violation of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +promulgated thereunder. Confessore’s conduct was willful and constitutes improper professional +conduct. + +B. RESPONDENT +Richard Confessore, age 73, resides in Sarasota, Florida and has been a licensed Certified +Public Accountant (“CPA”) in Florida since 1970. Confessore is currently a Director and “Quality +Review Partner” at DKM. During 2011, Confessore was the CFO and worked at Issuer C. During +2012-2013, Confessore performed engagement quality reviews for the annual audits and interim +reviews DKM performed for Issuers A and B. In addition, from June 2012 – December 2012, +Confessore was an employee of Messineo & Co, then a sole proprietorship owned by Peter +Messineo (who was also the CFO for both Issuer A and Issuer B). + +C. OTHER RELEVANT PARTIES + + Issuer A was incorporated in Delaware in 2005 and is currently headquartered in California. +During 2012 and 2013, Issuer A’s common stock was registered with the Commission pursuant to +Section 12(g) of the Exchange Act. In its most recent Form 10-K filed with the Commission, +Issuer A states that its business “offers marketing tools and expertise to advertisers.” From +February 2010 – November 2012, Messineo served as CFO of Issuer A. In 2012 and 2013, Issuer +A engaged DKM to perform audit services. + + Issuer B was incorporated in Nevada in 2004 and is currently headquartered in St. +Petersburg, FL. During 2012 and 2013, Issuer B’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act. In its most recent Form 10-K filed +with the Commission, Issuer B states that its business “creates a unified solution path to securely +manage Advanced Metering Infrastructure and other Smart Grid optimization applications such as +substation and distribution automation.” From September 2010 – October 2012, Messineo served +as CFO of Issuer B. In 2012 and 2013, Issuer B engaged DKM to perform audit services. +Issuer C was incorporated in Colorado in 1981. Currently, it is a Florida corporation +headquartered in Southbury, CT. During 2012 and 2013, Issuer C’s common stock was registered +with the Commission pursuant to Section 12(g) of the Exchange Act. In its most recent Form 10-K +filed with the Commission, Issuer C states that its business consists of “operating motor freight +carriers, providing truck load service throughout the forty-eight contiguous United States.” + 4 +Confessore resigned as CFO of Issuer C on April 12, 2011. In 2012, Issuer C engaged Messineo & +Co to provide audit services. Messineo & Co. did not issue an audit report before DKM was +formed. In 2013, Issuer C then engaged DKM to provide audit services for the same period for +which Messineo & Co. had been retained. + + DKM Certified Public Accountants, Inc. (“DKM”) is registered with the Public +Company Accounting Oversight Board (“PCAOB”) as a public accounting firm based in +Clearwater, Florida. DKM is a Florida corporation and successor to audit firms: (i) Drake Klein & +Messineo CPAs PA; and (ii) Drake & Klein, CPAs PA (“Drake & Klein”). In December 2012, +when Peter Messineo joined DKM, the firm changed its operational name from Drake & Klein to +DKM. As of December 2012, DKM had four partners authorized to issue audit reports on behalf +of the firm, including Messineo, Confessore, and Charles Klein. +Charles U. Klein, age 60, resides in Dunedin, Florida and is currently President of DKM. +From approximately February 2012 through June 2013, Klein was the lead engagement partner for +the services DKM performed for Issuer A, Issuer B, and Issuer C. These services included annual +audits and interim reviews of the financial statements of Issuer A, Issuer B, and Issuer C. Klein +has been a licensed CPA in Florida since 1985, excluding 1995 – 1998 when his license was +inactive. + +Peter Messineo, age 54, resides in Palm Harbor, Florida and is currently a partner at and +95% owner of Messineo & Co., which is a PCAOB-registered public accounting firm based in +Clearwater, Florida. In 2012, he was the sole owner of Messineo & Co. (then named “Peter +Messineo, CPA”) and CFO of Issuer A and Issuer B. From December 17, 2012 – April 16, 2013, +Messineo was a partner and one-third owner of DKM and a shareholder of Issuer A and Issuer B +stock. Messineo has been licensed as a CPA in New York since 1989 and in Florida since 2007. + +D. IN 2012, CONFESSORE CAUSED DKM (THEN KNOWN AS DRAKE & KLEIN) +NOT TO BE INDEPENDENT BY POSSESSING A BUSINESS RELATIONSHIP +WITH THE CHIEF FINANCIAL OFFICER OF DKM’S AUDIT CLIENTS. + +1. Issuer A engaged DKM to perform interim reviews for the quarters ending June 30, +2012 (Form 10-Q filed August 14, 2012) and September 30, 2012 (Form 10-Q filed +November 14, 2012). Klein was DKM’s lead engagement partner and Confessore was +DKM’s engagement quality review (“EQR”) partner on these engagements. + +2. During the audit and professional engagement periods for these Issuer A engagements, +Messineo was Issuer A’s CFO. + +3. Issuer B engaged DKM to perform audit services for the annual period ending June 30, +2012 (Form 10-K filed October 15, 2012) and the quarter ending September 30, 2012 +(Form 10-Q filed November 14, 2012). Klein was DKM’s lead engagement partner and +Confessore was DKM’s EQR partner on these engagements. + +4. During the audit and professional engagement periods for these Issuer B engagements, +Messineo was Issuer B’s CFO. + 5 + +5. In June 2012, Messineo hired Confessore to work for him at Messineo & Co. +Confessore worked at Messineo & Co. until mid-December 2012. Thus, Confessore +worked under Messineo -- the Chief Financial Officer of both Issuer A and Issuer B -- +at the same time Confessore conducted engagement quality reviews for DKM of: (i) +Issuer A’s interim financial statements filed August 14, 2012 and November 14, +2012; (ii) and Issuer B’s annual financial statement filed October 15, 2012 (amended +October 22, 2012). Confessore also worked for Messineo during the entire audit +period of Issuer B’s interim financial statements, filed November 14, 2012, which +DKM and Confessore reviewed. + +6. Rule 2-01(b) of Regulation S-X (Qualifications of Accountants) states that the +“Commission will not recognize an accountant as independent, with respect to an audit +client, if the accountant is not…capable of exercising objective and impartial judgment +on all issues encompassed within the accountant's engagement.” 17 CFR §210.2-01. + +7. Rule 2-01(c) (3) states certain “business relationships” are inconsistent with +independence: + +Business Relationships. An accountant is not independent if, at any +point during the audit and professional engagement period, the +accounting firm or any covered person in the firm has any direct or +material indirect business relationship with an audit client, or with +persons associated with the audit client in a decision-making capacity, +such as an audit client’s officers, directors, or substantial stockholders. + +17 CFR §210.2-01(c)(3). + +8. Confessore’s employment with Messineo constituted an improper business +relationship and conflict of interest. + +9. Rule 2-01(f)(11) defines “covered person” to include partners, principals, +shareholders, and employees of an accounting firm on the “audit engagement team.” +17 CFR §210.2-01(f)(11). The “audit engagement team” includes the “concurring or +reviewing partner.” 17 CFR §210.2-01(f)(7)(ii)(B). + +10. PCAOB standards also require auditor independence. PCAOB Rule 3520 (Auditor +Independence) requires that, “[a] registered public accounting firm and its associated +persons must be independent of the firm’s audit client throughout the audit and +professional engagement period.” + +11. PCAOB Auditing Standard No. 7 (Engagement Quality Review) requires that “an +engagement quality reviewer must have competence, independence, integrity, and +objectivity.” See PCAOB AS 7.4. + + 6 +12. Confessore and DKM were not independent of Issuer A and Issuer B with respect to +DKM’s audit and interim reviews of financial statements filed from August 2012 +through November 2012 because Confessore -- the engagement quality reviewer -- had +a direct business relationship with Messineo -- the CFO of clients Issuer A and Issuer B +-- during DKM’s audit and professional engagement periods. See Rule 2-01(c)(3) of +Regulation S-X; see also PCAOB AS 7 and PCAOB Rule 3520. + +E. IN 2013, CONFESSORE FAILED TO MAINTAIN PROFESSIONAL STANDARDS +BY PERFORMING ENGAGEMENT QUALITY REVIEWS WHEN HE AND DKM +LACKED INDEPENDENCE. + +13. Messineo resigned as CFO of Issuer A effective November 15, 2012 and as CFO of +Issuer B effective October 30, 2012. + +14. In mid-December 2012, Messineo joined DKM. Messineo was a one-third owner of +DKM. While not a shareholder, Confessore was a partner authorized to issue audit +reports on behalf of DKM. + +15. Issuer A engaged DKM to perform audit services for the annual period ending +December 31, 2012 (Form 10-K filed April 15, 2013). Klein was DKM’s lead +engagement partner and Confessore was DKM’s engagement quality review partner on +this engagement. + +16. Issuer B engaged DKM to perform interim review services for the quarter ending +December 31, 2012 (Form 10-Q filed February 19, 2013). Klein was DKM’s lead +engagement partner and Confessore was DKM’s engagement quality review partner on +this engagement. + +17. PCAOB AS 7 requires that “an engagement quality reviewer must have competence, +independence, integrity, and objectivity.” See PCAOB AS 7.4 (emphasis added). + +18. Confessore lacked independence from Issuer A and Issuer B because Messineo, his +partner at DKM, had financial and employment relationships with Issuer A and Issuer +B. + +19. Rule 2-01(c) (1) (Financial Relationships) states that an accountant is not +independent if, at any point during the audit and professional engagement period, the +accountant has a “direct financial interest” in the accountant’s audit client, including +when: + +A. The accounting firm [or] any covered person in the firm…has any +direct investment in an audit client, such as stocks, bonds, notes, +options, or other securities. + +* * * + 7 +B. Any partner, principal, shareholder, or professional employee of the +accounting firm…has filed a Schedule 13D…with the Commission +indicating beneficial ownership of more than five percent of an audit +client’s securities + +17 CFR §210.2-01(c)(1)(i)(A)-(B). + +20. Rule 2-01(f)(11) defines “covered person” to include any “other partner, principal, or +shareholder from an ‘office’ of the accounting firm in which the lead audit +engagement partner primarily practices in connection with the audit.” 17 CFR +§210.2-01(f)(11). “Office” means “a distinct sub-group within an accounting firm, +whether distinguished along geographic or practice lines.” 17 CFR §210.2-01(f)(15). + +21. Rule 2-01(c) (2) (Employment Relationships) states that an accountant is not +independent if, at any point during the audit and professional engagement period, the +accountant has an “employment relationship” with an audit client, including when: + +A former officer, director, or employee of an audit client becomes a +partner, principal, shareholder, or professional employee of the accounting +firm, unless the individual does not participate in, and is not in a position +to influence, the audit of the financial statements of the audit covering any +period during which he or she was employed by or associated with that +audit client. + +17 CFR §210.2-01(2)(iv) Employment at Accounting Firm of Former Employee of +Audit Client. + +22. From December 2012 to April 2013, Messineo worked at DKM’s small office in +Clearwater, Florida along with Klein and approximately 6-8 staff personnel. Messineo’s +office was less than 10 feet away from the offices of those providing audit services to +Issuer A and Issuer B. + +23. From December 2012 to April 2013, Messineo had access to all of DKM’s audit files, +including those for the audit of Issuer A and the interim review of Issuer B. Messineo +supervised the audit staff at DKM, including the audit manager who worked on the +Issuer A audit, in some of DKM’s other engagements. + +24. During a significant portion of the professional engagement period for DKM’s audit of +Issuer A, Messineo possessed Issuer A’s books and records. + +25. During Messineo’s tenure as a shareholder and partner at DKM, he owned stock in +DKM’s clients Issuer A and Issuer B. As of April 15, 2013, when Issuer A’s Form 10-K +was filed, Messineo owned approximately 6% of the outstanding shares of Issuer A’s +stock. + + 8 +26. Confessore knew Messineo owned stock in Issuer A and Issuer B during the audit and +professional engagement periods for those clients. Despite his knowledge, he performed +the EQR for DKM’s audit of Issuer A and review of Issuer B without objection and +consented to the issuance of DKM’s audit report. + +27. Confessore caused DKM to not be independent of Issuer A and Issuer B with respect to +their public filings made in February 2013 and April 2013 because Messineo -- a +partner and shareholder of DKM -- possessed a direct financial interest (stock +ownership) in clients Issuer A and Issuer B during DKM’s audit and professional +engagement periods. See Rule 2-01(c)(1) of Regulation S-X; see also PCAOB AS 7.4. + +28. Confessore caused DKM to not be independent of Issuer A and Issuer B with respect to +their public filings made in February 2013 and April 2013 because Messineo -- a partner +and shareholder of DKM -- was the CFO of Issuer A and Issuer B during the audit +period and in a position to influence DKM’s audit and interim review. See Rule 2- +01(c)(2) of Regulation S-X; see also PCAOB AS 7.4. + +F. IN 2013, CONFESSORE CAUSED DKM NOT TO BE INDEPENDENT BY +PARTICIPATING IN AN AUDIT OF HIS FORMER EMPLOYER. + +29. Confessore was the CFO of Issuer C until April 12, 2011. Following his resignation, +Confessore made himself available to Issuer C on a part-time basis to assist with +accounting matters. On June 29, 2011, Issuer C filed a “Notification of Late Filing” for +its Form 10-K. The notification explained that Issuer C was unable to complete its +accounting at the subsidiary level. Issuer C’s notification identified Confessore as the +person to contact in regard to the notification. + +30. In 2012, Issuer C engaged Messineo & Co. to perform audit services for the period from +April 1, 2011 – March 31, 2012. Confessore performed work for Messineo & Co. +concerning Issuer C, including the period for which he had been CFO and/or worked for +Issuer C. Messineo & Co. did not complete its audit or issue an audit report before +DKM was formed. + +31. In 2013, DKM agreed to audit Issuer C’s financial statements for the same period (April +1, 2011 – March 31, 2012) despite Confessore’s prior position as CFO of Issuer C +during that audit period. DKM incorporated Messineo & Co.’s work into its audit of +Issuer C, including Confessore’s work. On behalf of DKM, Klein signed the +engagement report issued to Issuer C in June 2013. + +32. Confessore caused DKM to not be independent of DKM’s client Issuer C with respect to +its public filings made in June 2013 because Confessore – a partner of DKM – +participated in the audit of Issuer C, which covered the period Confessore had been the +CFO and/or worked for Issuer C. See Rule 2-01(c)(2) of Regulation S-X. + + 9 +33. Finally, Confessore failed to comply with PCAOB Interim Auditing Standard AU 230 +(Due Professional Care in the Performance of Work). AU 230.02 “requires the +independent auditor to plan and perform his or her work with due professional care. +Due professional care imposes a responsibility upon each professional within an +independent auditor's organization to observe the standards of field work and reporting.” +Confessore did not exercise due professional care when he performed EQRs while he +lacked independence. + +G. CONFESSORE AIDED AND ABETTED AND CAUSED DKM TO VIOLATE +RULE 2-02 OF REGULATION S-X BECAUSE DKM'S AUDIT REPORTS DID +NOT COMPLY WITH PCAOB STANDARDS. + +34. Rule 2-02(b)(1) of Regulation S-X (Representations as to the Audit included in +Accountants' Reports) requires an accountant's report to state “whether the audit was +made in accordance with generally accepted auditing standards.” 17 CFR §210.2-02(b). +These standards include the standards of the PCAOB. “[R]eferences in Commission +rules and staff guidance and in the federal securities laws to [generally accepted auditing +standards “GAAS”] or to specific standards under GAAS, as they related 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. + +35. DKM issued audit reports for its audits of Issuer C, Issuer A, and Issuer B for fiscal +years ending March 31, 2012, December 31, 2012 and June 30, 2012, respectively. +Confessore was the engagement quality review partner for these audits. The audit +reports incorrectly state that DKM “conducted [its] audit in accordance with the +standards of the Public Company Accounting Oversight Board (United States).” + +36. DKM's audits were not conducted in accordance with PCAOB auditing standards +because the firm lacked independence as described above. See PCAOB Rule 3520 +(requiring independence); PCAOB AS 7.4 (same). + +37. Accordingly, Confessore aided and abetted and caused violations of Rule 2-02 of +Regulation S-X. + +H. CONFESSORE CAUSED ISSUER A, ISSUER B, AND ISSUER C TO FILE FALSE +OR MISLEADING REPORTS WITH THE COMMISSION IN VIOLATION OF +SECTION 13(a) OF THE EXCHANGE ACT AND RULES 13a-1 AND 13a-13 +THEREUNDER. + +38. Exchange Act Sections 13(a) and Rules 13a-1 and 13a-13 require an issuer to file +accurate annual and quarterly reports on Forms 10-K and 10-Q. Section 13(a) of the +Exchange Act also requires issuers file annual reports certified by “independent +public accountants,” and Rule 10-01(d) of Regulation S-X requires an “independent +public accountant” review an issuer’s interim financial statements before the issuer +files its Form 10-Q. + 10 + +39. As a result of Confessore’s conduct, Issuer A, Issuer B, and Issuer C filed annual and +quarterly reports which had not been audited or reviewed by independent accountants in +violation of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13. + +I. VIOLATIONS + +40. As a result of the conduct described above, Confessore willfully aided and abetted and +caused (i) issuers to violate Section 13(a) of the Exchange Act and Rules 13a-1 and +13a-13 promulgated thereunder, and (ii) DKM to violate Rule 2-02 of Regulation S-X. + +41. As a result of the conduct described above, Confessore engaged in improper +professional conduct as defined in Rule 102(e)(1)(iv) in that Confessore violated +applicable professional standards or committed repeated instances of unreasonable +negligent conduct each resulting in a violation of applicable professional standards that +indicate a lack of competence to practice before the Commission. + +J. FINDINGS + +42. Based on the foregoing, the Commission finds that Confessore engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +43. Based on the foregoing, the Commission finds that Confessore willfully violated, or +willfully aided and abetted the violation of, a provision(s) of the Federal securities +laws or the rules and regulations thereunder pursuant to Section 4C(a)(2) of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +44. Based on the foregoing, the Commission finds that Confessore: willfully aided and +abetted and caused issuers to violate Section 13(a) of the Exchange Act and Rules 13a-1 +and 13a-13 promulgated thereunder and DKM to violate Rule 2-02 of Regulation S-X. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s respective Offer. + + Accordingly, pursuant to Sections 4C and 21C of the Exchange Act, it is hereby +ORDERED, effective immediately, that: + +A. Confessore shall cease and desist from committing or causing any violations and any +future violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 promulgated +thereunder, and Rule 2-02 of Regulation S-X. + +B. Confessore is denied the privilege of appearing or practicing before the Commission as +an accountant. + 11 + +C. After 2 years from the date of this order, Confessore 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 Confessore’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) Confessore, 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) Confessore, 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 Confessore’s or the firm’s +quality control system that would indicate that the Confessore’s will not +receive appropriate supervision; + +(c) Confessore 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) Confessore acknowledges his responsibility, as long as Confessore 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. + +3. 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 own 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. + +D. Confessore shall within 14 days of the entry of this Order, pay a civil money penalty in the +amount of $15,000 to the Securities and Exchange Commission. If timely payment is not + 12 +made, additional interest shall accrue pursuant to SEC Rule of Practice 600 and 31 U.S.C. § +3717. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(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 +Confessore as a Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to John T. Dugan, Associate Regional +Director, Boston regional Office, Securities and Exchange Commission, 33 Arch Street, Boston, +MA 02110. + + + + + By the Commission. + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3724.pdf b/raw/aaer/2015/AAER-3724.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c9d6c2153a88d7809ca17d6589e8799df603ea5f --- /dev/null +++ b/raw/aaer/2015/AAER-3724.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:58abf221083013b2a3e7644307527f2fea411f49b4d6b560781709fbf8aa6466 +size 171686 diff --git a/raw/aaer/2015/AAER-3724.txt b/raw/aaer/2015/AAER-3724.txt new file mode 100644 index 0000000000000000000000000000000000000000..54abab6c4c47c4af121a5b0c2018a2c1b588c8dd --- /dev/null +++ b/raw/aaer/2015/AAER-3724.txt @@ -0,0 +1,327 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76610 / December 10, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3724 / December 10, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16996 + + + + +In the Matter of + +ROBIN L. BIGALKE, CPA + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against Robin L. Bigalke (“Respondent” +or “Bigalke”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) +and Rules 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 4C of +the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + +During 2012, Bigalke falsified and backdated audit documents in an attempt to hide +improprieties and documentation deficiencies at the audit firm Peter Messineo, CPA, which is now +known as Messineo & Co., CPAs, LLC (“Messineo & Co.”). At the time, Messineo & Co. was +subject to a follow-up inspection by the Public Company Accounting Oversight Board (“PCAOB”) +and an investigation subpoena from the Commission. + +B. RESPONDENT +Robin L. Bigalke, age 50, resides in Gulfport, Florida and currently owns RLB Certified +Public Accountant, a PCAOB-registered public accounting firm based in Gulfport, Florida. During +2012, Bigalke was a senior accountant at Messineo & Co., then known as Peter Messineo, CPA. +Bigalke has been licensed as a Certified Public Accountant (“CPA”) in Rhode Island since 2001 +and in Florida since 2014. + +C. OTHER RELEVANT PARTIES + + Messineo & Co., CPAs, LLC (“Messineo & Co.”) is registered with the Public +Company Accounting Oversight Board (“PCAOB”) as a public accounting firm based in +Clearwater, Florida. The limited liability company operated as a sole proprietorship under the + + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or impr oper +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 + +name Peter Messineo, CPA from 2009 until December 17, 2012, when it effectively merged with +Drake & Klein, CPAs PA to form DKM Certified Public Accountants, Inc. (“DKM”). Peter +Messineo separated from DKM in April 2013 and resumed operating Messineo & Co., but under +its present name and form. During 2012, it performed audit services for over 70 clients, but only +had one partner -- sole owner Peter Messineo -- authorized to sign or issue audit reports. In 2012, +Messineo & Co. employed Bigalke and paid Joseph E. Mohr to perform engagement quality +reviews (“EQRs”). +Joseph E. Mohr, age 49, resides in Spring Hill, Florida and is currently a visiting assistant +professor at a Florida university. From 2009 through 2012, Mohr performed engagement quality +reviews (“EQRs”) for Messineo & Co. At the time, Mohr lived and worked in Florida, but was not +licensed as a CPA in Florida or in any other state. + +D. BACKDATING ENGAGEMENT QUALITY REVIEW DOCUMENTS + +1. In 2012, Mohr performed EQRs for Messineo & Co. for its audits and interim reviews. +To document Mohr’s EQRs in compliance with auditing standards, Messineo & Co. +used a “Concurring Review Questionnaire,” otherwise known as a “Form 4.2,” in +connection with each audit. See PCAOB Auditing Standard No. 7 (“AS 7”). + +2. After completing an EQR, Mohr was supposed to answer the questions on the +Concurring Review Questionnaire and then sign and date the Questionnaire. The date +on the form was to indicate when Mohr provided concurring approval of the issuance of +the audit report. See AS 7. + +3. Mohr then emailed the signed forms to Messineo & Co. where the executed Concurring +Review Questionnaires were included in the firm’s audit files. See PCAOB Auditing +Standard No. 3 (“AS 3”) & AS 7. + +4. In April 2012, the PCAOB issued a report following its inspection of Messineo & Co.’s +audit files. The PCAOB’s inspection addressed Messineo & Co.’s practices, policies +and procedures related to audit quality. The report stated that Messineo & Co. needed to +address any defects in its quality control system within 12 months or the nonpublic +portion of the PCAOB’s report would be made public. + +5. Following the PCAOB’s inspection report, in August 2012, Messineo & Co. began to +conduct a review of its audit files to identify any deficiencies and identified different +engagements for which either: + +i. it was missing a Concurring Review Questionnaire signed by Mohr; or + +ii. the signed Concurring Review Questionnaire was dated after the audit report had +been issued by Messineo & Co., indicating that Messineo & Co. had issued the +audit report prior to Mohr’s completion of his EQR. + +4 + +6. As a result, Bigalke requested Mohr backdate his signature on Concurring Review +Questionnaires for multiple public company audit clients. Bigalke even requested Mohr +backdate documents responsive to an investigation subpoena served by the Commission +on Messineo & Co. + +7. Mohr complied with many -- if not all -- of Bigalke’s requests. He knowingly +misrepresented the dates that he completed his EQRs. + +8. Bigalke then inserted the backdated Questionnaires into Messineo & Co.’s audit files, +including into files which were -- pursuant to auditing standards – putatively “locked- +down” because the audit report had been issued more than 45 days previously. See +PCAOB AS 3. + +E. FALSIFICATION OF AUDIT DOCUMENTS + +9. In 2012, Bigalke completed various audit checklists and forms, including “Audit +Documentation Checklists” and “Supervision, Review, and Approval Forms,” on behalf +of Messineo & Co. in connection with various engagements, including two specific +issuers. + +10. On the audit forms for those two issuers, Bigalke signed Peter Messineo’s name and +initials on his behalf. By signing Messineo’s name, she represented that the EQR was +adequately performed, timely, and that the audit files contained documentation of the +EQRs. + +11. The representations on the forms were false. As of the date indicated on the respective +forms, neither Mohr -- nor anyone else -- had performed the EQRs for those issuers and +no corresponding documentation existed in Messineo & Co.’s audit files. These false +documents were then inserted into Messineo & Co.’s audit files. + +F. BIGALKE’S FAILED TO EXERCISE PROFESSIONAL DUE CARE WHEN SHE +PARTICIPATED IN A SCHEME TO BACKDATE DOCUMENTS IN VIOLATION +OF PCAOB STANDARDS. + +15. PCAOB Interim Auditing Standard AU 230 (Due Professional Care in the Performance +of Work) “requires the independent auditor to plan and perform his or her work with due +professional care. Due professional care imposes a responsibility upon each professional +within an independent auditor's organization to observe the standards of field work and +reporting.” See PCAOB AU 230.02. + +16. Bigalke violated AU 230 when she requested Mohr backdate his signature on the +Concurring Review Questionnaires (Form 4.2s) to a date before the issuance of the audit +report when he had not, in fact, concluded his review and provided concurring approval +of issuance by that date. +5 + + +17. PCAOB Auditing Standard No. 7 (Engagement Quality Review) enumerates the +standards for an EQR or concurring review. AS 7 requires an EQR to be performed for +every audit and interim review. See PCAOB AS 7.1. + +18. For both audits and interim reviews, AS 7 prohibits a firm from granting permission to +its client to use the engagement report until the engagement quality reviewer provides +concurring approval of issuance. See PCAOB AS 7.13 & AS 7.18. + +19. AS 7 requires that “an engagement quality reviewer must have competence, +independence, integrity, and objectivity.” See PCAOB AS 7.4. + +20. AS 7 requires that documentation of an EQR should “contain sufficient information to +enable an experienced auditor, having no previous connection with the engagement, to +understand the procedures performed by the engagement quality reviewer…to comply +with the provisions of this standard, including information that identifies: + +* * * +c. The date the engagement quality reviewer provided concurring +approval of issuance or, if no concurring approval of issuance was +provided, the reasons for not providing the approval.” + See PCAOB AS 7.19. + +21. Bigalke further violated AU 230 and AS 3 when she inserted the backdated and falsified +Concurring Review Questionnaires into Messineo & Co.’s audit files. This violation +was compounded by the fact that the addition occurred more than 45 days after the +report release date without indication of the date the information was added, the name of +the person who prepared the additional documentation, and the reason for adding it. See +PCAOB AS 3.15. + +22. AS 7 states that “[d]ocumentation of an engagement quality review should be included +in the engagement documentation” and that “[t]he requirements related to retention of +and subsequent changes to audit documentation in PCAOB Auditing Standard No. 3, +Audit Documentation, apply with respect to the documentation of the engagement +quality review.” See PCAOB AS 7.20 and 7.21. + +23. PCAOB Auditing Standard No. 3 (Audit Documentation) provides the requirements for +documentation an auditor should prepare and retain for engagements. Per AS 3, audit +documentation must document the nature, timing, and results of the procedures +performed. See PCAOB AS 3.6 + +24. AS 3 requires an auditor to assemble a complete and final set of audit documentation no +more than 45 days of the report release date (“documentation completion date”). Audit +documentation may not be deleted or discarded following the documentation completion +6 + +date. AS 3 mandates that any documentation added after the document completion date +“must indicate the date the information was added, the name of the person who prepared +the additional documentation, and the reason for adding it.” See PCAOB AS 3.15 and +3.16. + +25. Therefore, Bigalke violated AU 230 and AS 3 when she falsified audit documentation +and included it within the audit files. + +G. Violations + +27. As a result of the conduct described above, Bigalke engaged in improper professional +conduct as defined in Rule 102(e)(1)(iv) in that she violated applicable professional +standards or committed repeated instances of unreasonable negligent conduct each +resulting in a violation of applicable professional standards that indicate a lack of +competence to practice before the Commission. + +H. Findings + +28. Based on the foregoing, the Commission finds that Bigalke engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Bigalke’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Bigalke is denied the privilege of appearing or practicing before the Commission as +an accountant. + +B. After 3 years from the date of this order, Bigalke 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 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 Bigalke’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 acceptable 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: +7 + + +(a) Bigalke, or the public 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) Bigalke, 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 Bigalke’s or the firm's +quality control system that would indicate that Bigalke will not receive +appropriate supervision; + +(c) Bigalke 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) Bigalke acknowledges her responsibility, as long as she 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. + +3. The Commission will consider an application by Respondent to resume appearing or +practicing before the Commission provided that her CPA license is current and she +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 own 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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3725.pdf b/raw/aaer/2015/AAER-3725.pdf new file mode 100644 index 0000000000000000000000000000000000000000..1087428e2e8a5a014e79e59c8c591ec82b929499 --- /dev/null +++ b/raw/aaer/2015/AAER-3725.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:6359baf65121f018d64569b1e932f783b0a5acdde33681fbe7e4446e74d7c68e +size 166710 diff --git a/raw/aaer/2015/AAER-3726.pdf b/raw/aaer/2015/AAER-3726.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c51878ba9068a1f95d3060506d9fd6d7ff4f5f93 --- /dev/null +++ b/raw/aaer/2015/AAER-3726.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:145cd85ccff5c67bbe21184a53513d1e992d47d77073f6af68288a8a37cdbeca +size 229171 diff --git a/raw/aaer/2015/AAER-3727.pdf b/raw/aaer/2015/AAER-3727.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5107ff23873ac94b10de6c23c651d7bfc7f4e7c1 --- /dev/null +++ b/raw/aaer/2015/AAER-3727.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9692eb2e8df0dff2e70d5491d3de4bbf04519b072c791e27c96aa78bb93b31e4 +size 154945 diff --git a/raw/aaer/2015/AAER-3727.txt b/raw/aaer/2015/AAER-3727.txt new file mode 100644 index 0000000000000000000000000000000000000000..86fa057c4094ca17adb5830ad950d235fddee0fd --- /dev/null +++ b/raw/aaer/2015/AAER-3727.txt @@ -0,0 +1,298 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76634 / December 14, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3727 / December 14, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-17002 + + +In the Matter of + +MICHAEL MCKENNA, CPA, + +Respondent. + + + + +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 Michael McKenna, CPA (“McKenna” 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, and Imposing Remedial Sanctions and a Cease-and-Desist Order +(“Order”), as set forth below. + + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. Respondent, a former employee of Diebold, Inc. (“Diebold”), entered into a +cooperation agreement with the Division of Enforcement on April 19, 2010, in connection with the +Commission’s investigation of violations of the federal securities laws at Diebold, and related +enforcement proceedings. That investigation and related enforcement proceedings against the +company and certain of its former senior executives are now concluded. The Commission, having +taken into consideration Respondent’s substantial cooperation, enters this Order resolving the matter +with respect to Respondent. + + 2. As described below, Respondent, often at the direction of management, made +improper accounting entries in Diebold’s books, records, and accounts in 2003 and 2004 while he +was Vice President of Global Finance at the company. As a result of the conduct described herein, +Respondent caused violations of Section 13(b)(2)(A) of the Securities Exchange Act of 1934 (the +“Exchange Act”), and violated Rule 13b2-1 thereunder. + + Respondent + + 3. Michael McKenna, 53, is a resident of New Hartford, New York. McKenna was +the Vice President of Global Finance at Diebold from 2002 to 2005, and the company’s Vice +President of North American Finance from 2005 through 2007. In July 2007, McKenna separated +from Diebold. Since January 2010, McKenna has been the Finance Director and Controller of a +private company in Utica, New York. McKenna is a certified public accountant in Ohio. His +license is inactive. McKenna entered into a cooperation agreement with the Division of +Enforcement on April 19, 2010. + +Other Relevant Individuals and Entity + + 4. Diebold, Inc. is an Ohio corporation headquartered in North Canton, Ohio. Diebold +manufactures and sells ATMs and bank security systems. Diebold’s common stock is registered +with the Commission pursuant to Exchange Act Section 12(b) and is listed on the New York Stock +Exchange. + + 5. Walden O’Dell, 69, is a resident of Columbus, Ohio. O’Dell was the CEO and +Chairman of Diebold from 1999 to 2005. He is retired. + + 6. Gregory Geswein, 60, is a resident of Toledo, Ohio. Geswein was the CFO of +Diebold from 2000 to 2005. Subsequently, Geswein was the CFO of Reynolds & Reynolds, Co. + +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 +from 2005 to 2006, and the CFO of Libbey, Inc., from May 2007 through June 2010. Geswein +currently operates a restaurant in Akron, Ohio. Geswein is not a certified public accountant. + + 7. Kevin Krakora, 59, is a resident of Canton, Ohio. Krakora was Diebold’s +Controller from 2001 through 2005, and the company’s CFO from 2005 through March 2008. +Krakora was removed as Diebold’s CFO in March 2008, and later separated from the company in +2010. From December 2011 through May 2012, Krakora worked part-time as a business +consultant. From July 2012 through September 2013, Krakora operated a handyman franchise. +Krakora is currently unemployed. Krakora is a certified public accountant in Ohio. His license is +inactive. + + 8. Sandra Miller, 47, is a resident of Houston, Texas. Miller was Diebold’s Director +of Corporate Accounting from 2002 to 2006. From 2006 through 2011, Miller was the Controller +at JoAnn Stores, Inc. Currently, she is a reporting and compliance director at a private company in +Houston, Texas. Miller is a certified public accountant in Ohio. + + 9. Charles Loveless, 50, is a resident of Massillon, Ohio. Loveless was a finance +manager at Diebold from 2001 to 2006, and the company’s Manager of External Reporting from +2006 to 2008. In January 2008, Loveless separated from Diebold. Currently, Loveless is the +Finance Director and Controller of a private company in North Canton, Ohio. Loveless is a +certified public accountant in Ohio. His license is inactive. Loveless entered into a cooperation +agreement with the Division of Enforcement on March 23, 2010. + +Background + + 10. McKenna is a former employee of Diebold, Inc., a public company based in North +Canton, Ohio that manufactures and sells ATMs and bank security systems. McKenna was the +Vice President of Global Finance at Diebold from 2002 to 2005, and the company’s Vice President +of North American Finance from 2005 through 2007. In 2003 and 2004, McKenna, often at the +direction of senior management, made improper accounting entries in Diebold’s books, records, +and accounts. These improper entries assisted the company and its management in artificially +inflating Diebold’s reported earnings to meet forecasts. + + 11. Under generally accepted accounting principles (“GAAP”), normally a product +must be shipped to the customer or services rendered before revenue can be recognized. An +exception exists, however, for what are known as “bill and hold” transactions. With a “bill and +hold” transaction, revenue can be recognized on the sale of products prior to delivery to the +customer if the GAAP criteria for a bill and hold transaction are met. + + 12. From at least 2002 through 2007, Diebold improperly used “bill and hold” +accounting to recognize revenue on certain transactions it called “F-term” (or “Factory”) orders. +Diebold recognized revenue on these orders when it shipped products from its factory to a Diebold +warehouse. During his tenure at Diebold, McKenna had accounting responsibilities for F-term +orders. At the direction of management, McKenna and his subordinates recorded revenue on F- +term orders when the company shipped products from its factory to a Diebold warehouse. Many + 4 +of these F-term orders, however, did not satisfy the GAAP criteria for bill and hold accounting. By +improperly applying bill and hold accounting to certain F-term orders, the company prematurely +recognized revenue on many of these transactions. + + 13. In 2004, at the direction of management, McKenna directed Diebold employees to +ship certain F-term orders from factory to warehouse prior to the shipment dates agreed to with +customers. This practice was known at the company as “pulling in” F-term orders. The amount of +F-term orders “pulled in” varied by quarter, but in many instances was done purposely to inflate +earnings in order to meet forecasts. For example, at the end of the second quarter of 2004, the +company “pulled in” approximately $3.4 million in orders that were not scheduled to ship until the +following quarter, and in the fourth quarter of 2004 the company “pulled in” approximately $3.8 +million in orders that were not scheduled to ship until the following year. This improper practice +inflated Diebold’s earnings in those quarters by approximately $1.1 million and $1.3 million, +respectively. + + 14. As a result of changes in the company’s revenue recognition practices in 2004, +fewer orders were being designated as F-term orders, and thus less revenue was being recognized. +As a result, by the third-quarter of 2004, the company was not on track to meet earnings forecasts. +At the direction of senior management to close the gap, McKenna made an $18.8 million top-level +journal entry that pulled in revenue that would not have been recognized until subsequent quarters +under its new practices. As a result of this improper entry, Diebold met its revised earnings +forecast in the third quarter of 2004. + + 15. As a result of the conduct described above, McKenna caused Diebold’s violations +of Section 13(b)(2)(A) of the Exchange Act, which requires Commission registrants to make and +keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the registrant. + +16. As a result of the conduct described above, McKenna violated Rule 13b2-1 of the +Exchange Act, which states that no person shall, directly or indirectly, falsify or cause to be +falsified, any book, record or account subject to section 13(b)(2)(A) of the Exchange Act. + +Cooperation + + 17. McKenna entered into a cooperation agreement with the Division of Enforcement on +April 19, 2010, in connection with the Commission’s investigation of violations of the federal +securities laws at Diebold and related enforcement proceedings. As a result of the investigation, the +Commission filed the following enforcement actions, all of which are now concluded: + + 18. On June 2, 2010, the Commission filed a settled enforcement action against +Diebold in which it consented to a final judgment ordering injunctive relief and a $25 million civil +penalty. See SEC v. Diebold, Inc., Civ. Action No. 1:10-CV-00908 (D.D.C.) / Lit. Rel. No. 21543. + + 19. On June 2, 2010, the Commission filed a settled compensation claw-back action +against Walden O’Dell, Diebold’s former CEO and Chairman, pursuant to Section 304 of the + 5 +Sarbanes-Oxley Act of 2002, in which he consented to a final judgment ordering him to reimburse +$470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of +Diebold stock. See SEC. v. O’Dell, Civ. Action No. 1:10-CV-00909 (D.D.C.) / Lit. Rel. No. +21543. + + 20. On June 2, 2010, the Commission filed a contested enforcement action against +Gregory Geswein, Diebold’s former CFO. On May 26, 2015, pursuant to a settlement, the court +entered a final consent decree against Geswein ordering him to pay $680,000 in disgorgement, a +$170,000 civil penalty, and prohibiting him for three years from acting as an officer or director of a +public company. See SEC v. Geswein, et al., Civ. Action No. 5:10-CV-01235 (N.D. Ohio) / Lit. +Rel. Nos. 21543 and 23268. + + 21. On June 2, 2010, the Commission filed a contested enforcement action against +Kevin Krakora, Diebold’s former Controller and later CFO. On May 26, 2015, pursuant to a +settlement, the court entered a final consent decree against Krakora ordering him to pay $400,000 in +disgorgement, a $100,000 civil penalty, prohibiting him for three years from acting as an officer or +director of a public company, and prohibiting him from appearing or practicing before the +Commission as an accountant, with a right to apply for reinstatement after three years. See SEC v. +Geswein, et al., Civ. Action No. 5:10-CV-01235 (N.D. Ohio) / Lit. Rel. Nos. 21543 and 23268. + + 22. On June 2, 2010, the Commission filed a contested enforcement action against +Sandra Miller, Diebold’s former Director of Corporate Accounting. On May 26, 2015, pursuant to +a settlement, the court entered a final consent decree against Miller that permanently enjoins her +from aiding and abetting any violation of Section 13(a), Section 13(b)(2)(A), and Section +13(b)(2)(B) of the Exchange Act, and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder, and +ordered disgorgement of $29,057, which was waived, and no penalty imposed, based on her +financial condition. See SEC v. Geswein, et al., Civ. Action No. 5:10-CV-01235 (N.D. Ohio) / Lit. +Rel. Nos. 21543 and 23268. + + 23. McKenna provided significant cooperation in connection with the Commission’s +investigation of this matter and its related enforcement actions. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent McKenna’s Offer. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. Respondent McKenna cease and desist from committing or causing any violations +and any future violations of Section 13(b)(2)(A) of the Exchange Act, and Rule 13b2-1 thereunder. + + B. Respondent shall pay disgorgement of $42,700 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act +Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to SEC + 6 +Rule of Practice 600. Payment shall be made in the following installments: (1) $21,350 due no +later than ten days after the entry of this Order; and (2) $21,350, plus interest pursuant to Rule 600 +of the Commission’s Rules of Practice, due no later than one year after the entry of this Order. If +any payment is not made by the date the payment is required by this Order, the entire outstanding +balance of disgorgement, 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: + +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 McKenna as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Brian O. Quinn, Assistant +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + +C. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon his agreement to cooperate in a Commission investigation and 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. + + + + 7 +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 \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3729.pdf b/raw/aaer/2015/AAER-3729.pdf new file mode 100644 index 0000000000000000000000000000000000000000..63c05e439660e6b84b37efa121fc236a76f4e591 --- /dev/null +++ b/raw/aaer/2015/AAER-3729.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a46a873e0b6b4185ac8e4b4fbd067a3df174887af0cc4ca1ed7b94743a26956e +size 165859 diff --git a/raw/aaer/2021/AAER-4201.txt b/raw/aaer/2021/AAER-4201.txt new file mode 100644 index 0000000000000000000000000000000000000000..c2cc340478a622d4a2b4b0003954d9564fc3634a --- /dev/null +++ b/raw/aaer/2021/AAER-4201.txt @@ -0,0 +1,492 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90875 / January 8, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4201 / January 8, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20200 + + +In the Matter of + +DEUTSCHE BANK AG + +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 Deutsche Bank AG (“Deutsche Bank” or +“Respondent”). + + +II. + + In anticipation of the institution of these proceedings, Deutsche Bank has submitted an +Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over it and the subject matter of these proceedings, and consents to the entry of this +Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set +forth below. + 2 + + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY + +1. This matter concerns the improper use, from at least 2009 through 2016, by Deutsche Bank +of third-party intermediaries, business development consultants, and finders (collectively “BDCs”) +to obtain and retain global business. Hundreds of BDCs were used during this timeframe, and their +use was approved by past members of Deutsche Bank’s senior management and various regional +committees.2 Among those engaged were foreign officials, their relatives and associates in +circumstances where bribery risks were neither assessed nor sufficient steps taken to mitigate +bribery risks posed by such engagements. + +2. Deutsche Bank lacked sufficient internal accounting controls related to the use and +payment of BDCs during this time period, resulting in payments to BDCs that were actually bribe +payments as well as payments made for unknown, undocumented or unauthorized services. The +payments in those circumstances were inaccurately recorded as legitimate business expenses in +Deutsche Bank’s books and records, and involved invoices and documentation falsified by its +employees. During this period, certain now-former members of senior management, including +members of the Management Board, were aware that these internal accounting controls were +insufficient to provide reasonable assurance that transactions with BDCs were executed in +accordance with management authorization and to provide reasonable assurance that payments +were accurately recorded in Deutsche Bank’s books and records. Deutsche Bank failed to take +sufficient steps to address and remediate these known internal accounting control failures until +2016. + +3. As a result of this conduct, Deutsche Bank violated the internal accounting control and +books and records provisions of the Foreign Corrupt Practices Act of 1977. During this period +approximately $7 million in payments to BDC’s were improperly booked as legitimate expenses, +and Deutsche Bank was unjustly enriched by approximately $35 million. + +RESPONDENT + +4. Deutsche Bank AG (“Deutsche Bank” or “the Bank”) is a multinational financial +services corporation incorporated and domiciled in Germany. The company issues and maintains a +class of publicly traded securities registered pursuant to Section 12(b) of the Exchange Act and is + +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 All of the relevant Management Board members and most members of senior management referenced in +this Order are former employees of the Bank. + 3 +listed on the New York Stock Exchange (ticker: DB). Deutsche Bank files periodic reports, +including Forms 20-F, with the Commission. Deutsche Bank operates in more than 70 countries +worldwide and is the direct or indirect holding company for Deutsche Bank’s subsidiaries. +Deutsche Bank employees in various parts of the world engaged in the conduct discussed herein.3 + +FACTS + +5. Throughout the relevant time period, Deutsche Bank’s Global Anti-Corruption Policy +(“Anti-Corruption Policy”) prohibited the payment of bribes, both directly and indirectly, to obtain +an improper personal or business advantage in both the public and private sectors. Deutsche Bank +prohibited the offer of anything of value which may be deemed to influence any act or decision of +a public official and also prohibited the use of BDCs to improperly obtain confidential information +about business opportunities. Under Deutsche Bank’s relevant policies, third-party representatives +could only be engaged in circumstances where: 1) there was documented pre-contractual due +diligence; 2) a written contract which set out the representative’s role and/or services was provided +in a form approved by the Bank’s Legal department (“Legal”); 3) the contract contained a +documented description of services to be performed, amount to be paid, and other material terms of +the engagement; 4) the payment was proportionate to the value of the services rendered; and 5) +appropriate review and approval was obtained before the engagement began. Additionally, +Deutsche Bank prohibited any undocumented payments or bribes. + +6. Since at least 2008, Deutsche Bank’s Use of Business Development Consultants Policy +(“BDC Policy”), its global policy governing the use of consultants and finders, required that the +Bank conduct thorough due diligence prior to retaining and paying a BDC to determine, among +other things, whether the BDC, or their immediate family members and close associates, had any +political or governmental affiliations or exposures. A BDC with a “political or governmental +affiliation” was classified as a politically exposed person (“PEP”) and required enhanced due +diligence; this person could not be engaged without additional vetting and approval by senior +management, Legal, and the Bank’s compliance function (“Compliance”) to provide reasonable +assurance that potential conflicts of interest were identified and addressed. The BDC Policy also +required that prospective BDCs have “sufficient expertise and qualifications” to perform the +contemplated services. Payments were required to be proportionate to the services rendered and +made only in circumstances where the supporting invoice contained “sufficient detail regarding the +services or matters to which such invoice relates.” + +7. While the BDC Policy required that regional and divisional management approve and +oversee the use of BDCs, in practice, the implementation and oversight of the Policy fell to the +BDC’s “business sponsor.” Business sponsors were responsible for generating business for +Deutsche Bank and were compensated, in part, based on the revenue earned by Deutsche Bank. +The business sponsors recommended the engagement of the identified BDC, determined whether +payments to the BDCs complied with both the terms of the BDC contract and the Bank’s policies, +and maintained records concerning the services provided by the BDC, including invoices. + +3 Deutsche Bank employees referenced in this Order may have worked for one or more Deutsche Bank legal +entities during the relevant time. Deutsche Bank is required to make and keep accurate books and records +and sufficient internal accounting controls within its subsidiaries. + 4 + + + +Deutsche Bank Identified Internal Accounting Control Failures in 2009 but Failed to +Remediate Until 2016 + +8. In approximately 2008, as part of the Bank’s anti-corruption program, a group within +Deutsche Bank’s internal audit function conducted a review of business arrangements in its Asia- +Pacific region in order to assess the integrity and legitimacy of certain transactions. In 2009, the +internal audit group issued a report (“2009 Report”) in which it identified certain concerns with the +Bank’s use of one BDC including insufficient oversight over that BDC engagement to ensure it +was not being used for corrupt purposes and a lack of documentation detailing what actual services +were rendered by the BDC. The 2009 Report recommended that Deutsche Bank’s global BDC +Policy be revised and that the internal accounting controls around BDCs be enhanced to include +centralized and thoroughly documented due diligence to demonstrate that a BDC was qualified to +perform the services for which it was contracted, maintenance of detailed records of all work +performed by the BDC, and a requirement that BDC engagements include books and +recordkeeping provisions giving Deutsche Bank inspection rights. The 2009 Report was provided +to senior management at Deutsche Bank, including members of the Management Board; however, +only limited steps were taken in response. + +9. In 2011, the same group conducted another internal investigation into the Bank’s BDC +relationships and identified numerous internal accounting control failures. Those failures were +identified in a report (“2011 Report”) and included: problems related to specific BDC +engagements; lack of due diligence; general lack of training and awareness of Deutsche Bank’s +BDC Policy and due diligence requirements among employees; failure by business sponsors to +appropriately assess, document, and mitigate corruption risks and conflicts of interests; and failure +to document the proportionality and justification for certain BDC payments. The 2011 Report was +also distributed to senior management at Deutsche Bank, including members of the Management +Board, and again only limited steps were taken in response. + +10. Contrary to its internal policies and with known failures in its relevant internal accounting +controls, between 2009 and 2016, Deutsche Bank engaged some BDCs: 1) with no demonstrated +expertise or qualifications; 2) who simultaneously worked for a government entity from which +Deutsche Bank sought business; 3) without a written agreement; 4) using form agreements with no +substantive description of the services to be performed and/or provisions calling for “success fee” +payments; 5) at rates that were unreasonably high as compared to the work allegedly being +performed; and 6) in circumstances where either adequate due diligence was not performed or +where due diligence was conducted more than a year after the BDC was retained and paid. + +11. As a result of its lack of sufficient internal accounting controls relating to BDCs, Deutsche +Bank paid certain BDCs in circumstances where no invoices were submitted and where invoices +contained insufficient documentation to detail what services were performed. In certain instances, +when invoices were submitted, they were vague and inadequate, making it nearly impossible to +determine what, if any, services were performed or to determine the purpose for the payment. In + 5 +some instances, BDCs were paid in excess of what was provided for pursuant to their contract with +Deutsche Bank and some BDCs were paid even though they had no contract at the time certain of +the services were purportedly performed. Amongst the BDC payments made in these +circumstances were those that were bribes. + +Consultant A – Chinese BDC + +12. Deutsche Bank retained Consultant A to help the Bank establish a clean energy +investment fund with a Chinese government entity. Prior to entering into a BDC relationship, +Consultant A introduced himself and provided certain Deutsche Bank employees with a +curriculum vitae indicating that he “is currently the senior advisor to [the regional Chinese] . . . +Government” with which the Bank sought to establish the investment fund. Deutsche Bank +employees working to establish the investment fund knew that in addition to potentially being a +government official or otherwise acting in an official capacity, Consultant A was also “a close +friend of” a foreign government official whose approval was needed for the establishment of the +investment fund. Notably, that same government official required that Deutsche Bank work +through Consultant A to establish the investment fund. + +13. Despite these facts, Consultant A was retained as a BDC without due diligence review +being conducted as required. + +14. Between April 2011 and May 2013, Consultant A was paid at least $1.6 million. This +included payments for services purportedly performed before he was engaged. Consultant A +submitted invoices for gifts and entertainment provided to foreign government officials that were +reimbursed without adequate review or advance approval by Compliance, as required under +Deutsche Bank’s policies. Moreover, Deutsche Bank did not fully document the services +Consultant A purportedly performed and paid him without appropriate documentation. For +example, although Deutsche Bank paid him for purported reimbursements of “out-of-pocket +expenses” or “client-related expenses,” Consultant A provided little verifiable support for the +purported expenses. + +15. In addition to these payments, Consultant A was given a partnership interest in the +investment fund that required little or no upfront capital and entitled him to a large potential +profit share. One Deutsche Bank employee explained contemporaneously, “[Consultant A] has +acted as an advisor and facilitator to this initiative and it is a requirement of [the government +entity] that he is included as both an equity (very small) participant and also part of the +investment committee.” This agreement was executed without Legal and Compliance having +full information about the circumstances of Consultant A’s relationship with the government +entity. + +16. In early 2017, Deutsche Bank began the dissolution of the investment fund because it +failed to raise capital; the Bank earned no profits from this arrangement. + 6 + +Consultant B – Abu Dhabi BDC + +17. Between 2010 and 2011, Deutsche Bank retained and paid Consultant B to obtain a +specific deal (“Project X”) with an Abu Dhabi sovereign wealth fund (“Abu Dhabi SOE”). +Consultant B approached Deutsche Bank about Project X and within weeks of that meeting, +Deutsche Bank employees understood that Consultant B’s brother would also be involved in the +proposed BDC engagement, although Deutsche Bank did not immediately engage either of them. + +18. During this same time period, an Abu Dhabi SOE Official with authority to influence the +award of Project X was pressuring Deutsche Bank to finance a mega-yacht. One email from an +Abu Dhabi SOE official read: + +“[Abu Dhabi SOE Official] has asked me to get in touch with DB: reputationally, this +financing is regarded as absolutely crucial, and [Abu Dhabi SOE Official] made the point +very forcefully that those institutions which participate in it can expect in future to enjoy +‘most favoured status’ with [the Abu Dhabi SOE].” + +19. Deutsche Bank employees working on Project X encouraged the Bank to finance the mega- +yacht in order to influence the Abu Dhabi SOE Official and better position Deutsche Bank to +obtain Project X. The Bank agreed to do so. Despite that, a banker working to obtain Project X +expressed concern that there was still “no guaranty” that Deutsche Bank would win Project X and +told a senior executive at Deutsche Bank, “We need to close the [Consultant B and brother] angle +within the next 48hrs. Need ur [sic] leadership and influence on getting it thru GMRAC.” The +senior executive agreed to sponsor the BDC arrangement, but expressed concern about entering +into a BDC arrangement shortly before Project X would be awarded. + +20. At the time Consultant B was retained as a BDC, Deutsche Bank knew Consultant B was a +relative of the Abu Dhabi SOE Official, a high ranking official of and key decision maker for the +Abu Dhabi SOE. Deutsche Bank knew that Consultant B was a proxy for the Abu Dhabi SOE +Official and that it needed to pay Consultant B to obtain the Abu Dhabi SOE’s business. A +Deutsche Bank employee described Consultant B as a “gatekeeper” to the Abu Dhabi SOE Official +who expected to be paid for his services. At the time Consultant B was retained as a BDC, the +Regional Head of Compliance, the banker acting as business sponsor, and the senior executive +each knew that Consultant B’s brother would be working with Consultant B, but did not disclose +the role of Consultant B’s brother in the BDC arrangement and Consultant B’s brother did not sign +a BDC contract with Deutsche Bank. + +21. Consultant B’s engagement was approved by the then-Global Markets Risk Assessment +Committee (“GMRAC”), which included senior-level Deutsche Bank executives. Despite the +requirements of the BDC Policy, the GMRAC at the time approved the engagement despite the +lack of due diligence on Consultant B, and without assessing or mitigating corruption risks and +conflicts of interest related to the retention which included: 1) Consultant B was related to the Abu +Dhabi SOE Official, a key decision maker at the SOE from which Deutsche Bank sought business; +2) Consultant B had no known qualifications for the role; and 3) the fact that the Abu Dhabi SOE + 7 +Official had made repeated requests to Deutsche Bank to finance a mega-yacht as a means to help +position Deutsche Bank to obtain Project X. + +22. Deutsche Bank was awarded Project X shortly after it retained Consultant B. Within a +week after Consultant B was retained as a BDC, Deutsche Bank paid him more than $2 million for +his purported legitimate services. +23. Consultant B was paid approximately $3.5 million without invoices or other documentation +to support the payments; the agreement itself did not call for Consultant B to perform any services +other than to provide generic advice and introductions; and the payments were not proportionate to +any legitimately rendered services. Despite this, a senior Deutsche Bank executive approved the +payments. As a result, Deutsche Bank was unjustly enriched by approximately $30 million. +Consultant C – Italian BDC + +24. Deutsche Bank retained Consultant C from approximately February 2007 through +December 2015 to refer high net worth clients to Deutsche Bank. Reasonable due diligence was +not done prior to the engagement of Consultant C, who was a regional tax judge in Italy and, +therefore, a current government official during his BDC engagement. Contemporaneous email and +documents show that Consultant C’s business sponsor was aware of this fact when sponsoring +Consultant C. + +25. Numerous payments were made to Consultant C that exceeded the commission rate in his +contract and included payments outside the terms of his contract. Consultant C was paid more +frequently than permitted by contract and was paid despite not performing some of the services for +which invoices were issued. Deutsche Bank employees were aware that payments were made to +him on the basis of inaccurate invoices. For example, he received payments for at least three +purported client introductions despite not having introduced those clients to the Bank. When he +made demands for payments outside the scope of his contract, he received additional payments and +was paid for research reports and advisory information that were of no value to the Bank. + +26. Although Consultant C’s contract ended in December 2015, Consultant C was paid beyond +the period required by the BDC agreement. Per the contract, the commission on those client assets +should have ceased in December 2015. + +27. As a result, Deutsche Bank was unjustly enriched by approximately $1 million. + +Consultant D – Middle Eastern BDC + +28. From 2011 through the end of 2012, Deutsche Bank paid bribes to one of two General +Managers (“Consultant D”) of the Family Office (“FO”) of a senior member of a Middle Eastern +Royal Family in order to obtain and retain the FO’s lucrative banking business. Consultant D +made investment decisions for the FO and managed hundreds of millions of dollars in investments +on behalf of the FO. To make the payments, Deutsche Bank entered into a BDC contract with, and +made these payments to, a shell company (“BVI Company”) owned by Consultant D’s wife. + + 8 +29. Although the FO was a preexisting client of Deutsche Bank, the employees who managed +that relationship at Deutsche Bank believed that Consultant D would take the FO business to +another bank if they did not pay him. A Deutsche Bank employee stated, “We are faced with the +serious potential of the client withdrawing and closing his relationship, putting at risk a potential +€5-6m revenue in 2013. Unless we manage to resolve this (and confirm payment by close of week +1 in December) we are highly likely to lose the entire relationship.” Deutsche Bank employees +justified the payments based both on the amount of revenue Deutsche Bank had already earned +from the FO’s assets and the expectation that Consultant D would provide the bank with future +business. One senior Deutsche Bank employee stated that the FO business was the Bank’s “single +largest relationship” in the Middle East and Africa and “also a top 3 revenue” relationship. + +30. Deutsche Bank employees managing the FO account inaccurately portrayed that Consultant +D’s wife, represented by the BVI Company, was the source of the business. Neither Compliance +nor the committee members approving the arrangement verified this claim. Deutsche Bank did not +negotiate the terms of the contract or conduct any business with Consultant D’s wife, and email +clearly indicated that “[Consultant D] has approved the Finder agreement.” The agreement was +supported by Deutsche Bank executives and various others on the approval committee including +some who were aware that there was an inherent conflict of interest in paying the wife of the +decision maker for the client. + +31. Although there is no evidence that either the BVI Company or Consultant D’s wife ever +provided any services to Deutsche Bank, the payments were authorized and paid. Because +Deutsche Bank helped establish the BVI Company and managed its bank account, Deutsche Bank +employees were aware that Consultant D was the real beneficiary of the payments. Deutsche Bank +made at least four payments totaling approximately $1.1 million to the BVI Company to induce +and “incentivize” Consultant D to invest and maintain the FO’s substantial assets with Deutsche +Bank. Deutsche Bank made two payments to the BVI Company under the BDC contract and two +additional extra-contractual payments: a $150,000 “exceptional payment” that cleared through +New York and a €220,000 “goodwill payment.” In one request for approval for an extra- +contractual payment, a senior level Deutsche Bank employee explained that payment was needed +to “secure the retention” and “future … contribution of the relationship” and “urgently” requested +that the payment be approved. + +32. The payments to Consultant D were inaccurately recorded in Deutsche Bank’s books and +records as legitimate payments, and as a result, Deutsche Bank was unjustly enriched by +approximately $3 million. + +LEGAL STANDARDS AND VIOLATIONS + +33. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease-and- +desist order upon any person who is violating, has violated, or is about to violate any provision of +the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, or +would be a cause of the violation, due to an act or omission the person knew or should have known +would contribute to such violation. + + 9 +Deutsche Bank Violated Exchange Act Section 13(b)(2)(A) + +34. The books and records provision of the FCPA, Section 13(b)(2)(A) of the Exchange Act, +requires every issuer with a class of securities registered pursuant to Section 12 of the Exchange +Act to make and keep books, records, and accounts, which, in reasonable detail, accurately and +fairly reflect the transactions and dispositions of the assets of the issuer. 15 U.S.C. § +78m(b)(2)(A). + +35. As a result of the conduct described above, Deutsche Bank violated Section 13(b)(2)(A) of +the Exchange Act. + +Deutsche Bank Violated Exchange Act Section 13(b)(2)(B) + +36. Section 13(b)(2)(B) of the Exchange Act requires companies with a class of securities +registered under Section 12 of the Exchange Act to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in +accordance with management’s general or specific authorization; (ii) transactions are recorded as +necessary (I) to permit preparation of financial statements in conformity with generally accepted +accounting principles or any other criteria applicable to such statements, and (II) to maintain +accountability for assets; (iii) access to assets is permitted only in accordance with management’s +general or specific authorization; and (iv) the recorded accountability for assets is compared with +the existing assets at reasonable intervals and appropriate action is taken with respect to any +differences. 15 U.S.C. § 78m(b)(2)(B). + +37. As described above, Deutsche Bank failed to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that transactions were executed in +accordance with management’s general or specific authorization and that access to assets was +permitted only in accordance with management’s general or specific authorization. By this +conduct, Deutsche Bank violated Exchange Act Section 13(b)(2)(B). + +Commission Consideration of Deutsche Bank’s Cooperation and Remedial Efforts + +38. In determining to accept the Offer, the Commission considered Deutsche Bank’s +cooperation and remedial efforts. + +39. Deutsche Bank’s cooperation included: responding promptly to the Commission’s requests +for information and documents; identifying issues and facts that would likely be of interest to the +Commission’s staff; providing regular updates of factual findings developed during the course of +its own internal investigation; making employees and now-former employees located outside the +United States available for interviews; and identifying key documents and providing factual +chronologies to the Commission’s staff. + +40. Deutsche Bank’s remedial measures included: enhancements to its internal accounting +controls; enhancements to its Anti-Bribery & Corruption Framework and policies concerning +BDCs on a global basis; the significant reduction of the number of BDCs used by the Bank; the + 10 +institution of enhanced procedures and practices to monitor and control BDC engagements; +increasing the Bank’s anti-corruption compliance staff; and increased and regular anti-bribery +training specifically addressing the use of third parties to obtain and retain business. Deutsche +Bank also undertook employment actions based upon its findings regarding the underlying +conduct, including separating certain employees. + +Criminal Disposition + +41. Deutsche Bank has entered into a Deferred Prosecution Agreement with the United States +Department of Justice that acknowledges responsibility for criminal conduct relating to certain +findings in the Order. + +Non-Imposition of a Civil Penalty + +42. Respondent acknowledges that the Commission is not imposing a civil penalty based upon +the imposition of a $79,561,206 criminal penalty for the same misconduct as part of Deutsche +Bank’s above referenced resolution with the United States Department of Justice. + + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Deutsche Bank cease and desist from +committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. + +B. Respondent shall, within 20 days of the entry of this Order, pay disgorgement of +$35,145,619 and prejudgment interest of $8,184,003, for a total payment of $43,329,622, to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to SEC Rule of Practice 600. Payment must be made in one of the +following ways: + +(1) 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 + + 11 +(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 +Deutsche Bank 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 Daniel J. Wadley, Director, Salt +Lake Regional Office, Securities and Exchange Commission, 351 S. West Temple, Suite 6.100, +Salt Lake City, UT 84101. + + +By the Commission. + + + + Vanessa A. Countryman + Secretary + + + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4202.txt b/raw/aaer/2021/AAER-4202.txt new file mode 100644 index 0000000000000000000000000000000000000000..ec5b2bdd4666c3f31fadd7c277d6b40659962d64 --- /dev/null +++ b/raw/aaer/2021/AAER-4202.txt @@ -0,0 +1,502 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10925 / February 2, 2021 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91042 / February 2, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4202 / February 2, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20217 + +In the Matter of + +Joseph JACKSON and Colm +CALLAN, + +Respondents. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against Joseph Jackson (“Jackson”) and Colm Callan (“Callan”) (each, a “Respondent”). + +II. + + In anticipation of the institution of these proceedings, each Respondent has submitted an +Offer of Settlement (“Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, each Respondent +consents to the entry of this (“Order”), as set forth below. + +2 +III. + + On the basis of this Order, Jackson’s Offer, and Callan’s Offer, the Commission finds1 that: + +Summary +1. These proceedings concern false and misleading statements made by former +WageWorks, Inc. (“WageWorks”) CFO Colm Callan and CEO Joseph Jackson and the false +financial reporting that resulted from those statements. Over the course of 2016 and 2017, Callan +made false and misleading statements to both WageWorks’s internal accountants and the +company’s independent auditor related to a significant contract between the company and a large +public-sector client (“Client A”). During the same period, Jackson also made misleading +statements related to this contract to WageWorks’s auditor. As a result of these false and +misleading statements, WageWorks improperly recognized $3.6 million worth of revenue in 2016 +from Client A that was not realizable and for which collectability was not reasonably assured. +Callan and Jackson both earned incentive-based compensation based on WageWorks’s 2016 +financial performance, which neither executive has paid back to the company. After WageWorks’s +auditor discovered that Client A never intended to pay this $3.6 million, WageWorks restated its +revenues for the second and third quarters, and the fiscal year, of 2016. As a result of this conduct, +Jackson and Callan violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, Rules 13a-14, +13b2-1, and 13b2-2 under the Exchange Act, and Section 304 of the Sarbanes-Oxley Act of 2002. +Jackson and Callan also caused WageWorks to violate Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. +Respondents +2. Jackson, age 60, resides in Hillsborough, California. He was the CEO and +Chairman of the board of directors of WageWorks from February 2007 to April 2018, and the +Executive Chairman of WageWorks’s board of directors from April 2018 to September 2018. +Jackson left WageWorks as a result of the events surrounding the company’s restatement. +3. Callan, age 51, resides in Palo Alto, California. He was the CFO of WageWorks +from September 2014 to April 2018. Callan left WageWorks as a result of the events surrounding +the company’s restatement. +Other Relevant Entities +4. WageWorks is a corporation organized under the laws of the state of Delaware and +headquartered in San Mateo, California. From May 10, 2012 to August 30, 2019 WageWorks’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 under the symbol “WAGE.” During that +period, WageWorks filed periodic reports, including Forms 10-K and 10-Q, with the Commission +pursuant to Section 13(a) of the Exchange Act and related rules thereunder. On August 30, 2019, + +1 The findings herein are made pursuant to the Respondents’ Offers of Settlement and are +not binding on any other person or entity in this or any other proceeding. + +3 +HealthEquity, Inc. completed an acquisition of WageWorks. WageWorks is now a wholly-owned +subsidiary of HealthEquity. +A Large Public-Sector Client Disputes That It Owes WageWorks For Certain Work +5. On March 1, 2016, WageWorks entered into a contract with Client A to provide +Flexible Spending Account (“FSA”) benefits servicing to certain public-sector employees. FSAs +are accounts funded through voluntary salary reductions which can be used to pay for certain out- +of-pocket medical and dependent care expenses. No employment or federal income taxes are +deducted from contributions to FSAs. +6. The contract between WageWorks and Client A (the “Contract”) provided that +WageWorks would assume full responsibility for servicing FSA benefits claims by September 1, +2016. Between March 1 and September 1, which the Contract referred to as “Base Year 1,” +WageWorks was required to undertake development and transition work so as to be ready to +assume responsibility for processing claims on September 1.2 +7. The Contract provided that Client A would pay WageWorks a fee on a per-account, +per-month basis, meaning that each month WageWorks would earn an amount of revenue equal to +the number of participant accounts it administered multiplied by a fixed price. +8. On March 17, 2016, a WageWorks project implementation employee emailed +Client A a question regarding billing for Base Year 1. On March 29, in reply, a Client A employee +indicated that Client A would not pay WageWorks for Base Year 1, and Callan shared this +response with Jackson. +9. On June 10, 2016, during a telephone call between WageWorks project +implementation employees and Client A employees, a Client A employee indicated that Client A +would not pay for Base Year 1. A WageWorks employee told Callan about this statement in an +email, and Callan forwarded the email to Jackson and another WageWorks executive. +WageWorks Overstated Revenue in Its Q2, Q3, and Year-End 2016 Financial Statements +10. Over the course of April, May, and June 2016, Callan had discussions with +WageWorks’s accounting staff and WageWorks’s independent auditor (the “Audit Firm”) +regarding the accounting treatment for the Contract. During a discussion on or about April 9, +Callan falsely told an Audit Firm partner that Client A had agreed to pay WageWorks for the Base +Year 1 period. +11. At Callan’s direction, WageWorks’s accounting staff started recognizing revenue +under the Contract in June 2016 (part of Base Year 1), the month that WageWorks established a +call center to address questions about the transition from the public-sector client’s existing FSA +benefits provider to WageWorks. WageWorks amortized the recognition of revenue related to the +first three months of Base Year 1—March, April, and May–over the period of June 2016 to August + +2 Another company had contracted with Client A to service FSA benefits claims through August +31, 2016. + +4 +2020. At no point prior to recognizing revenue for Base Year 1 did Callan tell WageWorks’s +internal accounting staff or the Audit Firm staff that Client A employees had twice indicated that +Client A was not going to pay WageWorks for Base Year 1. +12. Shortly before the end of each fiscal quarter, Callan attended a “Pre-Close Meeting” +with members of WageWorks’s finance and accounting staff. One purpose of the meeting was to +share information about complex transactions with WageWorks’s accounting staff, so that they +could accurately prepare the company’s quarter-end and year-end financial statements. +13. On June 23, 2016, Callan attended the Pre-Close Meeting for the second quarter of +2016. Based on Callan’s directions, WageWorks’s accounting staff anticipated recognizing +revenue related to Base Year 1 that quarter, and the meeting participants discussed the Client A +Contract. However, Callan did not tell the accounting staff that Client A employees had twice +indicated that Client A would not pay WageWorks for the Base Year 1 period. +14. During June and July 2016, WageWorks’s accounting staff prepared a +memorandum summarizing the Contract and the company’s accounting treatment for it, including +the decision to recognize revenue during Base Year 1. The memo stated that “[Client A] agreed to +pay fees to [WageWorks] starting on March 1, 2016” and that WageWorks “was able to contract +for fees during the development phase.” Callan reviewed the memo, but he did not tell +WageWorks’s accounting staff that Client A employees had twice indicated that Client A would +not pay WageWorks for the Base Year 1 period. +15. On August 9, 2016, WageWorks reported its financial results for the second quarter +of 2016 in Forms 8-K and 10-Q furnished and filed with the Commission. Those results +improperly recognized about $1 million in revenue related to Base Year 1 of the Client A Contract. +Callan signed the Form 10-Q, which represented that WageWorks prepared its financial statements +in accordance with generally accepted accounting principles in the United States (“GAAP”). +Consistent with GAAP, WageWorks stated that it recognized revenue when collectability was +reasonably assured, service had been performed, persuasive evidence of an arrangement existed, +and there was a fixed or determinable fee. Both Jackson and Callan, who were aware that the +company was recognizing revenue related to Base Year 1, certified that, among other matters, the +financial statements fairly presented WageWorks’s financial condition, results of operations and +cash flows. +16. On or about September 26, 2016, Callan attended the Pre-Close Meeting for the +third quarter of 2016. WageWorks’s accounting staff asked Callan if he knew when WageWorks +was going to collect amounts due from Client A for Base Year 1, which were recorded in +WageWorks’s books and records as an unpaid receivable. In his response, Callan falsely said that +Client A had agreed to pay WageWorks for Base Year 1. He did not disclose that Client A +employees had twice indicated that Client A would not pay for Base Year 1. +17. After the third fiscal quarter of 2016 ended, the Audit Firm conducted an interim +review of WageWorks’s third-quarter financial results. On November 9, 2016, in connection with +this review, Jackson and Callan signed a “management representation letter” addressed to the +Audit Firm. Among other things, the letter represented that WageWorks’s management had + +5 +continually assessed the collectability of all amounts that WageWorks said it was owed by Client +A (which included amounts related to Base Year 1) and determined that those amounts were +reasonably assured of collection. Neither Jackson nor Callan had disclosed to the Audit Firm that +Client A had twice indicated that it would not pay WageWorks for the Base Year 1 period. +18. On November 9, 2016, WageWorks reported its financial results for the third +quarter of 2016 in Forms 8-K and 10-Q furnished and filed with the Commission. Those results +improperly recognized more than $2 million in revenue related to Base Year 1 of the Client A +Contract. Callan signed the Form 10-Q, which represented that WageWorks prepared its financials +in accordance with GAAP. Jackson and Callan, who were both aware that the company was +recognizing revenue related to Base Year 1, certified that, among other matters, the financial +statements fairly presented WageWorks’s financial condition, results of operations and cash flows. +19. On December 13 and 14, 2016, Jackson sold 87,749 shares of WageWorks +common stock. +20. On February 23, 2017, Jackson and Callan signed another management +representation letter to the Audit Firm. That letter represented that WageWorks’s management had +continually assessed the collectability of all amounts that WageWorks said it was owed by Client +A (which included amounts related to Base Year 1) and determined that those amounts were +reasonably assured of collection. Neither Jackson nor Callan had disclosed to the Audit Firm that +Client A had twice indicated that it would not pay WageWorks for the Base Year 1 period. +21. On February 23, 2017, WageWorks reported its financial results for fiscal year +2016 in Forms 8-K and 10-K furnished and filed with the Commission. Those results improperly +recognized more than $3.6 million in revenue related to Base Year 1 of the Contract. Although +they had each had multiple communications with the Audit Firm concerning the Base Year 1 +payments, neither Jackson nor Callan had, at any point, disclosed that Client A had twice indicated +that it would not pay WageWorks for the Base Year 1 period. Jackson and Callan signed the Form +10-K, which represented that WageWorks prepared its financial statements in accordance with +GAAP. They also certified that, among other matters, the financial statements fairly presented +WageWorks’s financial condition, results of operations and cash flows. +22. Although Jackson and Callan believed that WageWorks was entitled to payment for +the Base Year 1 period, WageWorks’ recognition of revenue during Base Year 1 was improper +under GAAP. Because Client A had indicated to WageWorks that it would not pay for Base Year +1, WageWorks’s collection of Base Year 1 revenues was not realizable or reasonably assured. +23. The day after WageWorks filed its year-end 2016 financial statements, +WageWorks’s stock price rose above $75 for the first time in the company’s history, and it stayed +above $75 for twenty consecutive market days. On the basis of this performance, WageWorks +awarded Jackson a bonus of 50,000 shares of WageWorks common stock. +24. Based on WageWorks’s 2016 financial performance, Jackson and Callan both +earned cash bonuses. + + +6 +Callan and Jackson Failed to Disclose the Base Year 1 Dispute in 2017 +25. On February 15, 2017, WageWorks sent its first invoice to Client A. The invoice +showed charges for the entire period of March 1, 2016 through December 31, 2016, including +charges for Base Year 1. +26. Client A rejected WageWorks’s invoice on February 24, 2017. On or about March +3, 2017, Client A explained to Callan and WageWorks project implementation personnel that it +had rejected the invoice because it did not believe it owed WageWorks for the Base Year 1 period. +27. Between March 3 and August 17, 2017, WageWorks and Client A officers and +employees exchanged emails, letters, phone calls, and voicemails related to the Base Year 1 period. +Throughout this period, Client A reiterated that it did not intend to pay WageWorks for these +months. Throughout this period, Jackson and Callan were aware of Client A’s position that it did +not intend to pay for Base Year 1. +28. On or about March 29, 2017, WageWorks’s accounting staff asked Callan if there +were any updates regarding payment of the amounts that Client A purportedly owed to +WageWorks for Base Year 1. In response, Callan told the accounting staff that WageWorks was +talking to Client A, but he omitted that Client A had denied that it owed WageWorks for the Base +Year 1 period. +29. After the first quarter ended on March 31, 2017, the Audit Firm conducted an +interim review of WageWorks’s first-quarter financial results. At this time, WageWorks had not +received payment from Client A for Base Year 1. In connection with the interim review, an Audit +Firm partner interviewed Callan and asked about the status of the amounts that Client A +purportedly owed WageWorks. Callan replied that WageWorks was working on collection. +Callan omitted that Client A had rejected WageWorks’s invoice and that Client A had denied that +it owed WageWorks for the Base Year 1 period. +30. On May 4, 2017, Jackson and Callan signed another management representation +letter to the Audit Firm. That letter represented that WageWorks’s management had continually +assessed the collectability of all amounts that WageWorks said it was owed by Client A (which +included amounts related to Base Year 1) and determined that those amounts were reasonably +assured of collection. Neither Jackson nor Callan had disclosed to the Audit Firm that Client A +had denied that it owed WageWorks for the Base Year 1 period or that Client A had rejected +WageWorks’s invoice. +31. On or about July 3, 2017, Callan attended the second quarter 2017 Pre-Close +Meeting with WageWorks’s finance and accounting staff. The accounting staff asked Callan +whether he had any updates from Client A or if there was any uncertainty around collecting the +amounts that Client A purportedly owed WageWorks. Callan stated that Client A was going to +pay and that WageWorks just needed to work through Client A’s processes to receive payment; he +omitted that Client A had denied that it owed WageWorks for the Base Year 1 period. +32. After the second quarter ended, the Audit Firm conducted an interim review of +WageWorks’s second-quarter financial results. In connection with that review, Audit Firm + +7 +partners interviewed Jackson and Callan. In each interview, an Audit Firm partner asked about the +status of the amounts that Client A purportedly owed WageWorks, which it still had not paid. In +their respective responses, both Jackson and Callan said that Client A had rejected WageWorks’s +invoice because it had been submitted in the wrong format, and that WageWorks expected to be +paid after it resubmitted its invoice. Jackson and Callan omitted that Client A had rejected +WageWorks’s invoice because Client A had denied that it owed WageWorks for the Base Year 1 +period. +33. On August 1, 2017, Jackson and Callan signed another management representation +letter to the Audit Firm. That letter represented that WageWorks’s management had continually +assessed the collectability of all amounts that WageWorks said it was owed by Client A (which +included amounts related to Base Year 1) and determined that those amounts were reasonably +assured of collection. Neither Jackson nor Callan had disclosed to the Audit Firm that Client A +had denied that it owed WageWorks for the Base Year 1 period. +34. On August 18, 2017, WageWorks’s outside counsel, with Jackson and Callan’s +approval, submitted a formal “certified claim” to Client A on behalf of the company requesting +payment for Base Year 1 and explaining the reasons why WageWorks believed that the Contract +obligated Client A to pay for Base Year 1 services. WageWorks submitted the certified claim, in +part, because it was required to do so before bringing a lawsuit against Client A for the disputed +Base Year 1 payment. +35. On September 26, 2017, Callan attended the third-quarter 2017 Pre-Close Meeting +with WageWorks’s accounting and finance staff. At the meeting, accounting staff again asked +Callan about the status of the unpaid Client A receivable related to Base Year 1. Callan stated that +WageWorks was in discussions with Client A. He omitted that WageWorks had submitted a +certified claim to Client A and that Client A had denied that it owed WageWorks for the Base Year +1 period. +36. After the third quarter ended, the Audit Firm conducted an interim review of +WageWorks’s third-quarter financial results. In connection with that review, Audit Firm partners +conducted interviews with Jackson and Callan. In each interview, an Audit Firm partner asked +about the status of the payment that Client A purportedly owed WageWorks related to Base Year +1. In their respective responses, both Jackson and Callan said that they expected that WageWorks +would be paid by the end of the year. Although they said that WageWorks was going through a +process to collect the Base Year 1 fees, they omitted that WageWorks had submitted a certified +claim to Client A and that Client A had denied that it owed WageWorks for the Base Year 1 +period. +37. On November 8, 2017, Jackson and Callan signed another management +representation letter to the Audit Firm. That letter represented that WageWorks’s management had +continually assessed the collectability of all amounts that WageWorks said it was owed by Client +A (which included amounts related to Base Year 1) and determined that those amounts were +reasonably assured of collection. Neither Jackson nor Callan had yet disclosed to the Audit Firm +that Client A had denied that it owed WageWorks for the Base Year 1 period. + +8 +38. At the end of each fiscal quarter in 2017, the Audit Committee of WageWorks’s +Board of Directors met to discuss the company’s quarter-end financial statements and related +matters, including outstanding receivables. Jackson and Callan attended these meetings, but they +never disclosed to the Audit Committee that Client A had specifically denied that it owed +WageWorks for the Base Year 1 period. +39. On December 22, 2017, Client A notified WageWorks that it had rejected the +company’s certified claim requesting payment for Base Year 1. +WageWorks’s Public Offering +40. On June 19, 2017, WageWorks conducted a public offering of its common stock. +The offering prospectus incorporated by reference the company’s year-end 2016 Form 10-K, +which improperly included about $3.6 million in revenue related to Base Year 1. +41. WageWorks sought and obtained consent from the Audit Firm to incorporate the +Audit Firm’s 2016 audit report into the offering prospectus. Prior to obtaining this consent, neither +Jackson nor Callan disclosed to the Audit Firm that Client A had denied that it owed WageWorks +for the Base Year 1 period. +42. In the offering, WageWorks sold 1,954,852 shares of its common stock and +Jackson sold 495,148 shares of WageWorks common stock. +WageWorks’s Restatement +43. On January 10, 2018, WageWorks’s management, including Callan, told the Audit +Firm and the company’s internal accounting staff about WageWorks’s certified claim and Client +A’s rejection of that claim. This was the first time that the company’s executives disclosed Client +A’s denial that it owed WageWorks for the Base Year 1 period to either the Audit Firm or the +company’s accounting staff. +44. On March 1 and 2, 2018, WageWorks announced that it would be late in filing its +fiscal-year 2017 Form 10-K and that it was conducting an investigation into revenue recognition +related to the accounting for a government contract during fiscal 2016. WageWorks’s stock price +declined more than 9% on the news. +45. On March 18, 2019, WageWorks restated its year-end financial results for 2016 and +its quarter-end financial results for the second and third quarters of 2016. The restated results +reversed all revenue from Client A attributable to the Base Year 1 period. +46. During the 12-month periods following filings containing financial results that +WageWorks was required to restate, Jackson and Callan received incentive-based compensation, +and Jackson realized profits from the sale of WageWorks common stock. Neither Jackson nor +Callan has, to date, reimbursed WageWorks for these amounts. + + +9 +Violations +47. As a result of the conduct described above, Jackson and Callan violated Sections +17(a)(2) and 17(a)(3) of the Securities Act. Section 17(a)(2) proscribes obtaining “money or +property by means of any untrue statement of a material fact or any omission to state a material +fact necessary in order to make the statements made, in light of the circumstances under which +they were made, not misleading.” Section 17(a)(3) proscribes engaging “in any transaction, +practice, or course of business which operates or would operate as a fraud or deceit upon the +purchaser.” A violation of these provisions does not require scienter and may rest on a finding of +negligence. See Aaron v. SEC, 446 U.S. 680, 685, 701-02 (1980). +48. As a result of the conduct described above, Jackson and Callan violated Rule 13b2- +1 of the Exchange Act, which prohibits a person from, directly or indirectly, falsifying or causing +to be falsified any book, record, or account subject to Section 13(b)(2)(A) of the Exchange Act. +49. As a result of the conduct described above, Jackson and Callan violated Rule 13b2- +2, which prohibits any director or officer of an issuer from (a) directly or indirectly making or +causing to be made a materially false or misleading statement or 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 and (b) taking any action to +coerce, manipulate, mislead, or fraudulently influence any independent public or certified public +accountant engaged in the performance of an audit or review of the financial statements of +that issuer that are required to be filed with the Commission pursuant to this subpart or otherwise if +that person knew or should have known that such action, if successful, could result in rendering +the issuer's financial statements materially misleading. +50. As a result of the conduct described above, Jackson and Callan violated Rule 13a- +14 of the Exchange Act, which requires an issuer’s principal executive officer and principal +financial officer, in each quarterly and annual report filed under Section 13(a) of the Exchange Act, +to make the certifications specified in Regulation S-K Item 601(b)(31) [17 C.F.R. § +229.601(b)(31)]. +51. As a result of the conduct described above, Jackson and Callan violated Section 304 +of the Sarbanes-Oxley Act of 2002, which requires the chief executive officer and chief financial +officer of any issuer required to prepare an accounting restatement due to material noncompliance +with the securities laws as a result of misconduct to reimburse the issuer for (1) any bonus or other +incentive-based or equity-based compensation received by that person from the issuer during the +12-month period following the first public issuance or filing with the Commission of the financial +document embodying such financial reporting requirement and (2) any profits realized from the +sale of securities of the issuer during that 12- month. Section 304 does not require that a chief +executive officer or chief financial officer engage in misconduct to trigger the reimbursement +requirement. + +10 +52. As a result of the conduct described above, Jackson and Callan caused WageWorks +to violate Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 +thereunder, which require issuers to file accurate annual, current, and quarterly reports, which +include such further information as may be necessary to make the required statements not +misleading.3 +53. As a result of the conduct described above, Jackson and Callan caused WageWorks +to violate Section 13(b)(2)(A) of the Exchange Act, which requires an issuer to make and keep +books, records, and accounts which, in reasonable detail, accurately and fairly reflect the issuer’s +transactions and disposition of Assets. +54. As a result of the conduct described above, Jackson and Callan caused WageWorks +to violate Section 13(b)(2)(B) of the Exchange Act, which requires an issuer 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 and specific authorization; +transactions are recorded as necessary to permit preparation of financial statements in conformity +with GAAP or any other criteria applicable to such statements, and to maintain accountability for +assets; access to assets is permitted only in accordance with management’s general or specific +authorization; and the recorded accountability for assets is compared with the existing assets at +reasonable intervals and appropriate action is taken with respect to any differences. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Jackson’s Offer and Callan’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Jackson and Callan cease and desist from committing or causing any violations and +any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, Sections +13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, Rules 12b-20, 13a-1, 13a- +11, 13a-13, 13a-14, 13b2-1, and 13b2-2 thereunder, and Section 304 of the +Sarbanes-Oxley Act. + +B. Jackson shall, within 10 days of the entry of this Order, reimburse WageWorks for +a total of $1,929,740. Jackson shall simultaneously deliver proof of satisfying this +reimbursement obligation to Monique C. Winkler, Associate Regional Director, +Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San +Francisco, CA 91404. + + +3 The Commission may institute cease-and-desist proceedings against any person held to be a +cause of violations of the federal securities laws due to acts or omissions such person knew or +should have known would contribute to the violation. See 15 U.S.C. § 78u-3(a); Robert M. +Fuller, 56 SEC 976, 984 (2003), pet. denied, 95 F. App’x 361 (D.C. Cir. 2004). + +11 +C. Callan shall, within 10 days of the entry of this Order, reimburse WageWorks for a +total of $157,590. Callan shall simultaneously deliver proof of satisfying this +reimbursement obligation to Monique C. Winkler, Associate Regional Director, +Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San +Francisco, CA 91404. + +D. Jackson shall, within 10 days of the entry of this Order, pay a civil money penalty +in the amount of $75,000 to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant +to 31 U.S.C. §3717. + +E. Callan shall, within 10 days of the entry of this Order, pay a civil money penalty in +the amount of $100,000 to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant +to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +payor 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 Monique C. Winkler, Associate Regional +Director, Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San Francisco, +CA 91404. + +F. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, each Respondent + +12 +agrees that in any Related Investor Action, he shall not argue that he is entitled to, +nor shall he benefit by, offset or reduction of any award of compensatory damages +by the amount of any part of such Respondent’s payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, each Respondent agrees that he shall, within 30 days after entry of a +final order granting the Penalty Offset, notify the Commission's counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange +Commission. Such a payment shall not be deemed an additional civil penalty and +shall not be deemed to change the amount of the civil penalty imposed in this +proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against a Respondent by or on behalf of one or +more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +each Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by each 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 such Respondent of the federal securities laws or any regulation or order issued under +such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4203.txt b/raw/aaer/2021/AAER-4203.txt new file mode 100644 index 0000000000000000000000000000000000000000..e557d2469c094d9d8098f4f16e748d28175ac1f8 --- /dev/null +++ b/raw/aaer/2021/AAER-4203.txt @@ -0,0 +1,98 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91131 / February 16, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4203 / February 16, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20225 + +In the Matter of + +EDWARD T. KELLY, 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 Edward +T. Kelly (“Respondent” or “Kelly”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3. below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. +III. + On the basis of this Order and Respondent’s Offer, the Commission finds that: + 1. Kelly, age 63, was a certified public accountant licensed to practice in the +State of New York from June 1981 until February 2019. He served as Controller of Aceto +Corporation (“Aceto”) from 2001 until his retirement on March 7, 2018, and as a consultant to +Aceto in April 2018. + 2. Aceto was, at all relevant times, a New York corporation with its principal +place of business in Port Washington, New York. At all relevant times, Aceto was in the business +of marketing and selling generic pharmaceuticals, pharmaceutical ingredients, and chemicals. At +all relevant times, Aceto’s common stock was registered pursuant to Section 12(b) of the Securities +Exchange Act of 1934 (“Exchange Act”) and traded on the NASDAQ Global Select Market +(ticker: ACET). + 3. On December 9, 2020, a final judgment was entered against Kelly, +permanently enjoining him from future violations of Section 10(b) of the Exchange Act and Rule +10b-5 thereunder, in the civil action entitled Securities and Exchange Commission v. Edward T. +Kelly, Civil Action Number 20 Civ. 4479 (JMA), in the United States District Court for the +Eastern District of New York. Kelly was also ordered to pay a $170,227.76 civil money penalty +and was prohibited from acting as an officer or director of any issuer that has a class of securities +registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to +Section 15(d) of the Exchange Act. + 4. The Commission’s complaint alleged, among other things, that Kelly +traded securities issued by Aceto while owing a duty of trust and confidence to Aceto and its +shareholders and while in possession of material, non-public information (“MNPI”). The +Complaint alleged that following his March 7, 2018 retirement from Aceto, Kelly returned to +Aceto as a consultant to assist his successor in closing Aceto’s books for the quarter ending +March 31, 2018, during which he obtained MNPI regarding Aceto’s deteriorating financial +condition. The Complaint alleged that in breach of his duty of trust and confidence, Kelly sold +Aceto shares and exercised his in-the-money Aceto stock options in advance of an April 18, +2018 announcement containing news of Aceto’s deteriorating financial condition, which caused +Aceto’s stock to decline by approximately 64 percent, and that by engaging in such conduct, +Kelly avoided losses and made an unjust profit of more than $85,000 in the aggregate. + 3 +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Kelly’s Offer. + Accordingly, it is hereby ORDERED, effective immediately, that Kelly is suspended from +appearing or practicing before the Commission as an accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4204.txt b/raw/aaer/2021/AAER-4204.txt new file mode 100644 index 0000000000000000000000000000000000000000..3813904e90da3bef8c14b421f298d86a3ace0bf1 --- /dev/null +++ b/raw/aaer/2021/AAER-4204.txt @@ -0,0 +1,436 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91185 / February 23, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4204 / February 23, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20229 + +In the Matter of + +CHRISTOPHER L. STANLEY, +CPA, + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF +1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS + + + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against +Christopher L. Stanley (“Stanley” or “Respondent”) pursuant to Section 4C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice. +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 them and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order, as set forth +below. + + + +2 + +III. + On the basis of this Order and the Respondent’s Offer, the Commission finds1 that: +A. SUMMARY +1. Starting as early as 2013, the College of New Rochelle (the “College”) began +experiencing considerable financial challenges resulting from declining student enrollment and +decreasing tuition revenues. During fiscal year 2015, the College’s then current Controller, Keith +Borge (“Borge”), engaged in a fraudulent scheme that involved numerous fraudulent +misrepresentations and omissions in order to conceal the College’s financial challenges. +2. KPMG LLP (“KPMG”) was the College’s independent auditor during the relevant +period. For fiscal year 2015, Stanley was the audit partner responsible for the audit. In that +capacity, Stanley failed to comply with American Institute of Certified Public Accountants +(“AICPA”) auditing standards (“AICPA Standards”) during the College’s fiscal year 2015 audit. +Specifically, Stanley’s violations of the auditing standards stemmed from his failures to: (1) obtain +sufficient appropriate audit evidence; (2) properly prepare audit documentation; (3) properly +examine journal entries for evidence of fraud due to management override; (4) adequately assess +the risk of material misstatement; (5) communicate significant audit challenges to those charged +with governance; (6) properly supervise the audit; and, (7) exercise due professional care and +professional skepticism. These numerous and pervasive audit failures significantly reduced the +audit team’s ability to detect Borge’s fraud. +3. Notwithstanding these audit failures, Stanley approved the issuance of an audit +report for fiscal year 2015 stating that the audit was performed in accordance with generally +accepted auditing standards2 (“GAAS”). This statement was false in that the audit was not +performed in accordance with GAAS. +4. Pursuant to a 1999 bond offering, the College was contractually obligated to +provide annual continuing disclosure information to investors, including audited financial +statements. Stanley knew or should have known that the audit report, along with the College’s +fiscal year 2015 financial statements, would be submitted to the Municipal Securities Rulemaking +Board (“MSRB”) for posting in its Electronic Municipal Market Access (“EMMA”) system +pursuant to the College’s annual continuing disclosure requirements. + +1 The findings herein are made pursuant to the Respondent’s Offer of Settlement and are +not binding on any other person or entity in this or any other proceeding. +2 Generally accepted auditing standards for audits of entities not subject to the oversight authority of the +Public Company Accounting Oversight Board (PCAOB) are promulgated by the AICPA. +3 + +B. RESPONDENT +5. Christopher L. Stanley, age 44, of Tarrytown, New York, is a Certified Public +Accountant (“CPA”) licensed to practice in New York and New Jersey. Stanley began his +employment at KPMG in 2001 as an Associate and was subsequently promoted to Manager in +2004, Managing Director in 2014 and Partner in 2015. Stanley resigned from KPMG in March +2020. Stanley served as the KPMG engagement partner on, and had final audit responsibility over, +the College’s fiscal year 2015 audit engagement. +C. OTHER RELEVANT ENTITIES +6. KPMG LLP is a Delaware limited liability partnership headquartered in New York +City. KPMG is registered with the PCAOB and is the U.S. member firm of the KPMG global +network of independent member firms affiliated with KPMG International Limited, a private +English company limited by guarantee. KPMG was the College’s auditor for fiscal year 2015. +7. The College of New Rochelle was a private, not-for-profit education corporation +based in New Rochelle, New York, with additional locations in New York City. The College +ceased operations and filed for bankruptcy in September 2019 as a result of its financial challenges. +8. Keith Borge, age 64, of Brooklyn, New York, served as Controller of the College +during fiscal year 2015 and began employment with the College in 1979 as Assistant Controller. +Borge was responsible for perpetrating the fraud described herein. Borge pled guilty to criminal +securities fraud charges on March 28, 2019 and is currently serving a 3-year sentence in federal +prison. On the same day the SEC filed a complaint in the U.S. District Court for the Southern +District of New York against Borge which was subsequently settled on July 2, 2019. +D. FACTS + Borge’s Fraud +9. Starting as early as spring 2013, the College began experiencing financial +challenges resulting from decreases in student enrollment and tuition revenues. To bridge the +increasing gap between the College’s revenues and expenses, Borge began using funds in the +College’s endowment to pay for operating expenses. The consumption of these funds resulted in a +rapid decrease in the College’s net assets, from approximately $30.5 million at the conclusion of +fiscal year 2012 to negative $8.8 million at the conclusion of fiscal year 20153. +10. In order to conceal the precipitous decline in the College’s net assets, Borge +engaged in a fraudulent scheme, the result of which overstated assets and understated liabilities of +the College. For example, Borge intentionally withheld payroll tax remittances from federal, state +and local authorities starting as early as fiscal year 2013. However, instead of reporting the payroll +tax liabilities in the College’s financial statements, Borge recorded a series of improper and +unsupported journal entries, which concealed the payroll tax liabilities in the College’s general + +3 The College’s fiscal year ended on June 30. +4 + +ledger and financial statements. Borge also hid numerous past due vendor invoices in his office, +thereby preventing them from being recorded in the College’s financial statements, and allowed +receivables to be reported at inflated values. +11. As a result of Borge’s fraud, the College’s fiscal year 2015 net assets were +overstated by $33.8 million, an overstatement which impacted virtually every amount reported on +the College’s balance sheet. + KPMG’s Audit of the College’s Fiscal Year 2015 Financial Statements +12. KPMG performed the College’s financial statement audits during the relevant +period culminating with the fiscal year 2015 engagement. Stanley was the engagement partner for +the fiscal year 2015 audit with overall responsibility for supervising the audit team and approving +the audit report, with a focus on reviewing draft financial statements. Stanley was a member of +KPMG’s Higher Education, Research and Other Not-For-Profit (“HERON”) dedicated practice +group and had extensive experience auditing higher education and not-for-profit entities. +13. In the spring of 2015, the KPMG audit team assigned to complete the College’s +2015 audit, including Stanley, met with the College’s management team and presented the audit +plan to the College’s Audit Committee. KPMG’s presentation to the Audit Committee included, +among other things, an audit timeline with fieldwork scheduled to begin in August 2015 and an +expected audit report issuance date of September 2015. +14. Almost from inception, the KPMG audit team encountered significant challenges +primarily due to Borge’s untimely and inaccurate responses to the requests of the audit team. First, +when the audit team arrived to begin fieldwork in August 2015 they discovered large amounts of +information which was scheduled to be available, including the critical trial balance, was not yet +ready. In addition, the information that the College was able to provide, such as supporting +documentation for the College’s investment balances, contained reconciling issues and +contradictions. +15. The significant challenges encountered by the audit team worsened as the audit +progressed. For example, the reconciling issues with the College’s investment balances continued +to persist even after Stanley and the KPMG engagement manager unsuccessfully attempted to +resolve the issue. In other instances Borge, who was the audit team’s primary contact at the +College, took extended periods of leave during critical times in the audit leaving audit team +members without the information necessary to complete the audit. +16. On September 24, 2015, Stanley discussed a draft of the College’s fiscal year 2015 +financial statements with the Audit Committee. Included in the presentation was a slide explaining +that there were still open items and questions that needed to be addressed prior to KPMG’s +issuance of the audit report. However, Stanley did not inform the Audit Committee that the audit +report issuance was delayed primarily because of the significant challenges that the audit team had +experienced with Borge’s untimely and inaccurate responses to the requests of the audit team. +5 + +Following the Audit Committee presentation, Borge failed to provide the audit team with a timely +response to the open items and questions and, as a result, work on the audit stalled. +17. The significant challenges related to Borge’s untimely and inaccurate responses +continued throughout October and November 2015. The challenges to complete the audit became +so significant and pervasive throughout October and November 2015 that audit team members sent +emails to the engagement manager (but not to Stanley) that Borge “just makes up numbers from +his head” and that the financial statements “are never going to get issued because [Borge] doesn’t +care.” Despite the fact that he had not met the audit team’s requests for information, on November +30, 2015, Borge emailed the engagement manager notifying her that the College had a deadline to +provide its audited financial statements to its bank and that the College needed KPMG to issue the +audit report that day. In response, the engagement manager informed Borge that the audit team +was still waiting on open items and questions and that the financial statements needed to be +reviewed by Stanley. The engagement manager suggested that they schedule a time the following +day to resolve the outstanding issues. +18. Also during the morning of November 30, 2015, Stanley received a telephone +voicemail from the President of the College informing him of the bank deadline and the need for +KPMG to issue the College’s audit report that day. Following receipt of that voicemail, Stanley +approached the engagement manager to ask her what needed to be done in order for KPMG to +issue its audit report. During the next few hours Stanley and the engagement manager reviewed +the outstanding open items and unanswered questions and unreasonably concluded that none of the +outstanding items or questions should prevent KPMG from issuing its audit report. As a result, +KPMG issued its audit report containing an unmodified audit opinion on the College’s fiscal year +2015 financial statements by mid-afternoon on November 30, 2015. +19. Although KPMG issued its audit report on November 30, 2015, the audit evidence +at that time was not sufficient to support the audit opinion. The audit team, under Stanley’s +supervision, failed to verify the existence of assets or the completeness of liabilities. In addition, +approximately a third of the work papers in KPMG’s electronic work paper repository (the “eAudit +file”) did not contain any indication that they were prepared or reviewed as of November 30, 2015. +20. KPMG’s work on the College’s financial statement audit continued through +January 2016. One audit team member spent 2 ½ days in December 2015 unsuccessfully trying to +locate missing work papers and address open items and questions. In early January 2016, a new +senior associate was assigned to take over the responsibility to clean-up the audit file but was also +unable to locate all of the missing work papers or address all of the open items and questions. Four +business days before the audit file was required to be closed pursuant to KPMG policies, the new +senior associate emailed the engagement manager a list of 39 open items as well as 81 additional +work papers that required the engagement manager’s review. The engagement manager then +marked the work papers as “reviewed” and closed the audit file on the last day. +21. A few months after the College’s audit file was closed, the new senior associate +exchanged text messages with the engagement manager (but not with Stanley) concerning an +unrelated audit, saying “at least they are close to truly done too, and not fake done like the . . . +6 + +CNR audit.” In November 2016, after Borge’s fraud was discovered, KPMG withdrew its audit +opinion on the College’s FY15 financial statements. + Failure to Obtain Sufficient Appropriate Audit Evidence +22. GAAS require that auditors should design and perform audit procedures that are +appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence +(AU-C §500). Stanley failed to obtain sufficient appropriate audit evidence during the College’s +fiscal year 2015 audit in multiple areas. +23. For instance, Stanley failed to obtain sufficient appropriate audit evidence to +support the College’s investment balances. During fieldwork the audit team identified reconciling +issues where investment schedules provided by Borge did not tie to the College’s brokerage +statements or the financial statements. In response, Borge informed the audit team that the +reconciling issues were probably due to trades in transit at fiscal year-end. However, the audit +team, under Stanley’s supervision, was never able to successfully reconcile nor did it perform +alternative procedures to substantiate the College’s investment balances reported in the College’s +financial statements. +24. Stanley also failed to obtain sufficient appropriate audit evidence to confirm the +completeness of the College’s accounts payable balance. The College’s accounts payable balance +decreased by 59% in fiscal year 2015. This was due to Borge fraudulently preventing vendor +invoices from being recorded in the College’s accounts payable system. Despite this decrease, the +audit team determined the risk of material misstatement for the College’s accounts payables to be +low, based on its conclusion that “there was very little, if any, change to the characteristics of the +account compared to the prior year.” As a result, the audit team’s ability to detect the fact that +Borge was withholding vendor invoices was significantly reduced. Stanley reviewed and signed +off on the audit team’s search for unrecorded liabilities. +25. Finally, Stanley failed to obtain sufficient appropriate audit evidence to support the +College’s other accounts receivable balance. Notwithstanding annual increases in the College’s +other accounts receivable balance going back multiple years, KPMG did not test any of the other +accounts receivable to verify its existence during the fiscal year 2015 audit. Instead, KPMG’s +work papers document that $3.9 million of other accounts receivable had been tested in prior years +(some of which dated back to fiscal year 2011) and that the audit team passed on testing the +remaining $1.8 million because the amount was below the performance materiality threshold. It +was later determined that supporting documentation for most of the College’s $5.7 million other +accounts receivable reported in fiscal year 2015 did not exist. + Failure to Properly Prepare Audit Documentation +26. GAAS require that the auditor should prepare audit documentation on a timely +basis. An auditor is required to prepare audit documentation that is sufficient to enable an +experienced auditor, having no previous connection with the audit, to understand the nature, +timing, and extent of the audit procedures performed, the results of the procedures performed, the +7 + +audit evidence obtained and conclusions reached, who performed and reviewed the work and the +date such work was completed (AU-C §230). Finally, AICPA Standards require the auditor’s +opinion to be in written form and dated no earlier than the date on which the auditor has obtained +sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial +statements, including evidence that the audit documentation has been reviewed (AU-C §700). +27. Stanley failed to prepare adequate audit documentation during the College’s fiscal +year 2015 engagement. KPMG manages and monitors the status of its audit documentation +through its eAudit program. As explained above, as of November 30, 2015, the date of the audit +report, approximately a third of the audit work papers were not documented as either being +prepared or reviewed in the eAudit program. In addition, there was no evidence outside of the +eAudit program that the work papers that were lacking documentation were in fact reviewed prior +to the date of the audit report. Instead, the process of preparing and reviewing the work papers that +lacked proper documentation as of November 30, 2015 was completed subsequent to the audit +report date. +Failure to Properly Examine Journal Entries for Evidence of Fraud Due to +Management Override +28. GAAS require that the auditor maintain professional skepticism throughout the +audit by recognizing that, regardless of the auditor’s prior experience with the client, the possibility +of a material misstatement due to fraud always exists. As such, the risk of a material misstatement +due to management override is present in all entities and is a significant risk. As a result, auditors +are required to, among other things, select and test journal entries and other adjustments made at +the end of a reporting period (AU-C §240). +29. Stanley failed to comply with this requirement. During the College’s fiscal year +2015 audit, the audit team did not obtain sufficient appropriate audit evidence with respect to +journal entries posted at the end of the fiscal year. As a result, the audit team’s ability to detect the +numerous fraudulent journal entries that Borge posted during the College’s year-end financial +closing process was significantly reduced. +Failure to Adequately Assess the Risks of Material Misstatement +30. GAAS require that the auditor perform risk assessment procedures to provide a +basis for the identification and assessment of risks of material misstatement. Additionally, auditors +are required to revise the risk assessment in circumstances in which the auditor obtains audit +evidence that is inconsistent with the audit evidence on which the auditor originally based the risk +assessment (AU-C §315). +31. Stanley failed to adequately assess and reassess the risks of material misstatement +during the College’s fiscal year 2015 audit. The audit team’s risk analysis appears to have been +performed during previous audits without taking into consideration the College’s current operating +environment. For example, as described above, despite a 59% decrease in the College’s accounts +payable balance, the audit team assessed a low risk of material misstatement based on its +8 + +assessment that “there was very little, if any, change to the characteristics of the account compared +to the prior year.” In addition, amidst increasing challenges primarily related to receiving timely +and credible information from Borge, the audit team never reassessed the risk of material +misstatement during the College’s fiscal year 2015 audit. +Failure to Communicate Significant Audit Challenges to Those Charged with +Governance +32. GAAS require that the auditor communicate to those charged with governance, +among other things, significant difficulties encountered during the audit. This type of +communication from auditors enables those charged with governance to effectively carry out their +financial reporting oversight responsibilities (AU-C §260). +33. Stanley communicated the status of the audit to those charged with governance +during the September 24, 2015 presentation to the Audit Committee. During that presentation, +Stanley also informed the Audit Committee that there were still open items and questions that +needed to be addressed prior to audit report issuance. However, Stanley failed to communicate to +the Audit Committee the significant challenges that the audit team encountered throughout the +audit. Nevertheless, Stanley issued a letter to the College’s Audit Committee at the conclusion of +the fiscal year 2015 audit stating “We encountered no significant difficulties in dealing with +management in performing our audit.” +Failure to Properly Supervise the Audit +34. GAAS require that the engagement partner take responsibility for the overall +quality of each audit. In order to comply with this requirement, the engagement partner is +responsible for, among other things, directing, supervising and performing the audit in compliance +with professional standards and ensuring that the auditor’s report is appropriate in the +circumstances (AU-C §220). +35. Stanley, in his role as engagement partner, failed to properly supervise the +College’s audit. As discussed above, Stanley failed to address the challenges that the audit team +encountered during the audit. Stanley also failed to provide reasonable assurance that audit +documentation was sufficient, appropriate and complete prior to issuing the audit report. In +addition, Stanley failed to provide reasonable assurance that the procedures performed by the audit +team complied with GAAS. +Failure to Exercise Due Professional Care and Professional Skepticism +36. GAAS require that the auditor exercise due professional care and professional +skepticism during the planning and performance of an audit (AU-C §200). Professional skepticism +is an attitude that includes a questioning mind, being alert to conditions that may indicate possible +misstatement due to fraud or error, and a critical assessment of audit evidence. +37. Stanley failed to maintain professional skepticism during the planning and +performance of the College’s audit. As previously discussed, Stanley failed to exercise +9 + +professional skepticism with respect to the numerous reconciling issues that the audit team had +encountered including the receipt of unreliable audit evidence from Borge. In addition, Stanley +failed to adequately follow up on concerns raised by the audit team which should have prompted +additional inquiry, corroboration or analysis. As the audit progressed, and the audit team +continued to encounter challenges with the timing and reliability of the information received from +Borge, Stanley did not respond appropriately in order to obtain sufficient appropriate audit +evidence. +E. VIOLATIONS +38. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice provide, in pertinent part, that the Commission may censure or deny, temporarily or +permanently, the privilege of appearing or practicing before the Commission to any person who is +found by the Commission to have engaged in improper professional conduct. Section 4C(b)(2) +and Rule 102(e)(1)(iv)(B) define improper professional conduct to include the following two types +of negligent conduct: (1) a single instance of highly unreasonable conduct that results in a violation +of applicable professional standards in circumstances in which an accountant knows, or should +know, that heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct, +each resulting in a violation of applicable professional standards, that indicate a lack of competence +to practice before the Commission. +39. As a result of the conduct described above, Stanley engaged in improper +professional conduct under Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) as defined +in Rule 102(e)(1)(iv)(B) of the Commission’s Rules of Practice. +F. UNDERTAKING + +40. Stanley undertakes that he shall not serve as the engagement manager, engagement +partner or engagement quality control reviewer in connection with any audit expected to be posted +in EMMA until reinstated to appear before the Commission as an independent accountant. + +41. In determining whether to accept the Offer, the Commission has considered +Stanley’s undertaking. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Stanley’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Stanley is suspended from appearing or practicing before the Commission as an +accountant. +10 + +1. After three years from the date of this order, Stanley 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: + +a. 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 (other than as a member of an audit committee, +as that term is defined in Section 3(a)(58) of the Exchange Act). +Such an application must satisfy the Commission that Stanley’s work +in his practice before the Commission as an accountant 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 + +b. 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 as a member of an audit committee, as that term +is defined in Section 3(a)(58) of the Exchange Act. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of +demonstrating good cause for reinstatement will be particularly high +given the role of the audit committee in financial and accounting +matters; and/or + +c. an independent accountant. + + Such an application must satisfy the Commission that: + +(1) Stanley, 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; + +(2) Stanley, 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 Stanley’s or the firm’s quality control +system that would indicate that Stanley will not receive +appropriate supervision; + +(3) Stanley 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 +11 + +(4) Stanley 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 PCAOB, including, but not limited +to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards. + +2. The Commission will consider an application by Stanley 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 Stanley’s character, integrity, professional conduct or +qualifications to appear or practice before the Commission as an accountant. Whether an +application demonstrates good cause will be considered on a facts and circumstances +basis with due regard for protecting the integrity of the Commission’s processes. + By the Commission. + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4207.txt b/raw/aaer/2021/AAER-4207.txt new file mode 100644 index 0000000000000000000000000000000000000000..90fc251050705ead9698713435d3fe08a40d9935 --- /dev/null +++ b/raw/aaer/2021/AAER-4207.txt @@ -0,0 +1,518 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91475 / April 5, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4207 / April 5, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20256 + + + +In the Matter of + + Christopher E. Knauth, CPA, + + Respondent. + + +ORDER INSTITUTING ADMINISTRATIVE +AND CEASE-AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C OF +THE SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE AND NOTICE OF +HEARING + + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Christopher +E. Knauth, CPA (“Respondent” or “Knauth”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and (iii) of the Commission’s +Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if the +person is found . . . (2) to be lacking in character or integrity, or to have engaged in unethical +or improper professional conduct; or (3) to have willfully violated, or willfully aided and +abetted the violation of, any provision of the securities laws or the rules and regulations +thereunder. +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found to be lacking in character or +integrity or to have engaged in unethical or improper professional conduct. + Rule 102(e)(1)(iii) provides, in relevant part, that: +The Commission may censure a person, or deny, temporarily or permanently, the privilege of +appearing or practicing before it in any way to any person who is found . . . to have willfully + +2 + +II. + +After an investigation, the Division of Enforcement and the Office of the Chief Accountant +alleges that: +Summary +1. This proceeding arises from wholesale failures by Christopher E. Knauth in conducting +the fiscal year 2018 audit and quarterly reviews for the periods ended June 30, 2018, September +30, 2018, and March 31, 2019, for Issuer A on behalf of Audit Firm A. At the outset, Knauth +failed to register Audit Firm A, of which he was a principal, with the Public Company Accounting +Oversight Board (“PCAOB”). Further, the work Knauth performed during the audit and quarterly +reviews for Issuer A failed to comply with multiple PCAOB auditing standards, in that Knauth +(1) failed to properly plan the audit and to identify and assess risks of material misstatement; (2) +failed to exercise due professional care and professional skepticism (including through the failure +to obtain required engagement quality reviews (“EQRs”)); (3) failed to obtain sufficient +appropriate audit evidence; and (4) failed to prepare adequate audit documentation. + +2. On behalf of Audit Firm A, Knauth falsely represented to Issuer A that it was +registered with the PCAOB when conducting the audit and interim reviews for Issuer A, including +in Audit Firm A’s audit report. Knauth also falsely represented in Audit Firm A’s audit report that +Audit Firm A conducted its audit in compliance with PCAOB standards. + +3. As a result of Knauth’s conduct, Knauth willfully aided and abetted and caused Audit +Firm A’s violations of Section 102(a) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley +Act”), willfully aided and abetted and caused Audit Firm A’s violation of Rule 2-02 (b)(1) of +Regulation S-X, and willfully aided and abetted and caused Issuer A’s violations of Section 13(a) +of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. Knauth’s conduct also constituted +improper professional conduct pursuant to Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice. + +A. RESPONDENT +4. Christopher Knauth, age 53, is a resident of Plano, Texas. Knauth was a founder and +principal of Audit Firm A from October 2017 until December 2019. Prior to that, Knauth was a +partner at three other accounting firms since 2003. Knauth has been licensed as a Certified Public +Accountant in Texas since 1995. +B. OTHER RELEVANT ENTITIES +5. Audit Firm A was a Texas professional limited liability company headquartered in +Frisco, Texas, and founded in October 2017. While structured as a professional limited liability +company, in practice, Knauth and his co-principal in Audit Firm A solely shared office space and +certain limited overhead expenses, each maintaining separate clients and keeping revenue from his + +violated, or willfully aided and abetted the violation of any provision of the Federal securities +laws or the rules and regulations thereunder. + +3 + +own client engagements. Audit Firm A was never registered with the PCAOB. Audit Firm A +audited Issuer A’s financial statements for the company’s fiscal year ended December 31, 2018, +and conducted interim reviews for Issuer A for the quarters ended June 30, 2018, September 30, +2018, and March 31, 2019.3 Knauth entered into the engagement with Issuer A and performed all +of the audit work for Issuer A. Knauth’s co-principal in Audit Firm A was unaware of the Issuer A +engagement. Audit Firm A ceased operations in December 2019 and officially dissolved in +September 2020. +6. Issuer A is a Nevada corporation headquartered in Plano, Texas. Issuer A was at all +relevant times an issuer as defined by the Sarbanes-Oxley Act. Issuer A’s common stock was +registered with the Commission pursuant to Exchange Act Section 12(g). Issuer A’s common +stock was quoted on the OTCQB tier of the OTC Markets. Issuer A filed periodic reports, +including Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange +Act and the related rules thereunder. On October 24, 2019, Issuer A filed for bankruptcy. As part +of the Delinquent Filings Program and unrelated to this action, on September 21, 2020, the +Commission instituted an administrative proceeding against Issuer A pursuant to Section 12(j) of +the Exchange Act and instituted a trading suspension pursuant to Section 12(k) of the Exchange +Act. On November 23, 2020, the Commission accepted Issuer A’s offer of settlement and, +pursuant to Section 12(j) of the Exchange Act, revoked the registration of each class of Issuer +A’s securities. + +C. FACTS +i. Engagement by Issuer A +7. On June 6, 2018, Knauth, on behalf of Audit Firm A, entered into an engagement +agreement with Issuer A to perform the audit for the year ended December 31, 2018, as well as +interim quarterly reviews for 2018. In addition to conducting the annual audit for the year ended +December 31, 2018, Knauth conducted interim reviews on behalf of Audit Firm A for Issuer A for +the second and third quarters of 2018, and the first quarter of 2019. +8. In that engagement agreement, signed by Knauth, Audit Firm A represented to Issuer +A: “We are responsible for conducting our integrated audit of the financial statements and internal +control over financial reporting in accordance with the standards established by the Public +Company Accounting Oversight Board (PCAOB).” +9. The engagement agreement also provided that “Chris Knauth is the engagement +partner and is responsible for supervising the engagement and signing the [audit] report or +authorizing another individual to sign it.” +ii. Failure to Register with the PCAOB +10. Prior to Audit Firm A’s engagement by Issuer A, neither Audit Firm A nor Knauth +had performed any audit work for a public company, and at the time of Audit Firm A’s +engagement by Issuer A in June 2018, Audit Firm A was not registered with the PCAOB. On + +3 Issuer A is the only public company and/or registered broker-dealer for whom Audit Firm A +conducted any audits or interim reviews. + +4 + +August 16, 2018, Knauth signed and submitted to the PCAOB a Form 1, Application for +Registration, on behalf of Audit Firm A. Knauth did not confer with his co-principal in Audit Firm +A regarding the engagement with Issuer A or the PCAOB registration application. +11. On August 28, 2018, after its initial review of the application, PCAOB staff sent an +email to Knauth with requests for corrections and additional information, and, on September 17, +2018, the PCAOB issued a letter to Knauth requesting additional information regarding the +application for registration. In the September 17, 2018 letter, the PCAOB made clear that the +application had not been approved, warning that “[i]f [Audit Firm A] declines to provide the +requested information, the Board may deem the application incomplete, as described in PCAOB +Rule 2106(b)(2), may deem the application not to have been received in accordance with PCAOB +Rule 2102, or may take other such action as the Board deems appropriate.” +12. Between October 2018 and April 2019, PCAOB staff sent seven follow-up emails +to Knauth, attaching a copy of the September 17, 2018 letter and requesting to be advised of “[his] +plans to resubmit [his] firm’s application for registration.” Additionally, in a March 15, 2019 +telephone call initiated by Knauth, PCAOB staff reiterated to Knauth that he needed to respond +to the PCAOB’s requests for information. Knauth did not provide responses to the PCAOB’s +requests for information. +13. On May 9, 2019, the PCAOB informed Knauth by letter that, because the PCAOB +had not received the additional requested information, the PCAOB deemed the application as not +received. On the same day, Knauth informed PCAOB staff in a telephone call that he intended to +“re-submit a new application” and that he would address the PCAOB’s questions related to the +original application. Knauth never resubmitted an application for registration or provided +responses to the PCAOB’s requests for information. +14. Despite failing to complete Audit Firm A’s registration with the PCAOB, Knauth +conducted the annual audit of Issuer A’s financial statements for the fiscal year 2018. Knauth +prepared and caused Audit Firm A to issue an audit report dated April 15, 2019, which Issuer A +included in its Form 10-K for the year ended December 31, 2018 filed with the Commission. The +audit report signed by Audit Firm A, through Knauth, falsely stated that “[w]e are a public +accounting firm registered with the [PCAOB].” +15. Knauth also performed interim reviews on behalf of Audit Firm A for Issuer A for +the quarters ended June 30, 2018, September 30, 2018, and March 31, 2019, despite Audit Firm A +not being registered with the PCAOB. + 16. On August 1, 2019, following initial notification from the PCAOB and subsequent +discussions with Knauth regarding Audit Firm A’s failure to register with the PCAOB, Issuer A +filed a Form 8-K with the Commission announcing that (i) Issuer A’s financial statements for fiscal +year 2018 and quarters ended June 30, 2018, September 30, 2018, and March 31, 2019, which +were included in Issuer A’s annual report on Form 10-K or quarterly reports on Form 10-Q, should +no longer be relied upon because they were not audited or reviewed by a registered public +accounting firm; and (ii) Issuer A had dismissed Audit Firm A and retained a new firm as its +independent registered public accounting firm. Issuer A has not filed updated reports with the +Commission. + +5 + + 17. Audit Firm A received $49,000 in fees, all of which went to Knauth, for its audit +and review work for Issuer A. Between August and September 2019—after being contacted by +Commission Staff—Knauth agreed to pay Issuer A a total of $140,000 to reimburse it for the audit +fees and for additional costs associated with Audit Firm A’s failure to register with the PCAOB. +iii. Failure to Conduct Audit and Reviews in Accordance with +PCAOB Standards +18. In conducting the fiscal year 2018 audit and the June 30, 2018, September 30, 2018 +and March 31, 2019 interim reviews of Issuer A, Knauth’s work was deficient and failed to comply +with multiple PCAOB auditing standards. The audit work papers lack sufficient documentation to +determine what, if any, work was conducted. The work papers reflect no audit planning. It +appears from the existing documentation that Knauth merely obtained certain limited documents +from Issuer A and did not perform further analysis sufficient to identify and appropriately assess +the risks of material misstatement or exercise sufficient professional skepticism, including by +conducting further questioning. Further, no engagement quality reviews, as required under +PCAOB standards, were performed on Knauth’s audit or interim review work. +19. Specifically, Knauth (1) failed to properly plan the audit and to identify and assess +risks of material misstatement; (2) failed to exercise due professional care and professional +skepticism (including through the failure to obtain required EQRs); (3) failed to obtain sufficient +appropriate audit evidence; and (4) failed to prepare adequate audit documentation. +20. As the engagement partner on the audit and reviews of Issuer A, Knauth was +responsible for compliance with PCAOB standards. PCAOB Auditing Standard No. 1201, +Supervision of the Audit Engagement (“AS No. 1201”); AS No. 1201.03. +21. Knauth aided and abetted and caused Audit Firm A to issue an audit report +containing an unqualified audit opinion for Issuer A for the year ended December 31, 2018. The +audit report falsely stated that the audit was performed “in accordance with the standards of the +PCAOB,” when, as described below, the audit failed to comply with PCAOB standards. +Failure to Properly Plan the Audit (AS No. 2101) and Interim Reviews (AS No. 4105) and to +Identify and Assess Risks of Material Misstatement (AS No. 2110) +22. PCAOB Auditing Standard No. 2101, Audit Planning (“AS No. 2101”), establishes +requirements regarding planning an audit. AS No. 2101.01. “Planning the audit includes +establishing the overall audit strategy for the engagement and developing an audit plan, which +includes, in particular, planned risk assessment procedures and planned responses to the risks of +material misstatement.” AS No. 2101.05. +23. The auditor should develop and document an audit plan that includes a description +of: the planned nature, timing, and extent of the risk assessment procedures; the planned nature, +timing, and extent of tests of controls and substantive procedures; and other planned audit +procedures required to be performed so that the engagement complies with PCAOB standards. AS +No. 2101.10. + +6 + +24. “The purpose and objective of planning the audit are the same for an initial audit or +a recurring audit engagement. However, for an initial audit, the auditor should determine the +additional planning activities necessary to establish an appropriate audit strategy and audit plan, +including determining the audit procedures necessary to obtain sufficient appropriate audit +evidence regarding the opening balances.” AS No. 2101.19. +25. PCAOB Auditing Standard No. 4105, Reviews of Interim Financial Information +(“AS No. 4105”), requires that, “[i]n an initial review of interim financial information, the +accountant should perform procedures that will enable him or her to obtain sufficient knowledge of +the entity’s business and its internal control.” AS No. 4105.12. In planning a review of interim +financial information (following an initial review), the accountant should perform procedures to +update his or her knowledge of the entity’s business and internal control to aid in determining +inquiries to be made and analytical procedures to be performed, and to identify particular events, +transactions, or assertions to which the inquiries may be directed or analytical procedures applied. +AS No. 4105.11. +26. Knauth failed to engage in any meaningful audit planning process in connection +with Audit Firm A’s audit of Issuer A’s fiscal year 2018 financial statements and interim reviews +for June 30, 2018, September 30, 2018, and March 31, 2019. Among other things, Knauth failed +to develop any audit plan that included a description of the planned nature, timing, and extent of +the risk assessment procedures; the planned nature, timing, and extent of tests of controls and +substantive procedures; and any other planned audit procedures required to be performed. Nor did +Knauth perform any planning procedures to obtain knowledge of, or to update his knowledge of, +Issuer A’s business and internal control. In failing to engage in such planning, Knauth failed to +comply with AS No. 2101 and AS No. 4105, among others. +27. PCAOB Auditing Standard No. 2110, Identifying and Assessing Risks of Material +Misstatement (“AS No. 2110”), requires the auditor to “perform risk assessment procedures that +are sufficient to provide a reasonable basis for identifying and assessing the risks of material +misstatement, whether due to error or fraud.” AS No. 2110.04. +28. In addition, under AS No. 4105, if the accountant has not audited the most recent +annual financial statements, the accountant should perform procedures to obtain knowledge of an +entity’s internal control, including knowledge of the relevant aspects of the control environment, +the entity’s risk assessment process, control activities, information and communication, and +monitoring, as those terms are defined in AS No. 2110. AS No. 4105.13; see also AS No. +4105.10; AS No. 4105.12 (“[i]n an initial review of interim financial information, the accountant +should perform procedures to enable him or her to obtain sufficient knowledge of the entity’s +business and its internal control,” including considering the nature of any risks of material +misstatement due to fraud identified by the predecessor auditor). +29. “Risks of material misstatement can arise from a variety of sources, including +external factors, such as conditions in the company’s industry and environment, and company- +specific factors, such as the nature of the company, its activities, and internal control over financial +reporting.” AS No. 2110.05. “Thus, the audit procedures that are necessary to identify and +appropriately assess the risks of material misstatement include consideration of both external +factors and company-specific factors.” AS No. 2110.05. + +7 + +30. Knauth did not perform sufficient risk assessment procedures, and did not perform +steps, such as obtaining an understanding of Issuer A’s activities, environment or internal control +over financial reporting. As such, Knauth failed to comply with AS No. 2110 and AS No. 4105. +Failure to Exercise Due Professional Care and Professional Skepticism (AS No. 1015) and +Failure to Obtain Engagement Quality Reviews (AS No. 1220) +31. PCAOB Auditing Standard No. 1015, Due Professional Care in the Performance of +Work (“AS No. 1015”), requires auditors to exercise due professional care in the planning and +performance of the audit and the preparation of the report and in conducting interim reviews. AS +No. 1015.01; AS No. 4105.01 (noting that AS No. 1015 applies to interim reviews). Auditors are +required further to exercise professional skepticism, which is an attitude that includes “a +questioning mind and a critical assessment of audit evidence.” AS No. 1015.07 +32. In addition, the auditor should “consider the competency and sufficiency of the +evidence. Since evidence is gathered and evaluated throughout the audit, professional skepticism +should be exercised throughout the audit process.” AS No. 1015.08. +33. In addition, PCAOB Auditing Standard No. 1220, Engagement Quality Review +(“AS No. 1220”), provides that for both audits and interim reviews, an engagement quality +reviewer should, among other things, “evaluate the significant judgments made by the engagement +team and the related conclusions reached in forming the overall conclusion on the engagement.” +AS 1220.09 and .14. “Documentation of an engagement quality review should be included in the +engagement documentation.” AS 1220.20. +34. Beyond merely obtaining certain limited documents from Issuer A, Knauth did not +conduct sufficient audit procedures to assess such audit evidence. As such, Knauth failed to +exercise due professional care and professional skepticism in violation of AS No. 1015, among +others. +35. Further, Audit Firm A did not perform the procedures described in AS No. 1220 +and did not obtain any EQR with regard to the audit and interim reviews. As such, Audit Firm A +violated AS No. 1220, and, by failing to arrange for the EQRs, Knauth further failed to exercise +due professional care. +Failure to Obtain Sufficient Appropriate Audit Evidence (AS No. 1105) +36. PCAOB Auditing Standard No. 1105, Audit Evidence (“AS No. 1105”) requires an +auditor to “plan and perform audit procedures to obtain sufficient appropriate audit evidence to +provide a reasonable basis for his or her opinion.” AS No. 1105.04. “Audit evidence is all the +information, whether obtained from audit procedures or other sources, that is used by the auditor in +arriving at the conclusions on which the auditor’s opinion is based.” AS No. 1105.02. +37. By merely obtaining certain limited documents from Issuer A, without performing +sufficient audit procedures to assess that audit evidence, Knauth failed to obtain sufficient +appropriate audit evidence to support Audit Firm A’s issuance of the audit report for Issuer A’s +fiscal year 2018 financial statements. As such, Knauth failed to comply with AS No. 1105, among +others. + +8 + +Failure to Prepare Adequate Documentation +for the Audit (AS No. 1215) and Interim Reviews (AS No. 4105.52) +38. In conducting an audit or interim review, an auditor must document the procedures +performed, evidence obtained, and conclusions reached with respect to relevant financial statement +assertions. PCAOB Auditing Standard No. 1215, Audit Documentation (“AS No. 1215”). Audit +documentation must clearly demonstrate that the work was in fact performed and “must contain +sufficient information to enable an experienced auditor, having no previous connection with the +engagement (a) to understand the nature, timing, extent, and results of the procedures performed, +evidence obtained, and conclusions reached, and (b) to determine who performed the work and the +date such work was completed as well as the person who reviewed the work and the date of such +review.” AS No. 1215; AS No. 1215.06. +39. In connection with interim reviews, in addition to the requirements under AS No. +1215, under AS No. 4105 “the documentation should (a) enable members of the engagement team +with supervision and review responsibilities to understand the nature, timing, extent, and results of +the review procedures performed; (b) identify the engagement team member(s) who performed and +reviewed the work; and (c) identify the evidence the accountant obtained in support of the +conclusion that the interim financial information being reviewed agreed or reconciled with the +accounting records.” AS No. 4105.52. +40. As described above, Audit Firm A’s work papers contain no audit program and lack +documentation to determine what, if any, procedures were performed or conclusions reached with +respect to the audit and interim reviews of Issuer A. As such, Knauth failed to comply with AS +No. 1215 and AS No. 4105, among others. +D. VIOLATIONS +41. Section 102(a) of the Sarbanes-Oxley Act provides that “it shall be unlawful for any +person that is not a registered public accounting firm to prepare or issue, or to participate in the +preparation or issuance of, any audit report with respect to any issuer.”4 Audit Firm A was not +registered with the PCAOB when it performed the audit and interim reviews of Issuer A and, +accordingly, violated Section 102(a) of the Sarbanes-Oxley Act. Knauth willfully aided and +abetted and caused Audit Firm A’s violations of Section 102(a) of the Sarbanes-Oxley Act. + +42. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state “the +applicable professional standards under which the audit was conducted.” 17 CFR 210.2-02(b)(1). +An auditor violates Regulation S-X Rule 2-02(b)(1) if it issues a report stating it has conducted its +audit in accordance with PCAOB standards when it has not. Audit Firm A violated Rule 2- +02(b)(1) of Regulation S-X by issuing an audit report for Issuer A’s fiscal year 2018 audit stating +that it had conducted the audit in accordance with PCAOB standards when it had not. Knauth + +4 A violation of the Sarbanes-Oxley Act or any rule that the PCAOB issues under the Sarbanes- +Oxley Act is treated for all purposes in the same manner as a violation of the Exchange Act, including +with respect to penalties. Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7202(b)(1). + +9 + +willfully aided and abetted and caused Audit Firm A’s violations of Rule 2-02(b)(1) of Regulation +S-X. +43. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers with +equity securities registered under Section 12 to file annual reports with the Commission that have +been audited by an independent public accountant registered with the PCAOB.5 Exchange Act +Rule 13a-13 requires the same companies to file with the Commission accurate quarterly reports +on Form 10-Q. Rule 10-01(d) of Regulation S-X requires the interim financial statements included +in a Form 10-Q to be reviewed by an independent public accountant registered with the PCAOB. +17 C.F.R. § 210.10-01(d); see also 17 C.F.R. § 210.8-03. Issuer A filed an annual report on Form +10-K for fiscal year 2018 and quarterly reports on Form 10-Q for the quarters ended June 30, 2018, +September 30, 2018, and March 31, 2019, all of which were either audited or reviewed by Audit +Firm A when Audit Firm A was not registered with the PCAOB. Knauth willfully aided and +abetted and caused Issuer A’s violations of Section 13(a) of the Exchange Act and Rules 13a-1 and +13a-13 thereunder. + 44. Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice provide, in part, that the Commission may censure a person or deny, temporarily +or permanently, the privilege of appearing or practicing before the Commission to any person who +is found by the Commission to have engaged in improper professional conduct. With respect to +persons licensed to practice as accountants, “improper professional conduct” includes “intentional +or knowing conduct, including reckless conduct, that results in a violation of applicable +professional standards.” See Rule 102(e)(1)(iv)(A). In addition, “improper professional conduct” +includes either of the following two types of negligent conduct: (i) “a single instance of highly +unreasonable conduct that results in a violation of applicable professional standards in +circumstances in which an accountant knows, or should know, that heightened scrutiny is +warranted;” or (ii) “repeated instances of unreasonable conduct, each resulting in violations of +applicable professional standards, that indicate a lack of competence to practice before the +Commission.” See Rule 102(e)(1)(iv)(B)(1) and (2). By failing to comply with PCAOB +standards in the audit and interim reviews of Issuer A, as described above, Knauth engaged in +improper professional conduct as defined in Rule 102(e)(1)(iv). + 45. Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice provide, in part, that the Commission may censure a person or deny, temporarily +or permanently, the privilege of appearing or practicing before the Commission to any person who +is found by the Commission “[t]o have willfully violated, or willfully aided and abetted the +violation of, any provision of the Federal securities laws or the rules and regulations thereunder.” +Through the conduct described above, Knauth willfully aided and abetted violations of the federal +securities laws and rules and regulations thereunder within the meaning of Section 4C(a)(3) of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + + +5 See also 15 U.S.C. § 78c(a)(59); 15 U.S.C. § 7201(12) (defining registered public accounting +firm as a public accounting firm registered with the PCAOB). + +10 + + + +III. + +In view of the allegations made by the Division of Enforcement and the Office of the Chief +Accountant, the Commission deems it appropriate that public administrative and cease-and-desist +proceedings be instituted to determine: +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondent an opportunity to establish any defenses to such allegations; + +B. What, if any, remedial action is appropriate against Respondent pursuant to Section +4C of the Exchange Act and Rule 102(e)(1) of the Commission’s Rules of Practice; and + +C. Whether, pursuant to Section 21C of the Exchange Act, Respondent should be +ordered to cease and desist from committing or causing violations of and any future violations of +Section 102(a) of the Sarbanes-Oxley Act; Rule 2-02(b)(1) of Regulation S-X; Section 13(a) of the +Exchange Act and Rules 13a-1 and 13a-13 thereunder; and whether Respondent should be ordered to +pay a civil penalty pursuant to Section 21B(a) of the Exchange Act. +IV. + IT IS ORDERED that a public hearing before the Commission for the purposes of taking +evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days +and not later than 60 days from service of this Order at a time and place to be fixed by further order +of the Commission, pursuant to Rule 110 of the Commission’s Rules of Practice, 17 C.F.R. § +201.110. +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule +220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondent shall +conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The parties may meet in +person or participate by telephone or other remote means; following the conference, they shall file +a statement with the Office of the Secretary advising the Commission of any agreements reached at +said conference. If a prehearing conference was not held, a statement shall be filed with the Office +of the Secretary advising the Commission of that fact and of the efforts made to meet and confer. + +If any Respondent fails to file the directed Answer, or fails to appear at a hearing or +conference after being duly notified, the Respondent may be deemed in default and the proceedings +may be determined against him upon consideration of this Order, the allegations of which may be +deemed to be true as provided by Rules 155(a), 220(f), 221(f), and 310 of the Commission’s Rules +of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f), and 201.310. + + +11 + +This Order shall be served forthwith upon Respondent Knauth by any means permitted by +the Commission’s Rules of Practice. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to service of +paper copies, service to the Division of Enforcement of all opinions, orders, and decisions +described in Rule 141, 17 C.F.R. § 201.141, and all papers described in Rule 150(a), 17 C.F.R. § +201.150(a), in these proceedings shall be by email to the attorneys who enter an appearance on +behalf of the Division, and not by paper service. + +Attention is called to Rule 151(b) and (c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.151(b) and (c), providing that when, as here, a proceeding is set before the Commission, all +papers (including those listed in the following paragraph) shall be filed with the Office of the +Secretary and all motions, objections, or applications will be decided by the Commission. The +Commission requests that an electronic courtesy copy of each filing should be emailed to +APFilings@sec.gov in PDF text-searchable format. Any exhibits should be sent as separate +attachments, not a combined PDF. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to filing with or +disposition by a hearing officer, all filings, including those under Rules 210, 221, 222, 230, 231, +232, 233, and 250 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, +231, 232, 233, and 250, shall be directed to and, as appropriate, decided by the Commission. This +proceeding shall be deemed to be one under the 120-day timeframe specified in Rule of Practice +360(a)(2)(i), 17 C.F.R. § 201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and +250, 17 C.F.R. §§ 201.233 and 250. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that the Commission shall issue a decision on the basis of the record in this +proceeding, which shall consist of the items listed at Rule 350(a) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.350(a), and any other document or item filed with the Office of the +Secretary and accepted into the record by the Commission. The provisions of Rule 351 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.351, relating to preparation and certification of a +record index by the Office of the Secretary or the hearing officer are not applicable to this +proceeding. + +The Commission will issue a final order resolving the proceeding after one of the +following: (A) The completion of post-hearing briefing in a proceeding where the public hearing +has been completed; (B) The completion of briefing on a motion for a ruling on the pleadings or a +motion for summary disposition pursuant to Rule 250 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.250, where the Commission has determined that no public hearing is necessary; or +(C) The determination that a party is deemed to be in default under Rule 155 of the Commission’s +Rules of Practice, 17 C.F.R. § 201.155, and no public hearing is necessary. + +12 + + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within +the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the +provisions of Section 553 delaying the effective date of any final Commission action. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4208.txt b/raw/aaer/2021/AAER-4208.txt new file mode 100644 index 0000000000000000000000000000000000000000..8ebd75e9c76d411b707b9a79e80c6bb2ab4af61a --- /dev/null +++ b/raw/aaer/2021/AAER-4208.txt @@ -0,0 +1,111 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91536 / April 12, 2021 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4208 / April 12, 2021 +ADMINISTRATIVE PROCEEDING +File No. 3-17628 + +In the Matter of +CRAIG R. +FRONCKIEWICZ, 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 October 18, 2016, Craig R. Fronckiewicz, CPA (“Fronckiewicz”) 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 him pursuant to Rule +102(e)(1) of the Commission’s Rules of Practice. 1 This order is issued in response to +Fronckiewicz’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 Fronckiewicz caused Weatherford International Ltd.’s +(“Weatherford”) violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules +12b-20, 13a-1, and 13a-13 thereunder, and engaged in improper professional conduct under Rule +102(e)(1) of the Commission’s Rules of Practice between 2007 and the third quarter of 2010 (the +“relevant period”). The Commission’s findings related to his work as the coordinating partner +on the audits and reviews of Weatherford’s financial statements. During the relevant period, +Weatherford improperly inflated its earnings and materially understated its effective tax rate and +tax expense through the use of deceptive intercompany tax accounting. The Commission found +that Fronckiewicz and others failed to comply with Public Company Accounting Oversight +Board standards related to due professional care, professional skepticism, supervision, staffing, +training, and documentation. + +1 See Accounting and Auditing Enforcement Release No. 3814 dated October 18, 2016. Fronckiewicz was +permitted, pursuant to the order, to apply for reinstatement after two 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, +Fronckiewicz 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. Fronckiewicz 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, Fronckiewicz’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 Fronckiewicz, it appears that he has complied with the terms of the October 18, 2016 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 Fronckiewicz, 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. + + + + + + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +Therefore, it is accordingly, ORDERED pursuant to Rule 102(e)(5)(i) of the +Commission’s Rules of Practice that Craig R. Fronckiewicz, CPA is hereby reinstated to appear +and practice before the Commission as an accountant responsible for the preparation or review of +financial statements required to be filed with the Commission. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4210.pdf b/raw/aaer/2021/AAER-4210.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5919c9d7dd722dea1e60f580013d998070b1233c --- /dev/null +++ b/raw/aaer/2021/AAER-4210.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:d007a5d72cfe8fc88daf3445c8342edb6bb1bb864174ba9e88728e4a035fca80 +size 226265 diff --git a/raw/aaer/2021/AAER-4212.txt b/raw/aaer/2021/AAER-4212.txt new file mode 100644 index 0000000000000000000000000000000000000000..7816028809fbf30c98b7f727105087f83e9a6afd --- /dev/null +++ b/raw/aaer/2021/AAER-4212.txt @@ -0,0 +1,223 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91715 / April 29, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4212 / April 29, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20268 + + +In the Matter of + +FORTEM RESOURCES, +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 Fortem Resources, Inc. (“Fortem” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + + + 2 + + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers that fail to file timely a periodic report shall file a Form 12b-25 “Notification of +Late Filing,” commonly known as “Form NT,” which contains, among other things, reasonable +detail as to why the issuer’s periodic report could not be filed on time and an explanation of any +anticipated, significant changes in the issuer’s results of operations. + + 2. In July 2019, Fortem violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which Fortem failed to disclose why, in sufficient detail under the circumstances +presented, its first-quarter, fiscal year (“FY”) 2020 Form 10-Q could not be timely filed. Fortem’s +Form 12b-25 also failed to acknowledge anticipated, significant changes in Fortem’s results of +operations for the first quarter of FY2020, compared with Fortem’s operating results in the first +quarter of FY2019, and to provide an explanation of the changes, as required under the rule. Four +days after filing its Form 12b-25, Fortem filed a Form 8-K disclosing to investors and the market +that its financial statements for FY2018 and for the first three quarters of FY2019 should no longer +be relied upon. Fortem, however, had failed to include in its Form 12b-25 any disclosure that the +discovery, and ongoing correction, of errors in its prior financial statements were among the +principal reasons that it was unable to file timely the subject first-quarter FY2020 Form 10-Q. + +Respondent + +3. Fortem, a Nevada corporation based in Vancouver, British Columbia, Canada, +engages in the acquisition, exploration and development of oil and gas properties located in the +United States and Canada. Fortem common stock is registered under Section 12(g) of the +Exchange Act and is quoted on the OTCQB Venture Market. + +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date, and requires that the report actually be filed within such period. Form 12b-25 +also requires the issuer to confirm whether or not it anticipates that any significant change in +results of operations from the corresponding period for the prior fiscal year will be reflected by the +earnings statements to be included in the subject periodic report. If such change is anticipated, the +issuer must attach a narrative and quantitative explanation of the anticipated change and, if +appropriate, state the reasons why a reasonable estimate of the results cannot be made. + + 6. On July 11, 2019, Fortem filed with the Commission a Form 12b-25 disclosing that +Fortem could not file timely its Form 10-Q for its FY2020 first quarter, ended May 31, 2019, +because its management was “still compiling information necessary to complete the preparation of +its financial statements for the interim period ended May 31, 2019 and to complete the review of +these financial statements by its auditors.” + + 7. Furthermore, in its Form 12b-25, Fortem affirmed that it would file the subject +Form 10-Q within the five-calendar-day extension period and indicated that it did not anticipate +that any significant change in results of operations from the corresponding period for the prior +fiscal year would be reflected in the subject Form 10-Q. + + 8. On July 15, 2019, Fortem filed with the Commission a Form 8-K disclosing that its +FY2018 quarterly and full-year financial statements, as well as those for the first three quarters of +FY2019, should not be relied upon because, “[f]ollowing consultation with our financial advisor +and former [auditor], we determined that [those financial statements] incorrectly reported that four +companies … which were acquired by our company … were not ‘variable interest entities,’ when +they should have been reported as such. In addition, certain shares issued for consulting fees and oil +and gas property acquisitions were [incorrectly] valued at private placement price instead of the +quoted market value.” + +9. Fortem’s inability to meet the filing deadline for its first-quarter FY2020 Form +10-Q was due, in large part, to the discovery, and ongoing correction, of errors in its FY2018 +quarterly and full-year financial statements, as well as those for the first three quarters of FY2019. +In its Form 12b-25, however, Fortem failed to disclose this information and failed to provide the +detailed narratives and quantitative explanation specifically called for by the form. The company +anticipated that its first-quarter FY2020 financial results, when reported, would differ significantly +from its first-quarter FY2019 financial results, including a 52% increase in quarterly loss versus +first quarter FY2019. + + + +2 Form 12b-25 specifies a “narrative” disclosure. (See Form 12b-25, Part III.) + 4 +Violations + + 10. As a result of the conduct described above, Fortem violated Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Fortem’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Fortem cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +B. Respondent shall pay civil penalties of $25,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act +Section 21F(g)(3). Payment shall be made in the following four installments: (1) $5,000 within 14 +days of entry of this order; (2) $7,500 within 180 days of entry of this order; (3) $6,250 within 270 +days of entry of this order; and (4) $6,250 within 360 days of entry of this order. Payments shall +be applied first to post order interest, which accrues pursuant to 31 U.S.C. 3717. Prior to making +the final payment set forth herein, Respondent shall contact the staff of the Commission for the +amount due. If Respondent fails to make any payment by the date agreed and/or in the amount +agreed according to the schedule set forth above, all outstanding payments under this Order, +including post-order interest, minus any payments made, shall become due and payable +immediately at the discretion of the staff of the Commission without further application to the +Commission. + +Payment must be made in one of the following ways: + +(1) 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 + 5 +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Fortem 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 Anita B. Bandy, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4214.txt b/raw/aaer/2021/AAER-4214.txt new file mode 100644 index 0000000000000000000000000000000000000000..1b22e28964d438ec6a2e6d271d956b7e6e655a27 --- /dev/null +++ b/raw/aaer/2021/AAER-4214.txt @@ -0,0 +1,210 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91717 / April 29, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4214 / April 29, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20270 + + +In the Matter of + +SHIFTPIXY, 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 ShiftPixy, Inc. (“ShiftPixy” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + + + + + 2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers that fail to file timely a periodic report shall file a Form 12b-25 “Notification of +Late Filing,” commonly known as “Form NT,” which contains, among other things, reasonable +detail as to why the issuer’s periodic report could not be filed on time and an explanation of any +anticipated, significant changes in the issuer’s results of operations. + + 2. In July 2019, ShiftPixy violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which ShiftPixy failed to disclose why, in sufficient detail under the circumstances +presented, its third-quarter, fiscal year (“FY”) 2019 Form 10-Q could not be timely filed. +ShiftPixy’s Form 12b-25 also failed to acknowledge anticipated, significant changes in ShiftPixy’s +results of operations for the third quarter of FY2019, compared with ShiftPixy’s operating results in +the third quarter of FY2018, and to provide an explanation of the changes, as required under the +rule. One week after filing its Form 12b-25, ShiftPixy filed a Form 8-K disclosing to investors and +the market that financial statements included in its second-quarter FY2019 Form 10-Q should not be +relied upon. ShiftPixy, however, had failed to include in its Form 12b-25 any disclosure that the +discovery, and ongoing correction, of errors in its second-quarter FY2019 financial statements +were among the principal reasons that it was unable to file timely the subject third-quarter FY2019 +Form 10-Q. + +Respondent + +3. ShiftPixy, a Wyoming corporation based in Miami, Florida, is a human capital +management services provider. ShiftPixy common stock is registered under Section 12(b) of the +Exchange Act and trades on the Nasdaq Capital Market. + +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability + +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 +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date, and requires that the report actually be filed within such period. Form 12b-25 +also requires the issuer to confirm whether or not it anticipates that any significant change in +results of operations from the corresponding period for the prior fiscal year will be reflected by the +earnings statements to be included in the subject periodic report. If such change is anticipated, the +issuer must attach a narrative and quantitative explanation of the anticipated change and, if +appropriate, state the reasons why a reasonable estimate of the results cannot be made. + + 6. On July 15, 2019, ShiftPixy filed with the Commission a Form 12b-25 disclosing +that ShiftPixy could not file timely its Form 10-Q for its FY2019 third quarter, ended May 31, +2019, “due to its difficulty in completing and obtaining required financial and other information +without unreasonable effort and expense.” + + 7. Furthermore, in its Form 12b-25, ShiftPixy affirmed that it would file the subject +Form 10-Q within the five-calendar-day extension period and indicated that it did not anticipate +that any significant change in results of operations from the corresponding period for the prior +fiscal year would be reflected in the subject Form 10-Q. + + 8. On July 22, 2019, ShiftPixy filed with the Commission a Form 8-K disclosing that +financial statements included in ShiftPixy’s second-quarter FY2019 Form 10-Q should not be relied +upon because “the mistaken issuance of shares at a conversion price less than the original $2.49 +price and the resulting issuance of additional shares from these conversions [had] resulted in an +inadvertent material misstatement.” + +9. ShiftPixy’s inability to meet the filing deadline for its third-quarter FY2019 Form +10-Q was due, in large part, to the discovery, and ongoing correction, of errors in its second- +quarter FY2019 financial statements. In its Form 12b-25, however, ShiftPixy failed to disclose this +information and failed to provide the detailed narratives and quantitative explanation specifically +called for by the form. The company anticipated that its third-quarter FY2019 financial results, +when reported, would differ significantly from its third-quarter FY2018 financial results, including +a 175% increase in quarterly loss versus third quarter FY2018. + +Violations + + 10. As a result of the conduct described above, ShiftPixy violated Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + + + + + +2 Form 12b-25 specifies a “narrative” disclosure. (See Form 12b-25, Part III.) + 4 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent ShiftPixy’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent ShiftPixy cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $25,000.00 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +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 +ShiftPixy 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 Anita B. Bandy, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil + 5 +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4218.txt b/raw/aaer/2021/AAER-4218.txt new file mode 100644 index 0000000000000000000000000000000000000000..be2f9be33fc9623ed8b54df63baa4712dfa250e2 --- /dev/null +++ b/raw/aaer/2021/AAER-4218.txt @@ -0,0 +1,224 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 91722 / April 29, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4218 / April 29, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20274 + + +In the Matter of + +DANIELS CORPORATE +ADVISORY COMPANY, +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 Daniels Corporate Advisory Company, Inc. +(“Daniels” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + + 2 + + + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. These proceedings arise out of the violation of Exchange Act Rule 12b-25, which +requires that issuers that fail to file timely a periodic report shall file a Form 12b-25 “Notification of +Late Filing,” commonly known as “Form NT,” which contains, among other things, reasonable +detail as to why the issuer’s periodic report could not be filed on time and an explanation of any +anticipated, significant changes in the issuer’s results of operations. + + 2. In July 2019, Daniels violated Rule 12b-25 by filing a Form 12b-25 with the +Commission in which Daniels failed to disclose why, in sufficient detail under the circumstances +presented, its second-quarter, fiscal year (“FY”) 2019 Form 10-Q could not be timely filed. +Daniels’ Form 12b-25 also failed to acknowledge anticipated, significant changes in Daniels’ results +of operations for the second quarter of FY2019, compared with Daniels’ operating results in the +second quarter of FY2018, and to provide an explanation of the changes, as required under the rule. +One week after filing its Form 12b-25, Daniels filed an amended first-quarter FY2019 Form 10-Q +disclosing to investors and the market that its previously-filed financial statements for the first +quarter of FY2019 should no longer be relied upon. Daniels, however, had failed to include in its +Form 12b-25 any disclosure that the discovery, and ongoing correction, of errors in its first-quarter +FY2019 financial statements were among the principal reasons that it was unable to file timely the +subject Form 10-Q. + +Respondent + +3. Daniels, a Nevada corporation based in Forest Hills, New York, is engaged in the +business of offering corporate financial consulting services and also refurbishes, sells, and rents +“Class 8” heavy-duty trucks. Daniels common stock is registered under Section 12(g) of the +Exchange Act and is quoted on the OTCQB Venture Market. + +Legal Framework and Facts + + 4. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual reports on Form 10-K and quarterly reports on Form 10-Q. + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 + + 5. Rule 12b-25 provides that if an issuer fails to file a Form 10-K or 10-Q within the +time period prescribed for such report, the issuer, no later than one business day after the due date +for such report, shall file a Form 12b-25 with the Commission, disclosing the issuer’s inability +to file the report timely and the reasons therefore in reasonable detail.2 Form 12b-25 requires the +issuer to affirm, among other things, that the subject periodic report will be filed within fifteen +calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the report’s +prescribed due date, and requires that the report actually be filed within such period. Form 12b-25 +also requires the issuer to confirm whether or not it anticipates that any significant change in +results of operations from the corresponding period for the prior fiscal year will be reflected by the +earnings statements to be included in the subject periodic report. If such change is anticipated, the +issuer must attach a narrative and quantitative explanation of the anticipated change and, if +appropriate, state the reasons why a reasonable estimate of the results cannot be made. + + 6. On July 15, 2019, Daniels filed with the Commission a Form 12b-25 disclosing +only that Daniels could not file timely its Form 10-Q for its FY2019 second quarter, ended May +31, 2019, because: “The Registrant has been unable to complete all aspects of its Form 10-Q for +the quarterly period ended May 31, 2019 on, or prior to, the prescribed due date.” + + 7. Furthermore, in its Form 12b-25, Daniels affirmed that it would file the subject +Form 10-Q within the five-calendar-day extension period and indicated that it did not anticipate +that any significant change in results of operations from the corresponding period for the prior +fiscal year would be reflected in the subject Form 10-Q. + + 8. On July 22, 2019, Daniels filed with the Commission its second-quarter FY2019 +Form 10-Q and also an amended Form 10-Q for its FY2019 first quarter, ended February 28, 2019, +which restated Daniels’ financial statements for the FY2019 first quarter and disclosed that the +previously-filed financials for that quarter should no longer be relied upon. As explained in the +amended Form 10-Q: “In the course of its financial statements closing process subsequent to the +period ended February 28, 2019, the CEO and CFO … of Daniels … determined that the +Company’s interim financial statements for the three months ended February 28, 2019, could no +longer be relied upon. Specifically, Management discovered an overstatement of sales and cost of +sales which should not have been recognized during the three months ended February 28, 2019.” + +9. Daniels’ inability to meet the filing deadline for its second-quarter FY2019 Form +10-Q was due, in large part, to the discovery, and ongoing correction, of errors in its first-quarter +FY2019 financial statements. In its Form 12b-25, however, Daniels failed to disclose this +information and failed to provide the detailed narratives and quantitative explanation specifically +called for by the form. The company anticipated that its second-quarter FY2019 financial results, +when reported, would include $1.096 million in revenue from its truck-related business, thereby +differing significantly from its financial results for the second quarter of FY2018, when the +company reported having no operating revenue at all. + + +2 Form 12b-25 specifies a “narrative” disclosure. (See Form 12b-25, Part III.) + 4 +Violations + + 10. As a result of the conduct described above, Daniels violated Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Daniels’ Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Daniels cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rule 12b-25 thereunder. + +B. Respondent shall pay civil penalties of $25,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act +Section 21F(g)(3). Payment shall be made in the following four installments: (1) $5,000 within 14 +days of entry of this order; (2) $7,500 within 180 days of entry of this order; (3) $6,250 within 270 +days of entry of this order; and (4) $6,250 within 360 days of entry of this order. Payments shall +be applied first to post order interest, which accrues pursuant to 31 U.S.C. 3717. Prior to making +the final payment set forth herein, Respondent shall contact the staff of the Commission for the +amount due. If Respondent fails to make any payment by the date agreed and/or in the amount +agreed according to the schedule set forth above, all outstanding payments under this Order, +including post-order interest, minus any payments made, shall become due and payable +immediately at the discretion of the staff of the Commission without further application to the +Commission. + +Payment must be made in one of the following ways: + +(1) 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 + 5 +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Daniels 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 Anita B. Bandy, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4224.txt b/raw/aaer/2021/AAER-4224.txt new file mode 100644 index 0000000000000000000000000000000000000000..11c6a0bd8834b3d3061e27bdbff38213ba0f6a4e --- /dev/null +++ b/raw/aaer/2021/AAER-4224.txt @@ -0,0 +1,1322 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92361 / July 9, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4224 / July 9, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-19767 + + +In the Matter of + +PLS, CPA, A PROFESSIONAL +CORPORATION, A/K/A PLS CPAs, +CHANG G. PARK, CPA, A/K/A +CHANGGEUN PARK, +JOSEPH YONGYUN LEE, CPA, +A/K/A YONG YUN LEE, and +JUCHI LEE, CPA, A/K/A +JUCHI LEE FERNANDEZ, +JU-CHI LEE, JU CHI LEE, +SUE LEE, + +Respondents. + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS AND +A CEASE-AND-DESIST ORDER +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 April 24, 2020, the Securities and Exchange Commission (“Commission”) instituted +public administrative and cease-and-desist proceedings against PLS, CPA, A Professional +Corporation, a/k/a PLS CPAs (“PLS”), Chang G. Park, CPA, a/k/a Changgeun Park (“Park”), +Joseph Yongyun Lee, CPA, a/k/a Yong Yun Lee (“Joseph Lee”), and Juchi Lee, CPA, a/k/a +Juchi Lee Fernandez, Ju-chi Lee, Ju Chi Lee, Sue Lee (“Juchi Lee”) (collectively, “Respondents”) +pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +2 + +Rule 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of Practice.2 The Commission +now deems it appropriate to enter this Order Making Findings and Imposing Remedial Sanctions +and a Cease-and-Desist Order Pursuant to Sections 4C and 21C of the Exchange Act and Rule +102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of Practice against Respondents. + +II. + + 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 Making Findings and Imposing +Remedial Sanctions and a Cease-and-Desist Order 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. + + + +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + + 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 + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds that: + +A. SUMMARY + +1. These proceedings involve violations of Exchange Act Rule 2-01(b)(1) of +Regulation S-X, 17 C.F.R. § 210.02 and Public Company Accounting Oversight Board +(“PCAOB”) Rules 3500T and 4006 in five audits performed by Respondents for four public +company issuers. + +B. RESPONDENTS + +2. PLS, CPA, A Professional Corporation (a/k/a “PLS CPAs”) (“PLS”), a California +corporation, is a PCAOB-registered public accounting firm based in San Diego, California. PLS +was incorporated in November 2009, and is co-owned by Park, Joseph Lee, and a third individual. +Park, Joseph Lee, and Juchi Lee are PLS’s only individuals who perform audit services +(collectively, the “individual auditors”). + +3. Chang G. Park, CPA (a/k/a Changgeun Park) (“Park”), age 61, resides in San +Diego, California. Park is a certified public accountant licensed in California. Park is the +founder of Chang G. Park, C.P.A., A Professional Corporation, which later reincorporated as +PLS. Since November 2009, Park has been the managing partner and 55% co-owner of PLS, +and one of the firm’s three auditors. + +4. Joseph Yongyun Lee, CPA (a/k/a Yong Yun Lee) (“Joseph Lee”), age 58, resides in +San Diego, California. Joseph Lee is a certified public accountant licensed in California. Joseph +Lee joined Chang G. Park, C.P.A. as an accountant in December 2003. Since November 2009, +Joseph Lee has been a partner, 25% co-owner, and the CFO of PLS, where he is one of the firm’s +three auditors. + +5. Juchi Lee, CPA (a/k/a Juchi Lee Fernandez, Ju-chi Lee, Ju Chi Lee, Sue Lee) +(“Juchi Lee”), age 49, resides in San Diego, California. Juchi Lee is a certified public accountant +licensed in California. Juchi Lee joined Chang G. Park, C.P.A. as a senior auditor in October +2007. Since November 2009, Juchi Lee has been one of the three auditors at PLS. + +C. OTHER RELEVANT ENTITIES + +6. Interactive Multi-Media Auction Corporation (n/k/a Stop Sleep Go Inc.) +(“IMMA”), CIK# 0001565430, is a British Virgin Islands corporation with its principal place of +business in the United Kingdom, and has common stock registered pursuant to Section 12(g) of the +Exchange Act. IMMA was formerly headquartered in Hong Kong, and its stock was quoted on +OTC Link under the ticker symbol “IMMA.” In December 2016, IMMA entered into a business +4 + +combination with another company and changed its name to “Stop Sleep Go Inc.” Its stock +currently is quoted on the OTC Link under the ticker symbol “SSGOF.” + +7. IMMA has not filed any annual or quarterly periodic reports with the Commission +since 2016. The Commission filed an injunctive action against IMMA, SEC v. McDiarmid et al., +Case 2:17-cv-07201 (C.D. Cal.), and, on November 19, 2018, obtained a default judgment +enjoining IMMA from violations of the antifraud provisions of the Securities Act and the +Exchange Act. SEC v. McDiarmid et al., 2018 WL 6062313 (C.D. Cal. Nov. 19, 2018). PLS +issued audit reports for IMMA’s Forms 10-K for the fiscal years ended October 31, 2014 and +October 31, 2015, and resigned as IMMA’s auditor on October 13, 2016. + +8. IMK Group, Inc. (“IMKG”), CIK# 0001321710, is a Delaware corporation with its +principal place of business in Seoul, South Korea. IMKG had common stock registered pursuant +to Section 12(g) of the Exchange Act, which was quoted on OTC Link under the ticker symbol +“IMKG.” + +9. IMKG has not filed any periodic reports with the Commission since 2016. The +Commission suspended trading in IMKG from September 25, 2017 through October 6, 2017 (In +the Matter of IMK Group, Inc., et al., Exchange Act Release No. 81691 (September 22, 2017)), +then revoked the registration of each class of registered securities of IMKG, effective April 16, +2019, for failure to file timely periodic reports with the Commission. In the Matter of IMK Group, +Inc., et al., Exchange Act Release No. 85648 (April 15, 2019). PLS issued an audit report for +IMKG’s Form 10-K for the fiscal year ended February 28, 2015. + +10. RadTek, Inc. (“RDTK”), CIK# 0001487252, is a Nevada corporation with its +principal place of business in Louisville, Kentucky. RDTK had common stock registered pursuant +to Section 12(g) of the Exchange Act, which traded on the OTC Grey Market under the ticker +symbol “RDTK.” + +11. RDTK has not filed any periodic reports with the Commission since 2016. The +Commission suspended trading in RDTK from August 28, 2019 through September 11, 2019 for +failure to file timely periodic reports with the Commission and failure to maintain a valid address +on file with the Commission (In the Matter of LD Holdings, Inc., et al., Exchange Act Release No. +86780 (August 27, 2019)), then revoked the registration of each class of registered securities of +RDTK, effective December 8, 2020, for failure to file timely periodic reports with the +Commission. In the Matter of LD Holdings, Inc., et al., Exchange Act Release No. 90588 +(December 7, 2020). PLS issued audit reports for RDTK’s Forms 10-K for the fiscal years ended +December 31, 2013, December 31, 2014, and December 31, 2015. + +12. Therapeutic Solutions International, Inc. (“TSOI”), CIK# 0001419051, is a Nevada +corporation with its principal place of business in Oceanside, California, and has common stock +registered pursuant to Section 12(g) of the Exchange Act which is quoted on OTC Link under the +ticker symbol “TSOI.” PLS issued audit reports for TSOI’s Forms 10-K for the fiscal years ended +5 + +December 31, 2013, December 31, 2014, and December 31, 2015, and resigned as TSOI’s auditor +on or around October 31, 2016. + +13. Each of the Respondents signed a tolling agreement with the Commission that +tolled and suspended the running of any applicable statute of limitations for the period beginning +on January 13, 2020 through July 13, 2020. + +D. RESPONDENTS’ IMPROPER PROFESSIONAL CONDUCT + +1. Respondents’ Audit Practice + +14. In or around 2001, Park founded an audit firm, initially named Chang G. Park, +C.P.A. In November 2009, the firm was re-incorporated as PLS. + +15. PLS currently provides audit and review services to microcap issuers, development +stage companies, and shell companies. Park, Joseph Lee, and Juchi Lee are the three individual +auditors who conduct PLS’s audits and reviews of public company financial statements. + +16. PLS has never used any proprietary auditing software. The individual auditors use +downloads of commercially available electronic audit templates to document audits. The +individual auditors complete these templates electronically and/or print out hard copies to fill out +manually. + +17. The individual auditors either save their electronic work papers on PLS’s +networked storage drive, or they save them in electronic client folders on their PLS computers +which are copied to PLS’s networked storage drive. Hard copies are printed out and assembled in +audit binders for the auditors’ review and signature; the resulting audit binders are then stored in +the individual auditors’ offices. + +18. Joseph Lee and Juchi Lee are generally responsible for preparing PLS’s audit +documentation and assembling and storing the audit binders. Park generally reviews the audit +binders assembled by Joseph Lee or Juchi Lee. + +19. As managing partner of the firm, Park manages the relationship of the firm with its +clients, while Joseph Lee and Juchi Lee perform most of the audit and review work. When matters +arise during a client’s audit, all three individual auditors typically meet to discuss the audit. + +20. As of early 2016, PLS was providing audit and review services to approximately +thirty clients, including IMMA, IMKG, RDTK, and TSOI. + +6 + +2. The July 2016 Commission Subpoena and the November 2016 PCAOB +Inspection + +21. On July 5, 2016, the Commission issued an administrative subpoena for documents +to PLS (the “July 2016 Commission Subpoena”). The subpoena included requests for IMMA audit +work papers created during, or concerning, the time period from September 30, 2014, to July 5, +2016. + +22. PLS produced IMMA audit work papers in response to the July 2016 Commission +Subpoena. Juchi Lee was responsible for gathering and producing PLS’s documents in response to +the subpoena. + +23. On April 1, 2016, the PCAOB informed PLS that it would conduct an inspection +of PLS during the week of November 7, 2016 (the “November 2016 PCAOB inspection”). + +24. On April 12, 2016, a representative of the PCAOB emailed Park, cc’ing Joseph +Lee and Juchi Lee, requesting that PLS complete and return, prior to the inspection, an attached +“issuer information form.” The issuer information form required PLS to specify, among other +information, the engagement partner (“EP”) and engagement quality reviewer (“EQR”) assigned +to its client issuers. + +25. Park asked Joseph Lee and Juchi Lee to fill out the issuer information form, for +Park’s review. + +26. PLS sent the completed issuer information form back to the PCAOB on October +12, 2016. PLS subsequently amended the issuer information form to reflect the termination of its +auditor relationship with TSOI, sending a final version to the PCAOB on October 31, 2016. The +final version of the issuer information form PLS provided to the PCAOB included information +for twenty-nine issuers. + +27. The final version of the issuer information form PLS provided to the PCAOB +identified the individual auditors’ roles on audits for issuers IMMA, IMKG, RDTK and TSOI as +follows: + +Issuer EP EQR +IMMA Juchi Lee Park +IMKG Park Juchi Lee +RDTK Park Juchi Lee +TSOI Joseph Lee Juchi Lee + +28. Park instructed Joseph Lee and Juchi Lee to review PLS’s clients’ audit binders in +preparation for the inspection. + +7 + +29. Before the November 2016 PCAOB inspection was scheduled to begin, the +PCAOB informed PLS that it would review the audit work papers for IMKG, RDTK and TSOI +during the inspection. + +30. After learning which issuers were selected for the inspection, Park instructed +Joseph Lee and Juchi Lee to review the audit binders for those issuers again. + +31. The PCAOB conducted its inspection of PLS from November 7, 2016 to +November 11, 2016. + +3. Respondents Failed to Prepare and Retain Required Audit Documentation, +and Inappropriately Modified Audit Documentation, in Violation of PCAOB +Auditing Standard No. 33 + +32. Respondents violated PCAOB Auditing Standard No. 3, Audit Documentation +(“AS 3”), in that they: failed to timely prepare required audit documentation; failed to document +the addition of documents to the work papers after the documentation completion date; and drafted +back-dated, fraudulent work papers to create the appearance of having proper contemporaneous +work papers. + +33. AS 3 establishes general requirements for documentation the auditor should prepare +and retain in connection with engagements conducted pursuant to the standards of the PCAOB. +AS 3.1, AS 3.4. Audit documentation is the written record of the basis for the auditor’s +conclusions that provides the support for the auditor’s representations, whether those +representations are contained in the auditor’s report or otherwise. AS 3.2. Audit documentation +also facilitates the planning, performance, and supervision of the engagement, and is the basis for +the review of the quality of the work because it provides the reviewer with written documentation +of the evidence supporting the auditor’s significant conclusions. Id. + +34. 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. The auditor also must identify all significant findings or issues in an +engagement completion document. AS 3.13. + +35. The report release date is the date the auditor grants permission to use the auditor’s +report in connection with the issuance of the company’s financial statements. AS 3.14. Prior to +the report release date, the auditor must have completed all necessary auditing procedures and +obtained sufficient evidence to support the representations in the auditor’s report. AS 3.15. A + +3 PCAOB Auditing Standard No. 3 was renumbered from AS 3 to AS 1215, effective +December 31, 2016; references herein are to the numbering in effect at the time of the alleged +conduct. + +8 + +complete and final set of audit documentation should be assembled for retention as of a date not +more than 45 days after the report release date (the “documentation completion date”). Id. + +36. Circumstances may require additions to audit documentation after the report release +date. AS 3.16. Audit documentation must not be deleted or discarded after the documentation +completion date, however, information may be added. Id. Any documentation added must +indicate the date the information was added, the name of the person who prepared the additional +documentation, and the reason for adding it. Id. + +37. Because PLS did not use automated auditing software, it was up to the individual +auditors themselves to keep track of what audit work had been performed, and when, and to ensure +that the audit documentation for each audit was completed by the 45-day documentation +completion date, as required by AS 3.15. + +38. The individual auditors were aware that PLS commonly lacked a complete audit +binder for its clients’ audits. + +a. Park noticed missing work papers when reviewing audits; reprimanded +Joseph Lee for missing documentation; and told Juchi Lee that Joseph Lee’s +work papers were incomplete. + +b. Juchi Lee acknowledged that prior to the November 2016 PCAOB +inspection, the individual auditors were less “serious” about complying with +the audit documentation completion period, which she understood to be “45 +days or 60 days.” + +c. Joseph Lee admitted that he was unaware of the 45 day audit documentation +completion period before the November 2016 PCAOB inspection. + +39. PLS and the individual auditors inappropriately added documents to audit work +papers after the audit report had been released and the applicable documentation completion date +had passed, without disclosing the date that these documents were added, or other information +required under AS 3.16. In certain instances, the individual auditors identified documents that +were missing from the audit work papers, then intentionally prepared and backdated those +documents in order to make it appear as though those documents had been prepared and included +in the audit work papers on or before the date of the corresponding PLS audit report. +PLS subsequently produced backdated documents in response to the July 2016 Commission +Subpoena and/or the November 2016 PCAOB inspection. + +9 + +40. PLS and the individual auditors knew or were reckless in not knowing that they +inappropriately added documents to audit work papers and backdated audit work papers. + +a. IMMA Audits – Fiscal Years Ended October 31, 2014 and 2015 + +41. PLS performed the audit for IMMA’s fiscal year ended October 31, 2014 (the +“IMMA 2014 audit”). IMMA filed the PLS audit report, dated February 12, 2014,4 with its Form +10-K on February 12, 2015. The audit report stated that PLS had conducted the audit in +accordance with PCAOB standards. The applicable documentation completion date was March +29, 2015. + +42. PLS also performed the audit for IMMA’s fiscal year ended October 31, 2015 (the +“IMMA 2015 audit”). IMMA filed the PLS audit report, dated February 10, 2016, with its Form +10-K on February 10, 2016. The audit report stated that PLS had conducted the audit in +accordance with PCAOB standards. The applicable documentation completion date was +March 26, 2016. + +43. The issuer information form that PLS provided to the PCAOB in connection with +the November 2016 PCAOB inspection described Juchi Lee as the EP for IMMA, and Park as the +EQR. + +44. Juchi Lee was the lead auditor for the IMMA 2014 audit and the IMMA 2015 audit. +Park reviewed the audit binders for these audits. Each of them knew or were reckless in not +knowing that the IMMA 2014 audit and the IMMA 2015 audit had not actually been conducted in +accordance with PCAOB standards. + +45. The July 2016 Commission Subpoena required PLS to produce IMMA audit work +papers for the time period from September 30, 2014, to July 5, 2016, which included both the +IMMA 2014 audit and the IMMA 2015 audit. After PLS received the July 2016 Commission +Subpoena on or around July 5, 2016, Juchi Lee prepared and backdated documents for both the +IMMA 2014 audit and the IMMA 2015 audit. + +46. Specifically, after PLS received the July 2016 Commission Subpoena on or around +July 5, 2016, Juchi Lee prepared an audit form entitled “Inquiries of Management/Directors about +the Risks of Fraud” for the IMMA 2014 audit. Juchi Lee admitted that she had searched the +IMMA 2015 audit work papers for that audit’s version of the same form; hand copied the +responses from that version onto a blank form, which she then signed and backdated to make it +look like it had been prepared in 2015; and produced the backdated form to the Commission along +with the IMMA 2014 audit work papers. + +4 The February 12, 2014 date on the PLS audit report appears to have been a typo, as the +report was for the fiscal year ended October 31, 2014, and was filed with IMMA’s Form 10-K on +February 12, 2015. + +10 + + +47. Or around July 21, 2016, Juchi Lee also prepared an “Engagement Acceptance and +Continuance” form for the IMMA 2014 audit and backdated this document to December 1, 2014, +approximately two months before the date of the corresponding PLS audit report, which was +February 12, 2015. This document, which was filled out electronically prior to printing, included +the names of both Juchi Lee (as “Lead Partner”) and Park (as “Concurring Partner”) next to the +date December 1, 2014. Juchi Lee admitted that she had created this document after reviewing the +audit work papers in July 2016. + +48. On or around July 27, 2016, Juchi Lee prepared a form entitled “Engagement +Completion Document” for the IMMA 2015 audit and backdated this document to February 10, +2016, the date of the corresponding PLS audit report. The hard copy version of this form included +handwritten signatures from both Juchi Lee and Park, which also were backdated to February 10, +2016. Park admitted that his signature on this document was backdated. + +b. IMKG Audit – Fiscal Year Ended February 28, 2015 + +49. PLS performed the audit for IMKG’s fiscal year ended February 28, 2015 (the +“IMKG 2015 audit”). IMKG filed the PLS audit report, dated July 29, 2015, with its Form 10-K +on July 29, 2015. The audit report stated that PLS had conducted the audit in accordance with +PCAOB standards. The applicable documentation completion date was September 12, 2015. + +50. The issuer information form that PLS provided to the PCAOB in connection with +the November 2016 PCAOB inspection listed Park as the engagement partner for IMKG, and +Juchi Lee as the EQR. + +51. However, Park and Joseph Lee each admitted that they went together to Korea to +conduct field work for the audit. Joseph Lee prepared most of the audit work papers for IMKG, +which Park reviewed. Each of them knew or were reckless in not knowing that the IMKG 2015 +audit had not actually been conducted in accordance with PCAOB standards. + +52. The PCAOB reviewed audit work papers for the IMKG 2015 audit in connection +with the November 2016 PCAOB inspection. + +53. Both Park and Joseph Lee admitted that in October 2016, in the course of +preparing for the November 2016 PCAOB inspection, they had become aware that Joseph Lee +had failed to obtain all of the documents necessary for the IMKG 2015 audit. + +54. With Park’s knowledge, Joseph Lee emailed IMKG’s former owner and outside +consultants to request board minutes, bank reconciliations, and other documents, in an attempt to +complete the audit binder before the PCAOB inspection. + +55. Joseph Lee also prepared and backdated documents for the IMKG 2015 audit in +preparation for the November 2016 PCAOB inspection. PLS produced backdated documents for +the IMKG 2015 audit to the PCAOB in connection with the November 2016 PCAOB inspection. +11 + + +56. On or around October 12, 2016, Joseph Lee prepared a document entitled “Audit +Program for General Planning Procedures” for the IMKG 2015 audit. Joseph Lee admitted that +he had created this document after the audit report date, in preparation for the November 2016 +PCAOB inspection. + +57. On or around October 12 or 13, 2016, Joseph Lee also prepared a form entitled +“Engagement Completion Document” for the IMKG 2015 audit, and backdated it to July 29, +2015, the date of the corresponding PLS audit report. This document, which was filled out +electronically prior to printing, included the names of Joseph Lee (as “Engagement Manager”), +Park (as “Engagement Partner”), and Juchi Lee (as “Concurring Partner/Engagement Quality +Reviewer”) next to the date July 29, 2015. Joseph Lee admitted that this document had not been +prepared before the audit report was issued, and that he had backdated this document to the audit +report date. + +58. On or around October 14, 2016, Joseph Lee prepared a “Risk Assessment +Summary Form” for the IMKG 2015 audit, and backdated it to July 9, 2015, a few weeks prior to +the date of the corresponding PLS audit report. Joseph Lee admitted that he had created this +document after the audit report date, in preparation for the November 2016 PCAOB inspection. + +c. RDTK Audit – Fiscal Year Ended December 31, 2015 + +59. PLS performed the audit for RDTK’s fiscal year ended December 31, 2015 (the +“RDTK 2015 audit”). RDTK filed the PLS audit report, dated April 27, 2016, with its Form 10- +K on April 27, 2016. The audit report stated that PLS had conducted the audit in accordance +with PCAOB standards. The applicable documentation completion date was June 11, 2016. + +60. RDTK filed an amended Form 10-K for its fiscal year 2015 on August 24, 2016. +The Amended RDTK Form 10-K included a PLS audit report that was amended as to one note +only; that report was dual dated related to the one note for August 22, 2016. The audit report +stated that PLS had conducted the audit in accordance with PCAOB standards. The applicable +documentation completion date was October 6, 2016. + +61. The issuer information form that PLS provided to the PCAOB in advance of the +November 2016 PCAOB inspection listed Park as the engagement partner for RDTK, and +Juchi Lee as EQR. + +62. However, Park and Joseph Lee conducted the fieldwork for RDTK. Joseph Lee +prepared most of the audit work papers for RDTK, which Park reviewed. Each of them knew or +were reckless in not knowing that the RDTK 2015 audit had not actually been conducted in +accordance with PCAOB standards. + +63. The PCAOB reviewed audit work papers for the RDTK 2015 audit in connection +with the November 2016 PCAOB inspection. +12 + + +64. Joseph Lee admitted that he had contacted RDTK after the audit report was +released to request supporting documentation that was missing from the audit binders. + +65. Joseph Lee also prepared and backdated documents for the RDTK 2015 audit in +preparation for the November 2016 PCAOB inspection. PLS produced backdated documents for +the RDTK 2015 audit to the PCAOB in connection with the November 2016 PCAOB inspection. + +66. On or around October 18, 2016, Joseph Lee prepared a document entitled “Audit +Program for General Planning Procedures” for the RDTK 2015 audit. Joseph Lee admitted that +he had noticed this document was missing from the audit work papers and that he had created +this document in preparation for the November 2016 PCAOB inspection. + +67. On or around October 19, 2016, Joseph Lee also prepared a “Supervision, Review +and Approval Form” for the RDTK 2015 audit and backdated it to April 27, 2016, the date of the +original PLS audit report. This document, which was filled out electronically prior to printing, +included the typed “signatures” of Joseph Lee (under the “Detailed Review” section supposed to +be “performed by the staff in charge of the field work”), Park (as “Engagement Partner”), and +Juchi Lee (as “Engagement Quality Reviewer”) next to the date April 27, 2016. Joseph Lee +admitted that he had created this document in preparation for the November 2016 PCAOB +inspection. Park also admitted that this document was created in October 2016 to supplement the +audit work papers, and backdated. + +68. In addition, on or around October 19, 2016, Joseph Lee prepared an “Engagement +Completion Document” for the RDTK 2015 audit, and backdated it to April 27, 2016, the +original report release date. This document, which was filled out electronically prior to printing, +included the names of Joseph Lee (as “Engagement Manager”), Park (as “Engagement Partner”), +and Juchi Lee (as “Concurring Partner/Engagement Quality Reviewer”) next to the date April 27, +2016. Joseph Lee admitted that he had created this document in October 2016 in preparation for +the November 2016 PCAOB inspection. Park also admitted that this document was created in +October 2016 to supplement the audit work papers, and backdated. + +d. TSOI Audit – Fiscal Year Ended December 31, 2014 + +69. PLS performed the audit for TSOI’s fiscal year ended December 31, 2014 (the +“TSOI 2014 audit”). TSOI filed the PLS audit report, dated June 15, 2016, with its Form 10-K +on June 16, 2016. The audit report stated that PLS had conducted the audit in accordance with +PCAOB standards. The applicable documentation completion date was July 30, 2016. + +70. The issuer information form that PLS provided to the PCAOB in connection with +the November 2016 PCAOB inspection listed Joseph Lee as the engagement partner for TSOI, +and Juchi Lee as the EQR. + +13 + +71. However, Joseph Lee performed the substantive audit work for TSOI, including +preparation of the audit binder, and Park served as the reviewer. Each of them knew or were +reckless in not knowing that the TSOI 2014 audit had not actually been conducted in accordance +with PCAOB standards. + +72. Juchi Lee did not perform an engagement quality review for TSOI. In fact, Juchi +Lee admitted that she had not performed engagement quality reviews for IMKG, RDTK, or +TSOI, even though the issuer information form that PLS provided to the PCAOB in advance of +the November 2016 PCAOB inspection listed her as the EQR for each of these issuers. + +73. The PCAOB reviewed audit work papers for the TSOI 2014 audit in connection +with the November 2016 PCAOB inspection. + +74. Joseph Lee admitted that he did not fill out audit documentation forms for the +TSOI 2014 audit until the fall of 2016, when he was reviewing audit binders in preparation for +the November 2016 PCAOB inspection. + +75. Joseph Lee prepared and backdated documents for the TSOI 2014 audit in +preparation for the November 2016 PCAOB inspection. PLS produced backdated documents for +the TSOI 2014 audit to the PCAOB in connection with the November 2016 PCAOB inspection. + +76. Sometime between October 24 and November 1, 2016, Joseph Lee prepared a +document entitled “Audit Program for General Planning Procedures” for the TSOI 2014 audit. +Joseph Lee admitted that he had created this document several months after the TSOI 2014 Form +10-K had been filed, in preparation for the November 2016 PCAOB inspection. + +77. Sometime between October 24 and November 1, 2016, Joseph Lee also prepared +a document entitled “Risk Assessment Summary Form” for the TSOI 2014 audit. This +document, which was filled out electronically prior to printing, included the names of Joseph Lee +and Juchi Lee next to the date January 7, 2016, which was several months prior to the date of the +corresponding PLS audit report. + +78. In addition, on or around October 31 or November 1, 2016, Joseph Lee prepared a +“Supervision, Review and Approval Form” for the TSOI 2014 audit. This document, which was +filled out electronically prior to printing, included the names of Joseph Lee (as “Engagement +Partner”) and Juchi Lee (as “Engagement Quality Reviewer”) next to the date June 15, 2016, the +date of the corresponding PLS audit report. + +14 + +4. Respondents Failed to Obtain or Perform Engagement Quality Reviews in +Violation of PCAOB Auditing Standard No. 7 5 + +79. Respondents violated PCAOB Auditing Standard No. 7, Engagement Quality +Review (“AS 7”), by failing to obtain or perform adequate engagement quality reviews in +connection with PLS’s clients’ audits. + +80. AS 7 requires an engagement quality review and concurring approval of issuance +for each audit engagement conducted pursuant to the standards of the PCAOB. AS 7.1. The +objective of the EQR is to perform an evaluation of the significant judgments made by the +engagement team and the related conclusions reached in forming the overall conclusion on the +engagement and in preparing the engagement report, if a report is to be issued, in order to +determine whether to provide concurring approval of issuance. AS 7.2. To evaluate such +judgments and conclusions, the EQR to the extent necessary should hold discussions with the +engagement partner and other members of the engagement team, and review documentation. +AS 7.9. + +81. The EQR must be an associated person of a registered public accounting firm. +AS 7.3. An EQR from the firm that issues the engagement report must be a partner or another +individual in an equivalent position. Id. The EQR may also be an individual from outside the +firm. Id. To maintain objectivity, the EQR and others who assist the EQR should not make +decisions on behalf of the engagement team or assume any of the responsibilities of the +engagement team. AS 7.7. + +82. In an audit, the EQR should evaluate, among other things, the significant +judgments that relate to engagement planning, including consideration of the firm’s recent +engagement experience with the company and risks identified in connection with the firm’s +client acceptance and retention process. AS 7.10. The EQR also should evaluate the +engagement team’s assessment of, and audit responses to, significant risks identified by the +engagement team, including fraud risks, and other significant risks identified by the EQR. Id. +The EQR’s review of documentation should specifically include the engagement completion +document. Id. + +83. Additionally, in an audit, the EQR should evaluate whether the engagement +documentation that he or she reviewed indicates that the engagement team responded +appropriately to significant risks, and supports the conclusions reached by the engagement team +with respect to the matters reviewed. AS 7.11. The EQR may provide concurring approval of +issuance only if, after performing with due professional care the review required by AS 7, he or +she is not aware of a significant engagement deficiency, such as a failure by the engagement + +5 PCAOB Auditing Standard No. 7 was renumbered from AS 7 to AS 1220, effective +December 31, 2016; references herein are to the numbering in effect at the time of the alleged +conduct. + +15 + +team to obtain sufficient appropriate evidence in accordance with the standards of the PCAOB. +AS 7.12. The audit firm may grant permission to the client to use the engagement report only +after the EQR provides concurring approval of issuance. AS 7.13. + +84. The issuer information form that PLS provided to the PCAOB in advance of the +November 2016 PCAOB inspection represented that Park was the EQR for IMMA, and Juchi +Lee was the EQR for IMKG, RDTK, and TSOI. PLS, however, was not actually staffing its +audits in this manner. + +85. PLS and the individual auditors violated AS 7 by failing to obtain or perform +adequate engagement quality reviews, in accordance with the requirements of AS 7, for the +IMMA 2014 audit; the IMMA 2015 audit; the IMKG 2015 audit; the RDTK 2015 audit; and the +TSOI 2014 audit. + +86. Juchi Lee, the purported EQR for the IMKG 2015 audit, the RDTK 2015 audit, +and the TSOI 2014 audit, admitted that she had not performed engagement quality reviews for +IMKG, RDTK, or TSOI. She also admitted that she had not even known that she was supposed +to be EQR for these issuers until October 2016, when Park tasked her and Joseph Lee with the +job of completing the issuer information form for the PCAOB in connection with the +November 2016 PCAOB inspection. + +87. Moreover, given the audit documentation deficiencies described above, PLS and +the individual auditors could not have obtained or performed engagement quality reviews, in +accordance with the requirements of AS 7, for the IMMA 2014 audit, the IMMA 2015 audit, +the IMKG 2015 audit, the RDTK 2015 audit, or the TSOI 2014 audit. The documents that were +inappropriately added to audit work papers, after the audit report had been released and the +applicable documentation completion date had passed, included engagement acceptance, audit +planning, risk assessment, engagement completion, and other documents that an EQR +performing an engagement quality review pursuant to the standards of AS 7 should have +reviewed before providing approval for the audit report to be released. + +88. Respondents knew or were reckless in not knowing that they had failed to obtain +or perform engagement quality reviews, in accordance with the requirements of AS 7, for the +IMMA 2014 audit; the IMMA 2015 audit; the IMKG 2015 audit; the RDTK 2015 audit; and the +TSOI 2014 audit. + +16 + +5. Respondents Failed to Exercise Due Professional Care in Violation of +PCAOB Interim Auditing Standard No. 2306 + +89. Respondents violated PCAOB Interim Auditing Standard No. 230, +Due Professional Ca re in the Performance of Work (“AU 230”), by failing to exercise due +professional care in connection with the IMMA 2014 audit; the IMMA 2015 audit; the IMKG +2015 audit; the RDTK 2015 audit; and the TSOI 2014 audit. Namely, Respondents failed to +prepare and retain required audit documentation and produced backdated documents to the +PCAOB and the Commission, and they failed to obtain and perform engagement quality +reviews. + +90. AU 230 requires an auditor to exercise due professional care in the planning and +performance of the audit and the preparation of the report. AU 230.01 - 230.02. Due +professional care imposes a responsibility upon each professional within an independent +auditor’s organization to observe the standards of field work and reporting. AU 230.02. + +91. The matter of due professional care concerns what the independent auditor does +and how well he or she does it. AU 230.04. An auditor should possess “the degree of skill +commonly possessed” by other auditors and should exercise it with “reasonable care and +diligence” (that is, with due professional care). AU 230.05. The engagement partner should +know, at a minimum, the relevant professional accounting and auditing standards and should be +knowledgeable about the client. AU 230.06. + +92. Due professional care requires the auditor to exercise professional skepticism. +AU 230.07. Professional skepticism is an attitude that includes a questioning mind and a +critical assessment of audit evidence. Id. The auditor uses the knowledge, skill, and ability +called for by the profession of public accounting to diligently perform, in good faith and with +integrity, the gathering and objective evaluation of evidence. Id. Gathering and objectively +evaluating audit evidence requires the auditor to consider the competency and sufficiency of the +evidence. AU 230.08. Since evidence is gathered and evaluated throughout the audit, +professional skepticism should be exercised throughout the audit process. Id. + +93. PLS and the individual auditors failed to exercise due professional care in +connection with the audit documentation for the IMMA 2014 audit; the IMMA 2015 audit; the +IMKG 2015 audit; the RDTK 2015 audit; and the TSOI 2014 audit. + +94. As described above, PLS and the auditors failed to prepare and retain required +audit documentation for these audits, as required by AS 3. Although all three of the individual +auditors were aware that PLS had a problem with missing work papers, they did not take any + +6 PCAOB Interim Auditing Standard No. 230 was renumbered from AU 230 to AS 1015, +effective December 31, 2016; references herein are to the numbering in effect at the time of the +alleged conduct. + +17 + +action to remedy this problem until the July 2016 Commission Subpoena and the announcement +of the November 2016 PCAOB inspection threatened to expose their audit deficiencies. + +95. Even then, Respondents did not follow the requirements for adding audit +documentation set forth in AS 3.16, but intentionally attempted to conceal their actions from the +Commission and the PCAOB by retroactively completing and backdating documents, which +PLS then produced to the Commission or the PCAOB. + +96. PLS and the individual auditors also failed to exercise due professional care in +connection with engagement quality reviews for the IMMA 2014 audit; the IMMA 2015 audit; +the IMKG 2015 audit; the RDTK 2015 audit; and the TSOI 2014 audit. PLS and the individual +auditors issued audit reports and provided information to the PCAOB, representing that +engagement quality reviews had been obtained or performed for each of these audits, when in +fact they had failed to obtain or perform engagement quality review, in accordance with the +requirements of AS 7, for each of these audits. + +97. Respondents knew or were reckless in not knowing that they failed to exercise +due professional care in connection with the IMMA 2014 audit; the IMMA 2015 audit; the +IMKG 2015 audit; the RDTK 2015 audit; and the TSOI 2014 audit. + +6. Respondents Willfully Violated PCAOB Rules 3500T and 4006 + +98. PCAOB Rule 3500T, Interim Ethics and Independence Standards (“Rule +3500T”), requires a registered public accounting firm and its associated persons to comply with +AICPA’s Code of Professional Conduct Rule 102 in connection with the preparation or issuance +of any audit report. Rule 3500T(a).7 + +99. AICPA’s Code of Professional Conduct Rule 102, Integrity and Objectivity +(“AICPA Rule 102”) mandates that “in the performance of any professional service, a member +shall maintain objectivity and integrity.” AICPA Rule 102.01. The AICPA Code of +Professional Conduct defines “professional services” as including “all services requiring +accountancy or related skills performed by a member for a client, an employer, or on a volunteer +basis. These services include, but are not limited to accounting, audit and other attest services, +tax, bookkeeping, management consulting, financial management, corporate governance, +personal financial planning, business valuation, litigation support, educational, and those services +for which standards are promulgated by bodies designated by [the AICPA Council].” AICPA +Code of Professional Conduct § 0.400.40. + + +7 The rule requires auditors to comply with the AICPA’s Code of Professional Conduct +Rule 102, and interpretations and rulings thereunder, as in existence on April 16, 2003. +Although PCAOB Rule 3500T references the AICPA Code as in existence on April 16, 2003, the +definition of integrity remains identical to the current definitions in the Code of Professional +Conduct promulgated by the AICPA and applicable to current members of the AICPA. +18 + +100. PLS and the individual auditors willfully violated Rule 3500T because they failed +to act with integrity in connection with the preparation and issuance of the audit reports for the +IMMA 2014 audit; the IMMA 2015 audit; the IMKG 2015 audit; the RDTK 2015 audit; and the +TSOI 2014 audit. + +101. PLS and the individual auditors further demonstrated a lack of integrity by taking +affirmative steps to conceal their auditing deficiencies from us and the PCAOB, including the +preparation and backdating of additional audit documentation which was subsequently produced +to us and/or the PCAOB. + +102. PCAOB Rule 4006, Duty to Cooperate with Inspectors (“Rule 4006”), requires a +public accounting firm and its associated persons to cooperate with the Board in the performance +of any Board inspection. Cooperation includes, but it is not limited to, cooperating and complying +with any request made by the PCAOB to “provide access to, and the ability to copy, any record in +the possession, custody, or control of such firm or person.” See Rule 4006(a). “Implicit in this +cooperation requirement is that auditors provide accurate and truthful information.” In the Matter +of the Application of Kabani & Company, Inc., et al., Exchange Act Release No. 80201, at 13-14 +(March 10, 2017) (Commission Opinion). + +103. PLS and the individual auditors willfully violated Rule 4006 in connection with the +November 2016 PCAOB inspection by providing to the PCAOB documents that had been added to +audit work papers for the IMKG 2015 audit, the RDTK 2015 audit, and the TSOI 2014 audit, after +the audit report for each of these audits had been released and the applicable documentation +completion date had passed, without disclosing of the date that these documents were added to the +work papers, the persons who did so, or the reasons for doing so, as required under AS 3. + +104. Moreover, PLS and the individual auditors attempted to deceive the PCAOB by +backdating documents so that it would appear as though these documents had been prepared and +included in the audit work papers before the audit report had been released. + +E. VIOLATIONS + +a. As a result of the conduct described above, PLS 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 by engaging in repeated instances of unreasonable conduct +and/or engaging in intentional or knowing conduct, including reckless +conduct, and willfully violated the federal securities laws 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, by willfully violating Rule 2- +02(b)(1) of Regulation S-X, and willfully violating PCAOB Rule 3500T +and PCAOB Rule 4006. + +19 + +b. As a result of the conduct described above, Park 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 by engaging in repeated instances of unreasonable conduct +and/or engaging in intentional or knowing conduct, including reckless +conduct, and willfully violated or willfully aided and abetted violation of +the federal securities laws 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, by willfully aiding and abetting and causing PLS’s violations of +Rule 2-02(b)(1) of Regulation S-X, and by willfully violating PCAOB +Rule 3500T and PCAOB Rule 4006. + +c. As a result of the conduct described above, Joseph Lee 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 by engaging in repeated instances of unreasonable conduct +and/or engaging in intentional or knowing conduct, including reckless +conduct, and willfully violated or willfully aided and abetted violation of +the federal securities laws 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, by willfully aiding and abetting and causing PLS’s violations of +Rule 2-02(b)(1) of Regulation S-X, and by willfullly violating PCAOB +Rule 3500T and PCAOB Rule 4006. + +d. As a result of the conduct described above, Juchi Lee 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 by engaging in repeated instances of unreasonable conduct +and/or engaging in intentional or knowing conduct, including reckless +conduct, and willfully violated or willfully aided and abetted violation of +the federal securities laws 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, by willfully aiding and abetting and causing PLS’s violations of +Rule 2-02(b)(1) of Regulation S-X, and by willfully violating PCAOB +Rule 3500T and PCAOB Rule 4006. + +F. FINDINGS + +a. 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. + +20 + + b. Based on the foregoing, the Commission finds that Respondent PLS +willfully violated Rule 2-02(b)(1) of Regulation S-X; Respondents Park, +Joseph Lee and Juchi Lee willfully aided and abetted and caused PLS’s +violations of Rule 2-02(b)(1) of Regulation S-X; and Respondents willfully +violated PCAOB Rules 3500T and 4006. + +Disgorgement and Civil Penalties + +The disgorgement and prejudgment interest ordered in paragraph IV.N is consistent with +equitable principles and does not exceed Respondent PLS’s net profits from its violations and +will be distributed to harmed investors, if feasible. The Commission will hold funds paid +pursuant to paragraph IV.N in an account at the United States Treasury pending a decision +whether the Commission in its discretion will seek to distribute funds. If a distribution is +determined feasible and the Commission makes a distribution, upon approval of the distribution +final accounting by the Commission, any amounts remaining that are infeasible to return to +investors, and any amounts returned to the Commission in the future that are infeasible to return +to investors, may be transferred to the general fund of the U.S. Treasury, subject to Section +21F(g)(3) of the Exchange Act. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondents PLS, Park, Joseph Lee and Juchi Lee shall cease and desist from +committing or causing any violations and any future violations of Exchange Act Rule 2-02(b)(1) of +Regulation S-X and PCAOB Rules 3500T and 4006. + + B. Respondent PLS is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. After five years from the date of this Order, PLS may request that the +Commission consider its 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 +PLS’s work in its practice before the Commission will be reviewed either +by the independent audit committee of the public company for which it +works or in some other acceptable manner, as long as it practices before +the Commission in this capacity; and/or +21 + + +2. an independent accountant. + +Such an application must satisfy the Commission that: + +(a) PLS 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. However, if +registration with the Board is dependent upon reinstatement by the +Commission, the Commission will consider the application on its +other merits; + +(b) PLS hired an independent CPA consultant (“consultant”) who is +not unacceptable to the staff of the Commission and is affiliated +with a public accounting firm registered with the Board, that has +conducted a review of PLS’s quality control system and submitted +to the staff of the Commission a report that describes the review +conducted and procedures performed, and represents that the +review did not identify any criticisms of or potential defects in the +Firm’s quality control system that would indicate that any of PLS’s +employees will not receive appropriate supervision. PLS agrees to +require the consultant, if and when retained, to enter into an +agreement that provides that for the period of review and for a +period of two years from completion of the review, the consultant +shall not enter into any employment, consultant, attorney-client, +auditing or other professional relationship with PLS, or any of its +present or former affiliates, directors, officers, employees, or +agents acting in their capacity. The agreement will also provide +that the consultant will require that any firm with which he/she is +affiliated or of which he/she is a member, and any person engaged +to assist the consultant in performance of his/her duties under this +Order shall not, without prior consent of the staff, enter into any +employment, consultant, attorney-client, auditing or other +professional relationship with PLS, or any of its present or former +affiliates, directors, officers, employees, or agents acting in their +capacity as such for the period of the review and for a period of +two years after the review; + +(c) PLS 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) PLS acknowledges its responsibility, as long as it appears or +practices before the Commission as an independent accountant, to +22 + +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 PLS to resume appearing or +practicing before the Commission provided that its state CPA license is current and it 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 PLS’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + E. Respondent Park is denied the privilege of appearing or practicing before the +Commission as an accountant. + + F. After five years from the date of this Order, Park 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 (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Park’s work in his practice +before the Commission as an accountant 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. 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 as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + +23 + + Such an application must satisfy the Commission that: + + (a) Park, or the public accounting firm with which he is associated, is +registered with the Board in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + + (b) Park, 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 +respondent’s or the firm’s quality control system that would +indicate that Park will not receive appropriate supervision; + (c) Park 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) Park 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. + +G. The Commission will consider an application by Park 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 Park ’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + H. Respondent Joseph Lee is denied the privilege of appearing or practicing +before the Commission as an accountant. + + I. After three years from the date of this Order, Joseph Lee 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 (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +24 + +an application must satisfy the Commission that Joseph Lee’s work in his +practice before the Commission as an accountant 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. 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 as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Joseph Lee, or the public accounting firm with which he is +associated, is registered with the Board in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be +effective; + + (b) Joseph Lee, 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 +respondent’s or the firm’s quality control system that would +indicate that Joseph Lee will not receive appropriate supervision; + (c) Joseph Lee 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) Joseph Lee 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. + +J. The Commission will consider an application by Joseph Lee 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, +25 + +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 Joseph Lee’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission as an accountant. Whether an application demonstrates good cause will be +considered on a facts and circumstances basis with due regard for protecting the integrity of the +Commission’s processes. + + K. Respondent Juchi Lee is denied the privilege of appearing or practicing before +the Commission as an accountant. + + L. After three years from the date of this Order, Juchi Lee 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 person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Juchi Lee’s work in her +practice before the Commission as an accountant will be reviewed either by +the independent audit committee of the public company for which she works +or in some other acceptable manner, as long as she practices before the +Commission in this capacity; and/or + + 2. 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 as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Juchi Lee, or the public accounting firm with which she is +associated, is registered with the Board in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be +effective; + +26 + + (b) Juchi Lee, 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 control system that would +indicate that Juchi Lee will not receive appropriate supervision; + (c) Juchi Lee 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) Juchi Lee acknowledges her responsibility, as long as she 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. + +M. The Commission will consider an application by Juchi Lee to resume appearing or +practicing before the Commission provided that her state 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 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 Juchi Lee’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission as an accountant. Whether an application demonstrates good cause will be +considered on a facts and circumstances basis with due regard for protecting the integrity of the +Commission’s processes. + + N. Respondent PLS shall, within 360 days of the entry of this Order, pay disgorgement +of $36,000.00, prejudgment interest of $1,028.24, and civil money penalties of $36,000.00 to the +Securities and Exchange Commission. The Commission may distribute civil money penalties +collected in this proceeding if, in its discretion, the Commission orders the establishment of a Fair +Fund pursuant to 15 U.S.C. § 7246, Section 308(a) of the Sarbanes-Oxley Act of 2002. The +Commission will hold funds paid pursuant to this paragraph in an account at the United States +Treasury pending a decision whether the Commission, in its discretion, will seek to distribute funds +or, subject to Exchange Act Section 21F(g)(3), transfer them to the general fund of the United +States Treasury. If timely payment of disgorgement and prejudgment interest is not made, +additional interest shall accrue pursuant to SEC Rule of Practice 600. If timely payment of civil +money penalties is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. +Payment shall be made in the following installments: + +1. $14,605.64 within 30 days of the entry of this Order; +2. $14,605.65 within 90 days of the entry of this Order; +3. $14,605.65 within 180 days of the entry of this Order; +27 + +4. $14,605.65 within 270 days of the entry of this Order; and +5. $14,605.65 within 360 days of the entry of this Order. + +Payments shall be applied first to post order interest, which accrues pursuant to SEC Rule of +Practice 600 and/or pursuant to 31 U.S.C. 3717. Prior to making the final payment set forth herein, +Respondent shall contact the staff of the Commission for the amount due. If Respondent PLS fails +to make any payment by the date agreed and/or in the amount agreed according to the schedule set +forth above, all outstanding payments under this Order, including post-order interest, minus any +payments made, shall become due and payable immediately at the discretion of the staff of the +Commission without further application to the Commission. + +O. Respondent Park shall, within 360 days of the entry of this Order, pay a civil money +penalty in the amount of $38,556.00 to the Securities and Exchange Commission. The +Commission may distribute civil money penalties collected in this proceeding if, in its discretion, +the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section +308(a) of the Sarbanes-Oxley Act of 2002. The Commission will hold funds paid pursuant to this +paragraph in an account at the United States Treasury pending a decision whether the Commission, +in its discretion, will seek to distribute funds or, subject to Exchange Act Section 21F(g)(3), +transfer them to the general fund of the United States Treasury. If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. §3717. Payment shall be made in the +following installments: + +1. $7,711.20 within 30 days of the entry of this Order; +2. $7,711.20 within 90 days of the entry of this Order; +3. $7,711.20 within 180 days of the entry of this Order; +4. $7,711.20 within 270 days of the entry of this Order; and +5. $7,711.20 within 360 days of the entry of this Order. + +Payments shall be applied first to post order interest, which accrues pursuant to 31 U.S.C. 3717. +Prior to making the final payment set forth herein, Respondent shall contact the staff of the +Commission for the amount due. If Respondent fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-order interest, minus any payments made, shall become due and +payable immediately at the discretion of the staff of the Commission without further application +to the Commission. + +P. Respondent Joseph Lee shall, within 360 days of the entry of this Order, pay a civil +money penalty in the amount of $19,278.00 to the Securities and Exchange Commission. The +Commission may distribute civil money penalties collected in this proceeding if, in its discretion, +the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section +308(a) of the Sarbanes-Oxley Act of 2002. The Commission will hold funds paid pursuant to this +paragraph in an account at the United States Treasury pending a decision whether the Commission, +in its discretion, will seek to distribute funds or, subject to Exchange Act Section 21F(g)(3), +transfer them to the general fund of the United States Treasury. If timely payment is not made, +28 + +additional interest shall accrue pursuant to 31 U.S.C. §3717. Payment shall be made in the +following installments: + +1. $3,855.60 within 30 days of the entry of this Order; +2. $3,855.60 within 90 days of the entry of this Order; +3. $3,855.60 within 180 days of the entry of this Order; +4. $3,855.60 within 270 days of the entry of this Order; and +5. $3,855.60 within 360 days of the entry of this Order. + +Payments shall be applied first to post order interest, which accrues pursuant to 31 U.S.C. 3717. +Prior to making the final payment set forth herein, Respondent shall contact the staff of the +Commission for the amount due. If Respondent fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-order interest, minus any payments made, shall become due and +payable immediately at the discretion of the staff of the Commission without further application +to the Commission. + +Q. Respondent Juchi Lee shall, within 360 days of the entry of this Order, pay a civil +money penalty in the amount of $19,278.00 to the Securities and Exchange Commission. The +Commission may distribute civil money penalties collected in this proceeding if, in its discretion, +the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section +308(a) of the Sarbanes-Oxley Act of 2002. The Commission will hold funds paid pursuant to this +paragraph in an account at the United States Treasury pending a decision whether the Commission, +in its discretion, will seek to distribute funds or, subject to Exchange Act Section 21F(g)(3), +transfer them to the general fund of the United States Treasury. If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. §3717. Payment shall be made in the +following installments: + +1. $3,855.60 within 30 days of the entry of this Order; +2. $3,855.60 within 90 days of the entry of this Order; +3. $3,855.60 within 180 days of the entry of this Order; +4. $3,855.60 within 270 days of the entry of this Order; and +5. $3,855.60 within 360 days of the entry of this Order. + +Payments shall be applied first to post order interest, which accrues pursuant to 31 U.S.C. 3717. +Prior to making the final payment set forth herein, Respondent shall contact the staff of the +Commission for the amount due. If Respondent fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-order interest, minus any payments made, shall become due and +payable immediately at the discretion of the staff of the Commission without further application +to the Commission. + +29 + +R. 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 PLS, Park, +Joseph Lee or Juchi Lee 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 Alka Patel, +Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, 444 +South Flower Street, Suite 900, Los Angeles, CA, 90071. + + S. Regardless of whether the Commission in its discretion orders the creation of a +Fair Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondents agree that in any Related Investor Action, they shall not argue that they are entitled +to, nor shall they benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If +the court in any Related Investor Action grants such a Penalty Offset, 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. + +30 + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondents Park, Joseph Lee, and Juchi Lee, and further, any debt for disgorgement, prejudgment +interest, civil penalty or other amounts due by Respondents Park, Joseph Lee, and/or Juchi Lee +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 Park, +Joseph Lee, and/or Juchi Lee of the federal securities laws or any regulation or order issued under +such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4225.pdf b/raw/aaer/2021/AAER-4225.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b641acf0cd55377417ad511f4cb8d61c4506f07c --- /dev/null +++ b/raw/aaer/2021/AAER-4225.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b217d1b3c28c215894419a946facc97e44c6928a502861cd7d420c75b24648ee +size 405849 diff --git a/raw/aaer/2021/AAER-4226.txt b/raw/aaer/2021/AAER-4226.txt new file mode 100644 index 0000000000000000000000000000000000000000..bc9497e55955527699b8b5775c46a9683ca907c0 --- /dev/null +++ b/raw/aaer/2021/AAER-4226.txt @@ -0,0 +1,1577 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92382 / July 13, 2021 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5773 / July 13, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4226 / July 13, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20395 + + +In the Matter of + +Stockman Kast Ryan & Co. LLP; +Ellen S. Fisher, CPA; and +David H. Kast, CPA + +Respondents. + +ORDER INSTITUTING +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, AND +RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE AND NOTICE OF +HEARING + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Stockman +Kast Ryan & Co. LLP. (“SKR”), Ellen S. Fisher (“Fisher”), and David H. Kast (“Kast”) +(collectively, “Respondents”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 + +1 Section 4C provides, in relevant part, that: “The Commission may censure any person, or deny, temporarily or +permanently, to any person the privilege of appearing or practicing before the Commission in any way, if that person +is found . . . to be lacking in character or integrity, or to have engaged in unethical or improper professional +conduct.” + + 2 +(“Exchange Act”), Section 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) +(cease-and-desist proceedings), and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +II. + +After an investigation, the Division of Enforcement and the Office of the Chief Accountant +allege that: +SUMMARY +1. This proceeding arises from widespread audit failures in 12 audits of six private +funds (collectively, the “Funds” or Funds 1-6) by audit firm SKR and audit partners Fisher and +Kast. These audit failures were in connection with SKR’s engagement by an SEC-registered +investment adviser (the “Adviser”), to audit funds so that the Adviser could comply with Section +206(4) of the Advisers Act and Rule 206(4)-2 thereunder (the “Custody Rule”). +2. Respondents engaged in improper professional conduct under Rule 102(e). +Respondents’ audit reports stated that the audits were conducted in accordance with Public +Company Accounting Oversight Board (“PCAOB”) auditing standards, but they were +not. Specifically, Fisher, the audit partner, and SKR failed to obtain sufficient appropriate audit +evidence regarding the valuation and existence of certain hard-to-value assets described herein as +Level 3 assets.3 Fisher and SKR knew that these assets were hard to value and acknowledged +that they were high risk areas of the audit, but they failed to properly assess the risks associated +with these complex assets and design and execute an audit response sufficient to address the +risks. As such, Fisher and SKR failed to meet PCAOB auditing standards related to audit +planning, evaluating audit results, audit documentation, exercising due professional care, and +supervision and review. +3. In one particularly egregious example, Fisher and SKR failed to obtain sufficient +evidence of the existence of certain stock valued at $1,000,000 that made up 91% of one fund’s +total assets. If they had obtained such evidence, they would have seen that this stock series +owned by the fund had been cancelled in a recapitalization. The fund later restated its financial +statements by removing this asset. +4. The engagement quality review conducted by Kast, who was required under +PCAOB standards to evaluate significant judgments made by the engagement team and assess +the engagement team’s response to significant risks, was deficient. Kast reviewed and approved +work papers that failed to obtain sufficient appropriate audit evidence regarding the valuation + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that the “Commission may censure a person or deny, temporarily or +permanently, the privilege of appearing or practicing before it in any way to a person who is found. . . to have +engaged in unethical or improper professional conduct.” +3 As described in greater detail below, Financial Accounting Standards Board (“FASB”) Accounting Standards +Codification “ASC” 820 sets forth three categories of inputs for use in determining an asset’s fair value. Assets +valued using Level 3 inputs are the most difficult to value because they have no readily available market informati on +and are valued using unobservable inputs. + 3 +and existence of Level 3 assets and failed to review other required work papers on independence +and completion. +5. As a result of their deficient conduct, Fisher and Kast did not act with due +professional care, including professional skepticism. +6. The audit failures include multiple single instances, detailed below, of highly +unreasonable conduct that resulted in a violation of applicable professional standards in +circumstances in which Fisher, Kast, and SKR knew, or should have known, that heightened +scrutiny was warranted. +7. The audit failures detailed below also demonstrate repeated instances of +unreasonable conduct, each resulting in a violation of applicable professional standards that +indicate a lack of competence to practice before the Commission. +8. Respondents also caused CGI to violate the Custody Rule under the Advisers Act. +Among other things, the Custody Rule requires that advisory client assets be maintained with a +qualified custodian, and requires client assets to be verified through an annual surprise +examination by an independent public accountant. The Adviser, which had custody of investor +assets, sought to use the audit exception to the Custody Rule, which required that the funds’ +financial statements be audited in accordance with U.S. Generally Accepted Auditing Standards +(“GAAS”) by an independent public accountant that is registered with and subject to regular +inspection by the PCAOB. +9. As was stated in the Commission’s final rule revising the Commission’s Auditor +Independence Requirements, Release Nos. 33-7919; 34-43602; 35-27279; IC-24744; IA-1911; +FR-56, “It is the auditor’s opinion that furnishes investors with critical assurance that the +financial statements have been subjected to a rigorous examination by an objective, impartial, +and skilled professional, and that investors, therefore, can rely on them.” Similarly, AICPA’ s +Statement on Auditing Standards (SAS) No. 1, has long emphasized that auditors “should not +only be independent in fact; they should also avoid situations that may lead outsiders to doubt +their independence.” +10. SKR was not independent under the Commission’s independence rules set forth in +Regulation S-X, Rule 2-01. +11. SKR violated the SEC’s independence rules when a tax partner at SKR served as +the trustee or general partner for a number of trusts that invested in eight private funds audited by +SKR (Funds 7-14). SKR also lacked independence because it provided bookkeeping services to +one fund (Fund 2) for which it also audited the fund’s financial statements. Both of these +relationships violated the Commission’s independence rules for accountants. +12. Because SKR lacked independence and because of common control of the +Adviser’s funds, SKR’s lack of independence affected all 29 audits it conducted for the Adviser +in 2015 and 2016. +13. Moreover, as described below, many of the audit failures demonstrate that +Respondents failed to conduct the audits in accordance with PCAOB standards or GAAS. + 4 +14. Because SKR was not independent and did not conduct the audits of the funds in +accordance with GAAS, the Adviser could not meet the audit exception and violated the Custody +Rule. + A. RESPONDENTS +15. Stockman Kast Ryan & Co., LLP is a Colorado limited liability partnership and +accounting firm registered with the PCAOB. SKR has one office headquartered in Colorado +Springs, Colorado. +16. Ellen S. Fisher, CPA, age 51, is a resident of Elbert, Colorado. She began +working at SKR in 1999 as a senior auditor and became a partner in 2012. She first served on +audits of the Adviser’s funds in 2011 as senior manager, then as the audit engagement partner +from 2014 through at least 2019. She has bee n a licensed CPA in Colorado since 1998. +17. David H. Kast, CPA, age 69, is a resident of Colorado Springs, Colorado. He was +one of the founding partners of SKR in 1995. Kast served as the audit engagement partner on +audits of the Adviser’s funds from at least 2010 through 2013 and then as the audit engagement +quality review (“EQR”) partner from 2014 through at least 2017. He has been a licensed CPA in +Colorado since 1977. + B. OTHER RELEVANT ENTITIES AND INDIVIDUALS +18. Adviser is an SEC-registered investment adviser incorporated in Colorado that +provides investment advisory, financial planning, and estate planning services to high-net-worth +clients. +19. Individual 1, age 66, is a resident of Colorado Springs, Colorado. Individual 1 is +a tax partner at SKR and was a trustee and general partner for seven trusts or partnerships that +invested in eight funds also audited by SKR in 2015. +C. BACKGROUND +20. Between at least January 1, 2015 and December 31, 2016, the Adviser had +custody of investor assets invested in the Funds and, as such, was required to comply with the +Custody Rule. +21. Among other things, the Custody Rule requires that advisory client assets be +maintained with a qualified custodian, and requires client assets to be verified through an annual +surprise examination by an independent public accountant. See Advisers Act Rule 206(4)-2(a)(1) +and (4). An adviser to a limited liability company or pooled investment vehicle, such as the +Adviser, does not have to satisfy the annual surprise examination requirement if it distributes +annual audited financial statements to each member or beneficial owner within 120 days of the +end of each fund’s fiscal year. See Rule 206(4)-2(b)(4) of the Advisers Act. The audit exception +requires that the Funds’ financial statements be prepared in accordance with generally accepted +accounting principles (“GAAP”) and that they be audited in accordance with GAAS for the +purpose of expressing an opinion therein. + 5 +22. To comply with the audit exception to the Custody Rule, the Adviser engaged +SKR to perform annual audits for the funds for the years ended December 31, 2015 and +December 31, 2016, and then distributed audited financial statements to each investor in the +Funds. +23. SKR’s relationship with the Adviser dates back to approximately 1999 and SKR +provides (or has provided) audit, tax, and bookkeeping services to the Adviser and/or affiliates of +the Adviser. Between 2014 and 2016, SKR’s revenues from the Adviser, the Adviser’s +employees, and related parties ranged between approximately 8-10% of SKR’s total revenue. +24. In 2015, SKR audited a total of 20 Adviser funds, 11 of which were funds holding +Level 3 assets. 4 In 2016, SKR audited a total of nine Adviser funds, seven of which held Level 3 +assets. For each year, six of the funds that held Level 3 assets involved audit failures that are the +subject of this proceeding. The 12 audits with audit failures at issue in this proceeding are +referred to as the “Audits.” +25. ASC 820 defines fair value for purposes of GAAP as “the price that would be +received to sell an asset or paid to transfer a liability in an orderly transaction between market +participants at the measurement date.” ASC 820-10-35-36 states that the methods used to +measure fair value “shall maximize the use of relevant observable inputs and minimize the use of +unobservable inputs.” +26. According to SKR’s audit reports, the Audits were performed in accordance with +PCAOB auditing standards. +27. Kast worked on the Adviser’s audits as engagement partner from at least 2010 +through 2013 and then as EQR beginning in 2014. Fisher worked on the Adviser’s audits +beginning in 2011 as senior manager, and then as engagement partner from 2014. +28. In 2015 and 2016, Fisher was the SKR engagement partner on all fund audits for +the Adviser and was ultimately responsible for the funds’ audit engagements and for SKR’s audit +reports. +29. Prior to the 2014 audits of the Adviser’s private funds, Fisher could not recall +whether she had ever audited valuations of Level 3 assets. +30. SKR audited six Adviser funds in 2014 holding 19 Level 3 assets totaling $48 +million. SKR’s audit of Level 3 assets expanded to 11 funds in 2015 holding 78 Level 3 assets +totaling $103 million. + +4 ASC 820 prioritizes inputs used to measure fair value into three levels based on the observability of the inputs. The +highest, and generally most reliable, level of inputs – Level 1 – are “quoted prices (unadjusted) in active markets for +identical assets or liabilities.” ASC 820-10-35-40. Level 2 inputs are “inputs other than quoted prices included +within Level 1 that are observable for the asset or liability, either directly or indirectly.” ASC 820-10-35-47. Level +3 inputs are “unobservable inputs for the asset or liability.” ASC 820-10-35-52. ASC 820-10-35-53 further notes as +follows: “Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are +not available, thereby allowing for situations in which there is little, if any market activity for the asset or liability at +the measurement date.” + 6 +31. Many of the Audits at issue here involved funds whose assets were entirely Level +3 assets, while Funds 2 and 3 (discussed in more detail below) included Level 3 assets +accounting for between 57% and 71% of total assets. +32. Prior to the 2015 fund audits, Fisher could not recall any specific training in +valuing Level 3 assets, which made up a large portion of the funds’ assets that year and had +increased significantly from 2014. Despite having little to no experience in auditing these types +of assets, Fisher did not engage a valuation specialist or anyone trained and experienced in +auditing these type of assets. +33. In 2015, the individual at the Adviser preparing the financial statements for the +funds was doing so for the first time, and was not a CPA. He replaced a CPA who had left the +firm, and for the 2016 financial statements a new CPA took over primary responsibility for +preparing the financial statements. +34. Fisher knew that, in 2015, the individual at the Adviser who performed the Level +3 asset valuations that SKR audited was not an accountant and had minimal familiarity with +GAAP, including ASC Topic 820 concerning the valuation of investments for financial reporting +purposes. +35. Fisher also knew in 2015 that the audit senior (the most senior professional on the +audit below Fisher) also had minimal audit experience auditing valuations of Level 3 assets . +36. As the EQR partner, Kast was responsible for reviewing the audit file and the +Fund financial statements. Under the applicable PCAOB standards and GAAS, Kast was +responsible for evaluating the significant judgments made by the engagement team, the +conclusions reached by the engagement team, and approving the issuance of the audit report. +RESPONDENTS FAILED TO CONDUCT THE AUDITS +IN ACCORDANCE WITH PCAOB AND GAAS AUDITING STANDARDS +37. Fisher, Kast, and SKR failed to conduct the Audits in accordance with PCAOB +auditing standards and GAAS. +38. SKR and Fisher planned for the Fund audits collectively, but within the audit +work papers there was a separate valuation work paper for each Fund’s assets. +39. This section first describes conduct that impacted all of the Audits and failed to +comply with the applicable auditing standards. This section then describes conduct that +impacted the audit of specific funds and specific assets that failed to comply with the applicable +auditing standards. +A. PERVASIVE FAILURES THROUGHOUT THE AUDITS + +40. As detailed in this section, Fisher and SKR failed to do the following with respect +to the Audits: + 7 +(i) adequately plan the Audits and obtain sufficient appropriate audit evidence to provide a +reasonable basis for SKR’s audit opinions; +(ii) properly evaluate audit results; +(iii) document audit procedures; +(iv) adequately supervise the Audits; and +(v) exercise due professional care, including professional skepticism. +41. In addition, Kast failed to comply with the requirements for EQRs and exercise +due professional care and professional skepticism. +i. SKR and Fisher Failed to Obtain Sufficient Appropriate Audit +Evidence on Level 3 Assets + +a. Insufficient Audit Response to the High Inherent Risk and Risk of +Material Misstatement of Level 3 Assets +42. Fisher and SKR failed to adequately assess the risks of the Audits and +appropriately plan the Audits in response to the high risks of these Audits. +43. Fisher, Kast and other SKR employees admit the valuation of Level 3 assets in +these Audits were high risk. +44. The valuation of Level 3 assets in these Audits were high risk. +45. AS 2110.595 states, among other things, that the auditor should “identify and +assess the risks of material misstatement at the financial statement level and the assertion level” +and “determine whether any of the identified risks and assessed risks of material misstatement +are significant risks.” +46. AS 2301.05 states that “[t]he auditor should design and implement overall +responses to address the assessed risks of material misstatement” including, but not limited to, +evaluating whether the “company’s selection and application of significant accounting +principles, particularly those related to subjective measurements and complex transactions, are +indicative of bias that could lead to material misstatement of the financial statements.” +47. AS 1105.04 states that “the auditor must plan and perform audit procedures to +obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion.” + +5 PCAOB Auditing Standards use the nomenclature “AS” and a numbering arrangement adopted when the standards +were reorganized effective after December 30, 2016. The reorganized standards were in effect for SKR’s audits for +the period ending December 31, 2016. The substance of the standards applicable to SKR’s 2015 and 2016 audits +was not changed. As such, we cite the reorganized standards throughout this Order. See PCAOB Release No. 2015- +002 (permitting referencing the reorganized standards before the effective date, as the amendments do not +substantively change the standards’ requirements). + 8 +48. AS 1105.05 adds, among other things, that as the risk of the audit increases, “the +amount of evidence that the auditor should obtain also increases.” +49. AS 2301.09 states, in relevant part, that “[i]n designing the audit procedures to be +performed, the auditor should: a. obtain more persuasive audit evidence the higher the auditor’s +assessment of risk [and] b. take into account the types of potential misstatements that could result +from the identified risks and the likelihood and magnitude of potential misstatement.” +50. AU-C 200.086 provides that “GAAS requires that the auditor exercise +professional judgment and maintain professional skepticism throughout the planning and +performance of the audit and, among other things . . . obtain sufficient appropriate audit evidence +about whether material misstatements exist, through designing and implementing appropriate +responses to the assessed risks.” +51. AU-C 240.A38 provides that “[d]etermining overall responses to address the +assessed risks of material misstatement due to fraud generally includes the consideration of how +the overall conduct of the audit can reflect increased professional skepticism through, for +example, increased +• sensitivity in the selection of the nature and extent of documentation to be examined in +support of material transactions. + +• recognition of the need to corroborate management explanations or representations +concerning material matters….” +52. AU-C 330.07(b) provides that in “designing the further audit procedures to be +performed, the auditor should . . . obtain more persuasive audit evidence the higher the auditor’s +assessment of risk.” +53. AU-C 330.18 states that “[i]rrespective of the assessed risks of material +misstatement, the auditor should design and perform substantive procedures for all relevant +assertions related to each material class of transactions, account balance, and disclosure.” +54. Level 3 assets can be difficult to value because they have no readily available +market information and are estimated using unobservable inputs. +55. In 2015, SKR identified and assessed the risk of material misstatement and +planned audit responses for all Adviser funds collectively. In 2016, SKR identified and assessed +the risk of material misstatement and planned audit responses for all Funds holding Level 3 +assets collectively (and separately from funds holding Level 1 and 2 assets) . SKR did not +perform separate risk identification, assessment, and response proce dures for each individual +fund and SKR failed to document the funds with Level 3 assets generally had a risk level above +those that did not have Level 3 assets. + +6 AU-C refers to the AICPA professional standards. + 9 +56. SKR’s work papers for the 2015 Audit failed to identify these Level 3 assets as +having a significant risk, including a fraud risk , despite Fisher’s knowledge that valuation of +Level 3 assets were a significant audit risk and a fraud risk. Kast similarly knew that valuation +of Level 3 assets was “high risk in the audit” and was both a significant risk and a fraud risk. +57. SKR’s work papers for the 2015 and 2016 Audits also failed to identify that the +inherent risk of the Level 3 assets was high, despite Fisher’s knowledge that inherent risk related +to the valuation of Level 3 assets was high. +58. Accordingly, in both 2015 and 2016, the audit work papers incorrectly +documented the risk of material misstatement as moderate, instead of high. +59. Fisher and SKR failed to design audit approaches and procedures to address the +high risks they knew were associated with valuation of these Level 3 assets. +60. SKR’s audit program also contained no specific procedures to be performed +regarding evaluating the appropriateness of valuation models, testing Level 3 inputs, or obtaining +and evaluating investment committee minutes and related documentation that included +contemporaneous information regarding the valuation of Level 3 assets. +61. Because SKR and Fisher failed to properly plan and perform audit procedures for +the risk of material misstatement associated with the valuation and existence of these Level 3 +assets, they also failed to obtain sufficient appropriate audit evidence to provide a reasonable +basis for SKR’s audit reports. +b. Insufficient Audit Evidence of Existence of Level 3 Assets +62. In each of the Audits, SKR did not perform audit procedures to obtain sufficient +appropriate audit evidence regarding the existence of Level 3 assets at year end. Fisher reviewed +and approved audit work papers showing that SKR did not obtain sufficient appropriate audit +evidence. +63. AS 1105.04 requires the auditor to, “plan and perform audit procedures to obtain +sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion.” +64. AS 1105.08 provides that, “evidence obtained from a knowledgeable source that +is independent of the company is more reliable than evidence obtained only from internal +company sources.” +65. AS 2310.06 states that, “confirmation is undertaken to obtain evidence from third +parties about financial statement assertions made by management.” +66. AU-C 330.03 details that the “objective of the auditor is to obtain sufficient +appropriate audit evidence regarding the assessed risks of material misstatement through +designing and implementing appropriate responses to those risks.” +67. AU-C 330.18 discussed above, applies to both existence and valuation issues. + 10 +68. AU-C 330.19 states that the auditor “should use external confirmation procedures +for accounts receivable.” +69. AU-C 500.06 provides that the “auditor should design and perform audit +procedures that are appropriate in the circumstances for the purpose of obtaining sufficient +appropriate audit evidence.” +70. AU-C 500.A8 provides that “[m]ore assurance is ordinarily obtained from +consistent audit evidence obtained from different sources or of a different nature than from items +of audit evidence considered individually. For example, corroborating information obtained from +a source independent of the entity may increase the assurance that the auditor obtains from audit +evidence that is generated internally, such as evidence existing within the accounting records, +minutes of meetings, or a management representation.” +71. AU-C 505.02 notes that “audit evidence is more reliable when it is obtained from +independent sources outside the entity.” +72. AU-C 505.03 provides that the “auditor is required to consider whether external +confirmation procedures are to be performed as substantive audit procedures and is required to +use external confirmation procedures for accounts receivable unless the overall account balance +is immaterial, external confirmation procedures would be ineffective, or the auditor’s assessed +level of risk of material misstatement at the relevant assertion level is low, and the other planned +substantive procedures address the assessed risk.” +73. AU-C 505.03 also notes that “section 330 requires that the auditor obtain more +persuasive audit evidence the higher the auditor’s assessment of risk. To do this, the auditor may +increase the quantity of the evidence or obtain evidence that is more relevant or reliable, or both. +For example, the auditor may place more emphasis on obtaining evidence directly from third +parties or obtaining corroborating evidence from a number of independent sources. Section 330 +also indicates that external confirmation procedures may assist the auditor in obtaining audit +evidence with the high level of reliability that the auditor requires to respond to significant risks +of material misstatement, whether d ue to fraud or error. +74. AU-C 580.04 clarifies that “[a]lthough written representations provide necessary +audit evidence, they complement other auditing procedures and do not provide sufficient +appropriate audit evidence on their own about any of the matters with which they deal. +Furthermore, obtaining reliable written representations does not affect the nature or extent of +other audit procedures that the auditor applies to obtain audit evidence about the fulfillment of +management's responsibilities or about specific assertions.” +75. SKR’s audit program provided that the existence of Level 3 assets should be +confirmed, i.e. that SKR should obtain sufficient appropriate evidence that those assets exist at +the time of the audit. However, Fisher and SKR took no steps to confirm the existence of Level +3 assets or obtain other sufficient appropriate evidence. +76. SKR did not confirm the existence of any Level 3 assets held by any of the Funds +or perform sufficient alternative procedures; instead, SKR relied predominantly on the Adviser’s +representations (in valuation write ups, management representation letters, and made orally). + 11 +Fisher reviewed and approved the audit work papers showing these failures and Kast signed off +on the Audits. +c. Insufficient Audit Evidence of Valuation of Level 3 Assets +77. In each of the Audits, SKR did not perform audit procedures to obtain sufficient +appropriate audit evidence regarding the valuation of Level 3 assets. Fisher reviewed and +approved audit work papers showing these failures. +78. AS 2502.03 requires, in relevant part, the auditor “to obtain sufficient appropriate +audit evidence to provide reasonable assurance that fair value measurements and disclosures are +in conformity with GAAP.” +79. AS 2805.02 states, among other things, that management representations, “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.” +80. AS 2810.03 states that, “[i]n forming an opinion on whether the f inancial +statements are presented fairly, in all material respects, in conformity with the applicable +financial reporting framework, the auditor should take into account all relevant audit evidence, +regardless of whether it appears to corroborate or to contradict the assertions in the financial +statements.” +81. AS 2502.47 provides that the “auditor should evaluate the sufficiency and +competence of the audit evidence obtained from auditing fair value measurements and +disclosures as well as the consistency of that evidence with other audit evidence obtained and +evaluated during the audit. The auditor’s evaluation of whether the fair value measurements and +disclosures in the financial statements are in conformity with GAAP is performed in the context +of the financial statements taken as a whole (see AS 2810.12 through .18 and AS 2810.24 +through .27).” +82. AS 2301.11 requires that “[f]or significant risks, the auditor should perform +substantive procedures, including tests of details that are specifically responsive to the assessed +risks.” +83. AU-C 330.03 and 500.06, discussed above, also apply to valuation issues. +84. AU-C 330.28 states that, “In forming a conclusion, the auditor should consider all +relevant audit evidence, regardless of whether it appears to corroborate or contradict the +assertions in the financial statements.” +85. AU-C 500.08 states that “[i]f information to be used as audit evidence has been +prepared using the work of a management’s specialist, the auditor should, to the extent +necessary, taking into account the significance of that specialist’s work for the auditor’s +purposes,… a. evaluate the competence, capabilities, and objectivity of that specialist; … b. +obtain an understanding of the work of that specialist; and . . .c. evaluate the appropriateness of +the specialist’s work as audit evidence for the relevant assertion.” (citations omitted). + 12 +86. AU-C 500.09 provides that “when using information produced by the entity, the +auditor should evaluate whether the information is sufficiently reliable for the auditor’s purposes, +including, as necessary, in the following circumstances: a. Obtaining audit evidence about the +accuracy and completeness of the information . . . [and] b. Evaluating whether the information is +sufficiently precise and detailed for the auditor’s purposes. . . .” +87. AU-C 501.06 sets forth parameters for “investments in derivate instruments and +securities measured or disclosed at fair value” noting the “auditor should a. determine whether +the applicable financial reporting framework specifies the method to be used to determine the +fair value of the entity’s derivative instruments and investments in securities and b. evaluate +whether the determination of fair value is consistent with the specified valuation method.” +88. “If estimates of fair value of derivative instruments or securities are obtained from +broker-dealers or other third-party sources based on valuation models, the auditor should +understand the method used by the broker-dealer or other third-party source in developing the +estimate and consider the applicability of section 500.1.” AU-C 501.07. +89. Further, “If derivative instruments or securities are valued by the entity using a +valuation model, the auditor should obtain sufficient appropriate audit evidence supporting +management's assertions about fair value determined using the model.” AU-C 501.08. +90. AU-C 540.06 provides that the “objective of the auditor is to obtain sufficient +appropriate audit evidence about whether, in the context of the applicable financial reporting +framework a. accounting estimates, including fair value accounting estimates, in the financial +statements, whether recognized or disclosed, are reasonable and b. related disclosures in the +financial statements are adequate.” +91. AU-C 540.12 requires that “[b]ased on the assessed risks of material +misstatement, the auditor should determine . . . a. whether management has appropriately +applied the requirements of the applicable financial reporting framework relevant to the +accounting estimate and b. whether the methods for making the accounting estimates are +appropriate and have been applied consistently and whether changes from the prior period, if +any, in accounting estimates or the method for making them are appropriate in the +circumstances.” +92. AU-C 540.13 states, in relevant part, that in “responding to the assessed risks of +material misstatement, as required by section 330, the auditor should undertake one or more of +the following, taking into account the nature of the accounting estimate: … [t]est how +management made the accounting estimate and the data on which it is based. In doing so, the +auditor should evaluate whether . . . i. the method of measurement used is appropriate in the +circumstances…. ii. the assumptions used by management are reasonable in light of the +measurement objectives of the applicable financial reporting framework, and . . . iii. the data on +which the estimate is based is sufficiently reliable for the auditor’s purposes.” +93. AU-C 540.A33 explains that “In the case of fair value accounting estimates, +assumptions reflect, or are consistent with, what knowledgeable, willing arm's length parties +(sometimes referred to as market participants or equivalent) would use in determining fair value + 13 +when exchanging an asset or settling a liability. Specific assumptions also will vary with the +characteristics of the asset or liability being valued; the valuation technique used (for example, a +market approach or an income approach); and the requirements of the applicable financial +reporting framework.” +94. AU-C 540.A69 elaborates on how the auditor may test how management made an +accounting estimate and the data on which it is based by for example: +• “Testing the extent to which data on which the accounting estimate is based is +accurate, complete, and relevant and whether the accounting estimate has been properly +determined using such data and management assumptions[.] +• Considering the source, relevance, and reliability of external data or information, +including that received from management's specialists, to assist in making an accounting +estimate[.] +• Determining how management has taken into account the effect of events, +transactions, and changes in circumstances occurring between the date that the estimate or +inputs to the estimate were determined and the reporting date, if the estimate was not made +as of a date that coincides with the reporting date (for example, a valuation by an +independent appraiser may be as of a different date)[.] +• Recalculating the accounting estimate and reviewing, for internal consistency, +information used to determine the estimate[.] +• Considering management's review and approval processes[.]” +95. AU-C 540.A84 elaborates on fair value accounting related to unobservable inputs, +noting “when fair value accounting estimates are based on unobservable inputs, matters that the +auditor may consider include, for example, how management supports +• the identification of the characteristics of market participants relevant to the +accounting estimate. +• modifications it has made to its own assumptions to reflect its view of +assumptions market participants would use. +• whether it has incorporated appropriate information. +• when applicable, how its assumptions take account of comparable transactions, +assets, or liabilities.” +96. AU-C540.A84 continues on to state that if “there are unobservable inputs, it is +more likely that the auditor's evaluation of the assumptions will need to be combined with other +responses to assessed risks in paragraph [540.13 (see above)] in order to obtain sufficient +appropriate audit evidence. In such cases, it may be necessary for the auditor to perform other +audit procedures (for example, examining documentation supporting the review and approval of + 14 +the accounting estimate by appropriate levels of management and, when appropriate, those +charged with governance).” +97. AU-C 580.04, discussed above, also applies to valuation issues. +98. SKR’s valuation procedures excessively relied on representations from the +Adviser without obtaining sufficient corroborating audit evidence and sometimes ignored +contradictory evidence inconsistent with the Adviser’s valuation determinations. +99. For example, SKR failed to identify that the valuation estimates were not +prepared in accordance with GAAP and failed to obtain sufficient audit evidence corroborating +management’s supporting valuation inputs and assumptions (e.g. at times the Adviser and SKR +relied on stale appraisals, consulting reports that were up to nine years old, and unsigned sales +agreements). +100. As further set forth below, these audit deficiencies contributed to Fisher’s and +SKR’s failure to identify potential misstatements in financial statements for three funds in 2015 +(pertaining to 9 separate Level 3 assets), and for two funds in 2016 (pertaining to four Level 3 +assets). +ii. Fisher and SKR Failed to Evaluate Audit Results +101. In several Audits, SKR did not evaluate management for possible bias and +properly identify and evaluate misstatements in the financial statements. +102. AS 2401.64 requires a retrospective review of accounting estimates in significant +accounts to provide the auditor with additional information, with the benefit of hindsight, about +whether there may be a possible bias on the part of management. +103. AS 2810.03, also discussed above, requires auditors to take into account all +relevant audit evidence in forming an opinion on the financial statements. +104. AS 2810.17 states, in relevant part, “[t]he auditor should evaluate whether +uncorrected misstatements are material, individually or in combination with other +misstatements.” +105. Importantly, AS 1215.12 states, among other things, that the auditor must +document the identified “accumulated misstatements and evaluation of uncorrected +misstatements, including the quantitative and qualitative factors the auditor considered to be +relevant to the evaluation.” +106. AU-C 240.32b states that the auditor should design and perform audit procedures +to “review accounting estimates for biases and evaluate whether the circumstances producing the +bias, if any, represent a risk of material misstatement due to fraud. In performing this review, the +auditor should … perform a retrospective review of management judgments and assumptions +related to significant accounting estimates reflected in the financial statements of the prior year. ” + 15 +107. AU-C 240.A52 explains that the “purpose of performing a retrospective review of +management judgments and assumptions related to significant accounting estimates reflected in +the financial statements of the prior year is to determine whether an indication exists of a +possible bias on the part of management. This review is not intended to call into question the +auditor's professional judgments made in the prior year that were based on information available +at the time.” +108. AU-C 240.A53 elaborates that a “retrospective review is also required by section +540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related +Disclosures. That review is conducted as a risk assessment procedure to obtain information +regarding the effectiveness of management's prior period estimation process, audit evidence +about the outcome, or when applicable, the subsequent reestimation of prior period accounting +estimates that is pertinent to making current period accounting estimates, and audit evidence of +matters, such as estimation uncertainty, that may be required to be disclosed in the financial +statements. As a practical matter, the auditor's review of management judgments and +assumptions for biases that could represent a risk of material misstatement due to fraud in +accordance with this section may be carried out in conjunction with the review required by +section 540.” (Internal footnotes omitted.) +109. AU-C 540.21 states, “The auditor should review the judgments and decisions +made by management in the making of accounting estimates to identify whether indicators of +possible management bias exist. Indicators of possible management bias do not, themselves, +constitute misstatements for the purposes of drawing conclusions on the reasonableness of +individual accounting estimates.” +110. AU-C 450.05 provides that the “auditor should accumulate misstatements +identified during the audit, other than those that are clearly trivial.” +111. AU-C 450.11 provides that the “auditor should determine whether uncorrected +misstatements are material, individually or in the aggregate.” +112. AU-C 560.15 provides that if “a subsequently discovered fact becomes known to +the auditor after the report release date, the auditor should . . . a. discuss the matter with +management and, when appropriate, those charged with governance. [and] b. determine whether +the financial statements need revision and, if so, inquire how management intends to address the +matter in the financial statements.” +113. Fisher reviewed and approved the SKR audit work papers that failed to perform a +retrospective review and properly evaluate and document whether identified misstatements in +Fund 2 in 2016 were material to fund financial statements. +114. For example, with respect to retrospective reviews, as detailed below in Funds 2 +and 3, Asset 1, despite an 83% increase in the value of an asset within 5 months from the date of +the 2015 financial statements, SKR failed to perform a retrospective review and address whether +the Adviser’s 2015 valuation contained bias or was materially in error. +115. SKR’s failure to sufficiently document whether identified misstatements were +material to the fund financial statements applies to Fund 2 and is discussed below in Section B.x. + 16 +116. During the Audits, SKR identified valuation discrepancies and concluded without +adequate evaluation or documentation that these discrepancies were not errors and/or were +immaterial to the financial statements. +117. These identified valuation discrepancies, which SKR concluded without adequate +evaluation or documentation were not errors and/or were immaterial to the financial statements, +included for example, SKR’s failure to consider the effect of the ownership error discovered in +2016 for Asset 2 of Fund 2, in which, as discussed below, the Adviser discovered the ownership +percentage for Fund 2 in 2016 was overstated by 29%, corresponding to a $716,000 +overstatement in the financials (SKR did not even quantify the overstatement for 2015 based on +the ownership error). +iii. SKR’s Audit Documentation Was Not in Accordance with Applicable +Audit Standards +118. In each of the Audits, SKR’s audit work papers are replete with documentation +deficiencies. +119. AS 1215.06 requires the auditor to document the procedures performed, evidence +obtained, and conclusions reached and the audit documentation must clearly demonstrate that the +work was in fact performed. +120. AS 1215.06 further requires that the audit documentation must contain sufficient +information to enable an experienced auditor, having no previous connection with the +engagement to a) understand the nature, timing, extent, and results of the procedures performed, +evidence obtained, and conclusions reached; and b) determine who performed the work and the +date such work was completed as well as the person who reviewed the work and the date of such +review. +121. AU-C 230.08 provides that the “auditor should prepare audit documentation that +is sufficient to enable an experienced auditor, having no previous connection with the audit to +understand. . . a. the nature, timing and extent of the audit procedures performed to comply with +GAAS and applicable legal and regulatory requirements; b. the results of the audit procedures +performed, and the audit evidence obtained; and c. significant findings or issues arising during +the audit, the conclusions reached thereon, and significant professional judgments made in +reaching those conclusions.” +122. SKR’s work papers contain various documentation deficiencies that would +prevent an experienced auditor from understanding the extent and results of the procedures +performed, evidence obtained, and conclusions reached, and whether certain work was reviewed. +For example: + Fisher and Kast both reviewed and approved the 2015 audit work papers that did +not identify the valuation of Level 3 assets as a significant risk, including a fraud +risk, although Fisher knew that valuation of level three assets were a significant +audit risk and a fraud risk and Kast knew that they were high risk, and both a +significant risk and a fraud risk; + 17 + Fisher and Kast both reviewed and approved the 2015 and 2016 audit work papers +that incorrectly documented inherent risk and the risk of material misstatement as +moderate instead of high; and + The 2015 audit work papers did not identify that SKR provided bookkeeping +services to a fund that it audited or evaluate whether the services impacted SKR’s +independence. +iv. Fisher’s Supervision and Review of the Audit Engagements was +Inadequate +123. It is the responsibility of the engagement partner to provide for proper supervision +of the work of the engagement team and for compliance with PCAOB auditing standards. AS +1201.03. +124. The engagement partner is also responsible for evaluating that the audit work was +performed and documented, the objectives of the audit procedures were achieved, and the results +of the work support the conclusions reached. AS 1201.05. +125. AU-C 220.13 states that the “engagement partner should form a conclusion on +compliance with independence requirements that apply to the audit engagement. In doing so, the +engagement partner should a. obtain relevant information from the firm and, when applicable, +network firms to identify and evaluate circumstances and relationships that create threats to +independence; b. evaluate information on identified breaches, if any, of the firm's independence +policies and procedures to determine whether they create a threat to independence for the audit +engagement; and c. take appropriate action to eliminate such threats or reduce them to an +acceptable level by applying safeguards or, if considered appropriate, to withdraw from the audit +engagement when withdrawal is possible under applicable law or regulation. The engagement +partner should promptly report to the firm any inability to resolve the matter so that the firm may +take appropriate action.” +126. AU-C 220.17 directs that the engagement partner “should take responsibility for +the following: a. the direction, supervision, and performance of the audit engagement in +compliance with professional standards, applicable legal and regulatory requirements, and the +firm’s policies and procedures…[and] b. The auditor’s report being appropriate in the +circumstances.” +127. AU-C 220.19 requires that “on or before the date of the auditor’s report, the +engagement partner should, through a review of the audit documentation and discussion with the +engagement team, be satisfied that sufficient appropriate audit evidence has been obtained to +support the conclusions reached and for the auditor's report to be issued.” +128. In each of the Audits, Fisher’s supervision and review was inadequate because +she reviewed and approved the audit work papers that did not meet PCAOB auditing standards +or GAAS and did not support SKR’s audit reports. This pervasive failure applies to all of the +identified existence and valuation audit failures in this Order. + 18 +129. Most significantly, Fisher reviewed and approved the Audits that did not properly +evaluate SKR’s independence, document the risks of Level 3 assets, adequately respond to the +identified risks of Level 3 assets, and obtain sufficient appropriate audit evidence. She also did +not perform a retrospective review. +v. Fisher Did Not Act with Due Professional Care, Including +Professional Skepticism +130. AS 1015 and AS 2301 required Fisher to act with due professional care, including +professional skepticism in the planning and performance of the audit. +131. AS 2301.07 provides that due professional care includes, among other things, +“obtaining sufficient appropriate evidence to corroborate management’s explanations or +representations concerning important matters, such as through third-party confirmation, use of a +specialist engaged or employed by the auditor, or examination of documentation from +independent sources.” +132. AU-C 200.08, cited above, requires Fisher to maintain professional skepticism. +133. AU-C 200.17 provides that the “auditor should plan and perform an audit with +professional skepticism, recognizing that circumstances may exist that cause the financial +statements to be materially misstated.” +134. Professional skepticism, as defined by AU-C 200.A22, includes “being alert to,” +for example, “[a]udit evidence that contradicts other audit evidence obtained.” +135. AU-C 200.A24 continues to explain that “[p]rofessional skepticism is necessary +to the critical assessment of audit evidence. This includes questioning contradictory audit +evidence and the reliability of documents and responses to inquiries and other information +obtained from management and those charged with governance. It also includes consideration of +the sufficiency and appropriateness of audit evidence obtained in light of the circumstances; for +example, in the case when fraud risk factors exist and a single document, of a nature that is +susceptible to fraud, is the sole supporting evidence for a material financial statement amount.” +136. AU-C 240.08 states, in relevant part, that “[w]hen obtaining reasonable assurance, +the auditor is responsible for maintaining professional skepticism throughout the audit.” +137. AU-C 240.A9 explains that “[m]aintaining professional skepticism requires an +ongoing questioning of whether the information and audit evidence obtained suggests that a +material misstatement due to fraud may exist. It includes considering the reliability of the +information to be used as audit evidence and the controls over its preparation and maintenance +when relevant. Due to the characteristics of fraud, the auditor's professional skepticism is +particularly important when considering the risks of material misstatement due to fraud.” +138. AU-C 240.A20 notes that “[m]anagement is often in the best position to +perpetrate fraud. Accordingly, when evaluating management's responses to inquiries with +professional skepticism, the auditor may judge it necessary to corroborate responses to inquiries +with other information.” + 19 +139. AU-C 240.A38 provides, in part, that “[d]etermining overall responses to address +the assessed risks of material misstatement due to fraud generally includes the consideration of +how the overall conduct of the audit can reflect increased professional skepticism through, for +example, increased [1] sensitivity in the selection of the nature and extent of documentation to be +examined in support of material transactions[] [and] [2] recognition of the need to corroborate +management explanations or representations concerning material matters.” +140. In each of the Audits, Fisher did not act with due professional care, including +professional skepticism, because she did not plan and perform the audits in accordance with +PCAOB auditing standards or GAAS, including not corroborating management representations, +not obtaining sufficient appropriate audit evidence, and ignoring contradictory information. +Again, this applies to all of the existence and valuation audit deficiencies identified in this Order. +141. In each of the Audits, Fisher’s deficient conduct caused SKR to issue unqualified +audit opinions on the Funds’ financial statements for 2015 and 2016 when SKR was not +independent and the SKR’s audits were not performed in accordance with PCAOB auditing +standards and GAAS. +vi. Kast’s EQR Failures +142. For each of the Audits, Kast failed to conduct his engagement quality reviews in +accordance with PCAOB auditing standards and GAAS. +143. AS 1220.09 states that an engagement quality reviewer should, among other +things, “evaluate the significant judgments made by the engagement team and the related +conclusions reached in forming the overall conclusion on the engagement.” +144. AS 1220.10 adds that the engagement quality reviewer must evaluate the +engagement team’s assessment of and response to significant risks, including fraud risks; +evaluate the significant judgments made about the materiality and disposition of identified +misstatements; and review the engagement team’s evaluation of the firm’s independence in +relation to the engagement. +145. AU-C 220.22 states that “engagement quality control reviewer should perform an +objective evaluation of the significant judgments made by the engagement team and the +conclusions reached in formulating the auditor's report. This evaluation should involve a. +discussion of significant findings or issues with the engagement partner; b. reading the financial +statements and the proposed auditor’s report; c. review of selected audit documentation relating +to the significant judgments the engagement team made and the related conclusions it reached; +and d. evaluation of the conclusions reached in formulating the auditor's report and consideration +of whether the proposed auditor's report is appropriate.” +146. The engagement quality reviewer must evaluate whether the procedures +performed by the engagement team responded appropriately to significant risks identified and +supported the conclusions reached. The engagement quality review can provide concurring +approval only if the engagement quality review was performed with due professional care and +the reviewer is not aware of a significant engagement deficiency, including the engagement team +failing to obtain sufficient appropriate evidence. See AS 1220.11 and .12. + 20 +147. Kast failed to perform a sufficient engagement quality review on the Audits. +148. Kast approved the 2015 audit risk work papers that did not document valuation +of Level 3 assets as a significant risk, including a fraud risk, contrary to his knowledge about the +risk level of the valuation of these assets. +149. In both 2015 and 2016, Kast also reviewed and approved the work papers that +incorrectly documented the valuation of Level 3 assets as having only moderate inherent risk and +risk of material misstatement, contrary to his testimony about the risk level. +150. In both 2015 and 2016, Kast reviewed and approved every investment valuation +audit work paper and failed to recognize that SKR did not respond appropriately to the identified +risks and did not obtain sufficient appropriate audit evidence supporting its conclusion that Level +3 assets existed and were properly valued. +151. For example, Kast reviewed and approved the deficient valuation work paper for +a fund (Fund 1 described below) that had to restate its financial statements because its principal +asset, which had been valued at $1 million, actually did not exist at year-end 2015. +152. In another example, like Fisher, Kast reviewed and approved another work paper +(for Fund 2 described below) that concluded, without any analysis, that an overstatement of +Level 3 assets was immaterial. +153. Kast did not review the 2015 and 2016 work papers that contain the team’s +independence work. +154. Kast also did not review the 2015 and 2016 investment audit programs, which +list the procedures that will be performed to obtain sufficient evidence in response to the +identified risks. +155. Further, for each of the two biggest funds holding Level 3 assets Kast chose to +review one 2016 work paper, the valuation work paper, yet he failed to document his review and +approval of those work papers. +156. For each of the Audits, Kast’s EQR audit failures demonstrate that he did not act +with the required due professional care, including professional skepticism. +B. AUDIT FAILURES WITH RESPECT TO SPECIFIC FUNDS AND ASSETS + +i. Fund 1: Failure to Identify Non-Existence of Shares +157. Fund 1 was a private fund created by and managed by an affiliate of the Adviser +to hold an investment in an unrelated, third-party private technology company. +158. In 2014, Fund 1 purchased a series of shares in a private company for $1,000,000. +In August 2015, Fund 1 purchased another series of shares in that company for $102,845 as part +of a recapitalization. + 21 +159. As of year-end 2015, Fund 1’s financial statements showed that it owned one +series of shares worth $1,000,000 (91% of assets) and another series of shares worth $102,845 +(9% of assets). The shares valued at $1,000,000, however, did not exist at year-end 2015 +because they had been cancelled in connection with a recapitalization earlier that year. +160. Fund 1 restated its 2015 financial statements in April 2017, writing off the entire +value of the series of shares purchased in 2014 and writing down the value of the shares +purchased in 2015 to $1. +161. Fisher and SKR reviewed and approved the 2015 work papers showing SKR +failed to obtain sufficient appropriate audit evidence of existence of Level 3 assets held by Fund +1. +162. The Adviser had an investment committee that received all documents associated +with the recapitalization. The recapitalization documents and the Adviser’s investment +committee meeting minutes reflect that the private company had “suffered a business +catastrophe,” was having “severe inner turmoil,” had “no sales,” and its board advised +liquidation was the “only alternative.” Documents associated with the recapitalization made it +clear that the shares purchased in 2014 were being cancelled and that there was no outstanding +equity prior to issuance of the shares purchased in 2015. Documents associated with the +purchase of the 2015 shares clearly set forth the steps of the recapitalization and noted that +previously issued shares would be converted to common stock, the technology company would +conduct a reverse stock split, and that “[a]fter effecting the reverse split, all Existing Shares +will be effectively cancelled.” (Emphasis in original.) +163. SKR and Fisher knew about the recapitalization but did not request or obtain all +of the recapitalization documents. Fisher and SKR also knew about the existence of the +Adviser’s investment committee, but did not request any materials submitted to the investment +committee, or the investment committee minutes regarding the investments in the technology +company. +164. SKR did not take any steps to confirm the existence of either series of shares. +Instead, SKR relied only on the Adviser’s representations, and SKR’s prior receipt of +documentation evidencing the purchase of both series of shares of the technology company. +165. Additionally, Fisher received one of the recapitalization documents that stated +there would be no outstanding stock of the technology company prior to issuance of the new +security. +166. Fisher and SKR reviewed and approved work papers showing that SKR failed to +obtain sufficient appropriate audit evidence of valuation of the Level 3 assets held by Fund 1. +167. Fisher reviewed and approved SKR’s 2015 test work that failed to obtain +sufficient appropriate audit evidence corroborating the representation that the value of the Fund’s +investment in its first series of shares of the technology company was unchanged from the prior +year and should be valued at cost, or $1,000,000. + 22 +168. Fisher and SKR knew based on the valuation write up provided by the Adviser +that the Adviser did not conduct any type of valuation estimating the fair value of the shares. +169. Fisher and SKR learned information during the audit that contradicted the +Adviser’s position of leaving the fair value unchanged from the prior year. Specifically, during +the 2015 audit, Fisher and SKR learned from the Adviser’s employees and the Adviser’s +valuation write up that in 2015 the private company 1) was in financial trouble and had +experienced a substantial drop in revenue and increased losses, 2) underwent a recapitalization +resulting in the company’s valuation declining from $85 million in 2014 to $8 million in 2015, +and 3) failed to provide annual financial statements to the Adviser when requested. This +information should have prompted Fisher and SKR to take additional audit steps to obtain +evidence supporting the Adviser’s valuation of these Level 3 assets. +170. In 2016, SKR similarly relied on the Adviser’s representations and failed to +confirm the existence of the series of shares of the technology company or perform sufficient +other procedures. +171. In addition to the audit standards discussed above concerning sufficiency of +evidence in general, AS 2810.08, in relevant part, states that “the auditor should obtain +corroboration for management’s explanations regarding significant unusual or unexpected +transactions, events, amounts, or relationships.” +172. In connection with Fund 1, in 2015 SKR and Fisher failed to comply with the +following PCAOB audit standards: AS 1101, AS 1105, AS 1215, AS 2301, AS 2310, AS 2401, +AS 2502, AS 2503, AS 2805, AS 2810, AS 3101, AS 1015, and AS 1201. +173. In connection with Fund 1, in 2015, SKR and Fisher failed to comply with the +following GAAS: AU -C 330.03, AU-C 330.18, AU -C 330.19, AU-C 500.06, AU-C 505.02, AU- +C 505.03; AU-C 330.28, AU-C 500.09, AU-C 501.06, AU-C 540.06, AU-C 540.12, AU-C +540.13, AU-C 540.A33. +174. In connection with Fund 1, in 2016, SKR and Fisher failed to comply with the +following PCAOB audit standards: AS 1101, AS 1215, AS 2301, AS 2310, AS 2401, AS 2502, +AS 2503, AS 2805, AS 3101, AS 1015, and AS 1201. +175. In connection with Fund 1, in 2016, SKR and Fisher failed to comply with the +following GAAS: AU -C 330.03, AU-C 330.18, AU -C 330.19, AU-C 500.06, AU-C 505.02, AU- +C 505.03, and AU -C 220. +176. In connection with Fund 1, in both 2015 and 2016, Kast failed to comply with AS +1220 and AU-C 220. +ii. Funds 2 and 3 – Asset 1: Failure to obtain evidence about an +appraisal and perform retrospective review +177. Funds 2 and 3 are private funds that held significant Level 3 assets, including +many of the same Level 3 assets. + 23 +178. Funds 2 and 3 each owned an interest in an LLC formed by the Adviser and +managed by an affiliate of the adviser, “Asset 1,” which in turn owned undeveloped ranch land. +179. The LLC was formed and funded in 2005. It acquired land for development +purposes. While it previously held a contract to develop the parcel, due to the economic +downturn in 2008 that contract was cancelled. +180. In its valuation write up for the financial statements in 2015, the Adviser valued +the ranch land owned by Asset 1 at $14 million based on a stale appraisal from 2012, added cash +held by the LLC, and calculated the valuation for Fund 2 and Fund 3’s interests based on each +entity’s pro-rata ownership portion of the LLC that owned the land. +181. SKR failed to obtain sufficient evidence that the appraisal remained an accurate +estimate of the fair value three years later at December 31, 2015. This failure violated PCAOB +standards, including AS 2502.25. This failure violated GAAS, including AU-C 330.03, AU-C +330.28, AU-C 500.06, AU-C 500.08, AU-C 500.09, AU-C 501.06, AU-501.08, AU-C 505.03, +AU-C 540.06, AU-C 540.12, AU-540.13, AU-C 540.13, AU-C 540.A33, and AU 540.A70. +182. SKR also ignored contradictory evidence in the work papers showing the value +the ranch land had likely increased between 2012 and 2015 including that (1) the population in +the area had increased and was expected to increase through 2019, which “will provide demand +for the development of [the land],” (2) there was a decrease in vacant housing in 2014 which +“will cause an increase in value,” and (3) listing prices for homes in the area increased 12% from +2013 to 2015. These failures violated PCAOB standards, including AS 2502.47. These failures +violated GAAS, including AU-C 500.10. +183. In May 2016, the Adviser obtained a new appraisal that valued the land at $25.6 +million. +184. SKR did not evaluate the qualifications of the appraiser, or test any of the data +inputs supporting the appraisal. The se failures violated PCAOB standards, including AS +1210.08-.12 and AS 2502.21. These failures violated GAAS, including AU-C 500.08. +185. Despite this 83% increase in value within 5 months from the date of the 2015 +financial statements, SKR failed to perform a retrospective review in 2016 and address whether +the Adviser’s 2015 valuation contained bias or was materially in error. This failure violated +PCAOB standards, including AS 2401.64. This failure violated GAAS, including AU -C 240.32 +and AU-C 540.21. +186. Further, Fisher and SKR failed to perform any audit procedures upon learning of +the new appraisal to determine if the 2015 financial statements were materially misstated. This +failure violated PCAOB standards, including AS 2905.04 and 2905.05. This failure violated +GAAS, including AU-C 560.15. +187. SKR also did not consider that the Adviser valued the ranch land rather than Asset +1 (an LLC), which in turn owned the ranch land. SKR did not obtain sufficient audit evidence to +determine whether or not there were any other assets or liabilities or if Asset 1 was just a pass +through entity. In 2015, SKR acknowledged that the land was the “primary asset” held by the + 24 +LLC, but it did not consider whether there were other assets or liabilities. These failures violated +PCAOB standards, including AS 2502.03. These failures violated GAAS, including AU-C +540.06. +iii. Funds 2 and 3 – Asset 2: Failure to obtain evidence and perform a +retrospec tive review +188. Funds 2 and 3 each owned 50% of a promissory note that entitled them to $1,000 +for each lot sold in a parcel of undeveloped land (“Asset 2”). +189. In 2015, SKR did not obtain sufficient audit evidence supporting the Adviser’s +$800,000 valuation. This failure violated PCAOB standards, including AS 2502.03, AS 2805.02, +and AS 2301.11. This failure violated GAAS, including AU-C 330.03, AU-C 330.28, AU-C +500.06, AU-C 500.08, AU-C 500.09, AU-C 501.06, AU-501.08, AU-C 505.03, AU-C 540.06, +AU-C 540.12, AU-540.13, AU-C 540.13, AU-C 540.A33, and AU-C 540.A70. +190. During the 2016 audit, SKR did not perform a retrospective review after learning +the Adviser received a May 2016 appraisal valuing this asset at $2 million or 150% higher than +the $800,000 value at December 31, 2015. This failure violated PCAOB standards, including AS +2401.64. This failure violated GAAS, including AU-C 240.32 and AU-C 540.21. +191. Further, Fisher and SKR failed to perform any audit procedures upon learning of +the new appraisal to determine if the 2015 financial statements were materially misstated. These +failures violated PCAOB standards, including AS 2905.04 and 2905.05. These failures violated +GAAS, including AU-C 560.15. +192. SKR also did not evaluate the qualifications of the appraiser, or test any of the +data inputs supporting the appraisal. These failures violated PCAOB standards, including AS +1210.08-.12 and AS 2502.21. These failures violated GAAS, including AU-C 500.08. +193. In both 2015 and 2016, SKR failed to obtain evidence of the existence of Asset 2. +This failure violated PCAOB standards, including AS 1105.08, and AS 2310.06 This failure +violated GAAS, including AU-C 330.03, AU-C 330.18, AU-C 500.06, AU-C 505.02, AU-C +505.03, AU-C 580.04, and AU-C 240.A38. +iv. Funds 2 and 3 – Asset 3: Failure to obtain evidence of existence of +ownership interests and to audit valuation of interest +194. Funds 2 and 3 both had an ownership interest in an LLC (“Asset 3”) that was +managed by an affiliate of the Adviser, and which in turn had two wholly owned subsidiaries +that owned land in Hawaii being developed for residential use. +195. In 2015 and 2016, SKR failed to obtain sufficient appropriate evidence of the +existence of the funds’ ownership interests in Asset 3 and relied only upon management +representations. This failure violated PCAOB standards, including AS 1105.08, and AS 2310.06. +This failure violated GAAS, including AU-C 330.03, AU-C 330.18, AU-C 500.06, AU-C +505.02, AU-C 505.03, AU-C 580.04, and AU-C 240.A38. + 25 +196. According to the Adviser’s records, Fund 2 had a 25.22% interest in Asset 3 in +2015 and a 19.525% interest in 2016; Fund 3 had a 24.0% interest in 2015 and a 23.9% interest +in 2016. +197. In 2016, during fieldwork, the Adviser discovered the ownership percentage for +Fund 2 in 2015 was overstated by 29%, corresponding to a $716,000 overstatement in the 2015 +value of Asset 3. SKR failed to identify and then evaluate this overstatement. These failures +violated PCAOB standards, including AS 2401.64, AS 2810.17, AS 1215.12, AS 2905.04, and +AS 2905.05. These failures violated GAAS, including AU-C 240.32, AU-C 540.21, and AU-C +560.15. +198. In 2015 and 2016, SKR did not obtain sufficient appropriate audit evidence +supporting valuation. This failure violated PCAOB standards, including AS 2502.03, AS +2805.02, and AS 2301.11. This failure violated GAAS, including AU-C 330.03, AU-C 330.28, +AU-C 500.06, AU-C 500.09, AU-C 501.06, AU-C 501.08, AU-C 505.03, AU-C 540.06, AU-C +540.12, AU-C 540.13, and AU-C 540.A33. +199. With respect to the valuation models used by the Adviser, SKR failed to (1) +properly evaluate the appropriateness of the models that the Adviser used; (2) test model inputs; +and (3) test the mathematical accuracy of the Adviser’s models. These failures violated PCAOB +standards, including AS 2502.03, AS 2502.26, AS 2502.38, AS 2502.39, and AS 2503.40. These +failures violated GAAS, including AU-C 330.03, AU-C 540.06, AU-C 540.13, and AU-C +580.04. +200. In 2017, the Adviser determined the year-end 2016 fair value estimate of Asset 3 +was overstated by approximately $1.3 million, which corresponds to a $316,000 or 16.9% +overstatement of Asset 3 held by Fund 2 and a $299,000 or 16.9% overstatement of Asset 3 held +by Fund 3. +v. Funds 2 and 3 – Asset 4: Failure to obtain evidence of value and to +test existence and failure to perform retrospective review +201. Funds 2 and 3 invested in an LLC (“Asset 4”) formed by affiliates of the Adviser, +which in turn invested in an LLC that owned an apartment complex and land in Arizona. +202. In 2015, SKR did not obtain sufficient audit evidence to support the value of this +investment. This failure violated PCAOB standards, including AS 2502.03, AS 2805.02, and AS +2301.11. This failure violated GAAS, including AU-C 330.03, AU-C 330.28, AU-C 500.06, +AU-C 500.09, AU-C 501.06, AU-C 501.08, AU-C 505.03, AU-C 540.06, AU-C 540.12, AU-C +540.13, and AU-C 540.A33. +203. SKR relied on a July 2015 email from Asset 4’s property manager to the Adviser +stating the fair value of the investment was estimated to be a 55-60% return of capital. SKR did +not evaluate the qualifications of the manager to make this estimate, determine how the property +manager estimated the fair value, or test any of the data inputs supporting the estimate. These +failures violated PCAOB standards, including AS 1210.08-.12 and AS 2502.21. These failures +violated GAAS, including AU-C 500.08. + 26 +204. SKR ignored other available information, which it could have used to calculate its +own fair value estimate, or used to perform procedures to verify whether the Adviser complied +with ASC 820 in the valuation of investments. This other available information included +estimates of the per unit sale price. This failure violated PCAOB standards, including AS +2502.03. This failure violated GAAS, including AU-C AU 330.03, 330.28, AU -C 500.06, AU-C +500.09, AU-C 501.06, AU-C 501.08, AU-C 505.03, AU-C 540.06, and AU-C 540.12. +205. SKR did not test the existence or ownership of Fund 2 or 3’s ownership in Asset 4 +and relied on management representations. Consequently, SKR failed to identify that Fund 3 and +4’s ownership and fair values were incorrect. This failure violated PCAOB standards, including +AS 1105.08, and AS 2310.06. This failure violated GAAS, including AU-C 580.04 and AU-C +240.A38. These failures violated GAAS, including AU-C 330.03, AU-C 330.18, AU -C 330.19, +AU-C 500.06, AU-C 505.02, and AU-C 505.03, AU-C 580.04 and AU-C 240.A38. +206. In 2016, SKR continued to rely on the July 2015 email and ignored inconsistent +and contradictory information in the work papers showing that the apartment complex was now +estimated to sell for $210,000 per unit - an 18% increase over the prior year estimate of $178,000 +- suggesting the fair value of the investment may have increased. These failures violated PCAOB +standards, including AS 2502.26, and AS 2502.29. These failures violated GAAS, including +AU-C 500.10, AU-C 540.06, AU-C 540.13, AU-C 580.04, and AU-C 330.03. +207. The manager for Asset 4 had a broker price opinion from Q4 2016, estimating +that the units could sell for $220,000 per unit, a 23% increase over the estimate of $178,000 for +2015. +208. SKR failed to conduct any retrospective analysis after learning during the 2016 +audit that Fund 2’s and Fund 3’s capital contribution of $7.5 million in 2015 was overstated by +20% and should have been $6.25 million. SKR determined, without any analysis, the resulting +2015 valuation overstatement of $158,000 for Fund 3 and $143,000 for Fund 2 were immaterial. +This failure violated PCAOB standards, including AS 2905.04, AS 2905.05, and AS 2401.64. +This failure violated GAAS, AU-C 240.32 AU-C 540.21, and AU-C 560.15. +vi. Funds 2 and 3 – Asset 5: Failure to obtain evidence of valuation in +transactions with a related party +209. Funds 2 and 3 each owned interests in an LLC (“Asset 5”), which was formed by +affiliates of the Adviser in September 2015 and closed in December 2015. The LLC in turn +purchased a two-thirds interest in a construction company located in Hawaii. An oral agreement +concerning entering into a partnership with the construction company was reached on April 1, +2015, prior to execution of the formal documentation. +210. Since at least 2014, the construction company had been providing construction +services to the president of the Adviser. +211. In 2015, Fund 3 made a capital contribution to the LLC of $500,000. +212. In 2015, Fund 3 also loaned $180,000 to the LLC for operating expenses under a +promissory note due 12/22/2016 bearing a 5% interest rate. + 27 +213. In 2015, Fund 2 made a capital contribution of $1,750,000 to the LLC. +214. In 2015, the Adviser valued Fund 2 and 3’s ownership interest in Asset 5 at the +amount Funds 2 and 3 contributed as capital. The Adviser determined that “the capital +contributed to the LLC is a good measure of fair market value” because “the transaction occurred +within a few weeks of the year end.” +215. In 2015, the Adviser also valued Fund 3’s promissory note at par value “because +the transaction occurred within a few weeks of the year end.” +216. SKR agreed stating that “due to the small amount of time between the date the +note was made and year end and no paydowns on the note prior to year end – it is reasonable the +note is valued at par value.” SKR also considered the collectability of the note based on the +borrower’s ability to repay it. +217. SKR failed to consider that the capital contributed and the loan amount may not +represent fair value because these transactions with the construction company may not have been +at arms-length given the relationship between the president of the Adviser and the construction +company. Consequently, SKR did not obtain sufficient evidence that contributed capital or the +loan amount represented the fair value of the loan or the investment in the construction company. +These failures violated PCAOB standards, including AS 2410.12, AS 2502.03, AS 2805.02, and +AS 2301.11. These failures violated GAAS, including AU-C 330.03, AU-C 500.06, AU-C +330.28, AU-C 500.09, AU-C 501.06, AU-501.08, AU-C 505.03, AU-C 540.06, AU-C 540.12, +AU-C 540.13, AU-C 540.A33, AU -C 550.03, and AU-C 550.05. +218. Fund 3’s promissory note to the LLC was repaid in April 2016. +219. In 2016, the Adviser valued the fund’s ownership interests in Asset 5 by +performing a discounted cash flow (“DCF”) analysis based on net operating income. SKR failed +to obtain and sufficiently evaluate audit evidence for the valuation cash flows and assumptions +supporting the valuation of Asset 5. These failures violated PCAOB standards, including AS +2502.03, AS 2805.02, and AS 2301.11. These failures violated GAAS, including AU-C 330.03, +AU-C 500.06, AU-C 330.28, AU-C 500.09, AU-C 501.06, AU-C 501.08, AU-C 540.06, AU-C +540.12, AU-C 540.13, and AU-C 540.A33. +220. In both 2015 and 2016, SKR did not obtain sufficient evidence of the funds’ +ownership interest in the LLC. These failures violated PCAOB standards, including AS 1105.04, +AS 1105.08, and AS 2310.06. These failures violated GAAS, including AU-C 330.03, AU-C +330.18, AU-C 500.06, AU-C 505.02, and AU-C 505.03, AU -C 580.04 and AU-C 240.A38. +vii. Fund 3 – Asset 6: Failure to obtain evidence of valuation and +existence +221. Fund 3 owned an interest in an LLC formed by third-parties (“Asset 6”) that in +turn owned an interest in undeveloped land. +222. In 2015, the Adviser’s valuation on its fac e valued the land and not the LLC +whose fair value could be different from the land. SKR did not obtain sufficient audit evidence + 28 +to determine whether or not there were any other assets or liabilities or if Asset 6 was just a pass +through entity. SKR failed to obtain sufficient appropriate audit evidence regarding the +valuation of Asset 6 including (1) failing to consider that the Adviser valued the land and not the +LLC whose fair value could be different from the land; (2) primarily relying on management +representations and an undated purchase offer; and (3) ignoring information inconsistent with +valuing the asset at the same amount as the prior year. These failures violated PCAOB +standards, including AS 2502.03, AS 2502.26, AS 2502.29, AS 2805.02, and AS 2301.11. These +failures violated GAAS, including AU-C 330.03, AU-C 500.06, AU-C 501.06, AU-C 330.28, +AU-C 500.09, AU-C 501.06, AU-C 501.08, AU-C 505.03, AU-C 540.06, AU-C 540.12, AU-C +540.13, and AU-C 540.A33. +223. In 2016, the Adviser again valued the land and not the LLC whose fair value +could be different from the land, and SKR did not obtain sufficient audit evidence to determine +whether or not there were any other assets or liabilities or if Asset 6 was just a pass through +entity. SKR failed to obtain sufficient appropriate audit evidence regarding the valuation of +Asset 6 including (1) failing to consider that the Adviser valued the land and not the LLC whose +fair value could be different from the land; (2) primarily relying on management and the same +unsigned, undated potentially stale purchase offer used for the 2015 valuation; and (3) ignoring +information inconsistent with the Adviser’s valuation, including a recent sale of nearby land that +sold for 56% above the Adviser’s fair value. These failures violated PCAOB standards, including +AS 2502.03, AS 2502.26, AS 2502.29, AS 2805.02, and AS 2301.11. These failures violated +GAAS, including AU-C 330.03, AU-C 500.06, AU-C 330.28, AU-C 500.09, AU-C 501.06, AU- +C 501.08, AU-C 540.06, AU-C 540.12, AU-C 540.13, and AU-C 540.A33. +224. In both 2015 and 2016, SKR failed to obtain sufficient appropriate evidence of the +Fund’s ownership percentage in Asset 6 and relied on management’s representations regarding +the ownership percentage. These failures violated PCAOB standards, including AS 1105.04 and +1105.08. These failures violated GAAS, including AU-C 330.03, AU-C 330.18, AU-C 500.06, +and AU-C 505.02, AU-C 505.03, AU -C 580.04, and AU-C 240.A38. +viii. Funds 2 and 3 – Asset 7: Failure to obtain evidence about existence +and valuation; failure to perform retrospective review +225. Funds 2 and 3 invested in a real estate fund formed by affiliates of the Adviser +(“Asset 7”), which owned two apartment buildings (Buildings 1 and 2). +226. In 2015, the two buildings were valued by the Adviser at approximately $5.3 +million (Building 1) and $3.7 million (Building 2). +227. The Adviser valued the buildings using a DCF model, which uses average +capitalization rate as a significant input. The Adviser’s valuation used the average capitalization +rate for Class A and Class B properties,7 without considering Building 1’s characteristics. SKR + +7 “Class A and Class B” properties are classifications of property used in real estate to communicate factors about +the quality and rating of properties. Each property classification reflects a different risk and return as properties are +graded on a variety of factors. Class A properties are typically the highest quality buildings in their market and area. +Class B properties are a step down from Class A and generally older, tend to have lower income tenants, and may or + 29 +failed to evaluate the Class of building 1 and whether it was appropriate for the Adviser to use +the average capitalization rate for Class A and Class B properties. These failures violated +PCAOB standards, including AS 2502.03, AS 2805.02, and AS 2301.11. These failures violated +GAAS, including AU-C 330.03, AU-C 500.06, AU-C 330.28, AU-C 500.09, AU-C 501.06, AU- +C 501.08, AU-C 540.06, AU-C 540.12, AU-C 540.13, and AU-C 540.A33. +228. Fisher knew of Building 1’s characteristics that likely made it a lower class of +property, but did not question the Adviser’s use of the average capitalization rate for Class A and +B properties. +229. SKR did not obtain evidence showing these investments existed at December 31, +2015. This failure violated PCAOB standards, including AS 1105.08, and AS 2310.06. These +failures violated GAAS, including AU-C 330.03, AU-C 330.18, AU-C 330.19, AU -C 500.06, +AU-C 505.02, and AU-C 505.03, AU -C 580.04, and AU-C 240.A38. +230. The Adviser valued the property based upon an estimated fair market value +(“FMV”) using an appraisal of the building, plus assets, minus liabilities. In 2016, SKR failed to +obtain sufficient appropriate evidence regarding the fair value of Building 2. This failure +violated PCAOB standards, including AS 2502.03, AS 2502.23-42, AS 2503.38, AS 2503.40, +AS 1210.08, AS 1210.09, and AS 1210.12. These failures violated GAAS, including AU-C +330.03, AU-C 500.06, AU-C 330.28, AU -C 500.09, AU-C 501.06, AU-C 501.07, AU-C 501.08, +AU-C 540.06, AU-C 540.12, AU-C 540.13, and AU-C 540.A33. +231. SKR never saw the appraisal and its evidence of value was limited to an internal +Adviser email where an employee of the Adviser said that a manager of Building 2 told him that +the building manager had an appraisal of the building and the property had a mortgage. This +failure violated PCAOB standards, including AS 1105.04 and AS 2502.03. This failure violated +GAAS, including 500.08 and AU-C 501.07. +232. SKR and Fisher knew Building 1 sold in 2016 but failed to perform a +retrospective review to evaluate if there was any bias in the Adviser’s 2015 estimate or analyze +the valuation difference. Information sent to SKR notes that Building 1 was sold in April 2016 +for $500,000 less than the Adviser’s December 31, 2015 fair value estimate. This failure +violated PCAOB standards, including AS 2401.64. This failure violated GAAS, including AU-C +240.32, AU-C 540.21, and AU -C 560.15. +233. SKR did not obtain evidence that the funds owned the real estate fund, or that the +real estate fund owned Building 2. This failure violated PCAOB standards, including AS +1105.04, AS 1105.08 and AS 2310.06. These failures violated GAAS, including AU-C 330.03, +AU-C 330.18, AU -C 500.06, and AU-C 505.02, AU-C 505.03, AU-C 580.04, and AU-C +240.A38. +ix. Funds 2 and 3 – Asset 8: Failure to obtain evidence about valuation. + +may not be professionally managed. Class C properties are typically more than 20 years old and located in less than +desirable locations. + 30 +234. Fund 2 and Fund 3 each owned an interest in another real estate fund (“Asset 8”), +which in turn owns apartments. +235. SKR failed to obtain sufficient appropriate audit evidence of valuation. The +Adviser valued the investment based on a market value assessment provided by the manager for +the apartments that noted that the manager had annual appraisals of the underlying assets, which +provided reasonable FMV estimates. SKR did not evaluate the manager’s estimate or evaluate +the underlying appraisal as required. SKR also did not check the mathematical accuracy of the +Adviser’s calculation. This failure violated PCAOB standards, including AS 2502.03, AS +2805.02, and AS 2301.11. These failures violated GAAS, including AU-C 330.03, AU-C 500.06, +AU-C 330.28, AU-C 500.09, AU-C 501.06, AU-C 501.07, AU-C 501.08, AU-C 540.06, AU-C +540.12, AU-C 540.13, and AU-C 540.A33. +236. SKR did not confirm existence or obtain sufficient evidence regarding Fund 2 and +3’s ownership interests. SKR tested the Adviser’s purchase of this asset but not whether the fund +still held the investment at year-end. This failure violated PCAOB standards, including AS +1105.08 and AS 2310.06. These failures violated GAAS, including AU-C 330.03, AU-C 330.18, +AU-C 500.06, AU-C 505.02, AU-C 505.03, AU -C 580.04, and AU-C 240.A38. +x. Funds 2 and 3 – Asset 9: Failure to obtain evidence about valuation +237. Fund 2 and Fund 3 each owned an interest in another real estate fund (“Asset 9”), +which in turn owned an apartment. +238. SKR failed to obtain sufficient appropriate audit evidence of valuation. The +Adviser valued the investment based on a market value assessment provided by the manager for +the apartments. SKR noted in its 2015 and 2016 work papers that the estimated value is the +manager’s “best estimates of current market values” but the work papers fail to mention that the +manager also states the value is not based on an independent appraisal. SKR did not evaluate the +manager’s estimate, including evaluating the underlying methodology or assumptions as +required. SKR also did not check the mathematical accuracy of the Adviser’s calculation. This +failure violated PCAOB standards, including AS 2502.03, AS 2805.02, and AS 2301.11. These +failures violated GAAS, including AU-C 330.03, AU-C 500.06, AU-C 330.28, AU-C 500.09, +AU-C 501.06, AU-C 501.07, AU-C 501.08, AU-C 540.06, AU-C 540.12, AU-C 540.13, and +AU-C 540.A33. +239. SKR did not confirm existence or obtain sufficient evidence regarding Fund 2 and +3’s ownership interest. SKR tested the Adviser’s purchase of this asset but not whether the fund +still held the investment at year-end. This failure violated PCAOB standards, including AS +1105.08 and AS 2310.06. These failures violated GAAS, including AU-C 330.03, AU-C 330.18, +AU-C 330.19, AU-C 500.06, AU-C 505.02, AU-C 505.03, AU -C 580.04, and AU-C 240.A38. +xi. Fund 2: Failure to Properly Evaluate Misstatement s +240. As discussed above, PCAOB standards and GAAS require SKR to document +accumulated misstatements and evaluation of uncorrected misstatements, including the +quantitative and qualitative factors the audit team considered to be relevant to the evaluation. AS +1215.12; AU-C 450.05. + 31 +241. For Fund 2’s 2016 audit, SKR prepared a “Summary of Unadjusted +Misstatements” that accumulated misstatements identified during the audit that had not been +corrected by management, which totaled approximately $483,000. SKR concluded that the +$483,000 “was immaterial individually and in the aggregate ” without considering quantitative or +qualitative factors regarding materiality. SKR did not document any evaluation or benchmark by +which it evaluated audit differences. This failure violated PCAOB standards, including AS +2810.03, AS 2810.17, AS 1215.06 and AS 1215.12. This failure violates GAAS, including AU-C +450.11. +xii. Summary of Audit Deficiencies for Fund 2 and Fund 3 +242. In sum, in connection with Funds 2 and 3, in 2015, SKR and Fisher failed to +comply with the following PCAOB audit standards: AS 1101, AS 1105, AS 1215, AS 2301, +2310, AS 2401, AS 2410, AS 2502, AS 2503, AS 2805, AS 2810, AS 2905, AS 1015, and AS +1201. +243. In sum, in connection with Funds 2 and 3, in 2015, SKR and Fisher failed to +comply with the following GAAS: AU-C 240, AU-C 330, AU-C 500, AU-C 501, AU-C 505, +AU-C 540, AU-C 560, AU-C 580. +244. In sum, in connection with Funds 2 and 3, in 2016 SKR and Fisher failed to +comply with the following audit standards: AS 1101, AS 1105, AS 1215, AS 2301, AS 2310, AS +2401, AS 2410, AS 2502, AS 2503, AS 2805, AS 2310, AS 2905, AS 1015, and AS 1201. +245. In sum, in connection with Funds 2 and 3, in 2016, SKR and Fisher failed to +comply with the following GAAS: AU-C 240, AU-C 330, AU-C 500, AU-C 501, AU-C 505, +AU-C 540, AU-C 560, AU-C 580. +246. In connection with Funds 2 and 3 – in 2015 and 2016, Kast failed to comply with +AS 1220 and AU-C 220.22. +xiii. Audit Deficiencies Related to Debt Funds (Funds 4, 5, and 6) +247. SKR’s audits for Funds 4, 5, and 6 also failed to meet PCAOB standards. +248. Funds 4, 5, and 6 are each debt funds holding a single Level 3 asset consisting of +a credit facility to a single borrower that developed real estate. +249. Fund 4 was formed by affiliates of the Adviser and provides a letter of credit +(“LOC”) to the LLC discussed above as Funds 2 and 3, Asset 3. The executed letter of credit was +dated February 28, 2014, although initial draws on the LOC were made on October 9, 2013 prior +to execution of the agreement. +250. The loan balance on the LOC for Fund 4 was $8,086,737 at an interest rate of 6% +at 12/31/2015. The loan balance on the LOC for Fund 4 was $18,297,314 at 12/31/2016 at an +interest rate of 6.5%. + 32 +251. In 2015, the Adviser’s valuation included a paragraph from the previous year +describing the facility with a 2015 update that said “The loan is almost completely drawn up to +the maximum line of $25m. There was one sale by [the LLC that is Asset 5] in 2015 (P28) that +resulted in a pay-down to the line of approximately $3.3m. No conditions occurred during 2015 +that would lead to a change in the valuation of the note.” +252. The audit work papers for Fund 4 in 2015 noted that per discussion with an +employee of the Adviser, the credit facility and Fund 4 were “established as the borrowers could +not find other reasonable sources of financing. Due to the risk of the project, location, and the +specific needs of the borrowers reasonable financing could not be found. The borrowers, who are +also investors in various funds managed by [the Adviser], and [the Adviser] determined they +could create a reasonable yield for investors and create a Fund to offer the credit facility.” +253. Fund 5 was formed by Affiliates of the Adviser in 2015. It was funded by +investors in September 2015. Its purpose was to provide a letter of credit to another construction +company developing real estate in Hawaii. +254. The initial borrowing was made in October 2015. As of 12/31/2015, there was +$3,058,073 outstanding at an interest rate of 5.5%. +255. The audit work papers note that the credit facility and Fund 5 were established “as +the borrowers could not find other reasonable sources of financing. Due to the risk of the +project, location, and the specific needs of the borrowers reasonable financing could not be +found.” The work papers further noted that the “borrowers, who are also investors in various +funds managed by [the Adviser], and [the Adviser] determined they could create a reasonable +yield for investors and create a Fund to offer the credit facility.” +256. Fund 6 was formed by affiliates of the Adviser in 2014. It again provided a loan +for construction financing. As of 12/31/2015 the outstanding loan balance was $8,087,737. The +interest rate was 20% per year, with 8% paid quarterly and 12% added to the principal balance +and paid quarterly. +257. The audit work papers note that the investment opportunity in Fund 6 was brought +to the Adviser when an individual associated with the construction loan needed financing to pay +off his previous lender and that Adviser was looking for alternative investments with appropriate +yields. +258. In both years, SKR failed to test the existence of the credit facilities held by Funds +4, 5 and 6 as required by AS2310.06 and AU-C 330.19. +259. In 2015, the Adviser valued the investments at “cost basis for fair market value.” +This valuation method was not in accordance with GAAP, which defines fair value as the price +that would be received to sell an asset in an orderly transaction between market participants at +the measurement date. This valuation methodology did not comply with GAAP. +260. In 2015, SKR failed to obtain sufficient audit evidence of fair value of Funds 4, 5, +and 6. This failure violated PCAOB standards, including AS 2502.03, AS 2805.02, AS 2810.03, +and AS 2301.11. These failures violated GAAS, including AU -C 330.03, AU-C 500.06, AU-C + 33 +330.28, AU-C 500.09, AU-C 501.08, AU-C 540.06, AU-C 540.12, AU-C 540.13, and AU-C +540.A33 +261. In 2016, SKR failed to obtain sufficient appropriate evidence supporting the +Adviser’s DCF model, including failing to obtain sufficient evidence supporting the discount rate +used. These failures violated PCAOB standards, including AS 2502.03, AS 2805.02, AS +2810.03, and AS 2301.11. These failures violated GAAS, including AU-C 330.03, AU-C +500.06, AU-C 330.28, AU-C 500.09, AU-C 501.06, AU-C 501.07, AU-C 501.08, AU-C 540.06, +AU-C 540.12, AU-C 540.13, and AU-C 540.A33 +262. In connection with the audits of Funds 4, 5, and 6, in 2015, SKR and Fisher failed +to comply with the following PCAOB audit standards: AS 1101, AS 1105, AS 1215, AS 2301, +AS 2310, AS 2401, AS 2502, AS 2503, AS 2805, AS 3101, AS 1015, and AS 1201. +263. In connection with the audits of Funds 4, 5, and 6, in 2015, SKR and Fisher failed +to comply with the following GAAS: AU-C 330.03, AU-C 330.19, AU -C 500.06, AU-C 330.28, +AU-C 500.09, AU-C 501.08, AU-C 540.06, AU-C 540.12, AU-C 540.13, and AU-C 540.A33. +264. In connection with the audits of Funds 4 and 5, in 2016, SKR and Fisher failed to +comply with the following audit standards: AS 1101, AS 1105, AS 1215, AS 2301, AS 2310, AS +2401, AS 2502, AS 2503, AS 2805, AS 3101, AS 1015, and AS 1201. +265. In connection with the audits of Funds 4 and 5, in 2016, SKR and Fisher failed to +comply with the following GAAS: AU-C 330.03, AU 330.20, AU-C 500.06, AU-C 330.28, AU- +C 500.09, AU-C 501.06, AU-C 501.07, AU-C 501.08, AU-C 540.06, AU-C 540.12, AU-C +540.13, and AU-C 540.A3 +266. In connection with the audits of Fund 6, in 2016, SKR and Fisher failed to comply +with the following audit standards: AS 1101, AS 1215, AS 2301, AS 2310, AS 2401, AS 2805, +AS 3101, AS 1015, and AS 1201. +267. In connection with the audits of Fund 6, in 2016, SKR and Fisher failed to comply +with the following GAAS: AU-C 330.03, AU-C 330.19, AU -C 500.06, AU-C 330.28, AU-C +500.09, AU-C 501.06, AU-C 501.07, AU-C 501.08, AU-C 540.06, AU-C 540.12, AU-C 540.13, +and AU-C 540.A33 +268. In connection with Funds 4, 5, and 6, in 2015 and 2016, Kast failed to comply +with AS 1220 and AU-C 220.22. +SKR WAS NOT INDEPENDENT +269. The exception to the Custody Rule relied upon by the Adviser required that it +receive and distribute an audit report prepared by an independent public accountant. +270. For purposes of assessing compliance with the Custody Rule, the Commission +looks to whether an accountant is independent under the Commission’s independence rules set +forth in Regulation S-X, Rule 2-01. + 34 +271. SKR was not independent under these rules for the reasons described below and +thus caused the Adviser to violate the Custody Rule. +272. PCAOB AS 1005 requires an auditor to maintain independence and notes that the +SEC has also adopted independence rules. +273. PCAOB Rule 3520 requires that an auditor be independent of the audit client +throughout the engagement period and note 1 specifies that “Under Rule 3520, a registered +public accounting firm or associated person's independence obligation with respect to an audit +client encompasses not only an obligation to satisfy the independence criteria applicable to the +engagement set out in the rules and standards of the PCAOB, but also an obligation to satisfy all +other independence criteria applicable to the engagement, including the independence criteria set +out in the rules and regulations of the Commission under the federal securities laws.” +274. PCAOB Rule 3526 provides, among other things, that a registered public +accounting firm must, at least annually with respect to each of its audit clients: (1) describe in +writing to the audit committee all relationships between the audit firm and the audit client that, as +of the date of the communication, may reasonably be thought to bear on independence; (2) +discuss with the audit committee the potential effects of those relationships on the independence +of the audit firm; and (3) affirm to the audit committee in writing that, as of the date of the +communication, the firm is independent in compliance with PCAOB Rule 3520, Auditor +Independence . +275. PCAOB Rule 3501(a)(v) provides that “The term ‘audit committee’ means a +committee (or equivalent body) established by and among the board of directors of an entity for +the purpose of overseeing the accounting and financial reporting processes of the entity and +audits of the financial statements of the entity; if no such committee exists with respect to the +entity, the entire board of directors of the entity. For audits of non-issuers, if no such committee +or board of directors (or equivalent body) exists with respect to the entity, ‘audit committee’ +means the person(s) who oversee(s) the accounting and financial reporting processes of the entity +and audits of the financial statements of the entity.” +276. Adviser did not have an audit committee. Instead of communicating relationships +and services that may reasonably be thought to bear on independence as required by PCAOB +Rule 3526, SKR misrepresented to the Adviser that there were none in both 2015 and 2016. +These failures constitute improper professional conduct. +A. Trustee Relationship +277. Individual 1, an SKR partner, served as a trustee to a number of trusts that were +invested in Adviser funds audited by SKR. As a result, SKR was not independent under +Regulation S-X, Rule 2-01(c). +278. Rule 2-01(c) sets forth non-exclusive circumstances where accountants are not +considered independent. Rule 2 -01(c)(1) provides that: +An accountant is not independent if, at any point during the audit and professional +engagement period, the accountant has a direct financial interest or a material indirect financial + 35 +interest in the accountant’s audit client such as (i) Investments in audit clients. An accountant is +not independent when: … (C) The accounting firm, any covered person in the firm, or any of his +or her immediate family members, serves as voting trustee of a trust, or executor of an estate, +containing the securities of an audit client, unless the accounting firm, covered person in the +firm, or immediate family member has no authority to make investment decisions for the trust +or estate. (Emphasis added.) +279. Rule 2-01(f)(11)(iv) defines a covered person in the firm to mean “the following +principals, shareholders, and employees of an accounting firm: . . . (iv) any other partner, +principal, or shareholder from an ‘ office’ of the accounting firm in which the lead audit +engagement partner primarily practices in connection with the audit.” +280. Individual 1 was a “covered person” because he was a partner in the same office +as Fisher, the lead engagement partner in charge of the audits for the Adviser funds. Individual 1 +did not serve on the audit engagement team. +281. In 2015, Individual 1 was a trustee and/or a member of the management +committee for seven trusts or partnerships that had invested in eight Adviser funds audited by +SKR, including Funds 7-14. +282. As both a trustee and/or member of the management committee, Individual 1 had +authority to make investment decisions for the trusts/partnerships. +283. Two of the trusts did not have a management committee and the trust documents +provided that “The Trustee shall have po wer . . . to invest and reinvest in real or personal +property of any kind….” (Emphasis added.) +284. Three of the trusts had similar language regarding the powers of the trustee to +invest and reinvest the trust estate but simultaneously contain provisions under which the trustee +would be bound by recommendations of the management committee. +285. The two LLLPs provided for broad powers to the general partner, but also +provided for a management committee. +286. For all of the trusts and partnerships with a management committee, Individual 1 +was trustee or general partner and a member of a three-person management committee, which +had responsibility to, “monitor and review the performance of the Trustee and the Investment +Advisors, (ii) oversee and direct the scope of services to be performed by the Investment +Advisors, and (iii) select and terminate the Investment Advisors as provided in Section 10.5.” +287. The management committees met quarterly beginning in 2015. +288. Individual 1’s role as trustee for entities that invested in some of the Adviser +funds impacted SKR’s independence for the 2015 audits. +289. As the engagement partner, it was Fisher’s responsibility to ensure that all such +potential conflicts were identified and resolved for independence purposes. + 36 +290. The audit team performed no specific audit procedures to capture relevant +relationships to analyze and confirm SKR’s independence. +291. SKR held an annual meeting in which partners and certain employees of the firm +who worked on matters for the Adviser discussed services the firm provided to the Adviser. +292. Fisher did not document the annual meeting or any information she learned from +the meeting in the work papers. In fact, the 2015 work papers do not identify any relationships +or services for evaluation that could impair independence. +293. During the 2015 audits, the audit team sent Individual 1, as trustee, a confirmation +concerning certain contributions and distributions on behalf of the trusts he represented, which +he received and returned as trustee to the trusts. This confirmation was included in the work +papers. +294. The contributions and distributions confirmed by Individual 1 related to six of the +seven trusts of which he was a trustee or member of the management committee. +295. Fisher reviewed the work paper that contained the confirmation returned by +Individual 1. +296. Fisher should have been aware of Individual 1’s role and a potential independence +issue based on information in the work papers. +B. Bookkeeping Services +297. SKR provided bookkeeping services to Fund 2 in 2015 and 2016 when Fund 2 +was also audited by SKR in those years. +298. Rule 2-01(c)(4) provides that: +An accountant is not independent, if, at any point during the audit and professional +engagement period, the accountant provides the following non-audit services to an audit client: +(i) Bookkeeping or Other Services Related to the Accounting Records or Financial +Statements of the Audit Client. Any service, unless it is reasonable to conclude that the results of +these services will not be subject to audit procedures during an audit of the audit client’s financial +statements, including: (A) Maintaining or preparing the audit client’s accounting records; … (C) +Preparing or originating source data underlying the audit client’s financial statements. +299. SKR’s bookkeeping services provided to Fund 2 impaired SKR’s independence. +300. SKR’s accounting services department created and maintained the accounting +records underlying the financial statements audited by SKR. +301. Specifically, SKR’s accounting services department: + 37 + entered transactions into QuickBooks based upon information provided by the +Adviser or an accountant associated with Fund 2, including recording all investments into or out +of the fund, interest or dividend income received by the fund, and expenses incurred by the fund; + performed bank reconciliations by comparing the accounting transactions in +QuickBooks to the activity reflected on the bank account statements; and + sent the Adviser the year-end QuickBooks file and/or the general ledger exported +from QuickBooks that the Adviser used to prepare the fund financial statements. +302. After receiving the QuickBooks file and/or the general ledger from SKR, the +Adviser made journal entries to record the Level 3 assets at fair value. The Adviser then used +that general ledger to prepare the fund financial statements, including the final balance sheet and +income statements. +303. The audit engagement team then audited the final Fund 2 financial statements +based in part on the general ledger prepared by SKR. +304. The Adviser paid SKR approximately $200-$670 per month for “bookkeeping +services.” +305. It was Fisher’s responsibility to ensure that all such potential conflicts were +identified and resolved for independence purposes. +306. The audit team performed no specific audit procedures to capture relevant +relationships and services and to evaluate and confirm SKR’s independence. +307. Fisher was aware of SKR’s bookkeeping relationship in 2015. +308. In 2016, Fisher reviewed and approved a memo in the work papers concerning the +bookkeeping that incorrectly concluded the bookkeeping relationship did not impair SKR’s +independence. +309. PCAOB Rule 3526 required SKR to communicate to the Adviser all relationships +and services that may reasonably be thought to bear on SKR’s independence. SKR told the +Adviser there were none for the 2015 and 2016 audits. +VIOLATIONS +310. As a result of the conduct described above, Respondents engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. Section 4C 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 practic ing before the Commission to any person who +is found by the Commission to have engaged in improper professional conduct. Exchange Act +4C(b) and Rule 102(e)(1)(iv) define improper professional conduct with respect to persons +licensed to practice as accountants. + 38 +311. 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. +312. The audit failures of SKR, Fisher, and Kast constitute repeated instances of +unreasonable conduct throughout the audits discussed above and also satisfy the single instance +of highly unreasonable conduct standard as there were multiple single instances of highlight +unreasonable conduct since the audit of Level 3 assets warranted heightened scrutiny. +313. Further, questions regarding an auditor’s independence always warrant +heightened scrutiny. See Final Rule: Amendment to Rule 102(e) of the Commission’s Rules of +Practice, Release Nos. 33-7593; 34:40567; 35-26929; 39-2369; IA-1771; IC-23489; File No. S7- +16-98) (“Because of the importance of an accountant’s independence to the integrity of the +financial reporting system, the Commission has concluded that circumstances that raise questions +about an accountant’s independence always merit heightened scrutiny.”). +314. As detailed above, the Adviser was required to comply with the Custody Rule or +to satisfy its provisions by meeting an exception to it. During 2015 and 2016, the Adviser +attempted to comply with this rule by relying on the audit exception. The Adviser failed to +qualify for the Audit Exception because SKR did not conduct the Audits in accordance with +GAAS auditing standards and was not independent. As a consequence, the Adviser violated the +Custody Rule and the Respondents caused the Adviser’s violations of the Custody Rule. + +III. + +In view of the allegations made by the Division of Enforcement and the Office of the Chief +Accountant, the Commission deems it necessary and appropriate that public administrative and +cease-and-desist proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondents an opportunity to establish any defenses to such allegations; + +B. Whether pursuant to Section 4C of the Exchange Act and Section 102(e) of the +Commission’s Rules of Practice, Respondents should be censured or denied, temporarily or +permanently, the privilege of appearing or practicing before the Commission as an accountant; + +C. 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 +Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, and whether Respondents should +be ordered to pay a civil penalty pursuant to Section 203(i) of the Advisers Act. + + + 39 +IV. + +IT IS ORDERED that a public hearing before the Commission for the purposes of taking +evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days +and not later than 60 days from service of this Order at a time and place to be fixed by further order +of the Commission, pursuant to Rule 110 of the Commission’s Rules of Practice, 17 C.F.R. § +201.110. + +IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule +220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondents shall +conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The parties may meet in +person or participate by telephone or other remote means; following the conference, they shall file +a statement with the Office of the Secretary advising the Commission of any agreements reached at +said conference. If a prehearing conference was not held, a statement shall be filed with the Office +of the Secretary advising the Commission of that fact and of the efforts made to meet and confer. + +If any Respondents fail to file the directed Answer, or fail to appear at a hearing or +conference after being duly notified, the Respondents may be deemed in default and the +proceedings may be determined against them upon consideration of this Order, the allegations of +which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the +Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f), and 201.310. + +This Order shall be served forthwith upon Respondents by any means permitted by the +Commission’s Rules of Practice. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to service of +paper copies, service to the Division of Enforcement of all opinions, orders, and decisions +described in Rule 141, 17 C.F.R. § 201.141, and all papers described in Rule 150(a), 17 C.F.R. § +201.150(a), in these proceedings shall be by email to the attorneys who enter an appearance on +behalf of the Division, and not by paper service. + +Attention is called to Rule 151(a), (b) and (c) of the Commission’s Rules of Practice, 17 +C.F.R. § 201.151 (a), (b) and (c), providing that when, as here, a proceeding is set before the +Commission, all papers (including those listed in the following paragraph) shall be filed +electronically in administrative proceedings using the Commission’s Electronic Filings in +Administrative Proceedings (eFAP) system access through the Commission’s website, +www.sec.gov, at http://www.sec.gov/eFAP. Respondents also must serve and accept service of +documents electronically. All motions, objections, or applications will be decided by the +Commission. + + 40 +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to filing with or +disposition by a hearing officer, all filings, including those under Rules 210, 221, 222, 230, 231, +232, 233, and 250 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, +231, 232, 233, and 250, shall be directed to and, as appropriate, decided by the Commission. This +proceeding shall be deemed to be one under the 120-day timeframe specified in Rule of Practice +360(a)(2)(i), 17 C.F.R. § 201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and +250, 17 C.F.R. §§ 201.233 and 250. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that the Commission shall issue a decision on the basis of the record in this +proceeding, which shall consist of the items listed at Rule 350(a) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.350(a), and any other document or item filed with the Office of the +Secretary and accepted into the record by the Commission. The provisions of Rule 351 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.351, relating to preparation and certification of a +record index by the Office of the Secretary or the hearing officer are not applicable to this +proceeding. + +The Commission will issue a final order resolving the proceeding after one of the following: +(A) The completion of post-hearing briefing in a proceeding where the public hearing has been +completed; (B) The completion of briefing on a motion for a ruling on the pleadings or a motion for +summary disposition pursuant to Rule 250 of the Commission’s Rules of Practice, 17 C.F.R. § +201.250, where the Commission has determined that no public hearing is necessary; or (C) The +determination that a party is deemed to be in default under Rule 155 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.155, and no public hearing is necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within +the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the +provisions of Section 553 delaying the effective date of any final Commission action. + +By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4228.txt b/raw/aaer/2021/AAER-4228.txt new file mode 100644 index 0000000000000000000000000000000000000000..824a30ba800b2ae40edc4b9ac7fead5ec85bfff6 --- /dev/null +++ b/raw/aaer/2021/AAER-4228.txt @@ -0,0 +1,389 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92455 / July 21, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4228 / July 21, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20403 + + +In the Matter of + +Tandy Leather Factory, Inc. +and Shannon Greene, CPA, + +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 Tandy Leather Factory, Inc. (“Tandy”) and +Shannon Greene (“Greene”) (collectively “Respondents”). + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondents consent +to the entry of this Order Instituting Cease-and-Desist Proceedings pursuant to Section 21C of the +Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. +2 +III. + +On the basis of this Order and Respondents’ Offers, the Commission finds1 that: + +Summary + +1. This matter involves accounting, financial reporting, and control failures by Tandy, +a specialty leather retailer headquartered in Fort Worth, Texas. These deficiencies resulted in a +multi-year restatement in Tandy’s financial statements concerning, among other things, inventory, +net income and gross profit. Shannon Greene, Tandy’s former Chief Financial Officer (“CFO”) and +Chief Executive Officer (“CEO”), was the person primarily responsible for the establishment, +implementation, maintenance, and evaluation of Tandy’s relevant controls. + +2. Tandy had certain accounting, reporting, and control failures and deficiencies as +detailed below. First, Tandy’s inventory tracking system failed to properly maintain the historical +cost basis for individual inventory items. As a result, every new price input of a purchased +inventory item changed the historical cost for all earlier purchases. Data from this system populated +Tandy’s financial statements with inaccurate information. Due to the limitations of this system, it +could not support the company’s first-in, first-out (“FIFO”) inventory accounting methodology that +Tandy disclosed in its public reports. Second, despite knowledge of the system’s limitations, +Tandy’s management failed to design and maintain a system of internal accounting controls +sufficient to provide reasonable assurance that, among other things, transactions were recorded in +conformity with generally accepted accounting principles (“GAAP”). Third, Tandy failed to +properly design, maintain, and evaluate its disclosure controls and procedures (“DCP”) and internal +control over financial reporting (“ICFR”), and Greene failed to properly assess and evaluate the +effectiveness of Tandy’s DCP and ICFR. In addition to the risks associated with the system’s +limitations and the lack of system controls, Tandy’s management failed to retain sufficient, +qualified accounting personnel. + +3. As a result of the conduct detailed herein, Tandy violated Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 13a-15(a)- +(c) thereunder, and Greene violated Rule 13a-14 of the Exchange Act and caused Tandy’s +violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, +13a-1, 13a-13, and 13a-15(a)-(c) thereunder. + +Respondents + +4. Tandy Leather Factory, Inc., a Delaware corporation headquartered in Fort Worth, +Texas, is the world’s largest specialty retailer of leather goods. Tandy’s common stock currently is +registered with the Commission pursuant to Section 12(g) of the Exchange Act, but until August 13, +2020 it was registered pursuant to Exchange Act Section 12(b). Tandy’s common stock was traded +on Nasdaq under the ticker “TLF” until Nasdaq suspended trading TLF due to the company’s +failure to complete its financial restatement and file all outstanding periodic reports with the + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. +3 +Commission by an August 10, 2020 deadline. Nasdaq provided Tandy with a notice of delisting on +August 21, 2019, and a determination of delisting on August 11, 2020. Tandy shares are currently +trading on the OTC Link (previously “Pink Sheets”) operated by OTC Markets Group, Inc. under +the symbol TLFA. + +5. Shannon Greene, age 55, is a resident of Arlington, Texas, and served as Tandy’s +CEO from February 2016 to October 2018, and as its CFO for sixteen years prior to that, beginning +in 2000. She holds a current CPA license in Texas. + +Tandy’s Inventory Tracking System and Control Narratives + +6. According to Tandy’s Entity-Wide Risk Assessment (“ERA”), drafted by Greene, +“[t]he controls associated with the financial reporting processes rely on the heavy involvement of +the CFO and CEO because of the company’s size and organizational structure.” The ERA claimed +that: + +the structure of operations and the overall industry lends itself to a certain degree of +predictability in the company’s financial performance. Management’s experience +(length of time in the industry in particular) creates an ability to pinpoint unusual +transactions, trends, fluctuations, etc. Finally, the company’s financial statements +and reporting structure lack complexity which contributes to the probability of more +accurate, complete and timely financial statements. + +7. According to Tandy’s control narrative on inventory pricing—which Greene also +drafted—Greene, with assistance from others, had responsibility for updating and maintaining +inventory prices in the company’s systems. The narrative claimed a mitigated risk of inventory +valuation errors: “[t]he risk of improper inventory valuation is mitigated due to the history of +Tandy’s operations, the fact that Tandy’s inventory does not become obsolete, and given its +turnover.” + +8. Tandy’s inventory tracking system, which dated back to 2000, generated a stock +keeping unit (“SKU”) for each item. The SKU contained cost, price, vendor, size, color, and other +information. Tandy personnel—under Greene’s supervision—updated the pricing amounts for the +SKUs when there were additional purchases. However, a key limitation to the system was that it +could hold only one cost per SKU at a time, and did not retain any historical information. As a +result, when Tandy personnel input a new cost following a purchase for a given SKU, the updated +cost applied retroactively to all pre-existing products associated with that SKU. + +Tandy’s Inaccurate Financial Statements + +9. Dating back to at least 2016, Tandy represented in its public reports that +“[i]nventory is stated at the lower of cost or net realizable value and is accounted for on the ‘first-in, +first-out’ method. This means that sales of inventory treat the oldest item of identical inventory as +being the first sold.” However, inventory could not be valued at FIFO because the historical cost +4 +was always updating to the most recent cost in the inventory tracking system. The inaccurate +inventory values flowed from the inventory system to Tandy’s financial statements. + +10. Greene and others at the company knew that the company’s information systems +did not maintain inventory valuations consistent with FIFO. As a result, Greene and other Tandy +personnel utilized a separate manual process that failed to value inventory at FIFO. Specifically, +Tandy’s inventory purchasers were supposed to track inventory for all SKUs across all of Tandy’s +stores domestically and internationally, and only change the price in the inventory tracking system +after Tandy’s stores sold through the existing inventory. Greene and others did not take steps to +properly ensure implementation of this manual process. + +11. Accordingly, the inventory tracking system limitations caused Tandy’s inventory +valuations to be inaccurate, which in turn impacted the company’s calculations for inventory, net +income, and gross profit for each quarterly and annual reporting period. As a result, Tandy’s +financial statements dating back to at least 2016 were inaccurate. This also caused the company’s +related books and records—including the value of Tandy’s inventory—to be inaccurate. + +12. Prompted by concerns from Tandy’s new management, Tandy’s Audit Committee +commenced an internal investigation in July 2019. Following the investigation, on October 14, 2019, +the company filed a Form 8-K with the Commission announcing that its financial statements, dating +back to 2016, could not be relied upon due to material misstatements in, among other things, +inventory, net income and gross profit. On June 22, 2021, Tandy filed a Comprehensive Form 10-K +for the fiscal year ended December 31, 2019, and Forms 10-Q for the second and third quarters of +2019. The Comprehensive 10-K filing includes restated financial statements for the company’s +fiscal years 2017 and 2018, interim periods for 2018, and the first quarter of 2019. The chart below +shows the originally reported and restated amounts for inventory, net income and gross profit for +Fiscal Years 2017 and 2018: + + Inventory Net Income Gross Profit +Fiscal +Year Reported Restated % Reported Restated % Reported Restated % +2017 37,311,197 34,546,084 -7.4% 4,451,751 2,478,444 -44.3% 52,113,829 49,085,661 -5.8% +2018 33,867,276 33,302,549 -1.7% 1,963,828 4,398,365 124.0% 50,580,191 50,940,945 0.7% + +Tandy’s Accounting Controls, ICFR and DCP Failures + +13. Section 13(b)(2)(B) of the Exchange Act requires issuers with a class of securities +registered pursuant to Section 12 of the Exchange Act to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurance that, among other things, transactions +are recorded as necessary to permit preparation of financial statements in accordance with GAAP. + +14. Exchange Act Rule 13a-15(a) requires issuers with a class of securities registered +pursuant to Section 12 of the Exchange Act—such as Tandy—to maintain ICFR to provide +reasonable assurance regarding the reliability of financial reporting and the preparation of financial +statements in accordance with GAAP. 17 C.F.R. 240.13a-15(a), (f). Exchange Act Rule 13a-15(c) +5 +requires management—together with the participation of principal executive and principal financial +officers—to evaluate the effectiveness of ICFR as of the end of each fiscal year. + +15. Exchange Act Rule 13a-15(a) requires issuers with a class of securities registered +pursuant to Section 12 of the Exchange Act —such as Tandy—to maintain DCP as defined in Rule +13a-15(e). Exchange Act Rule 13a-15(b) requires that management of an issuer “must evaluate, +with the participation of the issuer’s principal executive and principal financial officers...the +effectiveness of the issuer’s disclosure controls and procedures, as of the end of each fiscal +quarter[.]” + +16. Item 308 of Regulation S-K requires management to provide an annual report that +contains its assessment of the effectiveness of ICFR and any material weaknesses in ICFR. Under +Item 308, “[m]anagement is not permitted to conclude that the registrant’s [ICFR] is effective if +there are one or more material weaknesses in the registrant’s [ICFR].” 17 C.F.R. 229.308. Item +308 of Regulation S-K further instructs that the registrant “must maintain evidential matter, +including documentation, to provide reasonable support for management’s assessment of the +effectiveness of registrant’s [ICFR].” Item 308(a)(3) of Regulation S-K requires public companies +to annually provide a report of management that discloses any material weaknesses in ICFR as +identified by management. + +17. Tandy repeatedly represented in its annual reports that it assessed the effectiveness +of its ICFR and, for each year dating back to at least 2016, Tandy represented that its ICFR was +effective. These representations were inaccurate. + +18. As the company disclosed in an October 14, 2019 Form 8-K filed following its +internal investigation detailed in ¶12 above, contrary to the company’s representations in its 2016, +2017, and 2018 public reports, the company had one or more material weaknesses in its ICFR. + +19. Greene and others at the company had responsibility for assessing the effectiveness +of Tandy’s ICFR at the end of each fiscal year and for evaluating the effectiveness of Tandy’s DCP +each fiscal quarter. + +20. Greene did not properly assess the effectiveness of Tandy’s ICFR as of the end of +each fiscal year. Accordingly, Tandy was not permitted to conclude the company’s ICFR was +effective. Moreover, Tandy did not maintain sufficient evidential matter to support its annual +representations that the company’s ICFR was effective. + +21. Tandy also lacked sufficient, qualified personnel to design and manage its control +environment and financial reporting systems. For example, Tandy relied on a group of non- +accountant employees to perform critical data entry tasks necessary to complete its financial +reporting process. The lack of qualified accounting personnel directly contributed to additional +accounting errors reflected in Tandy’s financial statements: (i) warehouse and handling +expenditures were not properly capitalized during the first and third quarters (they were “trued up” +on a semi-annual basis); (ii) warehouse and handling expenditures were improperly classified as +operating expenses each quarter; and (iii) appropriate inventory reserve levels were not properly +calculated for the lower of cost or net realizable value. +6 +22. Tandy also failed to maintain DCP as required by Exchange Act Section 13a-15(a) +to ensure that it properly recorded, processed, summarized, and reported its inventory. +Additionally, Greene (as Tandy’s CEO) failed to evaluate the effectiveness of Tandy’s DCP each +fiscal quarter as required by Exchange Act Section 13a-15(b). + +Sarbanes-Oxley Certifications + +22. Sarbanes-Oxley Section 302 provides that the Commission shall, by rule, require +the principal executive officer and the principal financial officer of companies filing periodic +reports under Section 13(a) of the Exchange Act to make certain certifications in each annual or +quarterly report. To implement Section 302, the Commission promulgated Exchange Act Rule 13a- +14, which provides that an issuer’s annual and quarterly reports shall include certain certifications +signed by the principal executive and principal financial officer of the issuer. + +23. Greene, as Tandy’s principal executive officer, was required to certify, among +other things, that she was responsible for establishing and maintaining DCP and ICFR, and did the +following: (i) designed such DCP to ensure that material information is made known to the +certifying officers, particularly during the period in which the periodic report is being prepared; (ii) +designed such ICFR or caused such ICFR to be designed under her supervision to provide +reasonable assurance regarding the reliability of financial reporting and the preparation of financial +statements for external reporting purposes in accordance with GAAP; (iii) evaluated the +effectiveness of the issuer's DCP as of the end of the period covered by the report, and presented in +the report her conclusions about the effectiveness of the DCP based on the required evaluation as of +that date; and (iv) disclosed to the issuer’s auditors and to Tandy’s audit committee of the board of +directors all significant deficiencies and material weaknesses in the design or operation of ICFR +which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize +and report financial data and have disclosed for the issuer’s auditors any material weaknesses in +internal controls. + +24. Greene executed such certifications for the quarters and years from the first quarter +of 2016 through the second quarter of 2018. For the reasons set forth above, these certifications +were inaccurate. + +Violations + +25. As a result of the conduct described above, Tandy violated, and Greene caused +Tandy’s violations of, Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, +which require reporting companies to file with the Commission complete and accurate annual and +quarterly reports. Tandy also violated, and Greene caused Tandy’s violations of, Exchange Act Rule +12b-20, which requires an issuer to include in a statement or report filed with the Commission any +information necessary to make the required statements in the filing not materially misleading. + +26. In addition, as a result of the conduct described above, Tandy violated, and Greene +caused Tandy’s violations of, Exchange Act Rules 13a-15(a)-(c), which requires issuers with a +class of securities registered pursuant to Exchange Act Section 12 to (i) maintain DCP as defined in +7 +Exchange Act Rule 13a-15(e); (ii) maintain ICFR designed to provide reasonable assurance +regarding the preparation of financial statements in accordance with GAAP; and (iii) evaluate the +effectiveness of its DCP and ICFR as required by Exchange Act Rules 13a-15(b) and (c). + +27. In addition, as a result of the conduct described above, Tandy violated, and Greene +caused Tandy’s violations of, Section 13(b)(2)(A) of the Exchange Act, which requires issuers such +as Tandy to make and keep books, records, and accounts which, in reasonable detail, accurately and +fairly reflect their transactions and dispositions of their assets. + +28. In addition, as a result of the conduct described above, Tandy violated, and Greene +caused Tandy’s violations of, Section 13(b)(2)(B) of the Exchange Act, which, among other things, +requires issuers such as Tandy 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 or any other criteria applicable to such +statements. + +29. In addition, as a result of the conduct described above, Greene violated Exchange +Act Rule 13a-14. + +Tandy’s Remedial Efforts + +In determining to accept Tandy’s Offer, the Commission considered remedial acts +promptly undertaken by Respondent Tandy and cooperation afforded the Commission staff. +Specifically, Tandy has: (i) installed a new company accounting system to, among other things, +more accurately value inventory and reduce the risk of errors in its financial reporting process; +(ii) hired qualified accounting personnel and other experts with GAAP, SEC reporting, DCP and +ICFR experience; and (iii) engaged controls and ICFR experts to assist in the creation of a new +risk control matrix with a comprehensive list of key and mitigating controls. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent Tandy cease and desist +from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 13a-15(a)-(c) +thereunder. + +B. Pursuant to Section 21C of the Exchange Act, Respondent Greene cease and desist +from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13a-14 and 13a-15(a)-(c) +thereunder. +8 + +C. Respondent Tandy shall, within 30 days of the entry of this Order, pay a civil +money penalty in the amount of $200,000 to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +Respondent Greene shall, within 30 days of the entry of this Order, pay a civil money penalty in +the amount of $25,000 to the Securities and Exchange Commission for transfer to the general fund +of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying the +paying Respondent as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Eric Werner, +Division of Enforcement, Securities and Exchange Commission, 801 Cherry Street, Suite 1900, +Fort Worth, Texas 76102. + +D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor +Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of their payment of a civil penalty +in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty +Offset, Respondents agree that they shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission's counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed +9 +in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a private +damages action brought against Respondents by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent Greene, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Respondent Greene 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 Greene of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4230.txt b/raw/aaer/2021/AAER-4230.txt new file mode 100644 index 0000000000000000000000000000000000000000..72b72edb4fc308627b19e0429b3c63c6aefd1e25 --- /dev/null +++ b/raw/aaer/2021/AAER-4230.txt @@ -0,0 +1,54 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92460 / July 21, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4230 / July 21, 2021 + +Admin. Proc. File No. 3- 20394 + +In the Matter of + +PAUL L. CHANCEY, JR., CPA + + +ORDER + +On July 13, 2021, the Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Paul L. Chancey, Jr., CPA (“Respondent”), pursuant +to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice.1 On July 15, 2021, the Division of Enforcement filed a notice +of the OIP’s service which stated that the OIP had been emailed to counsel for Respondent and +indicated that the OIP had been sent to the Respondent by certified mail. But Commission Rule +of Practice 141(a)(2)(i) does not permit service of an OIP by email, and service by certified mail +is only effected by confirmation of actual or attempted delivery.2 Accordingly, IT IS ORDERED +that the Division of Enforcement file a status report concerning service of the OIP by July 28, +2021, and every 28 days thereafter until service is accomplished. + +1 Paul L. Chancey, Jr., CPA, Exchange Act Release No. 92378, 2021 WL 2953721 (July +13, 2021). +2 17 C.F.R. § 201.141(a)(2)(i). The Division’s notice states that the OIP was instituted +pursuant to Exchange Act Section 15(b), and it sent a copy of its notice to the Office of +Administrative Law Judges. We remind the parties that the OIP was instituted pursuant to +Exchange Act Sections 4C and 21C and Rule of Practice 102(e), and that the OIP set the matter +down for a hearing before the Commission. Chancey, 2021 WL 2953721, at *1, 13. +2 + +The parties’ attention is directed to the most recent amendments to the Commission’s +Rules of Practice, which took effect on April 12, 2021, and which include new e-filing +requirements.3 +For the Commission, by the Office of General Counsel, pursuant to delegated authority. + + Vanessa A. Countryman + Secretary + +3 Amendments to the Commission’s Rules of Practice, Exchange Act Release No. 90442, +2020 WL 7013370 (Nov. 17, 2020), 85 Fed. Reg. 86,464, 86,474 (Dec. 30, 2020), +https://www.sec.gov/rules/final/2020/34-90442a.pdf; Instructions for Electronic Filing and +Service of Documents in SEC Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. The amendments impose other obligations such +as a new redaction and omission of sensitive personal information requirement. Amendments to +the Commission’s Rules of Practice, 85 Fed. Reg. at 86,465-81. \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4231.txt b/raw/aaer/2021/AAER-4231.txt new file mode 100644 index 0000000000000000000000000000000000000000..70348aea178c336bd3ea3b07e40f384bbdfb7907 --- /dev/null +++ b/raw/aaer/2021/AAER-4231.txt @@ -0,0 +1,164 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92482 / July 23, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4231 / July 23, 2021 + +Admin. Proc. File No. 3-20256 + +In the Matter of +CHRISTOPHER E. KNAUTH, CPA + + + + +PROTECTIVE ORDER +On April 5, 2021, the Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Christopher E. Knauth, CPA (“Respondent”), +pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rules 102(e)(1)(ii) +and (iii) of the Commission’s Rules of Practice. 1 On May 17, 2021, Respondent and the +Division of Enforcement jointly moved for entry of a protective order concerning the use and +disclosure of sensitive personal or confidential information in documents to be produced by the +Division to Respondent pursuant to Commission Rule of Practice 230.2 The parties represented +that they had stipulated to terms and submitted a proposed order with their motion. +Commission Rule of Practice 322 provides that a party may seek a protective order +limiting disclosure of a document or testimony that contains confidential information.3 We will +grant such a motion “only upon a finding that the harm resulting from disclosure would outweigh +the benefits of disclosure.”4 Because the parties represent that the Division will produce to +Respondents certain documents compiled during the Division’s investigation of Respondent (the + +1 Christopher E. Knauth, CPA , Exchange Act Release No. 91475, 2021 WL 1297855 (Apr. +5, 2021). +2 17 C.F.R. § 201.230. +3 17 C.F.R. § 201.322(a). +4 17 C.F.R. § 201.322(b). +2 + + + +“Investigative Record Materials”) that contain certain sensitive personal information, we grant +the parties’ motion for a protective order.5 +Accordingly, it is ORDERED, based on the parties’ stipulated language, that: +1. As used in this Protective Order, the term “Sensitive Personal Information” shall +mean any documents or other information containing any one or more of the following +categories of personal and private documents or information: (a) a social security or tax +identification number; (b) individuals’ financial account statements, including statements for any +bank account, credit card account, brokerage account, mortgage, student loan, or other loan; (c) +any financial account number, including for a bank account, credit card account, brokerage +account, mortgage, student loan, or other loan; (d) tax returns; (e) the home address and phone +number of any individual person; (f) the birth date of any individual person; (g) the name of any +individual person who, at the time the OIP was filed in this matter, was known to be less than 18 +years old; or (h) medical information. Sensitive Personal Information does not include the last +four digits of a financial account number or phone number, the city and state of an individual’s +home address, the year of an individual’s birth, or copies of unredacted filings by regulated +entities or registrants that are available on the Commission’s public website. +2. Sensitive Personal Information disclosed to Respondent in this action or to his +counsel during the course of this action: +a. Shall be used only for the purposes of this action; +b. Shall not be used for any business or commercial purposes; +c. Shall not be published to the public in any form, except as permitted by +Paragraphs 5 and 7, below; +d. May be disclosed only to the following persons, on an as-needed basis in the +course of the litigation, with reasonable precautions taken to insure the confidentiality of the +information: +i. Respondent; +ii. Employees or contractors of any law firm that represents Respondent, +including attorneys and secretarial, clerical, paralegal, legal, or student personnel, and +any person or entity with whom Respondent’s counsel contracts to reproduce or manage +documents; + +5 See, e.g. , LBB & Assocs. Ltd., Exchange Act Release No. 85569, 2019 WL 1531832 (Apr. 9, +2019) (granting request for a protective order against the disclosure of movant’s account and +social security numbers and other personally identifiable information); Russell C. Schalk, Jr. , +Exchange Act Release No. 32279, 2016 WL 5219501, at *3 n.8 (Sept. 21, 2016) (same). +3 + + + +iii. Non-party witnesses; +iv. A document’s author(s) or recipient(s); +v. Independent (non-employee) consultants, expert witnesses, or advisors +retained by any of the parties to this action in connection with this action; +vi. Court reporters or stenographers—and their employees—who are engaged +to record deposition or hearing testimony; +vii. the Commission and its employees, agents, or contractors; and +viii. Such other persons as hereafter may be authorized by either (1) written +consent of all the parties or (2) the Commission upon motion of either party. +3. A copy of this Protective Order shall be delivered to each of the named parties or +persons within paragraph 2.d above to whom a disclosure of Sensitive Personal Information is +made, at or before the time of disclosure, by the party making the disclosure. The provisions of +this Protective Order shall be binding upon each person to whom disclosure is made. +4. The provisions of this Protective Order shall not be construed as preventing: +a. Any disclosure of Sensitive Personal Information to any party to this action; +b. Any disclosure of Sensitive Personal Information to any Commissioner, law clerk, +or member or employee of the Commission for any purposes of this action; or +c. Any disclosure of Sensitive Personal Information for the purpose of enforcing the +criminal law or as otherwise required by law. +5. Except as otherwise ordered, prior to making a public filing of any document in +these proceedings, the Division and Respondent agree to redact all Sensitive Personal +Information from the document. The Division and Respondent also agree to take reasonable and +appropriate measures to prevent unauthorized disclosure of Sensitive Personal Information +contained in documents produced or filed in these proceedings, including by persons to whom +the Division or Respondent show or give access to such documents. In the event that redacting a +filing is impracticable or would result in a filing being almost entirely redacted, the parties shall +file the document under seal together with a copy of this Order. +If a document is filed under seal, it may be disclosed to the parties or persons under +paragraph 2.d. In addition, if a party intends to make a filing (such as a brief or motion) that +incorporates Sensitive Personal Information in the written text, the party must: (1) file a version +clearly labeled “under seal,” with the Sensitive Personal Information subject to this Order noted +by brackets, bold typeface, or some other clear indication; and (2) file a public redacted version +that removes the Sensitive Personal Information. +4 + + + +6. This Protective Order shall not: +a. Operate as an admission by any party that any particular document or other +discovery material in fact contains Sensitive Personal Information; +b. Prejudice in any way the right of a party to seek a determination of whether such +material is or should be subject to the terms of this Protective Order; +c. Prevent Respondent’s or non-party’s disclosure of its own Sensitive Personal +Information; or +d. Prejudice in any way the right of any party to apply to the Commission for a +further protective order relating to any other confidential information or Sensitive Personal +Information. +7. Nothing in this Protective Order shall preclude the parties from offering Sensitive +Personal Information into evidence at the hearing of this action or in any other proceeding in this +action, subject to the restrictions set forth in this Protective Order. +8. This Protective Order shall survive the termination of the litigation. Unless +otherwise agreed or ordered, this Protective Order shall remain in force after dismissal or entry +of final judgment not subject to further appeal. +9. Within sixty (60) days after dismissal or entry of final judgment not subject to +further appeal, all Investigative Record Materials, including copies of such documents, shall be +returned to the Division unless: (1) the document has been offered in evidence; or (2) the +Division agrees to destruction in lieu of return. Notwithstanding the above requirement to return +or destroy Investigative Record Materials, counsel may retain attorney work product, including +an index which refers or relates to documents containing Sensitive Personal Information, so long +as that work product does not duplicate verbatim substantial portions of the text or images of +such documents. This portion of the work product containing Sensitive Personal Information +shall continue to be protected under the terms of this Protective Order. An attorney may use his +or her work product in a subsequent litigation provided that its use does not disclose or use +documents containing Sensitive Personal Information. +10. This Protective Order shall be subject to modification by the Commission on the +Commission’s own motion or on motion of a party or any other person with standing concerning +the subject matter. +5 + + + +11. Notwithstanding any provisions contained herein, nothing in this Protective Order +shall limit the right of the Commission to make Routine Uses of Information as set forth in SEC +Forms 1661 and/or 1662.6 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + Vanessa A. Countryman + Secretary + +6 See https://www.sec.gov/files/sec1661.pdf (describing principal and routine uses of +information obtained other than pursuant to Commission subpoena); +https://www.sec.gov/files/sec1662.pdf (same as to information obtained voluntarily or pursuant +to Commission subpoena). \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4232.txt b/raw/aaer/2021/AAER-4232.txt new file mode 100644 index 0000000000000000000000000000000000000000..f2771c7ee69ea9c83052970e244e7cc359adf6c1 --- /dev/null +++ b/raw/aaer/2021/AAER-4232.txt @@ -0,0 +1,113 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92503 / July 26, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4232 / July 26, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20439 + + +In the Matter of + + + ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + STEVEN A. SPLAIN, CPA, PURSUANT TO RULE 102(e) + OF THE COMMISSION’S RULES +OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL + SANCTIONS +Respondent. + + +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 Steven +A. Splain (“Respondent” or “Splain”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + + 2 +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Splain, age 59, is a resident of Cheshire, Connecticut. Splain previously held +an active CPA license in Connecticut. That license is currently listed as inactive. From +approximately 2005 to February 8, 2016, Splain served as the Chief Accounting Officer of Brixmor +Property Group Inc. (“Brixmor” or the “Company”). Brixmor is a real estate investment trust +(“REIT”). Its shares have been publicly-traded on the New York Stock Exchange since 2013. + +2. Brixmor was, at all relevant times, a Maryland corporation with its principal +executive offices in New York, New York. Brixmor is an owner and operator of open-air shopping +centers. At all relevant times, Brixmor’s common stock was registered with the Commission +pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and traded on +the New York Stock Exchange. + +3. On August 1, 2019, the Commission filed a complaint against Splain in SEC +v. Michael A. Carroll, et al., Civil Action Number 19-CV-7199 (AT), in the United States District +Court for the Southern District of New York. On August 2, 2019, the Court entered an order +permanently enjoining Splain, by consent, from future violations of Section 10(b) of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 13a-14, and Rule 100(b) of Regulation +G thereunder. Splain was also barred by the Court from serving as an officer or director of a +publicly-held corporation under Section 21(d)(2) of the Exchange Act. + +4. The Commission’s complaint alleged, among other things, that Splain +engaged in a fraudulent scheme to knowingly or recklessly manipulate Brixmor’s reported same +property net operating income growth rate (“SP NOI Growth Rate”), a key non-GAAP measure +used by investors to evaluate a REIT’s performance, for the reporting periods ending September 30, +2013 through September 30, 2015 (the “Relevant Period”). Splain, along with the other defendants, +devised and implemented a variety of fraudulent accounting methods to manipulate Brixmor’s +reported SP NOI Growth Rate to make it appear strong, consistent, and in line with the Company’s +publicly-issued SP NOI Growth Rate guidance, to purposely conceal the fact that the Company’s SP +NOI Growth Rate was volatile and frequently missed guidance during the Relevant Period. In +addition, Splain signed each of Brixmor’s Forms 10-Q for the second through the third quarters of +2014 and the first through third quarters of 2015 as the Company’s CAO and with knowledge that + + 3 +those filings contained material misstatements and omissions and misstated a material non-GAAP +performance measure. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Splain’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Splain is suspended from appearing or practicing before the Commission as an +accountant. + + + + By the Commission. + + + Vanessa Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4233.txt b/raw/aaer/2021/AAER-4233.txt new file mode 100644 index 0000000000000000000000000000000000000000..888b5ab464c8a47399e556f5f6d6780fb1bbb64e --- /dev/null +++ b/raw/aaer/2021/AAER-4233.txt @@ -0,0 +1,110 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92507 / July 26, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4233 / July 26, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20440 + + +In the Matter of + + + ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + MICHAEL MORTIMER, PURSUANT TO RULE 102(e) OF THE + COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL + SANCTIONS +Respondent. + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Michael +Mortimer (“Respondent” or “Mortimer”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Mortimer, age 51, is a resident of Yardley, Pennsylvania. Mortimer has +served in various positions as an accountant in his professional career. From approximately October +2013 through February 2016, Mortimer served as the Senior Vice President of Accounting at +Brixmor Property Group Inc. (“Brixmor” or the “Company”), a publicly-traded real estate +investment trust (“REIT”) that trades on the New York Stock Exchange. + +2. Brixmor was, at all relevant times, a Maryland corporation with its principal +executive offices in New York, New York. Brixmor is an owner and operator of open-air shopping +centers. At all relevant times, Brixmor’s common stock was registered with the Commission +pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and traded on +the New York Stock Exchange. + +3. On August 1, 2019, the Commission filed a complaint against Mortimer in +SEC v. Michael A. Carroll, et al., Civil Action Number 19-CV-7199 (AT), in the United States +District Court for the Southern District of New York. On August 2, 2019, the Court entered an +order permanently enjoining Mortimer, by consent, from future violations of Section 10(b) of the +Exchange Act and Rule 10b-5 thereunder. Mortimer was also barred by the Court from serving as +an officer or director of a publicly-held corporation under Section 21(d)(2) of the Exchange Act. + +4. The Commission’s complaint alleged, among other things, that Mortimer +engaged in a fraudulent scheme to knowingly or recklessly manipulate Brixmor’s reported same +property net operating income growth rate (“SP NOI Growth Rate”), a key non-GAAP measure +used by investors to evaluate a REIT’s performance, and aided and abetted others’ knowing or +reckless material misrepresentations and omissions relating to that measure, for the reporting +periods ending September 30, 2013 through September 30, 2015 (the “Relevant Period”). +Mortimer, along with the other defendants, devised and implemented a variety of fraudulent +accounting methods to manipulate Brixmor’s reported SP NOI Growth Rate to make it appear +strong, consistent, and in line with the Company’s publicly-issued SP NOI Growth Rate guidance, +to purposely conceal the fact that the Company’s SP NOI Growth Rate was volatile and frequently +missed guidance during the Relevant Period. + + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Mortimer’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Mortimer is suspended from appearing or practicing before the Commission as an +accountant. + + + + By the Commission. + + + Vanessa Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4234.txt b/raw/aaer/2021/AAER-4234.txt new file mode 100644 index 0000000000000000000000000000000000000000..8765c3c1e3449548eafbd974f4afd820a9856e71 --- /dev/null +++ b/raw/aaer/2021/AAER-4234.txt @@ -0,0 +1,430 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92513 / July 28, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4234 / July 28, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-18346 + + + +In the Matter of + +Thomas Whittle, CPA, + +Respondent. + + + + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS +AND AND- AND A CEASE-AND-DESIST ORDER +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 January 22, 2018, the Securities and Exchange Commission (“Commission”) deeming +it appropriate instituted public administrative and cease-and-desist proceedings against Thomas +Whittle (“Whittle” or “Respondent”) pursuant to Sections 4C1 and 21C of the Securities Exchange +Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules +of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +2 +II. + +Respondent has submitted an Offer of Settlement (the “Offer”), which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, Respondent +admits the Commission’s jurisdiction over him and the subject matter of these proceedings, and +consents to the entry of this Order Making Findings and Imposing Remedial Sanctions and a Cease- +and-Desist Order 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. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This case involves the unauthorized disclosures of confidential information from +the Public Company Accounting Oversight Board (“PCAOB” or “Board”) and a concerted effort +by now-former members of KPMG’s Audit Quality and Professional Practice group (“AQPP” or +“National Office”) – including Thomas Whittle – to use that information to improve the results of +the PCAOB’s annual inspections of KPMG audits. +2. In 2015, KPMG hired Brian Sweet from the PCAOB to work in its National Office, +under Whittle’s direction. On his last day at the PCAOB, Brian Sweet took sensitive inspections- +related documents to use as a resource in his new job. After starting at KPMG, Sweet received +additional confidential PCAOB materials from Cynthia Holder, then a PCAOB employee. In 2016 +and 2017, a third PCAOB employee, Jeffrey Wada, leaked confidential information relating to the +PCAOB’s planned inspections of KPMG to Holder after she had left the PCAOB and joined +KPMG. +3. Shortly after joining the firm, Sweet told Whittle and Whittle’s supervisor David +Middendorf that he had taken confidential materials from the PCAOB and received, from time to +time, additional confidential information from PCAOB employees. Whittle and Middendorf + + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found to be lacking in character or integrity or to have +engaged in unethical or improper professional conduct. + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or willfully aided +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. +3 +encouraged Sweet to share the PCAOB’s confidential information with them, with other KPMG +colleagues, and with an outside contractor. This was valuable information to KPMG, which had +experienced a high rate of audit deficiency findings and had made a priority of improving its +PCAOB inspection results. +4. After Wada sent Holder the list of the PCAOB’s planned inspections for 2016, +Whittle, Middendorf, and other now-former KPMG personnel oversaw a program to review and +revise certain audit workpapers after the audit reports had been issued to reduce the likelihood that +the PCAOB would find deficiencies in those audits. This effort resulted in a substantial +improvement to KPMG’s 2016 inspection results. +5. In 2017, Whittle, Middendorf and the now-former KPMG personnel again obtained +the list of audit engagements that the PCAOB planned to inspect after Wada leaked the information +to Holder. However, the misconduct was discovered by others within the firm and reported to +KPMG leadership before relevant workpapers could be changed. + +RESPONDENT + +6. Thomas Whittle, 57, of Gladstone, New Jersey, was KPMG’s National Partner-In- +Charge for Quality Measurement until March 2017, and was separated from the firm the following +month. Whittle was previously licensed as a CPA in Connecticut, New Jersey, New York and +Pennsylvania. +OTHER RELEVANT PERSONS AND ENTITY + +7. Brian Sweet, 43, of Fresno, California, was a Partner in KPMG’s Department of +Professional Practice-Inspections group until March 2017. He was separated from the firm at the +end of March 2017. Prior to joining KPMG, Sweet was an Associate Director in the PCAOB’s +inspections group from March 2014 until April 2015. Sweet was previously licensed as a CPA in +California, Illinois, and New York. The Commission has charged Sweet for his role in the +misconduct described in this Order. +8. Cynthia Holder, 55, of Houston, Texas was an Executive Director in KPMG’s +Department of Professional Practice-Inspections group from August 2015 until April 2017, when +she was separated from the firm. Prior to joining KPMG, Holder was an Inspections Specialist and +Inspections Leader at the PCAOB from December 2011 until August 2015. Holder was previously +licensed as a CPA in New Jersey and Texas. The Commission has charged Holder for her role in +the misconduct described in this Order. +9. Jeffrey Wada, 45, of Tustin, California was an Inspections Leader at the PCAOB +from February 2012 until February 2017. Wada is no longer at the PCAOB. Wada was previously +licensed as a CPA in California. The Commission has filed litigated administrative and cease-and- +desist proceedings against Wada alleging misconduct related to the events described in this Order. +10. David Middendorf, 57, of Marietta, Georgia, was KPMG’s National Managing +Partner for AQPP until March 2017, and was separated from the firm the following month. +4 +Middendorf was previously licensed as a CPA in Georgia, New York, Ohio, and Texas. The +Commission has filed litigated administrative and cease-and-desist proceedings against +Middendorf alleging misconduct related to the events described in this Order. +11. David Britt, 57, of Salvo, North Carolina, was a Partner in KPMG’s Department of +Professional Practice within AQPP, in which he was the Banking and Capital Markets Group Co- +Leader until March 2017, and was separated from the firm the following month. Britt was +previously licensed as a CPA in California, the District of Columbia, and New York. The +Commission has charged Britt for his role in the misconduct described in this Order. + +12. KPMG LLP is a Delaware limited liability partnership and PCAOB-registered +accounting firm. Headquartered in New York, New York, KPMG is the U.S. member firm of +KPMG International Cooperative, a Swiss entity. The Commission has charged KPMG for its role +in the misconduct described in this Order.4 +FACTS + +The PCAOB’s Inspections Process and KPMG’s Efforts to Improve Its Results + +13. The PCAOB was created as part of the Sarbanes-Oxley Act of 2002 to oversee the +audits of public companies that are subject to the federal securities laws in order to protect the +interests of investors and further the public interest in the preparation of informative, accurate, and +independent audit reports. +14. One of the essential ways in which the PCAOB fulfills this mission is by inspecting +audits of public companies conducted by registered public accounting firms. Through these +inspections, the PCAOB assesses the audit firms’ compliance with the statutes, regulations, and +professional standards governing the accounting profession. The PCAOB typically selects the +audit engagements it will inspect based on confidential internal analyses and thereafter notifies +firms of which audits it will inspect. The PCAOB typically issues inspection reports, only parts of +which are made public, after all the inspections for a firm in a given cycle are complete. To ensure +the integrity of the inspection process, the PCAOB closely guards the confidentiality of both its +inspection targets prior to firm notification and its methodology for selecting those targets. +15. In September 2014, the PCAOB issued a report regarding its 2013 inspections of +KPMG audits. The report found that out of 50 audits the PCAOB inspected, 23 had deficiencies. +This 46 percent deficiency rate reflected a significant increase from KPMG’s 34 percent deficiency +rate the previous year. +The Use of Confidential PCAOB Information Sweet Misappropriated in 2015 + +16. As part of its efforts to improve its PCAOB inspection results, KPMG hired Brian +Sweet, an Associate Director at the PCAOB who had worked on the team inspecting KPMG + +4 KPMG LLP, Exchange Act Release No. 86118 (June 17, 2019). + +5 +audits. Sweet joined KPMG as a partner in the group within the firm’s National Office responsible +for PCAOB inspections. Sweet reported to Whittle, who was then the KPMG partner responsible +for overseeing the PCAOB’s inspections of the firm. Whittle, in turn, reported to David +Middendorf, who then oversaw the National Office’s audit quality and professional practice work. +17. In April 2015, shortly before leaving the PCAOB, Sweet copied from an internal +database to his office computer various confidential inspection-related materials he believed might +be of use to him when he joined KPMG. On his final day at the PCAOB, Sweet transferred these +materials, along with the other files on his PCAOB computer, to a personal hard drive that he took +with him. Sweet also took from the PCAOB hard copy documents and retained other confidential +PCAOB documents he had previously brought home. +18. The documents Sweet improperly took included PCAOB inspection planning +information, inspection guides and manuals, and drafts of confidential inspection comment forms. +The planning materials included the confidential list of KPMG audit engagements the PCAOB +intended to inspect in 2015, the focus areas for each inspection, and a list of all the quantitative and +qualitative criteria the Board used in deciding which KPMG audit engagements to inspect. +19. Upon joining KPMG in May 2015, Sweet transferred the PCAOB documents from +his personal hard drive to his computer at the firm. +20. On his first day at the firm in May 2015, Sweet had lunch with Middendorf and +other partners in KPMG’s National Office. Over lunch, Sweet’s new colleagues asked him various +questions about the PCAOB’s inspections of KPMG. Sweet testified that one of the questions +Middendorf asked Sweet was whether the PCAOB intended to inspect a specific KPMG banking +client that year. Without answering directly, Sweet indicated the PCAOB planned to do so. Sweet +testified that Middendorf told him the next day that Sweet needed “to share insight and add value +and be fully open when it came to that type of information,” and to “remember where [your] +paycheck came from” and that Sweet had to be “completely loyal to KPMG and KPMG only.” +21. Several days later, at Middendorf’s direction, Whittle asked Sweet to provide him +the list of the PCAOB’s planned inspections for 2015.5 Sweet testified that he showed Whittle a +hard copy of a PCAOB inspection planning document listing the KPMG banking and financial +service audits the PCAOB intended to inspect that year. +22. The next day, Whittle emailed Sweet, asking him to have an assistant “scan and +send me the banking selection list,” i.e. KPMG’s bank holding company clients the PCAOB had +selected for inspection. Sweet complied by sending Whittle the complete list of planned +inspections and asked Whittle to exercise discretion given the nature of the information. Whittle +forwarded this information to Middendorf the same day, writing, “The complete list. Obviously, +very sensitive. We will not be broadcasting this.” + +5 By that time, the PCAOB had informed KPMG of less than half of the audit engagements it intended to +inspect in 2015. + +6 +23. Though Whittle immediately assigned Sweet to review the workpapers of one of +the inspection targets, it does not appear that any workpapers were changed in response to Sweet +providing the 2015 inspection list. At the time Sweet provided this information to Middendorf and +Whittle, KPMG had, pursuant to its policy, already locked the audit workpapers for all but two of +the engagements from editing absent special circumstances. +24. Whittle also instructed Sweet to speak to certain engagement partners responsible +for audits on the 2015 list to explain the reasons for their selection. By learning why they were +selected, engagement partners could better tailor their responses to questions from PCAOB +inspectors to mitigate concerns. Middendorf and Whittle also assigned Sweet to one of the firm’s +large audit engagements on the 2015 list to help prepare for the inspection. Internal training +materials KPMG created for audit staff undergoing PCAOB inspection stressed the importance of +replying to inspectors’ questions – especially during the critical first meeting with PCAOB staff – +with the “best first answer.” KPMG’s National Office believed the audit staff’s ability to respond +effectively to inspectors’ questions had a significant impact on whether the PCAOB would find +deficiencies in the audit. +25. In April 2015, KPMG engaged an outside consultant to help it predict which audit +engagements the PCAOB would inspect in 2016. Sweet recalls that in June 2015 Middendorf and +Whittle directed Sweet to share with the outside consultant everything he knew about how the +PCAOB selected audits to inspect, including the confidential information Sweet had taken. Sweet +understood this to be an instruction to give the consultant all of the information he took from the +PCAOB. +26. Sweet complied with Middendorf and Whittle’s directive by providing information +about the Board’s selection criteria to a Director in KPMG’s National Office, who then gave that +information to the consultant. In September 2015, Sweet spoke directly with the consultant and +gave the consultant additional confidential information regarding the inspections selection process, +including how the PCAOB’s Inspections group used confidential information received from others +at the Board and the Commission. At the end of September, Sweet reported to Middendorf and +Whittle that he had “spent quite a bit of time with [the outside consultant] trying to guide their +modeling efforts.” +The Use of Confidential PCAOB Information Obtained from Wada in 2016 + +27. On March 28, 2016, Jeffrey Wada, an Inspections Leader at the PCAOB who had +previously performed work on KPMG inspections but was then assigned to inspect another audit +firm, called Cynthia Holder – a friend and former PCAOB Inspections Leader whom Sweet had +recruited to join KPMG’s National Office – and read to her the names of thirteen KPMG clients +the Board planned to inspect.6 Holder provided this information to Sweet, who then immediately + +6 Of the 13 clients, 11 were bank holding or other financial services companies and 2 were other issuers that +Wada appears to have thought were also bank holding or other financial services companies. It appears that Wada +identified these engagements for Holder because her responsibilities at KPMG included advising banking +engagement teams. + +7 +relayed the list to Middendorf, Whittle, and National Office Partner David Britt, informing them +that it had come from a former colleague at the PCAOB. +28. Wada sent the list of the PCAOB’s planned inspections at a critical time. In early +February 2016, Middendorf and other members of KPMG’s leadership team had met with staff +from the Commission’s Office of the Chief Accountant. During that meeting, Commission +personnel expressed significant concerns about the firm’s audit quality and questioned whether +KPMG was adequately addressing these issues. Middendorf told Whittle, Sweet, and Britt they +should use the list of inspection targets Wada had sent to protect KPMG from further criticism by +its regulators. +29. Middendorf, Whittle, Britt, and Sweet believed they could use Wada’s list in this +way because they had learned of the audits that would be inspected at a time when firm personnel +were still able to access and revise audit workpapers. Though KPMG had already issued audit +reports for each of these engagements, it was within the 45-day period in which professional audit +standards and firm policy allowed audit teams to complete the administrative process of +assembling final audit files.7 At the end of this 45-day period, KPMG locked audit workpapers +from editing absent special circumstances.8 +30. Recognizing that the workpapers had not yet been locked per KPMG’s policy, +Middendorf, Whittle, and Britt agreed to have Sweet and others conduct an additional review of +the audit workpapers for the seven banks on the list Wada had provided that were part of a key +monitoring program run by the National Office to determine whether anything could be done to +minimize the risk of receiving inspection comments from the PCAOB.9 Middendorf and Whittle +instructed that no one in the briefing should disclose that they had obtained confidential PCAOB +information. +31. To conceal the true purpose of their efforts, Britt falsely told others at KPMG that +they were performing work in the ordinary course of business on all 35 banking engagements in + +7 See Auditing Standard No. 3, Audit Documentation, paragraph 15. “Prior to the report release date, the +auditor must have completed all necessary auditing procedures and obtained sufficient evidence to support the +representations in the auditor’s report. A complete and final set of audit documentation should be assembled for +retention as of a date not more than 45 days after the report release date (documentation completion date).” +References to PCAOB standards are to those that were in effect at the time of the relevant conduct. + +8 KPMG has since revised its audit documentation policies, requiring electronic workpapers to be assembled +and locked within two business days of issuance of the report. + +9 As the PCAOB found an increasing number of audit deficiencies by KPMG beginning in 2013, KPMG’s +National Office implemented “monitoring programs” that worked with audit engagement teams and reviewed +workpapers to improve compliance with professional standards. One of these programs focused on the audits of +certain banking clients’ Allowance for Loan and Lease Losses. KPMG further developed this monitoring program +in 2015 in response to numerous deficiencies the PCAOB had identified in this area. The success of this program +was especially important to KPMG because the firm had promoted it as proof of th e seriousness with which the firm +was working to improve its audit quality. + +8 +the Allowance for Loan and Lease Losses (“ALLL”) monitoring program. On March 28, 2016, +Britt sent the engagement partners for these audits an email stating that, “[a]s part of our wrap up +and reporting of the results of the ALLL monitoring program we need to gather some additional +information” from the audit workpapers.10 +32. Over the next few weeks, Sweet, Holder, and various partners and managing +directors in the National Office engaged in a review of the audit workpapers of the seven banks in +the monitoring program that were on the list Wada provided. The National Office professionals +suggested edits and proposed revisions to the engagement teams, which then decided what +revisions to incorporate into the final audit workpapers.11 +33. In contrast to prior years, KPMG’s 2016 inspection results did not include any +comments related to the general Allowance for Loan and Lease Losses – an area where KPMG had +historically received criticism related to financial services audits. The PCAOB did not publish the +results because KPMG reported the misconduct to the PCAOB before the PCAOB issued the 2016 +report. However, the PCAOB had designated two of the bank audits in the ALLL monitoring +program whose workpapers Sweet had reviewed as “positive quality events,” which meant they +were so successful the PCAOB wanted to understand the factors driving the audit’s quality. +Indeed, the level of improvement in the inspection results led Whittle to be concerned that if +KPMG could not obtain confidential PCAOB information for the next inspection cycle, there could +be a return of audit deficiencies that would be difficult to explain. +34. After the misconduct was discovered, the PCAOB conducted inspections of ten +additional banks for the 2016 inspection cycle to replace the ones for which improper advance +notice had been obtained. The PCAOB found that six of these audits had deficiencies with respect +to auditing the ALLL. +The Use of Confidential PCAOB Information Obtained from Wada in 2017 + +35. In early January 2017, Wada provided Holder a “preliminary” list of PCAOB +inspection targets for 2017. On January 9, Holder relayed the names of the clients on the list to +Sweet. That night, Sweet, Whittle, and Britt discussed this information. Whittle instructed Sweet +to warn certain engagement partners about the potential inspections, but to be circumspect in how +he communicated these matters with KPMG colleagues. After that meeting, Sweet contacted the +engagement partners for two of the audits on the January 2017 list to warn them about the potential +inspections. Whittle also discussed the January 2017 list with Middendorf. As a result of that + +10 Britt also asked a subordinate who previously had been in the Department of Professional Practice and was +then assigned to an audit engagement on the list to conduct his own “stealth” review of workpapers for one KPMG +audit client. + +11 Middendorf, Whittle, Sweet, and Britt had agreed that Sweet would lead a team of National Office +professionals to review the workpapers of the banks in the monitoring program, and that Middendor f, Whittle, and +Britt would handle the other issuers on the list they received from Wada. + +9 +discussion, Middendorf and Whittle assigned additional National Office resources to assist with +two of the active audits on that list.12 +36. In early February 2017, Wada conveyed to Holder a list of 47 ticker symbols that +Holder understood to be the final list of KPMG audits the PCAOB would inspect that year. Sweet +testified that Wada also provided Holder the inspection focus areas for the banks on the list (as well +as for another KPMG engagement), and the PCAOB’s list of KPMG engagement partners with +“poor performance evaluations.” +37. Holder relayed the information to Sweet, who then shared it with Middendorf, +Whittle, and Britt. Though Sweet questioned what to do with that information, Middendorf +replied, “this is information that’s too good not to use.” Unlike the prior lists of PCAOB +inspection targets, the audits on the February 2017 list were ongoing, thus providing substantially +greater ability to improve the audit workpapers. +38. Sweet’s notice to one KPMG engagement partner that her engagement was on the +final list caused her to suspect that the firm may have received confidential PCAOB information. +These concerns were subsequently reported to the firm’s management, which then reported the +matter to the PCAOB, and KPMG began an investigation. +VIOLATIONS + +39. As a result of the conduct described above, Respondent willfully violated PCAOB +Rule 3500T, which requires members to maintain integrity when performing any professional +service in connection with the preparation or issuance of any audit report, 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. +40. As a result of the conduct described above, Respondent willfully aided and abetted +and caused Sweet’s violation of PCAOB Ethics Code Section EC3, which prohibits PCAOB staff +from acting in a manner which might reasonably result in or reasonably create the appearance that +the employee is using confidential information obtained through service for the Board for the +private gain of any person, 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. +41. As a result of the conduct described above, Respondent willfully aided and abetted +and caused Sweet’s violation of PCAOB Ethics Code Section EC9, which prohibits PCAOB staff +from disseminating or otherwise disclosing any information obtained in the course and scope of his +or her employment, and which has not been released, announced, or otherwise made available +publicly, 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. + +12 Middendorf was the Engagement Quality Review partner on one of those audits. In this role, he was +responsible for evaluating the significant judgments and related conclusions the audit team made in reaching the +overall conclusion reflected in the audit report. + +10 +FINDINGS + +42. Based on the foregoing, the Commission finds that Whittle willfully violated +PCAOB Rule 3500T, and willfully aided and abetted and caused Sweet’s violations of PCAOB +Ethics Code Sections EC3 and EC9 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. +43. Based on the foregoing, the Commission finds that Whittle lacks integrity pursuant +to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice. +44. Based on the foregoing, the Commission finds that Whittle engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice. +COOPERATION +In determining to accept Respondent’s Offer, the Commission considered the cooperation +Respondent afforded the Commission staff. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Whittle’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Whittle shall cease and desist from committing or causing any violations and any +future violations of PCAOB Rule 3500T and PCAOB Ethics Code Sections EC3 and EC9. + + B. Whittle is denied the privilege of appearing or practicing before the Commission as +an accountant. + + By the Commission. + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4238.txt b/raw/aaer/2021/AAER-4238.txt new file mode 100644 index 0000000000000000000000000000000000000000..90db8cd07276c48b57763fcd380782b9cd75873b --- /dev/null +++ b/raw/aaer/2021/AAER-4238.txt @@ -0,0 +1,592 @@ +Page 1 of 16 + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92539/ August 2, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4238 / August 2, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20446 + + + +In the Matter of + +WILLIAM G. STIEHL, +CPA, + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against William G. +Stiehl, CPA (“Respondent” or “Stiehl”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess +the requisite qualifications to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and +abetted the violation of, any provision of the securities laws or the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + +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 . . . [t]o have willfully violated, or willfully aided and +abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder. +2 +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over Respondent and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. +III. + On the basis of this Order and Respondent’s Offer, the Commission finds that:3 +SUMMARY + +1. This matter arises from conduct by Stiehl, the then-CAO and controller of a United +States publicly-traded company and SEC-Registrant (“Issuer”) from 2014 through 2015 in +connection with Issuer’s selection process and appointment of an accounting firm to serve as the +independent auditor of Issuer’s financial statements (“Audit Firm”). +2. Throughout 2014, Stiehl and Audit Firm improperly interfered with the Request for +Proposal (“RFP”) process initiated and overseen by Issuer’s Audit Committee to select an +independent auditor for fiscal year 2015. On multiple occasions, Stiehl provided Audit Firm with +competitive bid and other confidential documents and information in an effort to enable Audit +Firm to secure the audit engagement. +3. The manner in which Audit Firm obtained the engagement would cause a +reasonable investor to conclude that Audit Firm was not capable of exercising objectivity and +impartiality upon becoming Issuer’s independent auditor and that such conduct therefore would +result in a violation of the Commission’s and the Public Company Accounting Oversight Board +(“PCAOB”)’s auditor independence rules. Stiehl reviewed Audit Firm’s representation that it was +independent in audit reports that were included in or incorporated by reference into Issuer’s public +filings for 2015. Stiehl also reviewed and approved Issuer’s 2014 and 2015 public statements that +Issuer’s Audit Committee approved the selection of Audit Firm “to serve as the Company’s + +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 +Independent Registered Public Accounting Firm for the fiscal year ending December 31, 2015 +following a competitive search process.” +4. After Issuer learned of Stiehl’s RFP-related conduct on May 2, 2019, Issuer’s Audit +Committee conducted an internal investigation and terminated Stiehl’s employment on June 19, +2019. The next day, the Audit Committee publicly announced in Issuer’s Form 8-K that Stiehl’s +employment had been terminated for cause after “an internal review by the Audit Committee of the +Board.” On August 7, 2019, Issuer’s Audit Committee unanimously terminated Audit Firm’s audit +engagement and approved the engagement of another firm as Issuer’s independent audit firm. On +August 12, 2019, the Audit Committee publicly announced in Issuer’s Form 8-K that Audit Firm +was dismissed because of the “pendency of the SEC investigation, along with the [Audit] +Committee’s dissatisfaction with information it learned about the process by which [Audit Firm] +was selected as auditor. . . .” +5. For the reasons set forth below, Stiehl caused and willfully4 aided and abetted, +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, Issuer’s violations of Sections 13(a) and 14(a) of the Exchange +Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 14a-9 thereunder. +B. RESPONDENT + 6. William G. Stiehl, CPA (“Stiehl”), age 59, of New Orleans, Louisiana, is a CPA +licensed in North Carolina since 2006 and licensed in Ohio from 1986 through 2008. Stiehl served +as Issuer’s CAO and controller from January 2013 to October 2017, after which Stiehl served as +Issuer’s acting and then permanent CFO until his employment was terminated in June 2019. +Before working for Issuer, Stiehl was employed as an auditor at a public accounting firm and in +various internal audit and senior financial accounting roles at two public companies. +C. RELEVANT ISSUER AND INDIVIDUALS + 7. Issuer is a Fortune 500 multi-national company with substantial operations in the +United States. Issuer’s shares are registered with the Commission pursuant to Exchange Act +Section 12(b) and listed on the New York Stock Exchange. Issuer files periodic reports, including +on Forms 10-K and 10-Q, with the Commission pursuant to Exchange Act Section 13(a). + 8. Audit Firm is a professional service limited liability partnership, headquartered in +New York, New York, with offices located throughout the United States. Audit Firm provides +auditing, consulting, and tax services to various entities, including companies whose securities are + +4 “Willfully,” for purposes of imposing relief under Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice, “means no more than that the person charged with the duty knows what he is +doing.” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. +1949)). +4 +registered with the Commission and trade in the U.S. markets. Audit Firm served as Issuer’s +auditor from 2015 to August 2019. On August 12, 2019, Issuer filed a Form 8-K dismissing Audit +Firm and appointing another firm as Issuer’s independent audit firm. + 9. Audit Partner, age 46, is an assurance partner at Audit Firm. Audit Partner led +Audit Firm’s RFP pursuit of Issuer in 2014 and then served as the engagement partner5 on the +Audit Firm engagement team that provided audit and other services to Issuer from 2015 to March +2018. As the engagement partner, Audit Partner supervised Audit Firm’s engagement to audit and +review Issuer’s financial statements. Audit Partner is licensed as a CPA by the State of North +Carolina. + 10. Coordinating Partner, age 60, was an assurance partner at Audit Firm throughout +the relevant period. Coordinating Partner joined Audit Firm’s RFP pursuit of Issuer beginning in +August 2014 and became the coordinating partner on Issuer’s engagement for the fiscal year +ending December 31, 2015.6 As coordinating partner on the Issuer engagement, Coordinating +Partner had final responsibility for the audits and quarterly reviews of Issuer’s financial statements +from 2015 through August 2019. Coordinating Partner is licensed as a CPA by the States of North +Carolina and Ohio. Coordinating Partner retired from Audit Firm in 2020. + 11. Tax Partner, age 60, was a tax partner at Audit Firm, as well as the Carolinas Tax +Market Leader for Audit Firm throughout the relevant period. Tax Partner was on the Audit Firm +RFP pursuit of Issuer and served as the tax partner on the subsequent Issuer audit engagement +teams from 2015 until May 2019. As tax partner, Tax Partner reviewed the work of, and +supervised, Audit Firm tax professionals on the audit engagement team who performed audit and +review procedures related to Issuer’s income tax accounting throughout that period. Tax Partner is +licensed as a CPA by the State of North Carolina and has been previously licensed as a CPA by the +States of Alabama, Georgia, Ohio, and Texas. Tax Partner retired from Audit Firm in 2020. +D. FACTS +Background + +12. From 2004 through December 2012, Stiehl served in internal audit and senior +financial roles for two public companies at which Audit Firm was the independent auditor. Stiehl +was one of the primary contacts to Audit Partner and the Audit Firm teams on those engagements. + +5 The term “engagement partner” is used by Audit Firm to describe the second assurance partner on an audit +engagement. The engagement partner was not responsible for signing Issuer’s audit reports. + +6 The term “coordinating partner” is used by Audit Firm to describe the lead partner who signed the audit reports on +Audit Firm’s behalf on this engagement. +5 +During those eight years, Stiehl and Audit Partner worked closely together, and Stiehl came to +view Audit Partner as a trusted advisor. +13. In January 2013, Issuer, which was then headquartered in New Jersey, hired Stiehl +as its controller and CAO. At the time, another accounting firm had served as Issuer’s independent +auditor for decades. Beginning in February 2013, Stiehl participated in internal discussions at +Issuer about initiating an RFP process to solicit competitive bids from audit firms for Issuer’s +independent audit work. +Stiehl Provided Audit Partner With Confidential Information +Before the Issuance of the RFP + +14. As Issuer worked internally to initiate the RFP process, Stiehl began to provide +certain confidential information to Audit Partner. In August 2013, without Issuer’s knowledge, +Stiehl provided Audit Partner and Audit Firm with a draft RFP presentation to Issuer’s Audit +Committee. Stiehl did not provide this pre-RFP confidential information to any other audit firm. +In May 2014, for example, Stiehl called Audit Partner to provide Audit Firm with exclusive news +regarding the timing of Issuer’s upcoming RFP. During this call, CAO also shared confidential +news of Issuer’s pending corporate headquarters relocation to Charlotte, North Carolina. +15. Stiehl allowed Audit Firm to assist in drafting portions of Issuer’s RFP before it +was publicly released and arranged for Audit Partner to meet with Stiehl’s financial personnel at +least a month before other firms’ personnel were invited to do so. This exclusive access ultimately +led to Stiehl adding, at the suggestion of another partner at the Audit Firm, over $1 million in +global compliance tax services to Issuer’s RFP. +Issuer’s Audit Committee Sought a Competitive and Fair RFP Process +16. On July 14, 2014, after Issuer’s Audit Committee authorized the RFP’s +requirements and rules, Issuer invited Audit Firm and three other audit firms, including Issuer’s +then-incumbent audit firm, to submit bids in what Audit Committee intended to be a competitive +and fair RFP process. The RFP documents stated that Issuer intended that the process would allow +all prospective “Independent Registered Public Accounting Firm[s]” an “equal opportunity to +provide their best proposals” to Issuer’s Audit Committee. At the time, Issuer’s Audit Committee +was not aware that Stiehl had already provided Audit Firm with confidential information about and +relevant to the RFP. +17. Issuer’s RFP stated that all non-public information submitted by the audit firms +competing in the RFP would be treated as confidential. Each of the audit firms competing in the +RFP signed a bi-lateral Non-Disclosure Agreement in connection with the process. Issuer’s RFP +set forth specific instructions regarding the timing of all submissions and fair and equal access to +key audit and financial information in a web-based data room. The RFP also contained a +6 +“Conflicts of Interest” paragraph, which made clear that all competitors that submitted proposals +represented that: (i) Issuer personnel have not participated in the preparation of the firm’s proposal; +and (ii) Issuer personnel have not conveyed to the competitors any information pertaining to this +RFP. +CAO Unilaterally Provided Audit Firm with Confidential Competitive Bids and Audit +Committee Materials without Audit Committee Authorization +18. As CAO, Stiehl was assigned overall responsibility for ensuring that Issuer’s RFP +process was executed in the manner that Issuer’s Audit Committee intended. Stiehl understood the +RFP process and its importance to the Audit Committee’s selection of an independent auditor. +Stiehl knew that a level playing field that treated all competitors equally was an integral part of the +RFP appointment process. +19. Despite the clear contravention of the RFP process and without Audit Committee +authorization, Stiehl provided Audit Firm, through Audit Partner, with competing firms’ proposals +and submissions, the details of each competitive bid, and all of the internal documents prepared for +the Issuer’s Audit Committee, often before the Audit Committee itself received them. +20. Stiehl also gave Audit Firm an open invitation to provide suggestions or comments +to RFP materials summarizing each competitors’ proposals that were going to the Audit +Committee. On multiple occasions during the RFP process, Audit Firm solicited and received +information from Stiehl outside of the RFP’s data room, including “integral” incumbent fee +information, which enabled Audit Firm “to come up with an informed fee for the RFP.” +21. Stiehl unilaterally shared intelligence with Audit Firm because he wanted Audit +Firm to “get a seat at the table in the ultimate RFP.” Stiehl did not act with the Audit Committee’s +authority or with the knowledge or approval of Issuer’s senior management. +22. On September 15, 2014, Audit Firm and three other competing audit firms +submitted their initial confidential bid proposals to Issuer. The proposals contained detailed +staffing and billing information, including Excel spreadsheets that included hundreds of +engagement team names and email addresses, specific billing rates, budgeted hours, proposed bid +amounts, and staffing levels covering dozens of international jurisdictions. Stiehl immediately +forwarded the complete bid proposals provided by two competing audit firms, including all +supporting Excel spreadsheets, to Audit Partner. In a footnote below its tables of contents, the +incumbent firm’s bid proposal expressly included an “irreparable harm” confidentiality provision. +On the early morning of September 16, 2014, Audit Partner asked for a copy of the third +competing audit firm’s bid proposal, which Stiehl emailed in its entirety to Audit Partner later that +same morning. Stiehl later asked Audit Firm, through Audit Partner, for “some . . . stats that I +would be able to use in the [Audit Committee] presentation” to portray another competing firm as +having insufficient audit experience to support a potential client of Issuer’s size and Audit Firm +7 +obliged. Stiehl then used that information to inform Issuer’s Audit Committee that “[Issuer] +account would be nearly twice the size as their biggest global client.” + +Stiehl Enabled Audit Firm to Influence the Audit Committee’s RFP Process +Without Its Knowledge + +23. Without the Audit Committee’s knowledge and in contravention of the RFP, Stiehl +enabled Audit Firm to influence the Audit Committee at multiple stages throughout the RFP +process. For example, on October 3, 2014, Stiehl sent Audit Firm, through Audit Partner, “the +slide deck that I plan to share in executive committee,” and asked Audit Partner to share +“additional talking points that you think might be beneficial” before Stiehl met with the Audit +Committee to present his views of the competing firms. Stiehl was not authorized or instructed to +share this information with Audit Firm or to solicit additional talking points. Stiehl did not tell +anyone within Issuer that he had done so. Stiehl’s 16-page slide deck identified each competing +audit firm by “Key Qualitative Highlights,” “Pros and Cons,” and bid amount. Three days later, on +October 6, 2014, Audit Partner provided Stiehl with a detailed list of additional “Cons” against the +incumbent audit firm, including one that Audit Partner stated was a “big negative the [Audit +Committee] would be interested in” and additional “Pros” in favor of Audit Firm, including one +that Audit Partner urged “maybe you [Stiehl] could play that up” prior to the Audit Committee’s +scheduled down-selection meeting on October 7, 2014. + +24. On October 8, 2014, unaware of the above-described conduct, the Audit Committee +selected two RFP finalists, the incumbent audit firm and Audit Firm. The Audit Committee +instructed the two firms to make their final bids at the end of October, which pursuant to the RFP +would be submitted on the same day. The Audit Committee instructed Stiehl to give both firms +“the same opportunity to sharpen their pencils for this last round.” Stiehl repeatedly informed his +direct reports that the finalists would submit revised bids on October 31, 2014. + +CAO Provided Audit Firm With Key Confidential Competitive Information in +Contravention of the RFP Instructions + +25. On October 30, 2014, the incumbent audit firm asked CAO in an email—which +Stiehl immediately forwarded to Audit Partner—whether “we (and [Audit Firm]) [were] to re- +submit fees” the next day in accordance with “protocol and the preferred process.” CAO replied +“Yes, if there is any change in fees, then you can resubmit tomorrow.” Later that same day, Stiehl +met Audit Partner for dinner and they, along with Tax Partner and others from Audit Firm and +Issuer, attended a National Football League game in Audit Firm’s suite in Charlotte, North +Carolina. + +8 +26. In contrast to CAO’s instructions to the incumbent firm, on October 30, 2014, +Stiehl informed Audit Firm, through Audit Partner: “FYI – sounds like [incumbent audit firm] +may be changing their number but have no idea to what extent. We can talk Friday after I receive +[incumbent’s revised proposal]. Don’t send me anything yet.” + +27. On October 31, 2014, the incumbent audit firm submitted a 20-page revised bid +proposal with audit fee reductions of five percent, which Stiehl forwarded to Audit Partner and Tax +Partner seven minutes later. Audit Firm, through Audit Partner, then solicited additional +information about the incumbent audit firm’s revised bid, which Stiehl obtained from the +incumbent audit firm and forwarded to Audit Partner. + +28. Audit Firm did not file its own proposal until five days later, during which time, +Stiehl and Audit Firm, by and through Audit Partner, Coordinating Partner, and Tax Partner, +agreed upon a final bid number that was almost identical to the incumbent audit firm’s revised bid. +In fact, although Audit Firm’s final bid was slightly higher than incumbent firm’s final bid (once +budgeted expenses were taken into consideration), Stiehl deleted those expense amounts from the +final bid summary information that he gave to the Audit Committee, which created the appearance +that Audit Firm’s bid was lower. + +29. Shortly after Audit Firm submitted its final bid number —and six days before the +Audit Committee made its appointment— Stiehl emailed a draft Form 8-K to Audit Firm and +asked Audit Partner and Coordinating Partner for edits. The draft Form 8-K identified Audit Firm +as the newly selected independent auditor. Stiehl did not email the incumbent audit firm this draft +Form 8-K. Coordinating Partner provided the requested edits on behalf of Audit Firm. + +30. Stiehl’s provision of the incumbent’s final bid and proposal to Audit Firm before +Audit Firm filed its own enabled Audit Firm to make its fee submission and shape its oral +presentation and final bid and proposal to the Audit Committee based on what it saw in the +incumbent audit firm’s final bid and proposal. Audit Firm modified its written and oral +presentation after receiving information from Stiehl. Not only did Audit Firm modify its fees, but +it also added personnel to the presentation, changed its representations regarding its overall +portfolio, and amended its response to recent audit wins highlighted by the incumbent audit firm in +its final proposal. Despite the terms of the RFP and the Audit Committee’s direction to CAO to +give both firms an equal opportunity to “sharpen their pencils” and revised their bids, Stiehl gave +Audit Firm its competitor’s confidential final bid and proposal and then additional time to submit +its own. +31. On November 11, 2014, the morning of the final oral presentations to Issuer’s Audit +Committee, Stiehl provided Audit Partner with the final “top level summary the board will see, and +will refer to during the executive session[,]” adding that it was “[j]ust a comparison of the two +9 +firms to facilitate the discussion. But again some of the big arguing points, I have left off, so that I +can just verbalize.” + +32. That same day, the Audit Committee unanimously selected and appointed Audit +Firm as Issuer’s new auditor. That night, Stiehl sent another Audit Firm partner (his former +college roommate), a congratulatory email with the message: “Back in the family!!!” + +33. On November 14, 2014, Issuer filed its Form 8-K announcing: “Audit Committee +of the Board of Directors . . . of [Issuer] approved the selection of [Audit Firm] to serve as the +Company’s independent registered public accounting firm for the fiscal year ending December 31, +2015 following a competitive search process.” This representation was materially false and +misleading because the RFP process was not competitive. Stiehl reviewed and approved Issuer’s +representation (in the 2014 Form 8-K and a subsequent 2015 Proxy Statement) that Issuer’s Audit +Committee approval process was subject to a “competitive search process.” + +Stiehl Did Not Disclose His RFP-Related Conduct to the Audit Committee +Or Issuer’s Senior Management + +34. Stiehl did not disclose his RFP-related conduct to the Audit Committee or Issuer’s +senior management. In June 2019, after the Audit Committee discovered the RFP-related conduct, +Issuer’s Audit Committee unanimously terminated Stiehl’s employment for cause and, in August +2019, terminated Audit Firm’s engagement. + +35. Stiehl obtained a monetary benefit for his work on the RFP. For fiscal year 2014, +Issuer’s Compensation Committee awarded Stiehl a bonus based on a series of factors, of which +$26,000 was attributable to his work on Issuer’s RFP. +36. Audit reports issued on Issuer’s 2015 financial statements, which were included or +incorporated by reference in public filings with the Commission, indicated that Audit Firm was +independent. Stiehl reviewed Issuer’s representations disclosed in a 2014 Form 8-K and a 2015 +Proxy Statement that Issuer’s Audit Committee approved the selection of Audit Firm “to serve as +the Company’s independent registered public accounting firm for the fiscal year ending December +31, 2015” following a “competitive search process.” +37. During the relevant period, Stiehl knew and understood the audit independence +rules. As CAO, and later CFO, Stiehl had responsibilities directly connected to ensuring that +Issuer’s audits and reviews were performed by an independent auditor. He also reviewed and +supervised the preparation of Forms 8-K and proxy information that was incorporated into Issuer +Forms 10-K that referenced the purported “competitive search process” through which the Audit +Committee appointed Audit Firm as Issuer’s independent auditor. +10 +E. LEGAL ANALYSIS +38. As the Commission has long recognized, “[i]ndependent auditors have an important +public trust. . . . It is the auditor’s opinion that furnishes investors with critical assurance that the +financial statements have been subjected to a rigorous examination by an objective, impartial, and +skilled professional, and that investors, therefore, can rely on them.” Revision of the Commission’s +Auditor Independence Requirements, Exchange Act Rel. No 43602, 2000 WL 1726933, at *2 +(Nov. 21, 2000) (“Adopting Release”). Accordingly, Rule 2-02(b)(1) of Regulation S-X requires +each auditor’s report on a public issuer’s financial statements to state “whether the audit was made +in accordance with generally accepted auditing standards” (“GAAS”), including auditing standards +set forth in PCAOB rules and Commission regulations.7 +39. In the Adopting Release, the Commission made clear that: “the general standard in +paragraph (b) [of Rule 2-01] recognizes that an auditor must be independent in fact and +appearance.” Similarly, the preliminary note to Rule 2-01 of Regulation S-X provides that: +“Section 210.2-01 is designed to ensure that auditors are qualified and independent of their audit +clients both in fact and in appearance.” GAAS, in turn, requires auditors to be independent from +their clients in both fact and appearance. PCAOB Rule 3520; PCAOB Auditing Standards, +Independence, AU § 220.03. Independence in fact and appearance are “equally important under +the securities laws.” In the Matter of Ernst & Young LLP, Exchange Act Rel. No. 46821, 2004 +WL 824099, at *30 (Apr. 16, 2004); see also United States v. Arthur Young & Co., 465 U.S. 805, +819 n.15 (1984) (“It is therefore not enough that financial statements be accurate; the public must +also perceive them as being accurate.”) +40. The facts and circumstances in which an auditor will—and will not—be deemed +independent are set forth in Rule 2-01 of Regulation S-X. Rule 2-01(c) provides a non-exclusive +list of specific relationships that render an accountant non-independent. Rule 2-01(b) provides the +“general standard” for auditor independence, which all auditors must meet even if their conduct +does not fall within one of the non-exclusive specific prohibitions that render an accountant non- +independent in Rule 2-01(c). In drafting Rule 2-01 in this manner, the Commission never intended +to identify and describe in detail all relationships between an auditor and a client that could impair +independence; Rule 2-01(c) states that it is a “non-exclusive” description of relationships that +impair independence, and the preliminary note to the Rule states that, “(t)he rule does not purport + +7 The Commission has stated that for audit reports issued on or after May 24, 2004, the reference in Rule 2- +02(b)(1) to GAAS means the standards of the PCAOB plus any applicable Commission regulations, both of which +require an auditor to be independent of its client. See Commission Guidance Regarding the Public Company +Accounting Oversight Board’s Auditing and Related Professional Practice Standard No. 1, Exchange Act Rel. No. +49708, 2004 WL 1439831, at *2 (May 14, 2004); see also PCAOB Rule 3520 (“A registered public accounting firm +and its associated persons must be independent of the firm’s audit client throughout the audit and professional +engagement period.”); PCAOB Auditing Standards, AU Section 220.03. +11 +to, and the Commission could not, consider all circumstances that raise independence concerns, +and these are subject to the general standard [in Rule 2-01(b).]” (Emphasis added). +41. The language of the general standard, Rule 2-01(b) of Regulation S-X, provides: +[t]he Commission will not recognize an accountant as independent, with respect to +an audit client, if the accountant is not, or a reasonable investor with knowledge of +all relevant facts and circumstances would conclude that the accountant is not, +capable of exercising objective and impartial judgment on all issues encompassed +within the accountant’s engagement. In determining whether an accountant is +independent, the Commission will consider all relevant circumstances, including all +relationships between the accountant and the audit client, and not just those relating +to reports filed with the Commission. +17 C.F.R. § 210.2-01(b) (Emphasis added). As the Commission recognized “[t]he appearance +standard incorporated in the general standard is an objective one. Appearance is measured by +reference to a reasonable investor. The ‘reasonable person’ standard is embedded in the law +generally. In particular, the ‘reasonable investor’ standard is reflected in the concept of materiality +under the federal securities laws.” See Adopting Release. This standard applies with equal force to +both individual accountants and the audit firms in which they practice. See 17 C.F.R. § 210.2- +01(f) (1). +42. A reasonable investor with knowledge of all relevant facts and circumstances +concerning Audit Firm’s RFP conduct would conclude that Audit Firm was not capable of +exercising objective and impartial judgment for the 2015 audit and engagement period. + +43. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require public issuers +to file annual reports with the Commission that have been audited by an independent accountant. +An issuer violates Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder when +it files annual reports with the Commission that fail to include financial statements audited by an +independent public accountant. Similarly, an issuer violates Section 13(a) of the Exchange Act and +Rule 13a-13 thereunder when it files with the Commission quarterly reports that fail to include +interim financial statements reviewed by an independent public accountant. Because Issuer’s 2015 +annual and quarterly reports were neither audited nor reviewed by a public accountant who was +independent within the meaning set forth in Rule 2-01 of Regulation S-X, Issuer violated Section +13(a) and Rules 12b-20, 13a-1 and 13a-13. + +44. An issuer violates Section 14(a) of the Exchange Act and Rule 14a-9 thereunder +when such issuer files with the Commission a proxy statement that contains materially false or +misleading information. Similarly, an issuer violates Section 13(a) of the Exchange Act and Rules +12b-20 and 13a-11 thereunder when such issuer files a current report on Form 8-K reports that +12 +contains materially false or misleading information. Because Issuer issued misleading filings that +purported or made representations that it did regarding Issuer’s Audit Committee approval process +and the RFP “competitive search process” in disclosures to its November 11, 2014 Form 8-K and +its April 2, 2015 Proxy Statement, which were not true and accurate when made, Issuer violated +Sections 13(a) and 14(a) and Rules 12b-20, 13a-11, and 14a-9 thereunder. Issuer’s Form 10-K +incorporated the April 2, 2015 Proxy Statement by reference. Stiehl reviewed and authorized +Issuer’s disclosures. + +45. Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, and Section 4C(a)(3) of +the Exchange Act, permit the Commission to censure a person or deny a person the privilege of +appearing or practicing before it after finding that person “willfully violated, or willfully aided and +abetted the violation of any provision of the Federal securities laws of the rules and regulations +thereunder.” 17 C.F.R. 201.102(e)(1)(iii); 15 U.S.C. Section 78d-3(a)(3). + +V iolations + +46. As a result of the conduct described above, Stiehl caused and willfully aided and +abetted Issuer’s violations of Sections 13(a) and 14(a) of the Exchange Act and Rules 12b-20, 13a- +1, 13a-11, 13a-13, and 14a-9 promulgated thereunder during the relevant period and for the +purposes of Rule 102(e)(1)(iii). + +F. FINDINGS + + 47. Based on the foregoing, the Commission finds that Stiehl caused and willfully aided +and abetted Issuer’s violations of Sections 13(a) and 14(a) of the Exchange Act and Rules 12b-20, +13a-1, 13a-11, 13a-13, and 14a-9 promulgated thereunder. Stiehl’s willful aiding and abetting of +Issuer’s violations of Section 13(a) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a- +11, 13a-13, and 14a-9 thereunder constituted violations of the Federal securities laws and +regulations within the meaning of Sections 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Stiehl’s Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: +A. Respondent Stiehl shall cease and desist from committing or causing any violations +and any future violations of Sections 13(a) and 14(a) of the Exchange Act, and Rules +12b-20, 13a-1, 13a-11, 13a-13, and 14a-9 promulgated thereunder. +13 +B. Respondent Stiehl is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. After two years from the date of this Order, Stiehl 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 (other than as a member of an audit committee, +as that term is defined in Section 3(a)(58) of the Securities Exchange +Act of 1934). Such an application must satisfy the Commission that +Stiehl’s work in his practice before the Commission as an accountant +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. 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 as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + 3. an independent accountant. +Such an application must satisfy the Commission that: + +(a) Stiehl, 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) Stiehl, or the registered public ac counting 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 respondent’s or the +firm’s quality control system that would indicate that Stiehl will not +receive appropriate supervision; +14 +(c) Stiehl 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) Stiehl 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. + D. The Commission will consider an application by Stiehl 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 Stiehl’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission as an accountant. +Whether an application demonstrates good cause will be considered on a +facts and circumstances basis with due regard for protecting the integrity of +the Commission’s processes. + E. Stiehl shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $51,000 to the Securities and Exchange Commission +for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. §3717. +Payment must be made in one of the following ways: +(1) Stiehl may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; +(2) Stiehl 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) Stiehl 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 +15 +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 William G. Stiehl, CPA as a Respondent in these proceedings, and the +file number of these proceedings; a copy of the cover letter and check or money +order must be sent to Tracy L. Price. Esq., Deputy Chief, FCPA Unit, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, +DC 20549-5631. + F. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Stiehl agrees that in +any Related Investor Action, he shall not argue that he is entitled to, nor shall he +benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Stiehl’s payment of a civil penalty in this action ("Penalty +Offset"). If the court in any Related Investor Action grants such a Penalty Offset, +Stiehl agrees that he shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission's counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment +shall not be deemed an additional civil penalty and shall not be deemed to change +the amount of the civil penalty imposed in this proceeding. For purposes of this +paragraph, a "Related Investor Action" means a private damages action brought +against Stiehl by or on behalf of one or more investors based on substantially the +same facts as alleged in the Order instituted by the Commission in this proceeding. + +16 + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Stiehl, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts +due by Stiehl 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 Stiehl of the +federal securities laws or any regulation or order issued under such laws, as set forth in Section +523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4239.txt b/raw/aaer/2021/AAER-4239.txt new file mode 100644 index 0000000000000000000000000000000000000000..fa4303ca3251c88268eab6996a9383e51e82d128 --- /dev/null +++ b/raw/aaer/2021/AAER-4239.txt @@ -0,0 +1,879 @@ +Page 1 of 23 + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92540/ August 2, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4239 / August 2, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20447 + + +In the Matter of + +ERNST & YOUNG LLP, +JAMES G. HERRING, JR., CPA, +JAMES A. YOUNG, CPA, +AND CURT W. FOCHTMANN, +CPA, + +Respondents. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) OF +THE COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Ernst & +Young LLP (“EY”), James G. Herring, Jr., (“Herring”), James A. Young (“Young”), and Curt W. +Fochtmann (“Fochtmann”) (collectively, the “Respondents”) pursuant to Sections 4C1 and 21C of +the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess +the requisite qualifications to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and +abetted the violation of, any provision of the securities laws or the rules and regulations issued thereunder. +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. +2 +II. + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (each, an “Offer” and collectively, the “Offers”), which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over +Respondents and the subject matter of these proceedings, which are admitted, and except as +provided herein in Section V as to Herring, Young, and Fochtmann, Respondents consent to the +entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to +Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s +Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist +Order (“Order”), as set forth below. +III. + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: +A. SUMMARY + +1. This matter involves improper professional conduct by EY, a public accounting +firm, from 2014 through 2015 and EY audit partners James “Jay” Herring (“Herring”) and James +“Jay” Young (“Young”), and EY tax partner Curt Fochtmann (“Fochtmann”) (collectively, “EY +Partners”) in connection with their pursuit to serve as the independent auditor for a United States +publicly-traded company and SEC-Registrant (“Issuer”). +2. Throughout 2014, EY Partners and Issuer’s then-CAO and controller (“CAO”) +improperly interfered with the Request for Proposal (“RFP”) process initiated and overseen by +Issuer’s Audit Committee to select an independent auditor for fiscal year 2015. By and through +EY Partners, EY solicited and obtained from CAO competitive bid and other confidential +documents and information on multiple occasions in an effort to secure the audit engagement. EY +regional management and national leadership were, or should have been, aware of the conduct +undertaken by EY Partners in connection with ultimately winning the engagement. +3. EY and EY Partners should have known that the manner in which EY obtained the +engagement would cause a reasonable investor to conclude that EY was not capable of exercising +objectivity and impartiality upon becoming Issuer’s independent auditor and that such conduct +therefore would result in a violation of the Commission’s and the Public Company Accounting +Oversight Board (“PCAOB”)’s auditor independence rules. EY, by and through Herring and + + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. +3 +Young, made representations that it was independent in audit reports that were included in or +incorporated by reference into Issuer’s public filings for 2015. EY, through Herring and Young, +also reviewed and provided edits to Issuer’s 2014 and 2015 public statements that Issuer’s Audit +Committee approved the selection of EY “to serve as the Company’s Independent Registered +Public Accounting Firm for the fiscal year ending December 31, 2015 following a competitive +search process.” +4. At the time of selection and appointment by the Audit Committee, Issuer became +EY Charlotte, North Carolina’s largest audit client. During fiscal year 2015, EY collected audit, +tax, and other services fees of over $13 million from Issuer. +5. After Issuer learned of the RFP-related conduct on May 2, 2019, Issuer’s Audit +Committee conducted an internal investigation and terminated CAO’s employment on June 19, +2019. The next day, the Audit Committee publicly announced in Issuer’s Form 8-K that CAO’s +employment had been terminated for cause. On August 7, 2019, Issuer’s Audit Committee +unanimously terminated EY’s audit engagement and approved the engagement of another firm as +Issuer’s independent audit firm. On August 12, 2019 the Audit Committee publicly announced in +Issuer’s Form 8-K that EY was dismissed because of the “pendency of the SEC investigation, +along with the [Audit] Committee’s dissatisfaction with information it learned about the process by +which EY was selected as auditor. . . .” +6. For the reasons set forth below, EY violated Rule 2-02(b)(1) of Regulation S-X and +caused Issuer’s violations of Sections 13(a) and 14(a) of the Exchange Act and Rules 12b-20, 13a- +1, 13a-11, 13a-13, and 14a-9 promulgated thereunder. Young, Herring, and Fochtmann caused +EY’s violation of Rule 2-02(b)(1) of Regulation S-X and Herring and Young caused Issuer’s +violations of Sections 13(a) and 14(a) of the Exchange Act and relevant rules thereunder. EY also +failed to comply with the requirements of Rule 3526(a), which requires that before the initial +engagement, a prospective auditor must describe to the audit committee, in writing, all +relationships “that may be reasonably thought to bear on independence.” Respondents’ conduct +constituted improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. +B. RESPONDENTS + 7. Ernst & Young LLP (“EY”) is a professional service limited liability partnership, +headquartered in New York, New York, with offices located throughout the United States. It is a +member firm of Ernst & Young Global Limited and provides auditing, consulting, and tax services +to various entities, including companies whose securities are registered with the Commission and +trade in the U.S. markets. EY served as Issuer’s auditor from 2015 to August 2019. On August +4 +12, 2019, Issuer filed a Form 8-K dismissing EY and appointing another firm as Issuer’s +independent audit firm. + 8. James G. Herring, Jr., CPA (“Herring”), age 47, of Charlotte, North Carolina, is +an assurance partner at EY. Herring led EY’s RFP pursuit of Issuer in 2014 and then served as the +engagement partner on the EY engagement team that provided audit and other services to Issuer +from 2015 to March 2018. As the engagement partner, Herring supervised EY’s engagement to +audit and review Issuer’s financial statements.4 Herring is licensed as a CPA by the State of North +Carolina. + 9. James A. Young, CPA (“Young”), age 60, of Charlotte, North Carolina, was an +assurance partner at EY throughout the relevant period. Young joined EY’s RFP pursuit of Issuer +beginning in August 2014, and became the coordinating partner on Issuer’s engagement for the +fiscal year ending December 31, 2015.5 As coordinating partner on the Issuer engagement, Young +had final responsibility for the audits and quarterly reviews of Issuer’s financial statements from +2015 through August 2019. Young is licensed as a CPA by the States of North Carolina and Ohio. +He previously was licensed as a CPA by the State of Michigan from 2005 to 2017. Young retired +from EY in 2020. + 10. Curt W. Fochtmann, CPA (“Fochtmann), age 6 1, of Charlotte, North Carolina, +was a tax partner at EY as well as the EY Carolinas Tax Market Leader throughout the relevant +period. Fochtmann was on the EY RFP pursuit of Issuer and served as the tax partner on the +subsequent Issuer audit engagement teams from 2015 until May 2019. As the tax partner, +Fochtmann reviewed the work of, and supervised, EY’s tax professionals on the audit +engagement team who performed audit and review procedures related to Issuer’s income tax +accounting throughout that period. Fochtmann is licensed as a CPA by the State of North +Carolina and has been previously licensed as a CPA by the States of Alabama, Georgia, Ohio, +and Texas. Fochtmann retired from EY in 2020. +C. RELEVANT ISSUER AND INDIVIDUAL + 11. Issuer is a Fortune 500 multi-national company with substantial operations in the +United States. Issuer’s shares are registered with the Commission pursuant to Exchange Act + +4 The term “engagement partner” is used by EY to describe the second assurance partner on an audit engagement. +The engagement partner was not responsible for signing Issuer’s audit reports. + +5 The term “coordinating partner” is used by EY to describe the lead partner who signed the audit reports on EY’s +behalf on this engagement. +5 +Section 12(b) and listed on the New York Stock Exchange. Issuer files periodic reports, including +Forms 10-K and 10-Q, with the Commission pursuant to Exchange Act Section 13(a). + 12. CAO, a CPA, served as Issuer’s CAO and controller from January 2013 to October +2017, after which CAO served as Issuer’s acting and then permanent CFO until his employment +was terminated in June 2019. Before working for Issuer, CAO was employed as an auditor at a +public accounting firm and in various internal audit and senior financial accounting roles at two +public companies. +D. FACTS +Background + +13. Among other engagements from 2004 through December 2012, Herring served as a +manager and senior manager on EY audit teams for two public companies at which CAO served in +internal audit and senior financial accounting roles. CAO was one of the primary contacts to +Herring and the EY teams on those engagements. During those eight years, CAO and Herring +worked closely together, and CAO came to view Herring as a trusted advisor. + +14. In January 2013, Issuer, which was then headquartered in New Jersey, hired CAO +as its controller and CAO. At the time, another accounting firm had served as Issuer’s independent +auditor for decades. Beginning in February 2013, CAO participated in internal discussions at +Issuer about initiating an RFP process to solicit competitive bids from audit firms for Issuer’s +independent audit work. + +CAO Provided Herring With Confidential Information +Before the Issuance of the RFP + +15. As Issuer worked internally to initiate the RFP process, CAO began to provide +certain confidential information to Herring. In August 2013, CAO provided Herring and EY with +a draft RFP presentation to Issuer’s Audit Committee. CAO did not provide this pre-RFP +confidential information to any other audit firm. In May 2014, for example, CAO called Herring +to provide EY with exclusive news regarding the timing of Issuer’s upcoming RFP. During this +call, CAO also shared confidential news of Issuer’s pending relocation of its corporate +headquarters to Charlotte, North Carolina. + +16. CAO allowed EY to assist in drafting portions of Issuer’s RFP before it was +publicly released and arranged for Herring to meet with CAO’s financial personnel at least a month +before other firms’ personnel were invited to do so. An internal EY victory ‘case study’ prepared +shortly after EY was awarded the Issuer audit described this access as a “head start none of the +6 +other firms were given.” This exclusive access also ultimately led to CAO adding, at another EY +partner’s suggestion, over $1 million in global compliance tax services to Issuer’s RFP. +Issuer’s Audit Committee Sought a Competitive and Fair RFP Process +17. On July 14, 2014, after Issuer’s Audit Committee authorized the RFP’s +requirements and rules, Issuer invited EY and three other audit firms, including Issuer’s then- +incumbent audit firm, to submit bids in what the Audit Committee intended to be a competitive and +fair RFP process. The RFP documents stated that Issuer intended that the process would allow all +prospective “Independent Registered Public Accounting Firm[s]” an “equal opportunity to provide +their best proposals” to Issuer’s Audit Committee. At the time, Issuer’s Audit Committee was not +aware that EY already had obtained confidential information about and relevant to the RFP from +CAO. +18. Issuer’s RFP stated that all non-public information submitted by the audit firms +competing in the RFP would be treated as confidential. Each of the audit firms competing in the +RFP signed a bi-lateral Non-Disclosure Agreement (“NDA”) in connection with the process. +Issuer’s RFP set forth specific instructions regarding the timing of all submissions and fair and +equal access to key audit and financial information in a web-based data room. The RFP also +contained a “Conflicts of Interest” paragraph, which made clear that all competitors that submitted +proposals represented that: (i) Issuer personnel have not participated in the preparation of the +firm’s proposal; and (ii) Issuer personnel have not conveyed to the competitors any information +pertaining to this RFP. +CAO Unilaterally Provided EY with Confidential Competitive Bids and Audit Committee +Materials without Audit Committee Authorization +19. By signing the NDA, EY agreed to comply with the RFP process as set forth in +Issuer’s RFP documents. Without Audit Committee authorization, CAO provided EY, through +Herring, with competing firms’ proposals and submissions, the details of each competitive bid, and +all of the internal documents prepared for Issuer’s Audit Committee, often before the Audit +Committee itself received them. Despite the clear contravention of the RFP process and EY’s +obligation under the NDA, on receipt, Herring shared this information with Young, Fochtmann, +and other members of the EY engagement and pursuit teams, who then shared the competing +firms’ proposals and certain other unauthorized confidential information with EY regional and +national leadership. +20. CAO also gave EY an “open invitation” to provide “suggestions or comments” to +RFP materials summarizing each competitors’ proposals that were going to the Audit Committee. +(E.g., Herring email to Young, Fochtmann, and others: “See attached for materials that are going +to A[udit] C[ommittee] for meeting next Tuesday. If you have any suggestions or comments we +can provide to [CAO], we have an open invitation.”) (emphasis added). On multiple occasions +7 +during the RFP process, Respondents solicited and received information from CAO outside of the +RFP’s web-based data room, including “integral” incumbent fee information, which enabled EY to +“come up with an informed fee for the RFP.” +21. EY Partners knew or should have known that EY often was the sole recipient of +valuable competitive intelligence (e.g., Herring email to Young, Fochtmann and other EY +engagement and pursuit team members: “[CAO] asked that I review and provide any +comments/feedback before [CAO] sends [the RFP Audit Committee survey] to the Audit +Committee. Keep in mind that this is for our benefit and will not be shared with the other firms. +Please provide comments by end of day today so I can share with [CAO] tomorrow am.” +(emphasis added)). Similarly, EY Partners and EY ignored various indicators that should have +made it apparent that CAO was not acting with the Audit Committee’s authority or with the +knowledge or approval of Issuer’s senior management. +22. On September 15, 2014, EY and three other competing audit firms submitted their +initial confidential bid proposals to Issuer. The proposals contained detailed staffing and billing +information, including Excel spreadsheets that included hundreds of engagement team names and +email addresses, specific billing rates, budgeted hours, proposed bid amounts, and staffing levels +covering dozens of international jurisdictions. CAO immediately forwarded the complete bid +proposals provided by two competing audit firms, including all supporting Excel spreadsheets, to +Herring. In a footnote below its table of contents, the incumbent firm’s bid proposal expressly +included an “irreparable harm” confidentiality provision. On the early morning of September 16, +2014, Herring asked for a copy of the third competing audit firm’s bid proposal, which CAO +emailed in its entirety to Herring later that same morning. CAO later asked EY, through Herring, +for “some . . . stats that I would be able to use in the [Audit Committee] presentation” to portray +another competing firm as having insufficient audit experience to support a potential client of +Issuer’s size and EY obliged. CAO then used that information to inform Issuer’s Audit Committee +that “[Issuer] account would be nearly twice the size as their biggest global client.” + +EY Used the Competitive Intelligence and Confidential Bid Information It Received + +23. EY used the competitive intelligence and confidential bid information provided to it +by CAO for EY’s own benefit by broadly circulating it throughout EY, including to EY partners +contemporaneously pursuing other RFP opportunities. EY Business Development personnel +working on Issuer’s RFP shared, sometimes within hours of receipt, competitors’ full bid proposals +with over 20 EY individuals outside the Issuer pursuit, including personnel in regional and national +leadership positions. As one example of how quickly and how far EY disseminated the +competitive intelligence gained from these proposals, on September 19, 2014, EY’s Business +Development department circulated an email to at least 180 EY professionals entitled “Competitive +Intelligence – Technology and Project Management.” The email attached a 26-slide PowerPoint +8 +attachment, and, in relevant part, stated that the intelligence contained in that PowerPoint was +based largely on: “…recently received competitive proposals [names of audit firms identified] on +an active F500 audit pursuit thanks to a trusted relationship by one of our partners.” (emphasis +added). + +24. Without the Audit Committee’s knowledge and in contravention of the RFP, +Respondents also were able to use CAO and the confidential information provided by CAO to +influence the Audit Committee at multiple stages throughout the RFP process. For example, on +October 3, 2014, CAO sent EY, through Herring, “the slide deck that I plan to share in executive +committee,” and asked Herring to share “additional talking points that you think might be +beneficial” before CAO met with the Audit Committee to present CAO’s views of the competing +firms. CAO’s 16-page slide deck identified each competing audit firm by “Key Qualitative +Highlights,” “Pros and Cons,” and bid amount. Three days later, on October 6, 2014, after +soliciting comments from Young, Fochtmann, and others within EY’s engagement and pursuit +teams, Herring provided CAO with a detailed list of additional “Cons” against the incumbent audit +firm, including one that Herring stated was a “big negative the [Audit Committee] would be +interested in” and additional “Pros” in favor of EY, including one that Herring urged “maybe you +[CAO] could play that up” prior to the Audit Committee’s scheduled down-selection meeting on +October 7, 2014. To that end, Herring informed Young, Fochtmann, and EY regional leadership: +“I traded messages with [CAO] and spoke to [CAO] this weekend. I think we are in good shape +going into the A[udit] C[ommittee] meeting. They plan to verbally differentiate during the +meeting. I sent [CAO] a list of things [CAO] can use during the meeting to help with that.” +(emphasis added). + +25. On October 8, 2014, unaware of the above-described conduct, the Audit Committee +selected two RFP finalists, the incumbent audit firm and EY. The Audit Committee instructed the +two firms to make their final bids at the end of October, which pursuant to the RFP would be +submitted on the same day. The Audit Committee instructed CAO to give both firms “the same +opportunity to sharpen their pencils for this last round.” + +EY Solicited and Obtained Key Confidential Competitive Information +in Contravention of the RFP Instructions + +26. On October 30, 2014, the incumbent audit firm asked CAO in an email—which +CAO immediately forwarded to Herring—whether “we (and E&Y) [were] to re-submit fees” the +next day in accordance with “protocol and the preferred process.” CAO replied “Yes, if there is +any change in fees, then you can resubmit tomorrow.” Later that same day, CAO met Herring for +dinner and they, along with Fochtmann and others from EY and Issuer attended a National +Football League game in EY’s suite in Charlotte, North Carolina. + +9 +27. In contrast to CAO’s instructions to the incumbent firm, on October 30, 2014, CAO +informed EY, through Herring: “FYI – sounds like [incumbent audit firm] may be changing their +number but have no idea to what extent. We can talk Friday after I receive [incumbent’s revised +proposal]. Don’t send me anything yet.” + +28. On October 31, 2014, the incumbent audit firm submitted a 20-page revised bid +proposal with audit fee reductions of five percent, which CAO forwarded to Herring and +Fochtmann seven minutes later. EY, through Herring, then solicited additional information about +the incumbent audit firm’s revised bid, which CAO obtained from the incumbent audit firm and +forwarded to Herring. + +29. EY did not file its own proposal until five days later, during which time, CAO and +EY, by and through EY Partners, agreed upon a final bid number that was almost identical to the +incumbent audit firm’s revised bid. In fact, although EY’s final bid was slightly higher than the +incumbent firm’s final bid (once budgeted expenses were taken into consideration), CAO deleted +those expense amounts from the final bid summary information that CAO gave to the Audit +Committee, which created the appearance that EY’s bid was lower. + +30. Shortly after EY submitted its final bid number—and six days before the Audit +Committee made its appointment—CAO emailed a draft Form 8-K to EY and asked Herring and +Young for edits. The draft Form 8-K identified EY as the newly selected independent auditor. +CAO did not email the incumbent audit firm this draft Form 8-K. Young provided the requested +edits on behalf of EY. + +31. CAO’s provision of the incumbent’s final bid and proposal to Respondents before +EY filed its own enabled EY to make its fee submission and shape its oral presentation and final +bid and proposal to the Audit Committee based on what it saw in the incumbent audit firm’s final +bid and proposal. EY modified its written and oral presentation after receiving information from +CAO. Not only did EY modify its fees, but it also added personnel to the presentation, changed its +representations regarding its overall portfolio, and amended its response to recent audit wins +highlighted by the incumbent audit firm in its final proposal. Despite the terms of the RFP, EY +received both its competitor’s confidential final bid and proposal and then additional time to +submit its own. These were red flags that Respondents should have acted upon and scrutinized. +EY should have but failed to recognize that CAO was likely not authorized by the Audit +Committee to share incumbent’s updated bid and proposal. +32. On November 11, 2014, the morning of the final oral presentations to Issuer’s Audit +Committee, CAO provided Herring with the final “top level summary the board will see, and will +refer to during the executive session[,]” adding that it was “[j]ust a comparison of the two firms to +10 +facilitate the discussion. But again some of the big arguing points, I have left off, so that I can just +verbalize.” + +33. That same day, the Audit Committee unanimously selected and appointed EY as +Issuer’s new auditor. In an email to EY’s national leadership, EY Partners characterized the +appointment as a “$10 million a year annuity which will span across multiple service lines.” That +night, CAO sent another EY partner (CAO’s former college roommate), a congratulatory email +with the message: “Back in the family!!!” + +34. On behalf of EY , on November 11, 2014 and February 6, 2015, Y oung signed two +separate letters to Issuer’s Audit Committee that purported to disclose in writing all matters that +could reasonably bear on EY’s independence of Issuer upon the initiation of the audit engagement, +as required by PCAOB rules. Neither of these letters mentioned nor otherwise disclosed EY and +Respondents’ RFP-related conduct. + +35. On November 14, 2014, Issuer filed its Form 8-K announcing: “Audit Committee +of the Board of Directors . . . of [Issuer] approved the selection of Ernst & Young LLP to serve as +the Company’s independent registered public accounting firm for the fiscal year ending December +31, 2015 following a competitive search process.” This representation was materially false and +misleading, because the RFP process was not competitive. EY , through Herring and Young, +substantially reviewed and edited Issuer’s representation (in the 2014 Form 8-K and a subsequent +2015 Proxy Statement) that Issuer’s Audit Committee approval process was subject to a +“competitive search process.” + +Neither EY Nor EY Partners Disclosed Their RFP-Related Conduct to the Audit +Committee or Other Members of Issuer’s Senior Management + +36. Respondents did not disclose their RFP-related conduct to the Audit Committee or +other member of Issuer’s senior management. In June 2019, after the Audit Committee discovered +the RFP-related conduct, Issuer’s Audit Committee unanimously terminated CAO’s employment +for cause and, in August 2019, terminated EY’s engagement. + +37. Audit reports issued on Issuer’s 2015 financial statements, which were included or +incorporated by reference in public filings with the Commission, indicated that EY was +independent. EY , through Herring and Y oung, substantially reviewed and provided edits to +Issuer’s representations disclosed in a 2014 Form 8-K and a 2015 Proxy Statement that Issuer’s +Audit Committee approved the selection of EY “to serve as the Company’s independent registered +public accounting firm for the fiscal year ending December 31, 2015” following a “competitive +search process.” +11 +EY’s Quality Control System + +38. SEC Rules and PCAOB standards require auditors to be independent of SEC- +registrant audit clients. PCAOB quality standards require audit firms to establish policies and +procedures “to provide the firm with reasonable assurance that personnel maintain independence +(in fact and appearance) in all required circumstances.” (QC 20.09) Audit firms are required to +monitor on an ongoing basis whether personnel are complying with the independence +requirements. (QC 20.08) Such quality controls must be suitably designed in relation to, among +other factors, the firm’s size, number of officers, and nature and complexity of the firm’s practice. +(QC 20.04). +39. During the relevant period, EY maintained a global code of conduct as well as +policies and procedures regarding auditor independence, ethics, and integrity. EY trained and +tested its audit professionals on those policies. EY required audit engagement teams for public +company clients, including Issuer, to follow certain pre-engagement, annual, and quarterly review +procedures to assess EY’s independence from those audit clients. During the relevant period, EY’s +policies and procedures addressed possible familial, employment, financial relationships, and other +relationships between Issuer and EY that are expressly prohibited by Commission’s auditor +independence Rules 2-01(c)(1)-(6), (8). +40. During the relevant period, EY required each audit engagement team member to +certify he or she was independent of the audit client and that he or she had read, understood, and +complied with EY’s policies on independence. Outside of procedures that were specific to +individual audit clients, EY also required all audit professionals to certify on an annual basis, and +audit professionals at the level of manager and above on a quarterly basis, that they read +understood, and complied with EY’s internal policies on independence. Herring, Young, and +Fochtmann repeatedly certified (in quarterly and annual certifications) that they were independent +from Issuer and in compliance with EY’s policies on independence. +41. Despite these policies and procedures, EY’s quality control system did not +effectively provide reasonable assurance that the firm and its employees maintained independence +(in fact and appearance) in all required circumstances; namely, as applied to current and potential +SEC-Registered audit clients during RFP and other pursuits. Specifically, EY did not: (a) have +any internal policies and procedures providing its personnel with guidance on how to identify and +avoid conduct and behavior during the audit pursuit phase that could potentially violate SEC rules +and PCAOB standards; (b) provide its personnel with any training, supervision, or consultation +mechanism to provide reasonable assurances that they maintained heightened scrutiny toward +independence during RFP and other pursuits; and (c) review or monitor its audit teams or business +development personnel engaged in RFP and other pursuits for compliance with SEC rules and +PCAOB rules and standards regarding audit independence, ethics, and integrity. +12 +E. LEGAL ANALYSIS +42. As the Commission has long recognized, “[i]ndependent auditors have an important +public trust. . . It is the auditor’s opinion that furnishes investors with critical assurance that the +financial statements have been subjected to a rigorous examination by an objective, impartial, and +skilled professional, and that investors, therefore, can rely on them.” Revision of the Commission’s +Auditor Independence Requirements, Exchange Act Rel. No 43602, 2000 WL 1726933, at *2 +(Nov. 21, 2000) (“Adopting Release”). Accordingly, Rule 2-02(b)(1) of Regulation S-X requires +each auditor’s report on a public issuer’s financial statements to state “whether the audit was made +in accordance with generally accepted auditing standards” (“GAAS”), including auditing standards +set forth in PCAOB rules and Commission regulations.6 +43. In the Adopting Release, the Commission made clear that: “the general standard in +paragraph (b) [of Rule 2-01] recognizes that an auditor must be independent in fact and +appearance.” Similarly, the preliminary note to Rule 2-01 of Regulation S-X provides that: +“Section 210.2-01 is designed to ensure that auditors are qualified and independent of their audit +clients both in fact and in appearance.” GAAS, in turn, requires auditors to be independent from +their clients in both fact and appearance. PCAOB Rule 3520; PCAOB Auditing Standards, +Independence, AU § 220.03. Independence in fact and appearance are “equally important under +the securities laws.” In the Matter of Ernst & Young LLP, Exchange Act Rel. No. 46821, 2004 WL +824099, at *30 (Apr. 16, 2004); see also United States v. Arthur Young & Co., 465 U.S. 805, 819 +n.15 (1984) (“It is therefore not enough that financial statements be accurate; the public must also +perceive them as being accurate.”) +44. The facts and circumstances in which an auditor will—and will not—be deemed +independent are set forth in Rule 2-01 of Regulation S-X. Rule 2-01(c) provides a non-exclusive +list of specific relationships that render an accountant non-independent. Rule 2-01(b) provides the +“general standard” for auditor independence, which all auditors must meet even if their conduct +does not fall within one of the non-exclusive specific prohibitions that render an accountant non- +independent in Rule 2-01(c). In drafting Rule 2-01 in this manner, the Commission never intended +to identify and describe in detail all relationships between an auditor and a client that could impair +independence; Rule 2-01(c) states that it is a “non-exclusive” description of relationships that +impair independence, and the preliminary note to the Rule states that, “(t)he rule does not purport + +6 The Commission has stated that for audit reports issued on or after May 24, 2004, the reference in Rule 2- +02(b)(1) to GAAS means the standards of the PCAOB plus any applicable Commission regulations, both of which +require an auditor to be independent of its client. See Commission Guidance Regarding the Public Company +Accounting Oversight Board’s Auditing and Related Professional Practice Standard No. 1, Exchange Act Rel. No. +49708, 2004 WL 1439831, at *2 (May 14, 2004); see also PCAOB Rule 3520 (“A registered public accounting firm +and its associated persons must be independent of the firm’s audit client throughout the audit and professional +engagement period.”); PCAOB Auditing Standards, AU Section 220.03. +13 +to, and the Commission could not, consider all circumstances that raise independence concerns, +and these ar e subject to the general standard [in Rule 2-01(b)].” (emphasis added) +45. The language of the general standard, Rule 2-01(b) of Regulation S-X, provides: +[t]he Commission will not recognize an accountant as independent, with respect to +an audit client, if the accountant is not, or a reasonable investor with knowledge of +all relevant facts and circumstances would conclude that the accountant is not, +capable of exercising objective and impartial judgment on all issues encompassed +within the accountant’s engagement. In determining whether an accountant is +independent, the Commission will consider all relevant circumstances, including all +relationships between the accountant and the audit client, and not just those relating +to reports filed with the Commission. +17 C.F.R. § 210.2-01(b) (emphasis added). As the Commission recognized “[t]he appearance +standard incorporated in the general standard is an objective one. Appearance is measured by +reference to a reasonable investor. The ‘reasonable person’ standard is embedded in the law +generally. In particular, the ‘reasonable investor’ standard is reflected in the concept of materiality +under the federal securities laws.” See Adopting Release. This standard applies with equal force to +both individual accountants and the audit firms in which they practice. See 17 C.F.R. § 210.2-01(f) +(1). +Violations + +46. As a result of the conduct described above, Herring, Young, and Fochtmann lacked +independence from Issuer and violated Rule 2-01(b)’s general standard for the 2015 financial +statement audit and review periods. A reasonable investor with knowledge of all relevant facts and +circumstances concerning RFP conduct by Herring, Young, and Fochtmann would conclude that +each of them were not capable of exercising objective and impartial judgment for the 2015 audit +and engagement period. + +47. As a result of the conduct described above, EY violated Rule 2-01(b) for the 2015 +financial statement audit and review periods. As the Commission noted in the Adopting Release +for the revisions to Rules 2-01 and 2-02, the “[d]efinition of ‘accountant’ includes the accounting +firm in which the auditor practices. The definition makes clear that an individual accountant’s lack +of independence may be attributed to the firm.” Adopting Release, Exchange Act Rel. No. 43602, +2000 WL 1726933, at *86. A reasonable investor with knowledge of all relevant facts and +circumstances concerning EY’s RFP conduct would conclude that EY was not capable of +exercising objective and impartial judgment upon initiation of the 2015 audit and engagement +period. + +14 +48. As a result, EY violated Rule 2-02(b)(1) of Regulation S-X by falsely certifying +that its report for the 2015 audit period was conducted in accordance with PCAOB standards, when +in fact the firm lacked independence during that audit and professional engagement period and +violated the requirements of the rule. EY also signed 2014 and 2015 PCAOB Rule 3526 letters to +Issuer’s Audit Committee that did not disclose the RFP conduct and incorrectly certified that EY +was not aware of any matters that could bear on independence. + +49. Herring, Y oung, and Fochtmann caused EY’s violations of Rule 2-02(b)(1). + +50. EY , Herring, and Y oung caused Issuer to violate Section 13(a) of the Exchange Act +and relevant rules thereunder. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder +require public issuers to file annual reports with the Commission that have been audited by an +independent accountant. An issuer violates Section 13(a) of the Exchange Act and Rules 12b-20 +and 13a-1 thereunder when it files annual reports with the Commission that fail to include financial +statements audited by an independent public accountant. Similarly, an issuer violates Section 13(a) +of the Exchange Act and Rule13a-13 thereunder when it files with the Commission quarterly +reports that fail to include interim financial statements reviewed by an independent public +accountant. EY, Herring, and Y oung caused Issuer’s violation of Section 13(a) and Rules 12b-20, +13a-1 and 13a-13 because: (1) they knew or should have known that the conduct during the RFP +deprived Issuer of an independent auditor during the 2015 audit and review engagement period; +and (ii) EY issued an audit report that contained an unqualified opinion stating that it had +conducted an audit of Issuer’s annual financial statements in accordance with PCAOB standards. + +51. EY , Herring, and Y oung caused Issuer to violate Section 14(a) of the Exchange Act +and relevant rules thereunder. An issuer violates Section 14(a) of the Exchange Act and Rule 14a-9 +thereunder when such issuer files with the Commission a proxy statement that contains materially +false or misleading information. Similarly, an issuer violates Section 13(a) of the Exchange Act +and Rules 12b-20 and 13a-11 thereunder when such issuer files a current report on Form 8-K +reports that contains materially false or misleading information. EY , Herring, and Y oung caused +Issuer’s violation of Sections 13(a) and 14(a) and Rules 12b-20, 13a-11, and 14a-9 for conduct +resulting in Issuer issuing misleading filings that purported or made representations that it did +regarding Issuer’s Audit Committee approval process and the RFP “competitive search process” +articulated in the November 11, 2014 Form 8-K and the April 2, 2015 Proxy, which were not true +and accurate when made. Issuer’s Form 10-K incorporated the April 2, 2015 Proxy Statement by +reference. EY, through Herring and Y oung, reviewed and provided substantive changes to Issuer’s +disclosures. + +52. EY, Herring, Y oung, and Fochtmann engaged in improper professional conduct +pursuant to Rule 102(e)(ii) of the Commission’s Rules of Practice by virtue of the SEC and +PCAOB violations referenced herein. Rule 102(e)(1)(iv) and Section 4C(b)(2) of the Exchange +15 +Act define negligent “improper professional conduct” to include: “(i) [a] single instance of highly +unreasonable conduct that results in a violation of applicable professional standards” in +circumstances in which the “accountant,” in the case of Rule 102(e) or “registered public +accounting firm or associated person,” in the case of Section 4C(b)(2), “knows, or should know, +that heightened scrutiny is warranted;” and (ii) “[r]epeated instances of unreasonable conduct, each +resulting in a violation of applicable professional standards, that indicate a lack of competence to +practice before the Commission.” 17 C.F.R. § 201.102(e) (1) (iv)(B); 15 U.S.C. § 78d-3(b)(2). + +53. An auditor has an affirmative obligation to obtain the information that it needs to +assess independence. It is not free to rely solely on information provided by management when +warning signals or other factors should alert an accountant to potential independence violations. +The Commission has made clear that auditor independence is always an area requiring heightened +scrutiny. See Amendment to Rule 102(e) of the Commission’s Rules of Practice , Rel. Nos. 33- +7593, 34-40567, 1998 WL 729201, at *8 (October 19, 1998) (“Because of the importance of an +accountant’s independence to the integrity of the financial reporting system, the Commission has +concluded that circumstances that raise questions about an accountant’s independence always merit +heightened scrutiny. Therefore, if an accountant acts highly unreasonably with respect to an +independence issue, that accountant has engaged in ‘improper professional conduct.’”) The +Commission also has found negligent conduct where an auditor, when it knew or should have +known that independence was implicated, failed to gather all the salient, relevant facts pertinent to +the independence determination. See In re KPMG Peat Marwick LLP, Rel. No. 43862, 54 S.E.C. +1135, 1182-83 (January 19, 2001), reconsideration denied, Rel. Nos. 34-44050 and AAER-1374 +(March 8, 2001), petition for review denied, 289 F.3d 109 (D.C. Cir. 2002). +54. Under PCAOB Rule 3526(a), EY was required to disclose to the Audit Committee +in writing all matters that could reasonably bear on EY’s independence of Issuer upon the initiation +of the audit engagement. EY should have but failed to recognize that a reasonable investor with +knowledge of all relevant facts and circumstances would conclude that EY was not capable of +exercising objective and impartial judgment by virtue of the information it received during the +RFP. EY , by and through Y oung, failed to communicate its misconduct to the Audit Committee, as +required under PCAOB Rule 3526(a), before EY initiated the engagement. +55. As a result of the conduct described above, EY, Herring, Young, and Fochtmann +engaged in improper professional conduct under both prongs of the definition set forth in Rule +102(e)(1)(iv)(B) and Section 4C(b)(2) of the Exchange Act. + +F. FINDINGS + + 56. As a result of the conduct described above, the Commission finds that: (a) EY +violated Rule 2-02(b)(1) of Regulation S-X: (b) Herring, Young, and Fochtmann caused EY’s +violation of Rule 2-02(b)(1) of Regulation S-X; (c) EY, Herring and Young caused Issuer’s +16 +violations of Sections 13(a) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a- +13, and 14a-9 promulgated thereunder; and (d) EY, Herring, Young, and Fochtmann engaged in +improper professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and +Rules 102(e)(1)(ii) and 102(e)(1)(iv)(B) of the Commission’s Rules of Practice. Respondents’ +conduct involved repeated instances of unreasonable conduct, each resulting in violation of SEC +Rules or PCAOB standards and indicated a lack of competence. Respondents’ conduct also +satisfies the standard of highly unreasonable conduct resulting in violations of SEC Rules or +PCAOB standards in circumstances in which heightened scrutiny was warranted. +EY’s Remedial Efforts +57. In August 2020, EY introduced new policy and guidance concerning RFP and other +competitive proposal processes applicable to all SEC-Registered Audit Clients (“Channel 1 +Clients”).7 The new guidance, which is applicable to all EY personnel, includes a set of “specific +considerations” designed to assist professionals to identify and avoid relationships and behaviors, +such as the transmission of unauthorized confidential information, which might cause a reasonable +third party to question EY’s independence, ethics, and integrity during the pursuit process. It also +asks EY professionals to seek consultation where it is unclear whether information was authorized +or not. In November and December 2020, EY incorporated this new guidance into mandatory +independence training for all EY partners, principals, all client-serving personnel, and certain non- +client serving personnel. +58. In 2021, EY developed and initiated implementation of procedures intended to +measure compliance with, and the effectiveness of, its August 2020 Policy (the “Policy”). This +includes a process where participants in an audit pursuit for an SEC Registered Audit Client will +confirm periodically the information received in the pursuit and various certifications regarding +compliance with the Policy. The procedures also include ongoing monitoring and testing of +compliance by EY personnel. +59. In determining to accept EY’s Offer, the Commission considered the remedial acts +undertaken by EY. +Undertakings + 60. Respondent EY undertakes to complete the following actions: +a. Notification. Within ten (10) business days after entry of this Order EY shall provide +all audit, business development, and client-facing tax personnel with a copy of this + +7 For purpose of EY’s remedial efforts and undertakings, “Channel 1 Clients” includes both existing EY audit +clients and those that may become EY audit clients as a result of the proposal process. “Channel 1 Clients” also +encompasses all independence-restricted entities for which EY provides assurance services, including attestation +engagements. +17 +Order. + +b. EY Policies and Procedures. On an annual basis, review and update, as necessary, +internal policies and procedures , as described in Paragraphs 57 and 58, that have been +adopted to enhance EY’s ability to comply with the independence, conflict of interest, +ethics and integrity requirements under applicable Commission rules and PCAOB +standards concerning EY’s RFPs and other pursuits for all Channel 1 Clients +(hereinafter referred to as “Channel 1 Pursuit Policies and Procedures”). Channel 1 +Pursuit Policies and Procedures for EY include, guidance, training, professional +education, checklists, certifications, consultations, disclosure, reporting, testing, +monitoring, oversight, and special considerations, as appropriate. + +c. Reports to the Commission. Review, evaluate, and report to Commission staff +annually during a two-year term, as set forth herein, the effectiveness of, and +ongoing efforts to improve, EY’s Channel 1 Pursuit Policies and Procedures. During +this period, should EY discover credible evidence, not already reported to the +Commission staff, that non-compliant or improper professional RFP-related conduct +has taken place, EY shall promptly report such conduct to the Commission staff in +writing. During this two-year period, EY shall: (1) conduct an initial review and +submit an initial report (“Initial Report”), and (2) conduct and prepare one follow-up +review and report (“Final Report”), as described below: + +i. Initial Report. EY shall submit to the Commission staff a written report within +270 calendar days of the entry of this Order setting forth (i) a complete description +of the Channel 1 Pursuit Policies and Procedures and related remediation efforts to +date, including, but not limited to the areas of, EY implementation, monitoring, +testing, and oversight; (ii) an assessment as to whether EY’s Channel 1 Pursuit +Policies and Procedures are reasonably designed to detect and provide reasonable +assurance of compliance with the independence, conflict of interest, ethics, and +integrity requirements under applicable Commission and PCAOB regulations; and +(iii) a narrative description of any instances of non -compliance from the date of +the Order through the date of the Initial Report. EY may extend the time period +for issuance of the Initial Report with prior written approval of the Commission +staff. + +ii. Final Report. EY shall undertake and submit to the Commission staff one follow-up +review, incorporating any comments provided by the Commission staff on the +previous report, to further test, monitor, and assess whether its Channel 1 Pursuit +Policies and Procedures are reasonably designed to detect and provide reasonable +assurance of compliance with the independence, conflict of interest, ethics, and +18 +integrity requirements under applicable Commission and PCAOB regulations. The +Final Report shall also include a narrativ e description of any instances of non - +compliance from the date of the Initial Report through the date of the Final +Report. EY shall complete the Final Report no later than 640 days after the entry of +this Order. EY may extend the time period for issuance of the Final Report with +prior written approval of the Commission staff. + +iii. Review and Supervision: The Initial Report and Final Report shall be reviewed by +the U.S. Director of Professional Practice Quality & Regulatory Matters and +supervised by the U.S. Director of Quality Implementation , senior professionals +knowledgeable and experienced in the areas of independence, conflict of interest, +ethics, and integrity requirements under applicable Commission rules and PCAOB +standards, The Commission staff may make reasonable requests for further evidence +of compliance, and EY agrees to provide such evidence. +d. Certification. Within thirty (30) days of issuance of the Final Report, the EY U.S. Vice +Chair – Assurance shall certify, in writing, compliance with the undertakings set forth +above. The certification shall identify the undertakings, provide written evidence of +compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests for +further evidence of compliance, and EY agrees to provide such evidence. +e. Submissions to the Commission Staff: Unless otherwise directed by the Commission +staff, all Reports, Certifications, supporting materials and other documents required to +be provided to the Commission shall be sent to: James Valentino, Senior Counsel, +Division of Enforcement, Securities and Exchange Commission, 100 F Street, NE, +Washington, DC 20549-5631, or such other address as the Commission may provide, +with a copy to the Office of Chief Counsel of the Enforcement Division (the +“Designees”). +All such Reports, Certifications, and other documents submitted by EY likely will +include confidential financial, proprietary, competitive business or commercial +information. Public disclosure of the Reports could discourage cooperation, impede +pending or potential government investigations or undermine the objectives of the +reporting requirement. For these reasons, among others, the Reports, Certifications, and +other documents, and the contents thereof, are intended to remain and shall remain non- +public, except (1) pursuant to court order, (2) as agreed to by the parties in writing, (3) +to the extent that the Commission determines in its sole discretion that disclosure would +be in furtherance of the Commission’s discharge of its duties and responsibilities, or (4) +is otherwise required by law. +19 +f. Satisfaction of Undertakings. Unless otherwise notified by the Division of +Enforcement, these undertakings are deemed satisfied ninety (90) days after EY’s +submission of certification of compliance pursuit to Paragraph 60.d, as appropriate. +g. Recordkeeping. EY shall preserve and retain all documentation regarding all +certifications and reports for seven (7) years and will make them available to the staffs +of the Commission or the PCAOB upon request. +h. Deadlines. For good cause shown, the Commission staff may in its sole discretion +extend any of the procedural dates relating to the Undertakings. Deadlines for +procedural dates shall be counted in calendar days, unless otherwise specified. If the +last calendar day falls on a weekend or a federal holiday, the next business day shall be +considered to be the last day. +i. Petition to Reopen Matter. In determining whether to accept EY’s Offer, the +Commission has considered these undertakings. EY agrees that if the Division of +Enforcement believes that EY has not satisfied these undertakings, Commission staff +may petition the Commission to reopen the matter to determine whether additional +sanctions are appropriate. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + Accordingly, it is hereby ORDERED, effective immediately, that: +A. Respondents EY, Herring, and Young shall cease and desist from committing or +causing any violations and any future violations of Rule 2-02(b) of Regulation S-X, +Sections 13(a) and 14(a) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, +13a-13, and 14a-9 promulgated thereunder. + +B. Respondent Fochtmann shall cease and desist from committing or causing any +violations and any future violations of Rule 2-02(b) of Regulation S-X. + +C. Respondent EY is hereby censured. + +D. Respondent EY shall comply with the undertakings enumerated in Section III, +Paragraph 60 above. + +E. Respondents Herring, Young, and Fochtmann are denied the privilege of appearing +or practicing before the Commission as accountants. +20 +F. After 3 years from the date of this Order for Herring, after 2 years from the date of +this Order for Young, and after 1 year from the date of this Order for Fochtmann, +Respondents Herring, Young, and Fochtmann may separately request that the +Commission consider each of their reinstatements 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 (other than as a member of an audit committee, +as that term is defined in Section 3(a)(58) of the Securities Exchange +Act of 1934). Such an application must satisfy the Commission that +Respondent’s work in his practice before the Commission as an +accountant 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. 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 as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + 3. 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 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 ac counting 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 respondent’s or the +21 +firm’s quality control 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 + (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, concurring partner reviews and quality control standards. + G. The Commission will consider an application by Herring, Young or +Fochtmann 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 Herring, +Young, or Fochtmann’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission as an accountant. +Whether an application demonstrates good cause will be considered on a +facts and circumstances basis with due regard for protecting the integrity of +the Commission’s processes. +H. Respondent EY shall, within ten (10) days of the entry of this Order, pay a civil +money penalty in the amount of $10,000,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject +to Exchange Act Section 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. §3717. +I. Respondents Herring, Young, and Fochtmann shall, within ten (10) days of the +entry of this Order, each pay a civil money penalty in the amount of $50,000, +$25,000, and $15,000, respectively, to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act +Section 21F(g)(3). If timely payment is not made, additional interest shall accrue +pursuant to 31 U.S.C. §3717. +J. Payment must be made in one of the following ways: +22 +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying as appropriate either Ernst & Young LLP, Herring, Young, or +Fochtmann 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 +Tracy L. Price, Esq., Deputy Chief, FCPA Unit, Division of Enforcement, +Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549- +5631. + K. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondents agree +that in any Related Investor Action, EY, Herring, Young, and Fochtmann shall not +argue that they are entitled to, nor shall they benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondents’ +payment of a civil penalty in this action ("Penalty Offset"). If the court in any +Related Investor Action grants such a Penalty Offset, Respondents agree that they +shall, within 30 days after entry of a final order granting the Penalty Offset, notify +the Commission's counsel in this action and pay the amount of the Penalty Offset to +the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a "Related +Investor Action" means a private damages action brought against any of the +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. +23 +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 +Herring, Young, and Fochtmann, and further, any debt for disgorgement, prejudgment interest, +civil penalty or other amounts due by Herring, Young, or Fochtmann 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 Herring, Young, or Fochtmann of the federal securities +laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the +Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4240.txt b/raw/aaer/2021/AAER-4240.txt new file mode 100644 index 0000000000000000000000000000000000000000..fff2267cacbb488bd78f9b2f2e70d0e900b8e293 --- /dev/null +++ b/raw/aaer/2021/AAER-4240.txt @@ -0,0 +1,71 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92551 / August 2, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4240 / August 2, 2021 + +Admin. Proc. File No. 3-20394 + + +In the Matter of + +PAUL L. CHANCEY, JR., CPA + + +ORDER + +On July 13, 2021, t he Securities and Exchange Commission issued an order instituting an +administrative proceeding (“OIP”) against Paul L. Chancey, Jr., CPA (“Respondent”), pursuant +to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. 1 In compliance with the statutory provision governing cease- +and-desist proceedings, the OIP specified that a “public hearing before the Commission for the +purpose of taking evidence . . . shall be convened not earlier than 30 days and not later than 60 +days” from service of the OIP.2 The statute also provides that “an earlier or later date” for the +hearing may be “set by the Commission with the consent of any respondent so served.”3 +Respondent was served with the OIP on July 21, 2021.4 As a consequence, in the +absence of consent by Respondent regarding a later hearing date, a public hearing will be set for + +1 Paul L. Chancey, Jr., CPA , Exchange Act Release No. 92378, 2021 WL 2953721 (July +13, 2021). +2 Id. at *13. +3 15 U.S.C. § 78u-3(b). +4 On July 30, 2021, the Division of Enforcement filed a status report appending tracking +information for a copy of the OIP directed to Respondent’s counsel. The tracking information +shows that the mailing was “Delivered, Individual Picked Up at Postal Facility” on July 21, +2021. This information confirming delivery is sufficient for us to conclude that service was +effected on Respondent under Commission Rule of Practice 141(a)(2)(i), 17 C.F.R. § +201.141(a)(2)(i), on July 21, 2021. The Division sent a copy of its status report to the Office of +Administrative Law Judges (“OALJ”). We remind the parties that the OIP set the matter down +2 + +a date on or before September 17, 2021.5 To facilitate the orderly and expeditious resolution of +this matter, it is ORDERED that the parties shall file a statement advising the Commission of +any agreement to a later hearing date (or a statement that no agreement could be reached) by +August 9, 2021. In the event the parties do not reach an agreement by that date, this order does +not preclude the parties from reaching such an agreement subsequently. The Commission will +specify further proceedings by subsequent order. +The parties’ attention is directed to the most recent amendments to the Commission’s +Rules of Practice, which took effect on April 12, 2021, and which include new e-filing +requirements.6 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + +for a hearing before the Commission, meaning that OALJ at this time is not involved in this +proceeding. Paul L. Chancey, Jr., CPA , Exchange Act Release No. 92460, 2021 WL 3109831, +at *1 n.2 (July 21, 2021) (citing Chancey , 2021 WL 2953721, at *1, 13). +5 Sixty calendar days after July 21, 2021 is Sunday, September 19, 2021. +6 Amendments to the Commission’s Rules of Practice , Exchange Act Release No. 90442, +2020 WL 7013370 (Nov. 17, 2020), 85 Fed. Reg. 86,464, 86,474 (Dec. 30, 2020), +https://www.sec.gov/rules/final/2020/34-90442a.pdf; Instructions for Electronic Filing and +Service of Documents in SEC Administrative Proceedings and Technical Specifications , +https://www.sec.gov/efapdocs/instructions.pdf. The amendments impose other obligations such +as a new redaction and omission of sensitive personal information requirement. Amendments to +the Commission’s Rules of Practice , 85 Fed. Reg. at 86,465-81. \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4242.txt b/raw/aaer/2021/AAER-4242.txt new file mode 100644 index 0000000000000000000000000000000000000000..2d48ff50b9e4566e5073c6e44d57eff5534b4d96 --- /dev/null +++ b/raw/aaer/2021/AAER-4242.txt @@ -0,0 +1,530 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92675 / August 16, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4242 / August 16, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20256 + + + +In the Matter of + + Christopher E. Knauth, CPA, + + Respondent. + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER 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 April 5, 2021, the Securities and Exchange Commission (“Commission”) issued an Order +Instituting Administrative Proceedings against Christopher E. Knauth (“Respondent” or “Knauth”) +pursuant to Section 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule +102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + +2 + +II. + +In connection with 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 Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant +to Sections 4Cand 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. + +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: +Summary +1. This proceeding arises from failures by Christopher E. Knauth in conducting +the fiscal year 2018 audit and quarterly reviews for the periods ended June 30, 2018, September +30, 2018, and March 31, 2019, for Issuer A on behalf of Audit Firm A. At the outset, Knauth +failed to register Audit Firm A, of which he was a principal, with the Public Company Accounting +Oversight Board (“PCAOB”). Further, the work Knauth performed during the audit and quarterly +reviews for Issuer A failed to comply with multiple PCAOB auditing standards, in that Knauth +(1) failed to properly plan the audit and to identify and assess risks of material misstatement; (2) +failed to exercise due professional care and professional skepticism (including through the failure +to obtain required engagement quality reviews (“EQRs”)); (3) failed to obtain sufficient +appropriate audit evidence; and (4) failed to prepare adequate audit documentation. + +2. On behalf of Audit Firm A, Knauth falsely represented to Issuer A that it was +registered with the PCAOB when conducting the audit and interim reviews for Issuer A, including +in Audit Firm A’s audit report. Knauth also falsely represented in Audit Firm A’s audit report that +Audit Firm A conducted its audit in compliance with PCAOB standards. + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + +3 + + +3. As a result of Knauth’s conduct, Knauth willfully aided and abetted and caused Audit +Firm A’s violations of Section 102(a) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley +Act”), willfully aided and abetted and caused Audit Firm A’s violation of Rule 2-02 (b)(1) of +Regulation S-X, and willfully aided and abetted and caused Issuer A’s violations of Section 13(a) +of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. Knauth’s conduct also constituted +improper professional conduct pursuant to Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice. + +A. RESPONDENT +4. Christopher Knauth, age 53, is a resident of Plano, Texas. Knauth was a founder and +principal of Audit Firm A from October 2017 until December 2019. Prior to that, Knauth was a +partner at three other accounting firms since 2003. Knauth has been licensed as a Certified Public +Accountant in Texas since 1995. +B. OTHER RELEVANT ENTITIES +5. Audit Firm A was a Texas professional limited liability company headquartered in +Frisco, Texas, and founded in October 2017. While structured as a professional limited liability +company, in practice, Knauth and his co-principal in Audit Firm A solely shared office space and +certain limited overhead expenses, each maintaining separate clients and keeping revenue from his +own client engagements. Audit Firm A was never registered with the PCAOB. Audit Firm A +audited Issuer A’s financial statements for the company’s fiscal year ended December 31, 2018, +and conducted interim reviews for Issuer A for the quarters ended June 30, 2018, September 30, +2018, and March 31, 2019.4 Knauth entered into the engagement with Issuer A and performed all +of the audit work for Issuer A. Knauth’s co-principal in Audit Firm A was unaware of the Issuer A +engagement. Audit Firm A ceased operations in December 2019 and officially dissolved in +September 2020. +6. Issuer A is a Nevada corporation headquartered in Plano, Texas. Issuer A was at all +relevant times an issuer as defined by the Sarbanes-Oxley Act. Issuer A’s common stock was +registered with the Commission pursuant to Exchange Act Section 12(g). Issuer A’s common +stock was quoted on the OTCQB tier of the OTC Markets. Issuer A filed periodic reports, +including Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange +Act and the related rules thereunder. On October 24, 2019, Issuer A filed for bankruptcy. As part +of the Delinquent Filings Program and unrelated to this action, on September 21, 2020, the +Commission instituted an administrative proceeding against Issuer A pursuant to Section 12(j) of +the Exchange Act and instituted a trading suspension pursuant to Section 12(k) of the Exchange +Act. On November 23, 2020, the Commission accepted Issuer A’s offer of settlement and, +pursuant to Section 12(j) of the Exchange Act, revoked the registration of each class of Issuer A’s +securities. + + +4 Issuer A is the only public company and/or registered broker-dealer for whom Audit Firm A +conducted any audits or interim reviews. + +4 + +C. FACTS +i. Engagement by Issuer A +7. On June 6, 2018, Knauth, on behalf of Audit Firm A, entered into an engagement +agreement with Issuer A to perform the audit for the year ended December 31, 2018, as well as +interim quarterly reviews for 2018. In addition to conducting the annual audit for the year ended +December 31, 2018, Knauth conducted interim reviews on behalf of Audit Firm A for Issuer A for +the second and third quarters of 2018, and the first quarter of 2019. +8. In that engagement agreement, signed by Knauth, Audit Firm A represented to Issuer +A: “We are responsible for conducting our integrated audit of the financial statements and internal +control over financial reporting in accordance with the standards established by the Public +Company Accounting Oversight Board (PCAOB).” +9. The engagement agreement also provided that “Chris Knauth is the engagement +partner and is responsible for supervising the engagement and signing the [audit] report or +authorizing another individual to sign it.” +ii. Failure to Register with the PCAOB +10. Prior to Audit Firm A’s engagement by Issuer A, neither Audit Firm A nor Knauth +had performed any audit work for a public company, and at the time of Audit Firm A’s +engagement by Issuer A in June 2018, Audit Firm A was not registered with the PCAOB. On +August 16, 2018, Knauth signed and submitted to the PCAOB a Form 1, Application for +Registration, on behalf of Audit Firm A. Knauth did not confer with his co-principal in Audit Firm +A regarding the engagement with Issuer A or the PCAOB registration application. +11. On August 28, 2018, after its initial review of the application, PCAOB staff sent an +email to Knauth with requests for corrections and additional information, and, on September 17, +2018, the PCAOB issued a letter to Knauth requesting additional information regarding the +application for registration. In the September 17, 2018 letter, the PCAOB made clear that the +application had not been approved, warning that “[i]f [Audit Firm A] declines to provide the +requested information, the Board may deem the application incomplete, as described in PCAOB +Rule 2106(b)(2), may deem the application not to have been received in accordance with PCAOB +Rule 2102, or may take other such action as the Board deems appropriate.” +12. Between October 2018 and April 2019, PCAOB staff sent seven follow-up emails +to Knauth, attaching a copy of the September 17, 2018 letter and requesting to be advised of “[his] +plans to resubmit [his] firm’s application for registration.” Additionally, in a March 15, 2019 +telephone call initiated by Knauth, PCAOB staff reiterated to Knauth that he needed to respond to +the PCAOB’s requests for information. Knauth did not provide responses to the PCAOB’s +requests for information. +13. On May 9, 2019, the PCAOB informed Knauth by letter that, because the PCAOB +had not received the additional requested information, the PCAOB deemed the application as not +received. On the same day, Knauth informed PCAOB staff in a telephone call that he intended to +“re-submit a new application” and that he would address the PCAOB’s questions related to the + +5 + +original application. Knauth never resubmitted an application for registration or provided +responses to the PCAOB’s requests for information. +14. Despite failing to complete Audit Firm A’s registration with the PCAOB, Knauth +conducted the annual audit of Issuer A’s financial statements for the fiscal year 2018. Knauth +prepared and caused Audit Firm A to issue an audit report dated April 15, 2019, which Issuer A +included in its Form 10-K for the year ended December 31, 2018 filed with the Commission. The +audit report signed by Audit Firm A, through Knauth, falsely stated that “[w]e are a public +accounting firm registered with the [PCAOB].” +15. Knauth also performed interim reviews on behalf of Audit Firm A for Issuer A for +the quarters ended June 30, 2018, September 30, 2018, and March 31, 2019, despite Audit Firm A +not being registered with the PCAOB. + 16. On August 1, 2019, following initial notification from the PCAOB and subsequent +discussions with Knauth regarding Audit Firm A’s failure to register with the PCAOB, Issuer A +filed a Form 8-K with the Commission announcing that (i) Issuer A’s financial statements for fiscal +year 2018 and quarters ended June 30, 2018, September 30, 2018, and March 31, 2019, which +were included in Issuer A’s annual report on Form 10-K or quarterly reports on Form 10-Q, should +no longer be relied upon because they were not audited or reviewed by a registered public +accounting firm; and (ii) Issuer A had dismissed Audit Firm A and retained a new firm as its +independent registered public accounting firm. Issuer A has not filed updated reports with the +Commission. + 17. Audit Firm A received $49,000 in fees, all of which went to Knauth, for its audit +and review work for Issuer A. Between August and September 2019—after being contacted by +Commission Staff—Knauth agreed to pay Issuer A a total of $140,000 to reimburse it for the audit +fees and for additional costs associated with Audit Firm A’s failure to register with the PCAOB. +iii. Failure to Conduct Audit and Reviews in Accordance with +PCAOB Standards +18. In conducting the fiscal year 2018 audit and the June 30, 2018, September 30, 2018 +and March 31, 2019 interim reviews of Issuer A, Knauth’s work was deficient and failed to comply +with multiple PCAOB auditing standards. The audit work papers lack sufficient documentation to +determine what, if any, work was conducted. The work papers reflect no audit planning. It +appears from the existing documentation that Knauth merely obtained certain limited documents +from Issuer A and did not perform further analysis sufficient to identify and appropriately assess +the risks of material misstatement or exercise sufficient professional skepticism, including by +conducting further questioning. Further, no engagement quality reviews, as required under +PCAOB standards, were performed on Knauth’s audit or interim review work. +19. Specifically, Knauth (1) failed to properly plan the audit and to identify and assess +risks of material misstatement; (2) failed to exercise due professional care and professional +skepticism (including through the failure to obtain required EQRs); (3) failed to obtain sufficient +appropriate audit evidence; and (4) failed to prepare adequate audit documentation. + +6 + +20. As the engagement partner on the audit and reviews of Issuer A, Knauth was +responsible for compliance with PCAOB standards. PCAOB Auditing Standard No. 1201, +Supervision of the Audit Engagement (“AS No. 1201”); AS No. 1201.03. +21. Knauth aided and abetted and caused Audit Firm A to issue an audit report +containing an unqualified audit opinion for Issuer A for the year ended December 31, 2018. The +audit report falsely stated that the audit was performed “in accordance with the standards of the +PCAOB,” when, as described below, the audit failed to comply with PCAOB standards. +Failure to Properly Plan the Audit (AS No. 2101) and Interim Reviews (AS No. 4105) and to +Identify and Assess Risks of Material Misstatement (AS No. 2110) +22. PCAOB Auditing Standard No. 2101, Audit Planning (“AS No. 2101”), establishes +requirements regarding planning an audit. AS No. 2101.01. “Planning the audit includes +establishing the overall audit strategy for the engagement and developing an audit plan, which +includes, in particular, planned risk assessment procedures and planned responses to the risks of +material misstatement.” AS No. 2101.05. +23. The auditor should develop and document an audit plan that includes a description +of: the planned nature, timing, and extent of the risk assessment procedures; the planned nature, +timing, and extent of tests of controls and substantive procedures; and other planned audit +procedures required to be performed so that the engagement complies with PCAOB standards. AS +No. 2101.10. +24. “The purpose and objective of planning the audit are the same for an initial audit or +a recurring audit engagement. However, for an initial audit, the auditor should determine the +additional planning activities necessary to establish an appropriate audit strategy and audit plan, +including determining the audit procedures necessary to obtain sufficient appropriate audit +evidence regarding the opening balances.” AS No. 2101.19. +25. PCAOB Auditing Standard No. 4105, Reviews of Interim Financial Information +(“AS No. 4105”), requires that, “[i]n an initial review of interim financial information, the +accountant should perform procedures that will enable him or her to obtain sufficient knowledge of +the entity’s business and its internal control.” AS No. 4105.12. In planning a review of interim +financial information (following an initial review), the accountant should perform procedures to +update his or her knowledge of the entity’s business and internal control to aid in determining +inquiries to be made and analytical procedures to be performed, and to identify particular events, +transactions, or assertions to which the inquiries may be directed or analytical procedures applied. +AS No. 4105.11. +26. Knauth failed to engage in a proper audit planning process in connection with Audit +Firm A’s audit of Issuer A’s fiscal year 2018 financial statements and interim reviews for June 30, +2018, September 30, 2018, and March 31, 2019. Among other things, Knauth failed to develop +any audit plan that included a description of the planned nature, timing, and extent of the risk +assessment procedures; the planned nature, timing, and extent of tests of controls and substantive +procedures; and any other planned audit procedures required to be performed. Nor did Knauth +perform any planning procedures to obtain knowledge of, or to update his knowledge of, Issuer A’s + +7 + +business and internal control. In failing to engage in such planning, Knauth failed to comply with +AS No. 2101 and AS No. 4105, among others. +27. PCAOB Auditing Standard No. 2110, Identifying and Assessing Risks of Material +Misstatement (“AS No. 2110”), requires the auditor to “perform risk assessment procedures that +are sufficient to provide a reasonable basis for identifying and assessing the risks of material +misstatement, whether due to error or fraud.” AS No. 2110.04. +28. In addition, under AS No. 4105, if the accountant has not audited the most recent +annual financial statements, the accountant should perform procedures to obtain knowledge of an +entity’s internal control, including knowledge of the relevant aspects of the control environment, +the entity’s risk assessment process, control activities, information and communication, and +monitoring, as those terms are defined in AS No. 2110. AS No. 4105.13; see also AS No. +4105.10; AS No. 4105.12 (“[i]n an initial review of interim financial information, the accountant +should perform procedures to enable him or her to obtain sufficient knowledge of the entity’s +business and its internal control,” including considering the nature of any risks of material +misstatement due to fraud identified by the predecessor auditor). +29. “Risks of material misstatement can arise from a variety of sources, including +external factors, such as conditions in the company’s industry and environment, and company- +specific factors, such as the nature of the company, its activities, and internal control over financial +reporting.” AS No. 2110.05. “Thus, the audit procedures that are necessary to identify and +appropriately assess the risks of material misstatement include consideration of both external +factors and company-specific factors.” AS No. 2110.05. +30. Knauth did not perform sufficient risk assessment procedures, and did not perform +steps, such as obtaining an understanding of Issuer A’s activities, environment or internal control +over financial reporting. As such, Knauth failed to comply with AS No. 2110 and AS No. 4105. +Failure to Exercise Due Professional Care and Professional Skepticism (AS No. 1015) and +Failure to Obtain Engagement Quality Reviews (AS No. 1220) +31. PCAOB Auditing Standard No. 1015, Due Professional Care in the Performance of +Work (“AS No. 1015”), requires auditors to exercise due professional care in the planning and +performance of the audit and the preparation of the report and in conducting interim reviews. AS +No. 1015.01; AS No. 4105.01 (noting that AS No. 1015 applies to interim reviews). Auditors are +required further to exercise professional skepticism, which is an attitude that includes “a +questioning mind and a critical assessment of audit evidence.” AS No. 1015.07 +32. In addition, the auditor should “consider the competency and sufficiency of the +evidence. Since evidence is gathered and evaluated throughout the audit, professional skepticism +should be exercised throughout the audit process.” AS No. 1015.08. +33. In addition, PCAOB Auditing Standard No. 1220, Engagement Quality Review +(“AS No. 1220”), provides that for both audits and interim reviews, an engagement quality +reviewer should, among other things, “evaluate the significant judgments made by the engagement +team and the related conclusions reached in forming the overall conclusion on the engagement.” + +8 + +AS 1220.09 and .14. “Documentation of an engagement quality review should be included in the +engagement documentation.” AS 1220.20. +34. Beyond merely obtaining certain limited documents from Issuer A, Knauth did not +conduct sufficient audit procedures to assess such audit evidence. As such, Knauth failed to +exercise due professional care and professional skepticism in violation of AS No. 1015, among +others. +35. Further, Audit Firm A did not perform the procedures described in AS No. 1220 +and did not obtain any EQR with regard to the audit and interim reviews. As such, Audit Firm A +violated AS No. 1220, and, by failing to arrange for the EQRs, Knauth further failed to exercise +due professional care. +Failure to Obtain Sufficient Appropriate Audit Evidence (AS No. 1105) +36. PCAOB Auditing Standard No. 1105, Audit Evidence (“AS No. 1105”) requires an +auditor to “plan and perform audit procedures to obtain sufficient appropriate audit evidence to +provide a reasonable basis for his or her opinion.” AS No. 1105.04. “Audit evidence is all the +information, whether obtained from audit procedures or other sources, that is used by the auditor in +arriving at the conclusions on which the auditor’s opinion is based.” AS No. 1105.02. +37. By merely obtaining certain limited documents from Issuer A, without performing +sufficient audit procedures to assess that audit evidence, Knauth failed to obtain sufficient +appropriate audit evidence to support Audit Firm A’s issuance of the audit report for Issuer A’s +fiscal year 2018 financial statements. As such, Knauth failed to comply with AS No. 1105, among +others. +Failure to Prepare Adequate Documentation +for the Audit (AS No. 1215) and Interim Reviews (AS No. 4105.52) +38. In conducting an audit or interim review, an auditor must document the procedures +performed, evidence obtained, and conclusions reached with respect to relevant financial statement +assertions. PCAOB Auditing Standard No. 1215, Audit Documentation (“AS No. 1215”). Audit +documentation must clearly demonstrate that the work was in fact performed and “must contain +sufficient information to enable an experienced auditor, having no previous connection with the +engagement (a) to understand the nature, timing, extent, and results of the procedures performed, +evidence obtained, and conclusions reached, and (b) to determine who performed the work and the +date such work was completed as well as the person who reviewed the work and the date of such +review.” AS No. 1215; AS No. 1215.06. +39. In connection with interim reviews, in addition to the requirements under AS No. +1215, under AS No. 4105 “the documentation should (a) enable members of the engagement team +with supervision and review responsibilities to understand the nature, timing, extent, and results of +the review procedures performed; (b) identify the engagement team member(s) who performed and +reviewed the work; and (c) identify the evidence the accountant obtained in support of the +conclusion that the interim financial information being reviewed agreed or reconciled with the +accounting records.” AS No. 4105.52. + +9 + +40. As described above, Audit Firm A’s work papers contained no audit program and +lack documentation to determine what, if any, procedures were performed or conclusions reached +with respect to the audit and interim reviews of Issuer A. As such, Knauth failed to comply with +AS No. 1215 and AS No. 4105, among others. +D. VIOLATIONS +41. Section 102(a) of the Sarbanes-Oxley Act provides that “it shall be unlawful for any +person that is not a registered public accounting firm to prepare or issue, or to participate in the +preparation or issuance of, any audit report with respect to any issuer.”5 Audit Firm A was not +registered with the PCAOB when it performed the audit and interim reviews of Issuer A and +accordingly, violated Section 102(a) of the Sarbanes-Oxley Act. Knauth willfully aided and +abetted and caused Audit Firm A’s violations of Section 102(a) of the Sarbanes-Oxley Act. +42. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state “the +applicable professional standards under which the audit was conducted.” 17 CFR 210.2-02(b)(1). +An auditor violates Regulation S-X Rule 2-02(b)(1) if it issues a report stating it has conducted its +audit in accordance with PCAOB standards when it has not. Audit Firm A violated Rule 2- +02(b)(1) of Regulation S-X by issuing an audit report for Issuer A’s fiscal year 2018 audit stating +that it had conducted the audit in accordance with PCAOB standards when it had not. Knauth +willfully aided and abetted and caused Audit Firm A’s violations of Rule 2-02(b)(1) of Regulation +S-X. +43. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers with +equity securities registered under Section 12 to file annual reports with the Commission that have +been audited by an independent public accountant registered with the PCAOB.6 Exchange Act +Rule 13a-13 requires public issuers with securities to file with the Commission accurate quarterly +reports on Form 10-Q. Rule 10-01(d) of Regulation S-X requires the interim financial statements +included in a Form 10-Q to be reviewed by an independent public accountant registered with the +PCAOB. 17 C.F.R. § 210.10-01(d); see also 17 C.F.R. § 210.8-03. Issuer A filed an annual report +on Form 10-K for fiscal year 2018 audited by Audit Firm A and quarterly reports on Form 10-Q +for the quarters ended June 30, 2018, September 30, 2018, and March 31, 2019, which were +reviewed by Audit Firm A when Audit Firm A was not registered with the PCAOB. Knauth +willfully aided and abetted and caused Issuer A’s violations of Section 13(a) of the Exchange Act +and Rules 13a-1 and 13a-13 thereunder. +44. Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice provide, in part, that the Commission may censure a person or deny, temporarily +or permanently, the privilege of appearing or practicing before the Commission to any person who +is found by the Commission to have engaged in improper professional conduct. With respect to +persons licensed to practice as accountants, “improper professional conduct” includes “intentional + +5 A violation of the Sarbanes-Oxley Act or any rule that the PCAOB issues under the Sarbanes- +Oxley Act is treated for all purposes in the same manner as a violation of the Exchange Act, including +with respect to penalties. Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7202(b)(1). +6 See also 15 U.S.C. § 78c(a)(59); 15 U.S.C. § 7201(12) (defining registered public accounting +firm as a public accounting firm registered with the PCAOB). + +10 + +or knowing conduct, including reckless conduct, that results in a violation of applicable +professional standards.” See Rule 102(e)(1)(iv)(A). In addition, “improper professional conduct” +includes either of the following two types of negligent conduct: (i) a single instance of highly +unreasonable conduct that results in a violation of applicable professional standards in +circumstances in which an accountant knows, or should know, that heightened scrutiny is +warranted; or (ii) repeated instances of unreasonable conduct, each resulting in violations of +applicable professional standards, that indicate a lack of competence to practice before the +Commission. See Rule 102(e)(1)(iv)(B)(1) and (2). By failing to obtain registration of Audit Firm +A during its audit and interim reviews of Issuer A and by failing to comply with PCAOB standards +in the audit and interim reviews of Issuer A, as described above, Knauth engaged in improper +professional conduct as defined in Rule 102(e)(1)(iv). +45. Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice provide, in part, that the Commission may censure a person or deny, temporarily +or permanently, the privilege of appearing or practicing before the Commission to any person who +is found by the Commission “[t]o have willfully violated, or willfully aided and abetted the +violation of, any provision of the Federal securities laws or the rules and regulations thereunder.” +Through the conduct described above, Knauth willfully aided and abetted violations of the federal +securities laws and rules and regulations thereunder within the meaning of Section 4C(a)(3) of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. +E. FINDINGS +46. As a result of the conduct described above, Knauth willfully aided and abetted and +caused Audit Firm A to violate Section 102(a) of the Sarbanes-Oxley Act. +47. As a result of the conduct described above, Knauth willfully aided and abetted and +caused Audit Firm A’s violations of Rule 2-02(b)(1) of Regulation S-X. +48. As a result of the conduct described above, Knauth willfully aided and abetted and +caused Issuer A’s violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +thereunder. +49. As a result of the conduct described above, Knauth engaged in improper +professional conduct subject to Section 4C(a)(2) of the Exchange Act and the Commission’s Rule +of Practice 102(e)(1)(ii). +50. As a result of the conduct described above, Knauth willfully aided and abetted +violations of the federal securities laws, which constitutes conduct subject to Section 4C(a)(3) of +the Exchange Act and the Commission’s Rule of Practice 102(e)(1)(iii). +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 Sections 4C and 21C of the Exchange Act, and Rule 102(e) of the +Commission’s Rules of Practice, it is hereby ORDERED, effective immediately, that: + +11 + +A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Section 102(a) of the Sarbanes-Oxley Act, Rule 2-02(b)(1) of Regulation S- +X, and Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. +B. Respondent is denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. Respondent shall pay a civil money penalty in the amount of $20,000 to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). Payment shall be made in the following +installments: + +1. Within sixty (60) days of the entry of this Order, Respondent will pay $5,000. + +2. Within one hundred and fifty (150) days of the entry of this Order, Respondent +will pay $5,000. + +3. Within two hundred and forty (240) days of the entry of this Order, Respondent +will pay $5,000. + +4. Within three hundred and thirty (330) days of the entry of this Order, +Respondent will pay the remainder due under Section C. + +Payments shall be applied first to post order interest which accrues pursuant to 31 U.S.C. +§ 3717. Prior to making the final payment set forth herein, Respondent shall contact the staff of +the Commission for the amount due. If Respondent fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-order interest, minus any payments made, shall become due and +payable immediately at the discretion of the staff of the Commission without further application +to the Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard + +12 + +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Christopher Knauth as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Carolyn M. +Welshhans, Associate Director, Division of Enforcement, Securities and Exchange Commission, +100 F Street, NE, Washington, DC 20549-5010. + + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. +V. + It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + By the Commission. + + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4244.pdf b/raw/aaer/2021/AAER-4244.pdf new file mode 100644 index 0000000000000000000000000000000000000000..77d5cee1024b5c2d10254538c5c6a3de94b0d93b --- /dev/null +++ b/raw/aaer/2021/AAER-4244.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:64a6689033b8c38327ad20399af88d39d848db9da1e67caa882ee9f6d7d77650 +size 318657 diff --git a/raw/aaer/2021/AAER-4244.txt b/raw/aaer/2021/AAER-4244.txt new file mode 100644 index 0000000000000000000000000000000000000000..07e7b33a70ef2f34e3a28c80473167b7995892ce --- /dev/null +++ b/raw/aaer/2021/AAER-4244.txt @@ -0,0 +1,723 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10967 / August 24, 2021 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92735 / August 24, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4244 / August 24, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20468 + + + + +In the Matter of + +HEALTHCARE SERVICES +GROUP, INC., JOHN C. SHEA, +CPA, and DERYA D. WARNER, + +Respondents. + + + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF +1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Healthcare +Services Group, Inc., 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 John C. Shea, +CPA, pursuant to Section 8A of the Securities Act, Sections 4C1 and 21C of the Exchange Act, and + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess +the requisite qualifications to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and +abetted the violation of, any provision of the securities laws or the rules and regulations issued thereunder. + +2 +Rule 102(e)(1)(iii) of the Commission’s Rules of Practice,2 and against Derya D. Warner, pursuant +to Section 21C of the Exchange Act. + +II. + + In anticipation of the institution of these proceedings, Healthcare Services Group, Inc., +John C. Shea, and Derya D. Warner (collectively “Respondents”) have submitted Offers of +Settlement (the “Offers”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondents consent to the entry of this +Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A +of the Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +SUMMARY + +1. This matter involves the failure of Healthcare Services Group, Inc. (“HCSG”) to +properly accrue for or disclose loss contingencies relating to pending civil litigation in violation of +generally accepted accounting principles (“GAAP”), resulting in the reporting of inflated net +income and earnings per share (“EPS”) in certain periods. From 2014 to 2015, HCSG was facing a +series of large class- and collective-action lawsuits filed on behalf of HCSG employees in state and +federal courts, alleging the company had violated state and federal wage-and-hour labor laws. +HCSG agreed to seek out-of-court settlements with plaintiffs in these lawsuits, and ultimately +submitted settlement agreements to the applicable courts for preliminary and final approval. +However, John C. Shea (“Shea”), HCSG’s then-Chief Financial Officer, did not direct the accrual +for and disclosure of the loss contingencies for those settlements as required by GAAP, resulting in +HCSG’s misstatement of net income and EPS that did not accurately reflect the company’s +underlying performance in multiple quarters. + +2. Had HCSG properly recorded the financial impact of the loss contingencies at the +time they were probable and reasonably estimable, the company would have reported lower EPS +and missed research analysts’ consensus EPS estimates in many of the applicable quarters, + +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 Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. +3 +including by as little as a penny. The company also would not have been able to report multiple +quarters of EPS growth, including then-record-high EPS. For the quarters when HCSG eventually +accrued for the loss contingencies, the accruals contributed to the company’s reporting of a net loss +and loss per share, or reporting EPS that missed consensus estimates by a wide margin. +Consequently, HCSG’s financial statements filed with the Commission were materially misleading +during these periods. + +3. Also, in certain quarters, Derya D. Warner (“Warner”), HCSG’s Controller, made +journal entries during the closing process without adequate supporting documentation as required by +HCSG’s policies and procedures. + +4. HCSG failed to devise and maintain sufficient internal accounting controls to +prevent and detect such improper accounting and unsupported, period-end journal entries described +herein, resulting in the underlying violations of the federal securities laws. + +RESPONDENTS + +5. HCSG is a Pennsylvania corporation with its principal place of business located in +Bensalem, Pennsylvania. HCSG provides housekeeping, laundry, facility maintenance, and +dietary services to healthcare facilities in the U.S. The company’s common stock is registered +with the Commission pursuant to Section 12(b) of the Exchange Act, and is traded under the +symbol “HCSG” on the NASDAQ Global Select Market. HCSG files periodic reports with the +Commission pursuant to Section 13(a) of the Exchange Act and related rules thereunder. During +the relevant period, HCSG offered and sold its common stock pursuant to a Form S-8 registration +statement and amendments thereto to its employees, who purchased the stock via payroll +deductions. During the relevant period, the Form S-8 registration statements incorporated by +reference the company’s periodic reports filed with the Commission. + +6. Shea, age 50, resides in Wynnewood, Pennsylvania, and is a certified public +accountant (“CPA”) licensed in the Commonwealth of Pennsylvania. Shea was HCSG’s Chief +Financial Officer during the relevant period. As HCSG’s CFO, Shea was responsible for, among +other things, reviewing and approving all accounting entries. + +7. Warner, age 52, resides in Langhorne, Pennsylvania. During the relevant period, +Warner was the Controller of HCSG. As Controller, Warner was responsible for, among other +things, ensuring that all accounting entries were supported by adequate documentation. + +RELEVANT ACCOUNTING STANDARDS + +8. The accounting standards governing HCSG’s identification, assessment, and +measurement of loss contingencies relating to pending or threatened litigation are set forth in the +Financial Accounting Standards Board’s Accounting Standards Codification Topic 450, +Contingencies (“ASC 450”). + +9. Under ASC 450-20-25-2, a loss contingency shall be accrued if (a) it is probable +that an asset had been impaired or a liability had been incurred at the date of the financial +4 +statements, and (b) the amount of loss can be reasonably estimated. A loss or liability is +considered probable if it is likely to occur. ASC 450-20-20. + +10. The implementation guidance for ASC 450 lists certain factors to be considered +when determining the probability of an unfavorable outcome of litigation: a) the nature of the +litigation, claim, or assessment; b) the progress of the case; c) the opinions or views of legal +counsel and other advisers; d) the experience of the entity in similar cases; e) the experience of +other entities; and f) any decision of the entity’s management as to how the entity intends to +respond to the lawsuit, claim, or assessment (for example, a decision to contest the case vigorously +or to seek an out-of-court settlement). ASC 450-20-55-12. + +11. Further, disclosure of the nature of an accrual made under ASC 450-20-25-1, and in +some circumstances the amount accrued, may be necessary for the financial statements not to be +misleading. ASC 450-20-50-1. Terminology used shall be descriptive of the nature of the accrual, +such as estimated liability or liability of an estimated amount. Id. + +FACTS + +12. In 2013, HCSG was facing at least ten labor and employment class or collective +actions brought against it on behalf of current or former employees for alleged violations of wage- +and-hour labor laws. Five of these cases were filed in California state court from 2011 to 2013. +By the end of 2013, HCSG had settled two of these cases for a total amount of $6 million, with the +remaining three cases pending at year-end. HCSG also was sued in five collective actions filed in +2013 under the Fair Labor Standards Act (“FLSA”) in federal courts. These five FLSA cases also +were pending and in various stages of litigation by year-end. + +13. In general, the settlement of these types of class and collective actions are subject to +court approval. After the parties reach an out-of-court settlement, through a mediation or +otherwise, they submit an executed proposed settlement agreement to the court as part of a +preliminary approval process. After a court grants preliminary approval of a proposed settlement, +members of the class or collective are given notice of the proposed settlement terms, including the +amount of attorneys’ fees requested by plaintiffs’ attorneys. The class or collective members then +have an opportunity to object to the terms of the settlement, or in some cases, submit claims for +payment. Following a prescribed time for submitting objections or claims, the court will hold a +final approval hearing to consider any objections and determine whether final approval of the +proposed settlement should be granted. + +First Quarter of 2014 + +14. By Q1 2014, HCSG had determined to seek an out-of-court settlement of the three +pending class-action lawsuits in California state court (collectively, the “Irizarry” cases) after a +joint mediation of those cases with plaintiffs.4 Under the proposed settlement, HCSG agreed to +pay between $2.5 million and $3 million to plaintiffs, with the final amount to be determined based + +4 The three cases were captioned, Irizarry v. Healthcare Svcs. Grp., Inc., No. BC489570 (Cal. Sup. Ct.); +Woodard v. Healthcare Svcs. Grp., Inc., No. BC500892 (Cal. Sup. Ct.); and Cabrera v. Healthcare Svcs. Grp., Inc., +No. BC503407 (Cal. Sup. Ct.). These cases were consolidated for settlement purposes under the Irizarry case. +5 +on the amount of claims submitted by class members. These and other settlement terms were set +forth in a proposed settlement agreement that was submitted to the court for preliminary approval +in Q1 2014. Shea had participated in the mediation along with lawyers on behalf of HCSG. At all +times, Shea was aware of the proposed settlement amount and the submission of the settlement +agreement to the court for preliminary approval. + +15. HCSG, however, did not accrue for the loss contingency related to the settlement of +the Irizarry cases even though the loss was both probable and reasonably estimable no later than +Q1 2014. Based on the information available at the time, Shea was aware that, like the other +California employment class actions that HCSG had settled in 2013, HCSG intended to settle the +Irizarry cases instead of continuing to litigate them. Shea also knew that HCSG would likely incur +a liability between $2.5 million and $3 million under the out-of-court settlement, depending on the +amount of claims submitted by class members. Shea determined that no amount for this loss +contingency was probable or reasonably estimable because the Irizarry settlement claims process +was not complete, and the settlement had not received final court approval at the time. Shea also +did not maintain any documentation of any purported analysis under ASC 450 of a litigation loss +contingency. + +16. Shea was aware of quarterly consensus estimates of HCSG’s EPS by research +analysts. As a result of not accruing any amount for the Irizarry settlement, HCSG reported Q1 +2014 EPS of $0.21, meeting the consensus estimate. Had HCSG accrued for the settlement in this +quarter, HCSG would have missed the consensus estimate by $0.01. + +17. HCSG also did not disclose the nature of this loss contingency or an estimate of the +amount of loss in its Q1 2014 Form 10-Q. The Form 10-Q stated HCSG was “subject to various +claims and legal actions[,]” including “payroll and employee-related matters[.]” It also stated +HCSG “provide[s] accruals if the exposures [to claims and legal actions] are probable and +estimable,” and “[i]f an adverse outcome of such claims and legal actions is reasonably possible, +we assess materiality and provide such financial disclosure, as appropriate.” Notwithstanding +these statements, which were repeated in other Forms 10-Q and 10-K from 2014 to 2015, HCSG +did not disclose the nature or an estimate of the loss contingency for the settlement of the Irizarry +cases under ASC 450. + +Second Quarter 2014 + +18. By the end of Q2 2014 the court in the Irizarry cases had granted preliminary +approval of the settlement agreement, and scheduled a final approval hearing in November 2014. +Shea, however, did not direct the accrual of any amount or disclose the nature or an estimate of the +Irizarry loss contingency because the settlement claims process was not complete, and the court +had not yet granted final approval of the settlement, which was expected in Q4 2014. As a result +of not accruing any amount for the settlement, HCSG reported Q2 2014 EPS of $0.20, compared to +the $0.19 EPS HCSG had reported for Q2 2013, but less than the Q2 2014 consensus estimate of +$0.22. Had HCSG accrued for this loss contingency in this quarter, HCSG would have reported +Q2 2014 EPS of $0.19. + +6 +19. The Irizarry loss contingency was both probable and reasonably estimable by Q2 +2014, or earlier, regardless of whether the court had granted any approval of the settlement. By the +end of Q2 2014 the available information further indicated that a loss was even more likely +because the court had granted preliminary approval of the settlement. Although Shea was aware of +this information, he did not direct HCSG to accrue any amount for, and to disclose the nature or an +estimate of, this loss contingency in HCSG’s Q2 2014 filings. + +Third Quarter 2014 + +20. In Q3 2014, HCSG reported a net loss of $22.2 million or -$0.31 loss per share +(compared with the consensus EPS estimate of $0.22), most of which was due to nonrecurring +charges related to the creation of a captive insurance subsidiary and a corporate restructuring. + +21. HCSG also accrued $2.5 million for the settlement of the Irizarry cases in Q3 2014. +This amount was based, in part, on the number of claims submitted under the settlement agreement +– an amount that was probable and reasonably estimable no later than Q1 2014. Although the +court had not yet granted final approval of the settlement agreement in Q3 2014, Shea determined +that a loss arising from the settlement was probable and reasonably estimable in this period +because the deadline for making claims under or objections to the settlement had passed. Shea +directed the accrual of $2.5 million in a manual journal entry made during the quarter-end closing +process. By doing so, HCSG recorded this liability in a quarter when the company reported a +substantial net loss and loss per share. Had HCSG accrued this liability in Q4 2014, when the final +approval of the settlement was expected, it likely would have missed consensus EPS estimates for +that quarter by $0.01. + +Second Quarter 2015 + +22. In Q2 2015, HCSG agreed to seek an out-of-court settlement of a collective action +brought against it in 2013 captioned, Kelly v. Healthcare Services Group, Inc., No. 2:13-cv-00441- +JRG (E.D. Tex.). Kelly was brought on behalf of a nationwide collective of HCSG employees in +federal court alleging violations of the FLSA. HCSG had vigorously contested the action for +nearly two years, and was preparing for trial scheduled for July 2015. HCSG also had already paid +approximately $4 million in legal expenses for this action from 2013 to the first half of 2015, +making it one of HCSG’s most expensive litigations up to that point. But after the court issued +mixed decisions on motions for class decertification, HCSG’s potential exposure had increased +dramatically. After a second mediation on June 17, 2015, which had been ordered by the court on +its own motion, HCSG agreed with plaintiffs to seek an out-of-court settlement based on a +settlement framework proposed by the mediator. Under the proposed settlement framework, +HCSG would pay a maximum amount of $8 million to plaintiffs, including nearly 50% of that +amount, or $4 million, in plaintiffs’ attorneys’ fees to be paid with HCSG stock. The day after the +mediation, HCSG and plaintiffs jointly informed the court that they had reached a settlement in +principle, and moved for and received a stay of proceedings to finalize a settlement agreement. + +23. HCSG did not accrue any amount for the settlement of the Kelly action in Q2 2015. +HCSG also did not disclose the nature or an estimate of this loss contingency in its filings. Shea +was aware of HCSG’s litigation of the Kelly action, including HCSG’s incurred legal expenses, +7 +increased potential exposure, and intent to seek an out-of-court settlement similar to the California +class actions. Shea also knew that most of HCSG’s existing legal accrual of $4 million was for +incurred legal fees for, and not for any loss contingency for settling, the Kelly action. But Shea +determined that the loss was neither probable nor reasonably estimable because it was unclear +whether the court would grant any approval of the settlement due to the amount of plaintiffs’ +attorneys’ fees, and the payment of those fees in HCSG stock. + +24. Based on the information available at the time, the loss contingency for the Kelly +action was probable and reasonably estimable by Q2 2015 regardless of whether the court had +granted any approval of the settlement, and despite any uncertainty posed by the amount of the +attorneys’ fees or their payment in HCSG stock. Shea was aware of this information as of Q2 +2015, yet he did not direct HCSG to accrue any amount for, and to disclose the nature or an +estimate of, this loss contingency in HCSG’s Q2 2015 filings. + +25. As a result of not accruing any loss contingency for the Kelly settlement, HCSG +reported Q2 2015 EPS of $0.23, which met the consensus estimate and which HCSG announced as +a new company record. Had HCSG accrued a loss for the Kelly settlement in this quarter, it would +have reported EPS of $0.17, which would have missed the consensus estimate by 25%. + +26. In addition, notwithstanding the loss for the settlement of the Kelly action in Q2 +2015, HCSG also reduced legal expenses, without adequate documentation, resulting in HCSG +reporting $0.23 EPS for this quarter. + +27. On the day of the mediation in Kelly, an HCSG officer asked Shea a question +concerning HCSG’s estimated EPS for Q2 2015. In response, Shea stated that $0.23 – the +consensus EPS estimate – “is going to be a stretch based on current [cost of services].” + +28. During the quarter-end closing process, HCSG made a series of adjustments to +legal expenses resulting in the increase of EPS from $0.22 to $0.23. On July 4, 2015, Warner +informed Shea, “we are at 21.50 right now…updated legal by a credit of 200k[.]” On July 6, 2015, +HCSG reduced legal expenses by another $400,000, which resulted in an increase of EPS to $0.23, +which HCSG ultimately reported in its Q2 2015 filings. These adjustments to legal expenses were +not supported by adequate documentation. Without these adjustments, HCSG would have reported +Q2 2015 EPS of $0.22, missing the consensus estimate. + +Third Quarter 2015 + +29. In Q3 2015, HCSG had executed a settlement agreement in Kelly, consistent with +the settlement framework HCSG had agreed to at the June 2015 mediation, and further +documenting HCSG’s liability of $8 million for this loss contingency. The court granted +preliminary approval of the settlement in September 2015. Shea was aware of this information by +the end of Q3 2015. + +30. Although HCSG had carried forward from Q2 2015 an accrual for $4 million in +legal expenses, that amount was again for incurred legal fees and not for any loss related to the +Kelly settlement. Based on the information available at the time, the loss contingency for Kelly +8 +was probable and reasonably estimable by Q3 2015, if not earlier, regardless of whether the court +had granted any approval of the settlement. By Q3 2015 the available information further +indicated that the settlement liability was even more likely due to the court’s preliminary approval +of the settlement agreement. Yet HCSG did not accrue any amount for, or disclose the nature or an +estimate of, this loss contingency in HCSG’s Q3 2015 filings. + +31. As a result of not accruing any amount for the settlement of Kelly, HCSG reported +Q3 2015 EPS of $0.24, which met the consensus estimate and which HCSG announced as another +company record. Had HCSG accrued for the settlement of Kelly in this quarter, it would have +reported EPS of $0.18, which would have missed the consensus estimate by 25%. + +32. In addition, notwithstanding the loss for the settlement of the Kelly action in Q3 +2015, HCSG also reduced accruals for legal expenses and accounting fee expenses, without +adequate documentation, resulting in HCSG reporting $0.24 EPS for this quarter. + +33. During the quarter-end closing process, HCSG reduced legal expenses by $210,000 +without adequate documentation. Also, on the same date, HCSG reduced accounting fee expenses +by $104,000, again without adequate supporting documentation. HCSG recorded the accounting +fee expenses in certain quarters based on the audit services received, primarily from its external +auditor. Although HCSG had recorded $202,800 in accounting fees through September 2015 +based on the audit services received through the quarter, it then reversed $104,000 of that amount +without adequate supporting documentation. Warner did not ensure that there was adequate +documentation supporting those reductions. + +34. As a result, the $210,000 credit to legal expenses, and the $104,000 credit to +accounting fee expenses increased HCSG’s Q3 2015 EPS from $0.23 to $0.24. Had HCSG not +reduced these expenses, HCSG would have reported EPS of $0.23, missing the consensus estimate. + +Fourth Quarter 2015 + +35. In Q4 2015, the court in Kelly entered an order granting final approval of the $8 +million settlement between plaintiffs and HCSG. HCSG recorded $6.6 million in additional legal +expenses to fully account for this liability. HCSG also issued $4 million in HCSG shares in Q1 +2016 to pay the Kelly plaintiffs’ attorneys’ fees. HCSG reported Q4 2015 EPS of $0.13, missing +the consensus estimate of $0.26. Leading up to Q4 2015, when HCSG belatedly accrued for the +Kelly settlement loss contingency, HCSG reported EPS that met consensus estimates in the four +consecutive prior quarters, and reported three consecutive quarters of EPS growth. + +HCSG’s Responses to Inquiries by HCSG’s External Auditor Concerning Litigation + +36. During the relevant period, the Irizarry and Kelly cases described above were the +subject of quarterly lawyers’ letters sent to HCSG’s external auditor from the law firms that +represented HCSG in those cases. The letters, which were requested by HCSG’s external auditor +9 +each quarter, described the status of the cases, including settlement discussions and procedural +developments. HCSG management received copies or were otherwise aware of the letters. + +37. HCSG’s external auditor also discussed the cases with HCSG management in +connection with the external auditor’s interim reviews and annual audits of HCSG’s financial +statements. The external auditor’s working papers for the Q1-Q2 2014 and Q2-Q3 2015 interim +reviews documented that, based on discussions with HCSG management, there had been no +significant changes to contingent liabilities or commitments, or outstanding litigation, including the +Irizarry and Kelly cases, reviewed as part of HCSG’s prior year-end audit or interim review. +HCSG’s management, which was responsible for identifying, evaluating, and accounting for +litigation loss contingencies, did not maintain any documentation of an analysis of litigation loss +contingencies under ASC 450. + +Respondents’ Additional Accounting Entries + +38. In Q3 2014, HCSG recorded $500,000 in miscellaneous expenses for inventory that +had been purchased from certain customers, although the amount was still being determined. +Warner prepared the journal entry during the quarterly closing process without adequate +supporting documentation. + +39. During the Q4 2015 closing process Warner recorded an additional $400,000 in +accounting fee expenses without adequate supporting documentation. Although HCSG’s external +auditor provided substantial services in connection with HCSG’s annual audit from Q4 2015 to Q1 +2016, there was inadequate documentation to support recording the $400,000 amount, more than +50% of the external auditor’s annual fees, in Q4 2015. + +40. During the Q4 2015 closing process Warner recorded $300,000 in miscellaneous +expense for rebate payments due to certain customers. Approximately half of this expense should +have been recorded in Q3 2015 when the rebate was due, but was not recorded until Q4 2015. + +41. In addition, during the closing process for Q3 2014 and Q4 2015, HCSG accrued +$1.5 million and $1 million, respectively, in payroll and incentive compensation expense related to +bonuses for certain managers. However, the documentation for these entries, which were prepared +by other members of HCSG’s accounting department besides Warner, did not adequately support +the amounts recorded. + +HCSG Lacked Accurate Books and Records and Sufficient Internal Accounting Controls, and +Failed to Maintain Internal Control Over Financial Reporting + +42. HCSG’s accounting for litigation loss contingencies and other accounting entries +that impacted net income and EPS as described above were made in part because HCSG lacked +sufficient internal accounting controls over (a) accruals for litigation loss contingencies, (b) manual +journal entries, and (c) period-end adjustments made during the closing process. Although HCSG +had policies and procedures requiring accounting entries to have adequate supporting +documentation, its finance staff regularly recorded manual journal entries with no or inadequate +supporting documentation. Further, while HCSG had a Disclosure Control Committee that met +10 +each quarter to ensure that adequate disclosure controls and procedures were developed, +documented, and implemented to ensure that HCSG’s financial statements and disclosures were +complete and accurate, the committee’s procedures were insufficient in identifying and addressing +material inaccuracies in HCSG’s financial statements, especially relating to the accounting for and +disclosure of litigation loss contingencies. Moreover, HCSG’s accounting system did not have an +audit trail or time stamp function that enabled the finance staff to identify when certain manual +journal entries or adjustments were made during the closing process. + +43. As a result, HCSG’s internal accounting controls were not designed or maintained +to provide reasonable assurance that HCSG’s financial statements would be presented in +conformity with GAAP, and it further failed to maintain internal control over financial reporting. +HCSG’s books, records, and accounts also did not accurately and fairly reflect, in reasonable +detail, HCSG’s transactions and disposition of assets. + +VIOLATIONS + +44. Section 17(a)(2) of the Securities Act proscribes, in the offer or sale of a security, +obtaining “money or property by means of any untrue statement of a material fact or any omission +to state a material fact necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading.” Section 17(a)(3) of the Securities +Act proscribes, in the offer or sale of a security, engaging “in any transaction, practice, or course of +business which operates or would operate as a fraud or deceit upon the purchaser.” A violation of +these provisions does not require scienter and may rest on a finding of negligence. See Aaron v. +SEC, 446, U.S. 680, 685 & 701-02 (1980). + +45. Section 13(a) of the Exchange Act requires issuers to file such periodic and other +reports as the Commission may prescribe and in conformity with such rules as the Commission +may promulgate. Exchange Act Rules 13a-1, 13a-11, and 13a-13 require issuers with securities +registered under Section 12 of the Exchange Act to file annual, current, and quarterly reports, +respectively. The obligation to file such reports embodies the requirement that they be true and +correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied , +440 U.S. 913 (1979). In addition to the information expressly required to be included in such +reports, Rule 12b-20 of the Exchange Act requires issuers to add such further material information, +if any, as may be necessary to make the required statements, in the light of the circumstances under +which they are made, not misleading. A violation of these reporting provisions does not require +scienter. See SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978). + +46. Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make +and keep books, records, and accounts that accurately and fairly reflect the transactions and +dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires all reporting +companies, among other things, to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurances that transactions are recorded as necessary to permit +preparation of financial statements in accordance with GAAP. Scienter is not an element of the +books-and-records and internal accounting controls provisions. See Ponce v. SEC, 345 F.3d 722, +737 n.10 (9th Cir. 2003) (noting that a “plain reading of Section 13(b) reveals that it also does not +11 +impose a scienter requirement.”). Also, Exchange Act Rule 13a-15(a) requires issuers to maintain +internal control over financial reporting. + +47. Rule 13b2-1 prohibits any person from directly or indirectly falsifying or causing to +be falsified, any book, record, or account subject to Section 13(b)(2)(A). A violation of Rule 13b2- +1 does not require scienter and may rest on a finding of negligence. SEC v. World-Wide Coin +Investments, 567 F. Supp. 724, 749 (N.D. Ga. 1983). + +FINDINGS + +48. Based on the foregoing, the Commission finds that HCSG violated Securities Act +Sections 17(a)(2) and 17(a)(3), and Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), +and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a) thereunder. + +49. Based on the foregoing, the Commission finds that Shea (a) willfully5 violated +Securities Act Sections 17(a)(2) and 17(a)(3), and Exchange Act Rule 13b2-1; and (b) caused +HCSG’s violations of Securities Act Sections 17(a)(2) and 17(a)(3), and Exchange Act Sections +13(a), 13(b)(2)(A), and 13(b)(2)(B), and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a) +thereunder. + +50. Based on the foregoing, the Commission finds that Warner caused HCSG’s +violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). + +HCSG’S COOPERATION AND REMEDIAL EFFORTS + +51. In determining to accept HCSG’s Offer, the Commission considered cooperation +and the remedial acts promptly undertaken by HCSG to prevent and detect the type of misconduct +described in the Order. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. HCSG shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, and +13a-15(a) promulgated thereunder. + + +5 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)). +12 +B. Shea shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13a- +15(a), and 13b2-1 promulgated thereunder. + +C. Warner shall cease and desist from committing or causing any violations and any +future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + +D. Shea is denied the privilege of appearing or practicing before the Commission as an +accountant. + +E. After two (2) years from the date of this Order, Shea 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 (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Exchange Act). Such an application must +satisfy the Commission that Shea’s work in his practice before the +Commission as an accountant 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. 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 as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Exchange Act. Such an application will be +considered on a facts and circumstances basis with respect to such +membership, and the applicant’s burden of demonstrating good cause for +reinstatement will be particularly high given the role of the audit committee +in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Shea, 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) Shea, 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 +13 +Respondent’s or the firm’s quality control system that would +indicate that Shea will not receive appropriate supervision; + (c) Shea 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) Shea 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. + +F. The Commission will consider an application by Shea 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 Shea’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + +G. HCSG shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $6,000,000 to the Commission for transfer to the general fund of the +United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +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: + +14 +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 HCSG 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 Anita B. +Bandy, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., N.E., Washington, DC 20549. + +H. Shea shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $50,000 to the Commission for transfer to the general fund of the United +States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +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 Shea 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 Anita B. +Bandy, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., N.E., Washington, DC 20549. + +I. Warner shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $10,000 to the Commission for transfer to the general fund of the United +States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +15 +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 Warner 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 Anita B. +Bandy, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., N.E., Washington, DC 20549. + +J. Regardless of whether the Commission in its discretion orders the creation of a Fair +Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondents agree that in any Related Investor Action, they shall not argue that they are entitled +to, nor shall they benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Respondents’ payment of a civil penalty in this action (“Penalty Offset”). If +the court in any Related Investor Action grants such a Penalty Offset, Respondents agree that they +shall, within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission's counsel in this action and pay the amount of the Penalty Offset to the Commission. +Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change +the amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a +“Related Investor Action” means a private damages action brought against Respondents by or on +behalf of one or more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Shea and Warner, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Shea and Warner 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 +16 +violation by Shea and Warner of the federal securities laws or any regulation or order issued under +such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4245.txt b/raw/aaer/2021/AAER-4245.txt new file mode 100644 index 0000000000000000000000000000000000000000..0f0041cc3e7f165ae67f0b8575138d5d6d1224dc --- /dev/null +++ b/raw/aaer/2021/AAER-4245.txt @@ -0,0 +1,127 @@ + + +UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92835 / September 1, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4245 / September 1, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20511 + + +In the Matter of + + +JONATHAN BRETT WOODARD, + + +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” or “SEC”) deems it appropriate +and in the public interest that public administrative proceedings be, and hereby are, instituted +against Jonathan Brett Woodard (“Respondent” or “Woodard”) pursuant to Rule 102(e)(3)(i) of the +Commission’s Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by +order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . +. permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an +action brought by the Commission, from violating or aiding and abetting the violation of any provision of +the Federal securities laws or of the rules and regulations thereunder. + + 2 +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.2 below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Woodard, age 69, resides in Heber City, Utah. Woodard was Chief +Financial Officer of Blue Earth, Inc., a provider of alternative and renewable energy services, from +May 16, 2013 through August 2015. His duties and responsibilities as Blue Earth’s principal +financial officer included overseeing Blue Earth’s financial functions, corporate accounting +policies and practices, reporting to the Board on Blue Earth’s SEC compliance reporting, and +signing Blue Earth’s quarterly and annual SEC filings. + +2. On August 19, 2021, a final judgment was entered against Woodard +permanently enjoining him from future violations of Section 17(a)(2) of the Securities Act of 1933 +(the “Securities Act”), Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5(b) and +13b2-1 promulgated thereunder, and Rule 13a-14 promulgated under Exchange Act Section 13(a), +and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and +Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder, in the civil action entitled Securities and +Exchange Commission v. Johnny R. Thomas, et al., Civil Action Number 2:19-cv-01132, in the +United States District Court for the District of Nevada. The final judgment permanently barred +Woodard from serving as an officer or director of an issuer with a class of securities registered with +the Commission pursuant to Section 12 of the Exchange Act or that is required to file reports +pursuant to Section 15(d) of the Exchange Act. The final judgment also imposed a permanent +penny stock bar on Woodard, and ordered him to pay a $120,000 civil money penalty. + +3. The Commission’s complaint alleged that, from at least March 2014 +through at least March 2015, Woodard, directly and indirectly, knowingly or recklessly, made +materially false statements in, and omitted material information from, annual reports filed by Blue +Earth on Form 10-K or 10-K/As for fiscal years ended December 31, 2013 and 2014 and a periodic +report on Form 10-Q for the quarter ended September 30, 2014. According to the complaint, +Woodard’s false statements and omissions concerned, among other things, Blue Earth’s +relationship with its principal customer, a North American meat processing company, its financial +wherewithal to construct, own, and operate seven combined heat and power (“CHP”) plants for +that customer, and the nature and value of the assets underlying such projects. Woodard also +allegedly knowingly prepared and provided to Blue Earth’s accountants and auditor materially +overstated valuations of the purported CHP assets, which were recorded in Blue Earth’s books and +records, and publicly reported in the financial statements and footnotes reflected in Blue Earth’s +2013 and 2014 Forms 10-K and amendments, over which Woodard, as CFO, had oversight. The +complaint alleged that, as a result, Blue Earth reported a $44 million and $56 million asset on its + + 3 +balance sheets for the fiscal years 2013 and 2014, which comprised over 50% of total reported +assets in each year, and was overstated by over 400% and 125%, respectively. The complaint +alleged that Blue Earth raised funds from investors in private transactions based, in part, on the +misrepresentations and inflated valuations reflected in Blue Earth’s Forms 10-K and 10-K/A for +fiscal year 2013. Woodard allegedly falsely certified that, to his knowledge, the annual reports +filed for fiscal years 2013 and 2014 with the Commission did not contain any material +misstatements or omissions and fairly presented in all material respects Blue Earth’s financial +condition and results of operation. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Woodard’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + Woodard is suspended from appearing or practicing before the Commission as an +accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4247.txt b/raw/aaer/2021/AAER-4247.txt new file mode 100644 index 0000000000000000000000000000000000000000..d2099e17bb8cfccde31fd876b0355c9cbef84a7e --- /dev/null +++ b/raw/aaer/2021/AAER-4247.txt @@ -0,0 +1,446 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10975 / September 2, 2021 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 92866 / September 2, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4247 / September 2, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20522 + + +In the Matter of + +PARETEUM CORPORATION, + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”), and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”) against Pareteum Corporation (“Pareteum” 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 Respondent consents to the entry of this Order Instituting +Cease-and-Desist Proceedings, Pursuant to Section 8A of the Securities Act and Section 21C of the + 2 +Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY + +1. This case concerns accounting and disclosure fraud by Pareteum, a +telecommunications company, spanning from 2018 through mid-2019 (the “relevant time period”). +During this time, Pareteum’s public filings materially overstated revenue by approximately $12 +million for fiscal year 2018 (60% of the ultimately restated revenue), and by approximately $30 +million for the first and second quarters of 2019 (91% of the ultimately restated revenue). + +2. These misstatements resulted from improper accounting practices, whereby certain +now former executives directed that revenue be recognized based on non-binding purchase orders +and prior to product shipment, which is not in accordance with generally accepted accounting +principles (“GAAP”). Further, former senior accounting employees took steps to conceal these +practices from Pareteum’s auditor. + +3. On October 21, 2019, Pareteum issued a press release announcing that Pareteum’s +financial results for 2018 and the first half of 2019 required restatement, and on December 14, 2020, +Pareteum restated its financial results for 2018, reducing the full year revenue from $32.4 million to +$20.3 million. On March 12, 2021, Pareteum reported its financial results for 2019, reporting a full +year revenue of $62.05 million, including restated quarterly financial results for the first half of +2019 – reducing its stated revenue for the first quarter of 2019 from $23.04 million to $13.07 +million, and for the second quarter of 2019 from $34.2 to $16.9 million. + +4. As a result of the conduct described herein, Pareteum violated Section 17(a) of the +Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and +Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + +5. After determining that a restatement was needed, Pareteum’s Audit Committee +began an independent investigation that resulted in the separation of multiple Pareteum executives – +comprising almost all of the senior management team and certain senior executives in sales and +finance positions. Pareteum took additional remedial measures, including modifying and improving +internal accounting controls and procedures to prevent recurrence of the misconduct. Pareteum also +provided cooperation to the Commission staff during the staff’s investigation, including providing +presentations to the staff summarizing facts developed during the course of its own internal +investigation and identifying key documents. + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + 3 + + +RESPONDENT + +6. Pareteum Corporation is incorporated in Delaware with a principal place of +business in New York, NY. Pareteum is a telecommunications and cloud software company. Its +common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act, +and traded on the NASDAQ exchange under the symbol “TEUM.” NASDAQ delisted Pareteum’s +common stock on February 2, 2021 for its failure to timely file required periodic reports with the +Commission. Pareteum’s common stock currently trades on the OTC Pink market as “TEUM.” + +FACTS + +Background + +7. Pareteum is a telecommunications “Software as a Service” or “SaaS” company that +offers various products such as SIM cards, WiFi service, and a Cloud platform. One portion of +Pareteum’s business is its mobile bundled services line, which provides SIM cards with +customizable service plan options. Pareteum’s customers then resell the SIM cards to consumers. + +8. FASB Accounting Standards Codification Topic 606, Revenue From Contracts +With Customers (“ASC 606”), provides guidance for recognizing revenue for these type of sales +agreements. ASC 606 requires entities to recognize revenue only when control of the promised +goods or services is transferred to customers, and at an amount that reflects the consideration to +which the entity expects to be entitled in exchange for those goods or services where such transfer +has been completed. + +9. ASC 606 requires entities to take the following steps to assess whether and what +revenue should be recognized: (1) identify the contract with a customer; (2) identify the +performance obligations in the contract; (3) determine the transaction price; (4) allocate the +transaction price to the corresponding performance obligation(s); and (5) recognize revenue when +or as the entity satisfies a performance obligation by transferring control of a promised good or +service to a customer. + +10. Consistent with this, Pareteum disclosed in its 2018 Form 10-K that starting on +January 1, 2018, Pareteum was reporting revenue in accordance with ASC 606 which, Pareteum +stated, “requires entities to recognize revenue when control of the promised goods or services is +transferred to customers at an amount that reflects the consideration to which the entity expects to +be entitled in exchange for those goods or services.” + +Pareteum’s Improper Revenue Recognition Practices Based on +Non-Binding Purchase Orders + +11. Despite disclosing that ASC 606 would be followed, Pareteum recognized revenue +without confirming whether the criteria of ASC 606 had been fully satisfied. Instead, starting in or + 4 +around January 2018, Pareteum began recognizing the entire amount of a customer’s initial +purchase order with Pareteum, even though these purchase orders were non-binding and the +product had not yet been shipped. Pareteum did not have sufficient procedures and controls in +place to provide reasonable assurance that it was recognizing revenue in accordance with ASC +606, and instead, Pareteum’s former accounting and finance executives allowed revenue to be +recognized that was not in compliance with GAAP. + +12. In practice, Pareteum’s revenue recognition procedure for mobile bundled services +customers during the relevant time period was as follows: (1) a new customer signed a contract and +master services agreement, (2) a purchase order was drafted by Pareteum, providing the number of +SIM cards the customer intended to purchase, as well as an estimated cost for the average monthly +plan they were expecting to sell to downstream consumers; (3) the customer signed this purchase +order, which in most cases indicated that the full cost listed was just an estimated forecasted +amount that would not be due until the customer sold the product to downstream consumers; and +(4) Pareteum recognized revenue for the entire amount listed in the purchase order. Pareteum +recognized the total revenue of each purchase order regardless of whether the SIM cards had been +shipped yet or whether a platform had been set up by Pareteum sufficient to even allow the SIM +cards to work. + +13. Under ASC 606, Pareteum should have satisfied its performance obligations under +the purchase order prior to recognizing revenue. Specifically, Pareteum should have ensured that +the SIM cards had been shipped, and that the platform had been created and was operational. +Further, under the terms of most of the purchase orders, the SIM cards also had to have been sold +to and activated by an end-user before the customer was obligated to pay Pareteum. In multiple +instances, Pareteum failed to meet all of these requirements prior to recognizing revenue. + +14. There were insufficient internal accounting controls in place at Pareteum to assess +whether the required performance obligations had been met prior to revenue being recognized, and +in practice, such checks were often not properly done. As a result, Pareteum recognized the +amounts listed in the purchase orders based solely on the purchase order being signed by the +customer without confirming whether these amounts were recognizable under ASC 606, resulting +in the improper recognition of millions of dollars of revenue in contravention of ASC 606. + +15. Pareteum’s former leadership pressured employees to reach Pareteum’s internal +budgeted projections for revenue each month. Pareteum was only able to meet these projections +by immediately recognizing revenue for the entire projected amount of a purchase order when it +was signed – despite Pareteum having not met its performance obligations under the purchase +order. + +16. Recognizing the full amount of each purchase order once signed, rather than in +accordance with GAAP, became standard practice for Pareteum’s mobile bundled services line of +business. One or more former Pareteum executives knew or were reckless in not knowing that the +requirements for proper revenue recognition had not been met and yet continued to authorize or +accept decisions to recognize millions of dollars of revenue improperly. Revenue recognized this +way accounted for millions of Pareteum’s revenue each quarter starting in 2018 and continued + 5 +through the first half of 2019, even though it was not yet owed by the customers. By August 2019, +Pareteum had only collected a fraction of the tens of millions in revenue Pareteum had recognized +for mobile bundled services customers. + +Misstatements Made to Pareteum’s Auditor + +17. Because of the improper revenue recognition practices described above, +Pareteum’s accounts receivable balance ballooned by the end of 2018. For many, Pareteum was +still completing its obligations, such as shipping the SIM cards or setting up the platform. For +others, even if some SIM cards had been shipped, the customer had not yet become operational +and had not sold any SIM cards to downstream consumers, and as such did not actually owe the +accounts receivable amount to Pareteum. + +18. When Pareteum’s independent auditor performed its 2018 end-of-year audit +testing in February 2019, it included Pareteum’s accounts receivable as a main risk area. To test +the validity of the accounts receivable amounts, the auditor sent out audit confirmations to many +of Pareteum’s customers asking the customers to sign that they agreed with Pareteum’s record of +how much was owed to Pareteum as of year-end 2018. These audit confirmations went out to +the vast majority of the customers that accounted for the $12 million in revenue that Pareteum +improperly recognized in 2018. + +19. Despite the fact that the customers did not yet owe the amounts on the audit +confirmations, most of these customers did eventually sign the audit confirmations. One or more +former Pareteum officers or senior accounting executives knowingly or recklessly directed +Pareteum sales employees to encourage customers to sign the audit confirmations by falsely +telling them that the confirmation amounts listed were just for forecasts or estimates and did not +represent amounts that the customers were actually committed to paying. With these assurances, +most of these customers signed the audit confirmations and returned them to Pareteum’s auditor, +thereby unknowingly providing false audit evidence. + +Pareteum’s Improper Recognition of Revenue From an Unsigned Purchase Order, and +Related Cover-up Steps + +20. In addition to the improper revenue recognition practices discussed above, +Pareteum also improperly recognized millions in revenue based on an unsigned, mid-negotiation +purchase order for International Mobile Subscriber Identity numbers, or IMSIs, which was never +ultimately agreed to by the customer. + +21. Unlike SIM cards, IMSIs are “virtual,” and do not require the shipment of any +physical product – instead, Pareteum would deliver IMSIs by assigning and emailing the relevant +IMSI numbers to the customer once the necessary platform had been developed and created by +Pareteum. + + 6 +22. In late January 2019, Pareteum and a customer were negotiating an IMSI +purchase order. A former Pareteum sales employee drafted a purchase order for 6.3 million +euros and circulated an unsigned version internally to others at Pareteum for approval. + +23. Despite the fact that the 6.3 million euro purchase order had not been finalized or +agreed to by the customer, at the direction of one or more former Pareteum executives, Pareteum +recognized revenue for 20% of the order, or approximately $1.4 million, for January 2019. + +24. The former Pareteum sales employee ultimately finalized the purchase order with +the customer in February 2019 – but for 630,000 euros, not 6.3 million. Notwithstanding this +change in the purchase order, at the direction of one or more former Pareteum executives, +Pareteum continued to recognize revenue off of the unsigned draft purchase order for 6.3 million +euros. Pareteum recognized another 20% of revenue from the draft purchase order in February +2019, and another 20% in April 2019. Ultimately, in the first and second quarter of 2019, +Pareteum recognized a total of approximately $4.4 million in revenue based on this unsigned +draft purchase order when the final signed purchase order was only for 630,000 euros, or +approximately $750,000. + +25. Even if the 6.3 million euro purchase order had been finalized and signed, +Pareteum’s revenue recognition would not have been in accordance with GAAP. At the time +that this revenue was recognized, the platform for these IMSIs was not yet functional and +Pareteum was still working on setting it up properly. Further, there was no reasoning or support +for recognizing 20% of this purchase order three separate times. One or more former Pareteum +executives knew, or were reckless in not knowing, that this was not proper under ASC 606 and +as such was not in accordance with GAAP. + +26. In August 2019, Pareteum received a subpoena from Commission staff in +connection with its investigation into this conduct. At or around this time, multiple former +Pareteum executives became aware that the 6.3 million euro purchase order had never been +signed, and that a 630,000-euro purchase order had been signed instead. At first, rather than +report this issue to more senior management, former Pareteum sales and accounting executives +attempted to get a backdated purchase order signed retroactively to cover up the mistake. +Though these former sales and accounting employees were successfully able to get a +replacement backdated purchase order signed, Pareteum ultimately identified and self-reported +the existence of the backdated purchase order. + +Pareteum’s Restatement, Independent Investigation, +and Cooperation with Commission Staff + +27. On October 21, 2019, Pareteum publicly announced that it would be issuing +financial restatements for all of 2018 and the first two quarters of 2019, and that it expected the +restatements to reduce the reported revenue by $9 million for all of 2018 and $24 million for the +first half of 2019. After this announcement, Pareteum’s Audit Committee began an independent +investigation. + + 7 +28. On November 5, 2019, Pareteum announced it had appointed an Interim Chief +Financial Officer (“CFO”), while the former CFO’s status was “under review.” On November 25, +2019, Pareteum announced it had terminated and replaced the Executive Chairman and Chief +Executive Officer (“CEO”) of Pareteum. In addition to the CEO and CFO, in 2020, Pareteum +terminated its Chief Commercial Officer and Chief Revenue Officer and replaced its Controller. + +29. On December 14, 2020, Pareteum filed a restated Form 10-K for 2018, reducing the +full year revenue from $32.4 million to $20.3 million. On March 12, 2021, Pareteum restated is +financial results for 2019, reporting a full year revenue of $62.05 million – reducing its stated +revenue for the first quarter of 2019 from $23.04 million to $13.07 million, and for the second +quarter of 2019 from $34.2 to $16.9 million. + +30. During the staff’s investigation, after new management was installed, Pareteum and +its Audit Committee voluntarily met with the staff on multiple occasions, presented detailed factual +summaries of relevant information, and provided information and documents both on their own +initiative and at the staff’s request. + +VIOLATIONS + +31. As a result of the conduct described above, Respondent violated Section 17(a) of +the Securities Act, which prohibits fraudulent conduct in the offer or sale of a security. + +32. As a result of the conduct described above, Respondent violated Section 10(b) of +the Exchange Act and Rule 10b-5 promulgated thereunder, which prohibit fraudulent conduct in +connection with the purchase or sale of securities. + +33. As a result of the conduct described above, Respondent violated Section 13(a) of +the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 promulgated thereunder, which +require issuers of securities registered pursuant to Section 12 of the Exchange Act to file periodic +and other reports with the Commission, including annual, quarterly and current reports, on the +appropriate forms and within the period specified on the form that must contain any material +information necessary to make the required statements made in the report not misleading. + +34. As a result of the conduct described above, Respondent violated Exchange Act Section +13(b)(2)(A) which requires issuers of securities registered pursuant to Section 12 of the Exchange Act +to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect +their transactions and dispositions of assets. + +35. As a result of the conduct described above, Respondent violated Exchange Act +Section 13(b)(2)(B) which requires issuers of securities registered pursuant to Section 12 of the +Exchange Act to devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that transactions are recorded as necessary to, among other things, permit +preparation of financial statements in accordance with GAAP. + + + + 8 +PARETEUM’S REMEDIAL EFFORTS AND COOPERATION +36. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. +UNDERTAKINGS + +37. Respondent undertakes to: +a. Cooperate fully with the Commission in any and all investigations, litigations or +other proceedings relating to or arising from the matters described in this Order; +b. Use its best efforts to cause Respondent’s current and former employees, +officers, and directors to be interviewed by the Commission staff at such times +and places as the staff requests upon reasonable notice; +c. Use its best efforts to cause Respondent’s current and former employees, +officers, and directors to appear and testify truthfully and completely in such +investigations, depositions, hearings or trials as may be reasonably requested by +the Commission’s staff; +d. Accept service by mail or email or facsimile transmission of notices or +subpoenas issued by the Commission to Respondent for documents or +testimony at depositions, hearings, or trials, or in connection with any related +investigation by Commission staff; +e. Appoint its undersigned attorneys as agents to receive service of such notices +and subpoenas; +f. With respect to such notices and subpoenas, waive the territorial limits on +service contained in Rule 45 of the Federal Rules of Civil Procedure and any +applicable local rules, provided that the party requesting the interview or +testimony reimburses the travel, lodging, and subsistence expenses at the then- +prevailing U.S. Government per diem rates; and +g. Consent to personal jurisdiction over it in any United States District Court for +purposes of enforcing any such subpoena. + +In determining whether to accept Respondent’s Offer, the Commission has considered +these undertakings. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Pareteum’s Offer. + + 9 + Accordingly, pursuant to Section 8A of the Securities Act and 21C of the Exchange Act, it +is hereby ORDERED that: + + A. Respondent Pareteum cease and desist from committing or causing any violations +and any future violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 +thereunder. + +B. Respondent shall pay a civil money penalty in the amount of $500,000 to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). Payment shall be made in the following +installments: + Due within 14 days of the entry of this Order: $75,000 + December 31, 2021: $33,333 + March 31, 2022: $33,333 + June 30, 2022: $33,334 + September 30, 2022: $81,250 + December 31, 2022: $81,250 + March 31, 2023: $81,250 + June 30, 2023: $81,250 + +Payments shall be applied first to post order interest, which accrues pursuant to 31 U.S.C. § +3717. Prior to making the final payment set forth herein, Respondent shall contact the staff of the +Commission for the amount due. If Respondent fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-order interest, minus any payments made, shall become due and +payable immediately at the discretion of the staff of the Commission without further application to +the Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + + + + + + 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 +Pareteum 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 Thompson, Co-Acting Regional +Director, Division of Enforcement, Securities and Exchange Commission, Philadelphia Regional +Office, 1617 John F. Kennedy Boulevard, Suite 520, Philadelphia, PA 19103. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + +Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4250.pdf b/raw/aaer/2021/AAER-4250.pdf new file mode 100644 index 0000000000000000000000000000000000000000..05fb496addf5f3fe23424411a00bf3c509dc2718 --- /dev/null +++ b/raw/aaer/2021/AAER-4250.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a271ad3ab7668f4c229430cae973adbe54e43c552ad5ce7dc24abff81f949bf4 +size 224616 diff --git a/raw/aaer/2021/AAER-4251.pdf b/raw/aaer/2021/AAER-4251.pdf new file mode 100644 index 0000000000000000000000000000000000000000..69364971d2e4c195ae1101d43caeefad4b837370 Binary files /dev/null and b/raw/aaer/2021/AAER-4251.pdf differ diff --git a/raw/aaer/2021/AAER-4252.pdf b/raw/aaer/2021/AAER-4252.pdf new file mode 100644 index 0000000000000000000000000000000000000000..17514055f90f86e68df32e6f4a2d4f9bbc7e15d9 --- /dev/null +++ b/raw/aaer/2021/AAER-4252.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:50f18423e5908cf6b0c20bbf3c3a8e7bdba6c7a431e12dce015eeec2577dfe2e +size 225218 diff --git a/raw/aaer/2021/AAER-4252.txt b/raw/aaer/2021/AAER-4252.txt new file mode 100644 index 0000000000000000000000000000000000000000..1b4918fef2a5045a20e109fc86d789bf8e89f841 --- /dev/null +++ b/raw/aaer/2021/AAER-4252.txt @@ -0,0 +1,93 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93012 / September 15, 2021 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4252 / September 15, 2021 +ADMINISTRATIVE PROCEEDING +File No. 3-17745 + +In the Matter of +Alok Saraf, CA + +: +: +: +: +: +: +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 AND AS AN +INDEPENDENT ACCOUNTANT + +On December 22, 2016, Alok Saraf, CA (“Saraf”) 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 Saraf pursuant to Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice.1 This order is issued in response to Saraf’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 and as an +independent accountant. + +The Commission’s order related to Saraf’s conduct as a member of the engagement team +for KPMG India’s audits of Wipro Limited’s (“Wipro”) financial statements between 2007 and +2010. Beginning in December 2007 and continuing through October 2009, the Commission +found that Saraf accepted money from Anup Agarwal, a Wipro accountant who was at that time +embezzling funds from Wipro. During this period, Saraf was responsible for KPMG India’s +audit procedures around Agarwal’s work related to Wipro’s foreign exchange and derivatives +accounting. Saraf’s actions compromised his independence from Wipro, and therefore impaired +KPMG India’s independence from Wipro, its audit client. As a result, Saraf caused KPMG India +to violate Rule 2-02(b)(1) of Regulation S-X and further caused Wipro’s violation of Section +13(a) of the Exchange Act and Rule 13a-1 thereunder. The Commission also found that Saraf’s +work on the Wipro engagement failed to comply with numerous Public Company Accounting + +1 See Accounting and Auditing Enforcement Release No. 3836 dated December 22, 2016. Saraf was permitted, +pursuant to the order, to apply for reinstatement three years from the date of the order upon making certain +showings. +Oversight Board Auditing Standards, and his conduct constituted improper professional conduct +within the meaning of Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +Saraf 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, Saraf 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.” This “good cause” determination is +necessarily highly fact specific. +On the basis of the information supplied, representations made, and undertakings agreed +to by Saraf, it appears that he has complied with the terms of the December 22, 2016 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 Saraf, 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 Saraf, 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, +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Alok Saraf, CA 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 and as an independent accountant. +By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4253.txt b/raw/aaer/2021/AAER-4253.txt new file mode 100644 index 0000000000000000000000000000000000000000..7334717cb953288ac0a90ec1da1b6bcfd9efeea1 --- /dev/null +++ b/raw/aaer/2021/AAER-4253.txt @@ -0,0 +1,134 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93014 / September 16, 2021 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4253 / September 16, 2021 +ADMINISTRATIVE PROCEEDING +File No. 3-18293 + +In the Matter of +Richard J. Koch, 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 OTHER +THAN AS A MEMBER OF AN AUDIT COMMITTEE +AS THAT TERM IS DEFINED IN SECTION 3(a)(58) +OF THE SECURITIES EXCHANGE ACT OF 1934 AND +AS AN INDEPENDENT ACCOUNTANT + +On December 4, 2017, Richard J. Koch, CPA (“Koch”) 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 Koch pursuant to Rule +102(e)(1) of the Commission’s Rules of Practice. 1 This order is issued in response to Koch’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 (other than as a member of an audit committee, as that term is defined in Section +3(a)(58) of the Securities Exchange Act of 1934 (“Exchange Act”)) and as an independent +accountant. +The Commission’s order found that Koch had engaged in improper professional conduct +while serving as the Engagement Quality Reviewer (“EQR”) for Anton & Chia, LLP’s (“A&C”) +2013 year-end audit of Premier Holding Corp. (“Premier”) and the 2013 second and third quarter +interim reviews of CannaVEST Corp. (“CannaVEST”). As the EQR, Koch failed to adhere to +standards of the Public Company Accounting Oversight Board (“PCAOB”) and ignored a +number of red flags that indicated that Premier’s and CannaVEST’s financial statements did not + +1 See Accounting and Auditing Enforcement Release No. 3912 dated December 4, 2017. Koch was permitted, +pursuant to the order, to apply for reinstatement after two years from the date of the order upon making certain +showings. +2 + +conform to Generally Accepted Accounting Principles (“GAAP”) and contained material +misstatements. In addition, for Premier’s 2013 audit, Koch provided his concurring approval to +issue an audit report for Premier’s year-end financial statements in which the report inaccurately +represented that A&C had conducted the audit in accordance with Generally Accepted Auditing +Standards and further misleadingly represented that, based on that audit, in A&C’s opinion, +Premier’s financial statements presented fairly, in all material respects, the company’s financial +position, results of operations, and cash flows in accordance with GAAP. As a result, Koch was +a cause of A&C’s violation of Rule 2-02(b) of Regulation S-X. +Koch 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 PCAOB, 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, other than as a member of an +audit committee, Koch attests that he will have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, while practicing before the Commission in this capacity. + +Koch is not, at this time, seeking to appear or practice before the Commission as 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 as a member of an audit +committee, as that term is defined in Section 3(a)(58) of the Exchange Act. If he should wish to +resume appearing and practicing before the Commission in this role, 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, Koch’s suspension from practice +before the Commission as 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 as a +member of an audit committee 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. + + Koch is currently subject to probation under the California State Board of Accountancy. +Failure to abide by the terms of his probation could result in the revocation of Koch’s CPA +license. Koch has attested that he will notify the Commission if he is found to have violated the +terms of the probation. He also has attested that he understands that the suspension of his CPA +license could result in the revocation of the reinstatement of his privilege to appear or practice +before the Commission as an accountant. + +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. + +2 Rule 102(e)(5)(i) provides: + +3 + + +On the basis of the information supplied, representations made, and undertakings agreed +to by Koch, it appears that he has complied with the terms of the December 4, 2017 order +denying him the privilege of appearing or practicing before the Commission as an accountant. +No information has come to the attention of the Commission relating to his character, integrity, +professional conduct, or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission’s Rules of Practice. +In addition, Koch has undertaken 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 has undertaken 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, in his practice +before the Commission as an independent accountant. As a result, Koch 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 +Richard J. Koch, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission, other than as a me mber of an audit committee, and as an independent +accountant. + +By the Commission. + + + +Vanessa A. Countryman +Secretary + + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4254.txt b/raw/aaer/2021/AAER-4254.txt new file mode 100644 index 0000000000000000000000000000000000000000..413fa087462821d8ea26c4128532d30f9433a052 --- /dev/null +++ b/raw/aaer/2021/AAER-4254.txt @@ -0,0 +1,97 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93018 / September 16, 2021 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4254 / September 16, 2021 +ADMINISTRATIVE PROCEEDING +File No. 3-14835 + +In the Matter of +JOHN M. WILLIAMS + +: +: +: +: +: +: +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 April 4, 2012, John M. Williams (“Williams”) 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 him pursuant to Rule 102(e)(3)(i) of the +Commission’s Rules of Practice.1 This order is issued in response to Williams’ 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 Williams had been permanently enjoined by a United States +district court from future violations of Section 10(b) of the Securities Exchange Act of 1934 and +Rule 10b-5 thereunder. In its complaint in the civil injunctive action, the Commission alleged, +among other things, that Williams acquired nonpublic information concerning the acquisition of +Hi-Shear Technology Corp. (“Hi-Shear”) by Chemring Group PLC (“Chemring”) while +providing tax services to Deloitte Tax LLP’s (“Deloitte”) client Chemring. The complaint also +alleged that, in violation of Deloitte’s policies and his employment agreement, Williams traded +in the shares of Hi-Shear shortly before the September 16, 2009 announcement that Chemring +would acquire Hi-Shear. +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, Williams +attests that he will have his work reviewed by the independent audit committee of any company + +1 See Accounting and Auditing Enforcement Release No. 3377 dated April 4, 2012. Williams was permitted, +pursuant to the order, to apply for reinstatement after five years upon making certain showings. + + 2 +for which he works, or in some other manner acceptable to the Commission, while practicing +before the Commission in this capacity. Further, Williams attests that his appearance and +practice before the Commission will be limited to work in conjunction with the provision of tax +services. Williams 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, Williams’ 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 Williams it appears that he has complied with the terms of the April 4, 2012 order suspending +him from appearing or practicing before the Commission as an accountant. No information has +come to the attention of the Commission relating to his character, integrity, professional conduct +or qualifications to practice before the Commission that would be a basis for adverse action +against him pursuant to Rule 102(e) of the Commission's Rules of Practice. In addition, +Williams has undertaken 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, and to +limit his work to the provision of tax services in his practice before the Commission as a preparer +or reviewer of financial statements required to be filed with the Commission. As a result, +Williams 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 +John M. Williams is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Vanessa A. Countryman +Secretary + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4258.pdf b/raw/aaer/2021/AAER-4258.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d884b33dba7ee32228ba7e262088ced5551eb936 --- /dev/null +++ b/raw/aaer/2021/AAER-4258.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:21fba68507633bdcfa04697cb9a5a3b13cdf4707912314ee582db4c063350bdc +size 537435 diff --git a/raw/aaer/2021/AAER-4259.txt b/raw/aaer/2021/AAER-4259.txt new file mode 100644 index 0000000000000000000000000000000000000000..26bea54152164656c245fdf24b0856c35aeff29b --- /dev/null +++ b/raw/aaer/2021/AAER-4259.txt @@ -0,0 +1,137 @@ + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93135 / September 27, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4259 / September 27, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20601 + + +In the Matter of + +CARLOS JAVIER +MOCTEZUMA VELASCO, + + Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS AND +IMPOSING TEMPORARY SUSPENSION +PURSUANT TO RULE 102(e)(3) OF THE +COMMISSION’S RULES OF PRACTICE + + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to Rule +102(e)(3)1 of the Commission’s Rules of Practice against Carlos Javier Moctezuma Velasco +(“Respondent” or “Moctezuma”). + + +II. + +The Commission finds that: + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal sec urities laws or of the rules and regulations +thereunder. + 2 + +A. RESPONDENT + +1. Carlos Javier Moctezuma Velasco, age 50, a Mexican citizen residing in +Mexico, served as the Chief Financial Officer of Desarrolladora Homex S.A.B. de C.V. from +December 2009 until May 2016. + + B. CIVIL INJUNCTION + +2. On June 29, 2021, the U.S. District Court for the Southern District of +California entered an Order for Default Judgment against Moctezuma, permanently enjoining him +from future violations, direct or indirect, of Section 17(a) of the Securities Act of 1933, Sections +10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and +Rules 10b-5, 12b-20, 13a-1, 13a-14, 13a-16, 13b2-1 and 13b2-2 thereunder. Securities and +Exchange Commission v. Gerardo de Nicolás, et al., Civil Action Number 17-cv-02086 (S.D. +Cal.). + +3. The Commission’s complaint alleged that Moctezuma and others engaged +in a multi-billion dollar financial fraud involving Moctezuma’s former employer, Desarrolladora +Homex S.A.B. de C.V. (“Homex”), a Mexico-based homebuilding company. In addition to +Moctezuma, the Commission’s complaint charged Homex’s former Chief Executive Officer, +Gerardo de Nicolás Gutiérrez (“de Nicolás”), former Controller, Ramón Lafarga Bátiz (“Lafarga”), +and a former manager in Homex’s Operations department, Noe Corrales Reyes (“Corrales”), for +their roles in the fraud. From 2010-2012, Homex reported revenue from the sale of more than +100,000 homes that it had neither built nor sold. Homex’s resulting overstatements of its revenue +across its annual reports filed with the Securities and Exchange Commission during the three-year +period totaled at least MXN $44 billion (USD $3.3 billion) or 355%. The Commission’s +complaint alleged that Homex’s annual reports for 2010 through 2012 portrayed the company as +productive and financially sound, and that de Nicolás and Moctezuma certified their accuracy, +when in fact the defendants knew Homex was in a dire financial state. The complaint further +alleged that Lafarga directed Corrales to create a false second set of books, through which the +fraud was perpetrated. The Commission’s complaint also alleged that de Nicolás and Moctezuma +caused Homex to enter into loan agreements with at least 13 Mexican banks, which Homex was +able to repay only by additional bank borrowing, in check-kiting fashion, and that de Nicolás and +Moctezuma hid the true nature of these loans from Homex’s investors and mischaracterized them +to Homex’s auditor. + +III. + +Based upon the foregoing, the Commission finds that a court of competent jurisdiction has +permanently enjoined Moctezuma from violating the Federal securities laws within the meaning of +Rule 102(e)(3)(i)(A) of the Commission’s Rules of Practice. In view of these findings, the +Commission deems it appropriate and in the public interest that Moctezuma be temporarily +suspended from appearing or practicing before the Commission. + + 3 + IT IS HEREBY ORDERED that Moctezuma be, and hereby is, temporarily suspended +from appearing or practicing before the Commission. This Order shall be effective upon service +on the Respondent. + + IT IS FURTHER ORDERED that Moctezuma may within thirty days after service of this +Order file a petition with the Commission to lift the temporary suspension. If the Commission +within thirty days after service of the Order receives no petition, the suspension shall become +permanent pursuant to Rule 102(e)(3)(ii). + + If a petition is received within thirty days after service of this Order, the Commission shall, +within thirty days after the filing of the petition, either lift the temporary suspension, or set the +matter down for hearing at a time and place to be designated by the Commission, or both. If a +hearing is ordered, following the hearing, the Commission may lift the suspension, censure the +petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a +period of time, or permanently, pursuant to Rule 102(e)(3)(iii). + +This Order shall be served upon Moctezuma as provided for in Rule 141(a)(2)(iv) of the +Commission’s Rules of Practice, 17 C.F.R. § 201.141(a)(2)(iv). + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to service of +paper copies, service to the Division of Enforcement of all opinions, orders, and decisions +described in Rule 141, 17 C.F.R. § 201.141, and all papers described in Rule 150(a), 17 C.F.R. § +201.150(a), in these proceedings shall be by email to the attorneys who enter an appearance on +behalf of the Division, and not by paper service. + + + By the Commission. + + + +Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4260.txt b/raw/aaer/2021/AAER-4260.txt new file mode 100644 index 0000000000000000000000000000000000000000..ca8df81fa42df63a5935728270022a0c2161530e --- /dev/null +++ b/raw/aaer/2021/AAER-4260.txt @@ -0,0 +1,138 @@ + + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93136 / September 27, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4260 / September 27, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20602 + + +In the Matter of + +NOE CORRALES REYES, + + Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS AND +IMPOSING TEMPORARY SUSPENSION +PURSUANT TO RULE 102(e)(3) OF THE +COMMISSION’S RULES OF PRACTICE + + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to Rule +102(e)(3)1 of the Commission’s Rules of Practice against Noe Corrales Reyes (“Respondent” or +“Corrales”). + + +II. + +The Commission finds that: + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + +A. RESPONDENT + +1. Noe Corrales Reyes, age 51, a Mexican national, holds an inactive license as +a Contador Público, in Mexico. From at least May 2007 through October 2016, he served as a +manager in the Operations department of Desarrolladora Homex S.A.B. de C.V. + + B. CIVIL INJUNCTION + +2. On June 29, 2021, the U.S. District Court for the Southern District of +California entered an Order for Default Judgment against Corrales, permanently enjoining him +from future violations, direct or indirect, of Section 17(a) of the Securities Act of 1933, Sections +10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and +Rules 10b-5, 12b-20, 13a-1, 13a-16, and 13b2-1 thereunder. Securities and Exchange Commission +v. Gerardo de Nicolás, et al., Civil Action Number 17-cv-02086 (S.D. Cal.). + +3. The Commission’s complaint alleged that Corrales and others engaged in a +multi-billion dollar financial fraud involving Corrales’s former employer, Desarrolladora Homex +S.A.B. de C.V. (“Homex”), a Mexico-based homebuilding company. In addition to Corrales, the +Commission’s complaint charged Homex’s former Chief Executive Officer, Gerardo de Nicolás +Gutiérrez (“de Nicolás”), former Chief Financial Officer, Carlos Javier Moctezuma Velasco +(“Moctezuma”), and former Controller, Ramón Lafarga Bátiz (“Lafarga”) for their roles in the +fraud. From 2010-2012, Homex reported revenue from the sale of more than 100,000 homes that +it had neither built nor sold. Homex’s resulting overstatements of its revenue across its annual +reports filed with the Securities and Exchange Commission during the three-year period totaled at +least MXN $44 billion (USD $3.3 billion) or 355%. The Commission’s complaint alleged that +Homex’s annual reports for 2010 through 2012 portrayed the company as productive and +financially sound, and that de Nicolás and Moctezuma certified their accuracy, when in fact the +defendants knew Homex was in a dire financial state. The complaint further alleged that Lafarga +directed Corrales to create a false second set of books, through which the fraud was perpetrated. +The Commission’s complaint alleged that Corrales, at Lafarga’s direction, manually entered into +Homex’s accounting software the false revenue data, which was later uploaded into another system +for financial reporting purposes. The Commission’s complaint also alleged that de Nicolás and +Moctezuma caused Homex to enter into loan agreements with at least 13 Mexican banks, which +Homex was able to repay only by additional bank borrowing, in check-kiting fashion, and that de +Nicolás and Moctezuma hid the true nature of these loans from Homex's investors and +mischaracterized them to Homex’s auditor. + +III. + +Based upon the foregoing, the Commission finds that a court of competent jurisdiction has +permanently enjoined Corrales, a licensed Contador Público, from violating the Federal securities +laws within the meaning of Rule 102(e)(3)(i)(A) of the Commission’s Rules of Practice. In view +of these findings, the Commission deems it appropriate and in the public interest that Corrales be +temporarily suspended from appearing or practicing before the Commission. + 3 + + IT IS HEREBY ORDERED that Corrales be, and hereby is, temporarily suspended from +appearing or practicing before the Commission. This Order shall be effective upon service on the +Respondent. + + IT IS FURTHER ORDERED that Corrales may within thirty days after service of this +Order file a petition with the Commission to lift the temporary suspension. If the Commission +within thirty days after service of the Order receives no petition, the suspension shall become +permanent pursuant to Rule 102(e)(3)(ii). + + If a petition is received within thirty days after service of this Order, the Commission shall, +within thirty days after the filing of the petition, either lift the temporary suspension, or set the +matter down for hearing at a time and place to be designated by the Commission, or both. If a +hearing is ordered, following the hearing, the Commission may lift the suspension, censure the +petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a +period of time, or permanently, pursuant to Rule 102(e)(3)(iii). + +This Order shall be served upon Corrales as provided for in Rule 141(a)(2)(iv) of the +Commission’s Rules of Practice, 17 C.F.R. § 201.141(a)(2)(iv). + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to service of +paper copies, service to the Division of Enforcement of all opinions, orders, and decisions +described in Rule 141, 17 C.F.R. § 201.141, and all papers described in Rule 150(a), 17 C.F.R. § +201.150(a), in these proceedings shall be by email to the attorneys who enter an appearance on +behalf of the Division, and not by paper service. + + + By the Commission. + + + +Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4261.txt b/raw/aaer/2021/AAER-4261.txt new file mode 100644 index 0000000000000000000000000000000000000000..23f6a579a9d0ed4da4ae451669e25e872990909d --- /dev/null +++ b/raw/aaer/2021/AAER-4261.txt @@ -0,0 +1,136 @@ + + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93137 / September 27, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4261 / September 27, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20603 + + +In the Matter of + +RAMÓN LAFARGA BÁTIZ, + + Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS AND +IMPOSING TEMPORARY SUSPENSION +PURSUANT TO RULE 102(e)(3) OF THE +COMMISSION’S RULES OF PRACTICE + + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to Rule +102(e)(3)1 of the Commission’s Rules of Practice against Ramón Lafarga Bátiz (“Respondent” or +“Lafarga”). + + +II. + +The Commission finds that: + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the vio lation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + +A. RESPONDENT + +1. Ramón Lafarga Bátiz, age 61, a Mexican national, is a licensed Contador +Público in Mexico. From at least 2009 until April 2014, Lafarga served as the Controller and +Administrative and Accounting Officer of Desarrolladora Homex S.A.B. de C.V. + + B. CIVIL INJUNCTION + +2. On June 29, 2021, the U.S. District Court for the Southern District of +California entered an Order for Default Judgment against Lafarga, permanently enjoining him from +future violations, direct or indirect, of Section 17(a) of the Securities Act of 1933, Sections 10(b), +13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules +10b-5, 12b-20, 13a-1, 13a-16, and 13b2-1 thereunder. Securities and Exchange Commission v. +Gerardo de Nicolás, et al., Civil Action Number 17-cv-02086 (S.D. Cal.). + +3. The Commission’s complaint alleged that Lafarga and others engaged in a +multi-billion dollar financial fraud involving Lafarga’s former employer, Desarrolladora Homex +S.A.B. de C.V. (“Homex”), a Mexico-based homebuilding company. In addition to Lafarga, the +Commission’s complaint charged Homex’s former Chief Executive Officer, Gerardo de Nicolás +Gutiérrez (“de Nicolás”), former Chief Financial Officer, Carlos Javier Moctezuma Velasco +(“Moctezuma”), and a former manager in Homex’s Operations department, Noe Corrales Reyes +(“Corrales”), for their roles in the fraud. From 2010-2012, Homex reported revenue from the sale +of more than 100,000 homes that it had neither built nor sold. Homex’s resulting overstatements of +its revenue across its annual reports filed with the Securities and Exchange Commission during the +three-year period totaled at least MXN $44 billion (USD $3.3 billion) or 355%. The +Commission’s complaint alleged that Homex’s annual reports for 2010 through 2012 portrayed the +company as productive and financially sound, and that de Nicolás and Moctezuma certified their +accuracy, when in fact the defendants knew Homex was in a dire financial state. The complaint +further alleged that Lafarga directed Corrales to create a false second set of books, through which +the fraud was perpetrated. The Commission’s complaint also alleged that de Nicolás and +Moctezuma caused Homex to enter into loan agreements with at least 13 Mexican banks, which +Homex was able to repay only by additional bank borrowing, in check-kiting fashion, and that de +Nicolás and Moctezuma hid the true nature of these loans from Homex’s investors and +mischaracterized them to Homex’s auditor. + +III. + +Based upon the foregoing, the Commission finds that a court of competent jurisdiction has +permanently enjoined Lafarga, a licensed Contador Público, from violating the Federal securities +laws within the meaning of Rule 102(e)(3)(i)(A) of the Commission’s Rules of Practice. In view +of these findings, the Commission deems it appropriate and in the public interest that Lafarga be +temporarily suspended from appearing or practicing before the Commission. + + IT IS HEREBY ORDERED that Lafarga be, and hereby is, temporarily suspended from + 3 +appearing or practicing before the Commission. This Order shall be effective upon service on the +Respondent. + + IT IS FURTHER ORDERED that Lafarga may within thirty days after service of this +Order file a petition with the Commission to lift the temporary suspension. If the Commission +within thirty days after service of the Order receives no petition, the suspension shall become +permanent pursuant to Rule 102(e)(3)(ii). + + If a petition is received within thirty days after service of this Order, the Commission shall, +within thirty days after the filing of the petition, either lift the temporary suspension, or set the +matter down for hearing at a time and place to be designated by the Commission, or both. If a +hearing is ordered, following the hearing, the Commission may lift the suspension, censure the +petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a +period of time, or permanently, pursuant to Rule 102(e)(3)(iii). + +This Order shall be served upon Lafarga as provided for in Rule 141(a)(2)(iv) of the +Commission’s Rules of Practice, 17 C.F.R. § 201.141(a)(2)(iv). + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to service of +paper copies, service to the Division of Enforcement of all opinions, orders, and decisions +described in Rule 141, 17 C.F.R. § 201.141, and all papers described in Rule 150(a), 17 C.F.R. § +201.150(a), in these proceedings shall be by email to the attorneys who enter an appearance on +behalf of the Division, and not by paper service. + + + By the Commission. + + + +Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4262.txt b/raw/aaer/2021/AAER-4262.txt new file mode 100644 index 0000000000000000000000000000000000000000..6e63699f3fdc2976b611bb5b09ea2aaeb26e85d5 --- /dev/null +++ b/raw/aaer/2021/AAER-4262.txt @@ -0,0 +1,427 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10990 / September 30, 2021 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5878 / September 30, 20201 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4262 / September 30, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3 - 20609 + + + +In the Matter of + +DONNA M. SILVERMAN, + +Respondent. + + + +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS, PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTIONS 203(f) AND 203(k) +OF THE INVESTMENT ADVISERS ACT +OF 1940, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND +A CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Sections +203(f) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) against Donna M. +Silverman (“Silverman” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over her and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V., Respondent +consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, +Pursuant to Section 8A of the Securities Act and Sections 203(f) and 203(k) of the Advisers Act, + 2 +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: + +Summary + +1. TCA Fund Management Group Corp. (“TCA”) is the registered investment adviser +to TCA Global Credit Master Fund, LP (the “Master Fund”) and its two feeder funds, TCA Global +Credit Fund, LP (“Feeder Fund LP”) and TCA Global Credit Fund, Ltd. (“Feeder Fund Ltd.”) +(collectively, the “TCA Funds”). TCA Global Credit Fund GP, Ltd. (“GP”) is the general partner +to the Master Fund and Feeder Fund LP. The Master Fund focused solely on investing in short- +term, senior secured debt and equity-related investments, and providing investment banking +services for a fee to small and medium-sized companies. The feeder funds invested substantially all +of their assets into the Master Fund. + +2. TCA and GP fraudulently inflated the TCA Funds’ net asset value (“NAV”) and +performance results through the recording of non-binding transactions from 2010 through +December 2016, and through the recording of fraudulent investment banking fees from January +2016 through November 2019. Respondent Silverman included non-binding transactions and +fraudulent investment banking fees in information that others in TCA later sent to an outside +independent fund administrator (the “fund administrator”), who used it to calculate the TCA Funds’ +monthly NAV and performance results. Silverman knew or should have known that this data, +which was subsequently provided by others in TCA to the fund administrator, would fraudulently +inflate the TCA Funds’ NAV and performance figures. + +Respondent + +3. Donna M. Silverman, age 62, resides in Sparta, New Jersey. From August 2014 +until December 2017, Silverman served as TCA’s Chief Portfolio Manager. + +Relevant Entities + +4. TCA Fund Management Group Corp. was formed in 2011 and is an investment +adviser registered with the Commission since August 13, 2014. TCA is a Florida corporation +headquartered in Aventura, Florida, with other offices in New York, Las Vegas, London, and +Melbourne, Australia. + + 5. TCA Global Credit Fund GP, Ltd. is a Cayman Islands company formed in January +2010. GP serves as the general partner of Feeder Fund LP and the Master Fund. + +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. TCA Global Credit Fund, LP. is a Cayman Islands limited partnership formed in +March 2010. Feeder Fund LP engaged in investment activities as an unregistered private +investment fund. TCA serves as Feeder Fund LP’s investment adviser and GP is its general +partner. + +7. TCA Global Credit Fund, Ltd. is a Cayman Islands company formed in March +2010. Feeder Fund Ltd. engaged in investment activities as an unregistered private investment +fund. TCA serves as Feeder Fund Ltd.’s investment adviser. + +8. TCA Global Credit Master Fund, LP. is a Cayman Islands limited partnership +formed in March 2010. It serves as the master fund in a master-feeder structure for Feeder Fund +LP and Feeder Fund Ltd. TCA serves as the Master Fund’s investment adviser and GP is its +general partner. + +District Court Action + + 9. On May 11, 2020, the Commission filed a partially settled civil action in United +States District Court for the Southern District of Florida against TCA and GP based on violations +of the antifraud provisions. The Commission’s complaint alleged that between early 2010 through +November 2019, TCA and GP fraudulently inflated the TCA Funds’ NAV and performance results +by recording non-binding transactions and fraudulent investment banking services agreements. On +May 12, 2020, the Court entered a consented-to judgment that, among other things, enjoined TCA +and GP from future violations of the antifraud provisions. TCA and GP voluntarily consented to +the appointment of Jonathan Perlman, Esq. of Genovese Joblove & Battista, P.A. as Receiver over +TCA, GP, and the TCA Funds. See SEC v. TCA Fund Management Group Corp. et al., Case No. +1:20-cv-21964 (S.D. Fla.). + +Facts + +A. Background + +10. TCA has served as the investment adviser to the TCA Funds from September 2011 +until the present. TCA’s Master Fund focused solely on providing short-term, senior secured debt +and equity-related investments, and providing investment banking services for a fee to small and +medium-sized companies (“portfolio companies”). Feeder Fund LP and Feeder Fund Ltd. raised +money from investors through private sales of securities in the funds, which was then invested in +limited partnership interests in the Master Fund. Upon investing, investors in Feeder Fund Ltd. +received shares, and investors in Feeder Fund LP received limited partnership interests. As of +November 30, 2019, the date of their last reported NAV, the TCA Funds reported a consolidated +net asset value of $516 million and had a combined total of about 470 investor accounts. + + + + 4 +B. The Master Fund’s Investment Strategy + +11. The Master Fund provided financing investments to small and medium-sized +companies. A typical financing had interest rates ranging from 12% to 18% per year, and +required the company borrower to pay various fees at closing and over the duration of the loan. +After an initial vetting process, the Master Fund and the potential borrower signed a non-binding +“term sheet” that set forth the possible financing terms, and the company borrower would pay a +small fee in order to proceed to further due diligence review by TCA’s underwriting department. +If the company met TCA’s underwriting criteria, then transaction documents were executed at +closing by the borrower and by TCA on behalf of the Master Fund. + +12. At closing, borrowers were usually also required to sign either an “investment +banking” or “advisory services” agreement (“IB Agreement”) with the Master Fund. The IB +Agreements required companies to pay an “investment banking” or “advisory” fee (“IB Fee”) to +the Master Fund that was “earned upon execution” of the agreement, in consideration for certain +investment banking services that the Master Fund claimed it would provide the company. + +13. From at least August 2014 until at least December 2017, Silverman was primarily +responsible for originating financing deals for the Master Fund, and managing workout efforts +with respect to these transactions. In addition, Silverman prepared information relating to the +Master Fund’s monthly revenue and portfolio asset values that was incorporated in valuation +information that others in TCA sent to the fund administrator each month. + +C. TCA Inflated the TCA Funds’ Monthly NAV and Performance Figures + +14. Feeder Fund LP and Feeder Fund Ltd.’s private placement memoranda (“PPMs”) +state that their NAV inputs are calculated on an accrual basis in accordance with International +Financial Reporting Standards (“IFRS”). TCA was responsible for valuation of the Master +Fund’s assets, and every month, it sent valuation information on the Master Fund’s investment +portfolio to the fund administrator hired to calculate the TCA Funds’ NAV and performance +figures, and account balances for the feeder funds’ investors based on those NAV and +performance figures. Silverman prepared data relating to the Master Fund’s monthly revenue +and portfolio asset values that was used by other TCA staff to prepare this valuation information. +The information the fund administrator received from TCA that Silverman helped prepare, +included monthly listings, spreadsheets and workbooks of the recorded loan and investment +banking transactions for the month. + +1. Inflating of NAV through Improperly +Recorded Non-Binding Term Sheets + +15. From inception through December 2016, TCA routinely recorded financing deals +as revenue on the Master Fund’s financial statements on the date borrower companies signed +non-binding term sheets (“term sheet only deals”). Specifically, TCA recorded as revenue on the +Master Fund’s books the unearned accrued interest and fees associated with the term sheet only +deals. This is the interest and fees that the borrower company would pay on the loan if the + 5 +financing deal went through and became final and binding. Once recorded, the interest and fees +were also booked as assets of the Master Fund in the form of receivables, and were counted as +part of the calculation of the Master Fund’s monthly NAV going forward, therefore artificially +inflating NAV for every month the interest and fees were included in the calculation. The NAV +of each of the feeder funds was also inflated because substantially all of their respective assets +consisted of limited partnership interests of the Master Fund. + +16. TCA recorded these term sheet only deals in order to inflate the TCA Funds’ +NAV and show consistently positive performance results for the TCA Funds. On a monthly +basis, TCA added new term sheet only deals to the Master Fund’s NAV calculations and +removed various old ones. Silverman participated in the preparation of a list of the term sheet +only deals that the Master Fund was to record for the month, as well as the deals that needed to +be removed from the books because they had not closed. Once approved internally at TCA, +TCA’s staff would send this information to the fund administrator in order to calculate the +monthly NAV and performance figures. + +17. The term sheet only deals usually stayed on the Master Fund’s books and records +for months before TCA removed them. Even though these deals had not closed, and in many +instances, they did not lead to consummated transactions, year after year, TCA included them as +revenue and assets in valuation information used to calculate the Master Fund’s NAV. + +18. By recording the term sheet only deals into the Master Fund’s financial +statements, TCA did not meet the revenue recognition standards set forth in IFRS’s International +Accounting Standard (“IAS”) 18 – Revenue. + + 19. TCA’s actions in adding and removing these transactions on the Master Fund’s +books and records had the effect of obscuring the TCA Funds’ true monthly performance. + +20. Silverman knew or should have known that the data she provided to TCA staff +relating to the term sheet only deals resulted in TCA providing data to the fund administrator in +order to calculate the TCA Funds’ NAV and performance figures, and in TCA recording those deals +on the Master Fund’s books and records. + +21. After the Commission began investigating this matter, TCA stopped its practice +of recognizing loan fees as revenue prior to loan funding effective January 1, 2017. As a result, +TCA caused certain downward adjustments to be made to the NAV. TCA paid approximately +$1.5 million to investors adversely impacted by its improper revenue recognition of loan fee +revenue. + +2. Inflating of NAV through Improperly +Recorded Investment Banking Fees + +22. From January 2016 and continuing through November 2019, TCA improperly +recorded on the Master Fund’s books a cumulative total of at least $176 million in revenue from IB +Fees associated with numerous IB Agreements that were uncollectible. Once recorded as revenue, + 6 +these IB Fees became part of the TCA Funds’ monthly NAV going forward, thereby inflating +NAV for every month the IB Fees were captured in the calculation. TCA entered into these IB +Agreements in order to inflate the TCA Funds’ NAV and performance results. + +23. Despite recognizing revenue from these IB Fees upon execution of the IB +Agreements, TCA was aware that the Master Fund would not be able to collect the $176 million in +fees owed because: (i) TCA never rendered any significant services to the companies with whom it +had signed IB Fee agreements; (ii) TCA did not have staff with sufficient knowledge and +experience to provide IB services; (iii) most companies that signed IB Agreements understood that +the IB Fee was not payable until after they received that financing; and (iv) in many instances, the +IB Agreements associated with these deals were signed with companies that had no significant +assets or ability to pay the IB Fees involved. + +24. The revenue recognition standards set forth in IAS 18 and IFRS 15 (which +superseded IAS 18 on January 1, 2018) were not all met when TCA fraudulently recorded the $176 +million in IB Fees on the Master Fund’s books. In this situation, because it was not probable that +the IB Fees would be collected given the financial condition of the companies involved, the +revenue recognition requirements set forth in IAS 18 and IFRS 15 had not been met when TCA +recorded the IB Fees on the Master Fund’s books. In addition, at the time of the signing of these +IB Agreements, no significant services had been provided by the Master Fund to the companies +involved. Although the IB Agreements stated that the IB Fees were earned upon execution, +because it was not probable that the IB Fees could be collected, they should not have been recorded +as revenue. + +25. Between 2016 and December 2017, Respondent Silverman included data relating to +these fraudulent IB Agreements in data that others in TCA later sent to the fund administrator in +order to calculate the TCA Funds’ monthly NAV and performance figures. Silverman knew or +should have known that this data relating to the fraudulent IB Fees would be used by the fund +administrator to calculate the TCA Funds’ NAV and performance figures. + +3. Dissemination of False and Misleading Information to +Investors Regarding NAV and Performance Figures + +26. TCA distributed monthly “Fact Sheets” and newsletters, and GP distributed account +statements, to the TCA Funds’ investors and/or prospective investors that included inflated NAV +balances and false performance figures and monthly returns from the fraudulently recorded term +sheet only deals and the IB Agreements. In fact, the TCA Funds had never reported a down +month. However, without these transactions, the TCA Funds would have had at least 22 months of +negative returns during the period Silverman was employed at TCA. Moreover, as a result of the +revenue recognition practices described above, the statements that TCA and GP made in the TCA +Funds’ PPMs that NAV inputs would be calculated in accordance with IFRS were false and +misleading. + + + + 7 +Violations + +27. As a result of the conduct described above, Silverman willfully aided and abetted +and caused TCA’s and GP’s violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, +which prohibit fraudulent conduct in the offer or sale of securities. Sections 17(a)(2) and 17(a)(3) +of the Securities Act do not require a showing of scienter, negligence is sufficient. See Aaron v. +SEC, 446 U.S. 680, 697, 701-02 (1980). + +28. As a result of the conduct described above, Silverman willfully aided and abetted +and caused TCA’s violations of Section 206(2) of the Advisers Act, which prohibits an investment +adviser from engaging in any transaction, practice, or course of business which operates as a +fraud or deceit on any client or prospective client. Section 206(2) of the Advisers Act does not +require proof of scienter, and violation of this provision can be satisfied by a showing of simple +negligence. See SEC v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1992); SEC v. Capital Gains +Research Bureau, Inc., 375 U.S. 180, 195 (1963)). + +29. As a result of the conduct described above, Silverman willfully aided and abetted +and caused TCA’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, +which prohibit an investment adviser to a pooled investment vehicle from making +misrepresentations or omissions to or otherwise engaging in any act, practice, or course of business +that is fraudulent, deceptive or manipulative with respect to any investor or potential investor in the +pooled investment vehicle. Section 206(4) of the Advisers Act and the rules thereunder do not +require proof of scienter, and violation of these provisions can be satisfied by a showing of simple +negligence. See Steadman, 967 F.2d at 643 n. 5; Capital Gains Research Bureau, Inc., 375 U.S. at +195. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Silverman’s Offer. + + Accordingly, pursuant to Section 8A of the Securities Act and Sections 203(f) and 203(k) of +the Advisers Act, it is hereby ORDERED that: + + A. Respondent Silverman cease and desist from committing or causing any violations +and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Sections +206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. + +B. Respondent Silverman be, and hereby is, subject to the following limitations on her +activities: + +(1) Respondent shall not act in a director or officer capacity with any broker, +dealer, investment adviser, municipal securities dealer, municipal advisor, +transfer agent, or nationally recognized statistical rating organization; and + + 8 +(2) Respondent may apply to act in such a capacity after three (3) years to the +appropriate self-regulatory organization, or if there is none, to the +Commission. + +C. Any application to act in such a director or officer capacity will be subject to the +applicable laws and regulations governing the reentry process, and permission to act in such a +capacity may be conditioned upon a number of factors, including, but not limited to, compliance +with the Commission’s order and payment of any or all of the following: (a) any disgorgement or +civil penalties ordered by a Court against the Respondent in any action brought by the +Commission; (b) any disgorgement amounts ordered against the Respondent for which the +Commission waived payment; (c) any arbitration award related to the conduct that served as the +basis for the Commission order; (d) any self-regulatory organization arbitration award to a +customer, whether or not related to the conduct that served as the basis for the Commission order; +and (e) any restitution order by a self-regulatory organization, whether or not related to the conduct +that served as the basis for the Commission order. + +D. Respondent Silverman shall pay a civil penalty in the amount of $50,000 as +follows: + +1. Payment shall be made in the following installments: the first installment of +$10,000 upon the entry of this Order; subsequent installments of $10,000 shall be +paid within 90 days, 180 days, 270 days and 360 days from the date of this Order. +Payments shall be applied first to post order interest, which accrues pursuant to 31 +U.S.C. §3717. Prior to making the final payment set forth herein, Silverman shall +contact the staff of the Commission for the amount due. If Silverman fails to make +any payment by the date agreed and/or in the amount agreed according to the +schedule set forth above, all outstanding payments under this Order, including post- +order interest, minus any payments made, shall become due and payable +immediately at the discretion of the staff of the Commission without further +application to the Commission. + +2. Payments shall be made to Jonathan E. Perlman, Esq. of Genovese Joblove & +Battista, P.A., the Receiver appointed by the United States District Court for the +Southern District of Florida in the action SEC v. TCA Fund Management Group +Corp. et al., Case No. 1:20-cv-21964 (S.D. Fla.), for inclusion in the receivership +estate established in that action and distribution pursuant to a Court-approved +distribution plan. Payment must be made in one of the following ways: + +(a) Respondent may transmit payment electronically to Jonathan E. Perlman, +Receiver, who will provide detailed ACH transfer/Fedwire instructions +upon request; or + +(b) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to Jonathan E. Perlman, Receiver, +and hand-delivered or mailed to: + 9 + +Jonathan E. Perlman, Esq., Receiver +Genovese Joblove & Battista, P.A. +100 SE 2nd Street, Suite 400 +Miami, Florida 33131 + +Payments must be submitted under cover letter that identifies Silverman as +Respondent in these proceedings, and the file number of these proceedings. +Respondent shall simultaneously transmit photocopies of evidence of payment and +the cover letter sent to the Receiver to: Chedly C. Dumornay, Assistant Regional +Director, Division of Enforcement, Securities and Exchange Commission, 801 +Brickell Ave., Suite 1950, Miami, FL 33131. + + E. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is +created for the civil penalty referenced in paragraph D. above. This Fair Fund may receive the +funds from and/or be combined with funds paid by other respondents or defendants, including +without limitation defendants in the SEC v. TCA Fund Management Group Corp. et al. litigation. +The amount ordered to be paid as a civil money penalty pursuant to this Order shall be treated as +penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, she +shall not argue that she is entitled to, nor shall she benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in +this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty +Offset, Respondent agrees that she shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission's counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed +in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a private +damages action brought against Respondent by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + 10 +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent Silverman, and further, any debt for civil penalty or other amounts due by her under +this Order or any other judgment, order, consent order, decree or settlement agreement entered in +connection with this proceeding, is a debt for the violation by Respondent of the federal securities +laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the +Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4263.txt b/raw/aaer/2021/AAER-4263.txt new file mode 100644 index 0000000000000000000000000000000000000000..0b8f27ef35c0499a4cd1e0ae6bd07238ca1af0e3 --- /dev/null +++ b/raw/aaer/2021/AAER-4263.txt @@ -0,0 +1,518 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10991 / September 30, 2021 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93200 / September 30, 2021 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5879 / September 30, 2021 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 34391 / September 30, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4263 / September 30, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3 - 20610 + + + +In the Matter of + +ROBERT D. PRESS, + +Respondent. + + + + +ORDER INSTITUTING ADMINISTRATIVE +AND CEASE-AND-DESIST PROCEEDINGS, +PURSUANT TO SECTION 8A OF THE +SECURITIES ACT OF 1933, SECTION 21C +OF THE SECURITIES EXCHANGE ACT OF +1934, SECTIONS 203(f) AND 203(k) OF THE +INVESTMENT ADVISERS ACT OF 1940, +AND SECTION 9(b) OF THE INVESTMENT +COMPANY ACT OF 1940, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Section 21C of +the Securities Exchange Act of 1934 (“Exchange Act”), Sections 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 (“Company Act”) against Robert D. Press (“Press” or “Respondent”). + + 2 +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V., Respondent +consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, +Pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, Sections 203(f) +and 203(k) of the Advisers Act, and Section 9(b) of the Company Act, Making Findings, and +Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. TCA Fund Management Group Corp. (“TCA”) is the registered investment adviser +to TCA Global Credit Master Fund, LP (the “Master Fund”) and its two feeder funds, TCA Global +Credit Fund, LP (“Feeder Fund LP”) and TCA Global Credit Fund, Ltd. (“Feeder Fund Ltd.”) +(collectively, the “TCA Funds”). TCA Global Credit Fund GP, Ltd. (“GP”) is the general partner +to the Master Fund and Feeder Fund LP. The Master Fund focused solely on investing in short- +term, senior secured debt and equity-related investments, and providing investment banking +services for a fee to small and medium-sized companies. The feeder funds invested substantially all +of their assets into the Master Fund. + +2. TCA and GP fraudulently inflated the TCA Funds’ net asset value (“NAV”) and +performance results through the recording of non-binding transactions from 2010 through +December 2016, and through the recording of fraudulent investment banking fees from January +2016 through November 2019. TCA also misled the TCA Funds’ investors with respect to the +performance of the TCA Funds by improperly including a promissory note of $34.3 million as +income in the Master Fund’s 2015 financial statements. Press approved worksheets prepared by +TCA for the TCA Funds’ monthly NAV that included these non-binding transactions and fraudulent +investment banking fees. TCA sent this information to an outside independent fund administrator +(the “fund administrator”) who used it to calculate the TCA Funds’ monthly NAV and performance +results. Press’ severely reckless actions resulted in TCA providing this data to the fund +administrator and recording the non-binding transactions and fraudulent investment banking fees on +the TCA Funds’ books and records. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 +Respondent + + 3. Robert Press, 57, resides in Aventura, Florida. Press is the founder and former +owner, Chief Executive Officer and director of TCA. He is also the former owner and director of +GP. + +Relevant Entities + + 4. TCA Fund Management Group Corp. was formed in 2011 and is an investment +adviser registered with the Commission since August 13, 2014. TCA is a Florida corporation +headquartered in Aventura, Florida, with other offices in New York, Las Vegas, London, and +Melbourne, Australia. + + 5. TCA Global Credit Fund GP, Ltd. is a Cayman Islands company formed in January +2010. GP serves as the general partner of Feeder Fund LP and the Master Fund. + + 6. TCA Global Credit Fund, LP is a Cayman Islands limited partnership formed in +March 2010. Feeder Fund LP engaged in investment activities as an unregistered private +investment fund. TCA serves as Feeder Fund LP’s investment adviser and GP is its general +partner. + + 7. TCA Global Credit Fund, Ltd. is a Cayman Islands company formed in March +2010. Feeder Fund Ltd. engaged in investment activities as an unregistered private investment +fund. TCA serves as Feeder Fund Ltd.’s investment adviser. + + 8. TCA Global Credit Master Fund, LP is a Cayman Islands limited partnership +formed in March 2010. It serves as the master fund in a master-feeder structure for Feeder Fund +LP and Feeder Fund Ltd. TCA serves as the Master Fund’s investment adviser and GP is its +general partner. + +District Court Action + + 9. On May 11, 2020, the Commission filed a partially settled civil action in United +States District Court for the Southern District of Florida against TCA and GP based on violations +of the antifraud provisions. The Commission’s complaint alleged that between early 2010 through +November 2019, TCA and GP fraudulently inflated the TCA Funds’ NAV and performance results +by recording non-binding transactions and fraudulent investment banking services agreements. On +May 12, 2020, the Court entered a consented-to judgment that, among other things, enjoined TCA +and GP from future violations of the antifraud provisions. TCA and GP voluntarily consented to +the appointment of Jonathan Perlman, Esq. of Genovese Joblove & Battista, P.A. as Receiver over +TCA, GP, and the TCA Funds. See SEC v. TCA Fund Management Group Corp. et al., Case No. +1:20-cv-21964 (S.D. Fla.). + + + + 4 +Facts + +A. Background + +10. TCA has served as the investment adviser to the TCA Funds from September 2011 +until the present. TCA’s Master Fund focused solely on providing short-term, senior secured debt +and equity-related investments, and providing investment banking services for a fee to small and +medium-sized companies (“portfolio companies”). Feeder Fund LP and Feeder Fund Ltd. raised +money from investors through private sales of securities in the funds, which was then invested in +limited partnership interests in the Master Fund. Upon investing, investors in Feeder Fund Ltd. +received shares, and investors in Feeder Fund LP received limited partnership interests. As of +November 30, 2019, the date of their last reported NAV, the TCA Funds reported a consolidated +net asset value of $516 million and had a combined total of about 470 investor accounts. + +B. The Master Fund’s Investment Strategy + +11. The Master Fund provided financing investments to small and medium-sized +companies. A typical financing had interest rates ranging from 12% to 18% per year, and +required the company borrower to pay various fees at closing and over the duration of the loan. +After an initial vetting process, the Master Fund and the potential borrower signed a non-binding +“term sheet” that set forth the possible financing terms, and the company borrower would pay a +small fee in order to proceed to further due diligence review by TCA’s underwriting department. +If the company met TCA’s underwriting criteria, then transaction documents were executed at +closing by the borrower and by TCA on behalf of the Master Fund. + +12. At closing, borrowers were usually also required to sign either an “investment +banking” or “advisory services” agreement (“IB Agreement”) with the Master Fund. The IB +Agreements required companies to pay an “investment banking” or “advisory” fee (“IB Fee”) to +the Master Fund that was “earned upon execution” of the agreement, in consideration for certain +investment banking services that the Master Fund claimed it would provide the company. + +13. At all times, Press was responsible for the overall investment strategy of the TCA +Funds and had the final word on all investment decisions TCA made on behalf of the TCA +Funds. In addition, he approved information relating to the Master Fund’s monthly revenue and +portfolio asset values that was incorporated in valuation information that TCA sent to the fund +administrator each month. + +C. TCA Inflated the TCA Funds’ Monthly NAV and Performance Figures + +14. Feeder Fund LP and Feeder Fund Ltd.’s private placement memoranda (“PPMs”) +state that their NAV inputs are calculated on an accrual basis in accordance with International +Financial Reporting Standards (“IFRS”). TCA was responsible for valuation of the Master +Fund’s assets and, every month, it sent valuation information on the Master Fund’s investment +portfolio to the fund administrator hired to calculate the TCA Funds’ NAV and performance +figures, and account balances for the feeder funds’ investors based on those NAV and + 5 +performance figures. The information the fund administrator received from TCA included +monthly listings, spreadsheets and workbooks of the recorded loan and investment banking +transactions for the month. Since inception, Press signed off on each month’s final NAV report. + +1. Inflating of NAV through Improperly +Recorded Non-Binding Term Sheets + +15. From inception through December 2016, TCA routinely recorded financing deals +as revenue on the Master Fund’s financial statements on the date borrower companies signed +non-binding term sheets (“term sheet only deals”). Specifically, TCA recorded as revenue on the +Master Fund’s books the unearned accrued interest and fees associated with the term sheet only +deals. This is the interest and fees that the borrower company would pay on the loan if the +financing deal went through and became final and binding. Once recorded, the interest and fees +were also booked as assets of the Master Fund in the form of receivables, and were counted as +part of the calculation of the Master Fund’s monthly NAV going forward, therefore artificially +inflating NAV for every month the interest and fees were included in the calculation. The NAV +of each of the feeder funds was also inflated because substantially all of their respective assets +consisted of limited partnership interests of the Master Fund. + +16. TCA recorded these term sheet only deals in order to inflate the TCA Funds’ NAV +and show consistently positive performance results for the TCA Funds. On a monthly basis, TCA +added new term sheet only deals to the Master Fund’s NAV calculations and removed various old +ones. Based on recommendations from TCA’s staff, Press would decide each month which term +sheet only deals to record on the Master Fund’s books and which of the previously recorded ones +that had not closed, to remove from the books. In particular, TCA’s staff would prepare a monthly +listing of the term sheet only deals to record and would provide the list to Press for his review and +approval. Once approved by Press, TCA’s staff would send this information to the fund +administrator in order to calculate the monthly NAV and performance figures. + +17. The term sheet only deals usually stayed on the Master Fund’s books and records +for months before TCA removed them. Even though these deals had not closed, and in many +instances, they did not lead to consummated transactions, year after year, TCA included them as +revenue and assets in valuation information used to calculate the Master Fund’s NAV. + +18. By recording the term sheet only deals into the Master Fund’s financial +statements, TCA did not meet the revenue recognition standards set forth in IFRS’s International +Accounting Standard (“IAS”) 18 – Revenue. + +19. TCA’s actions in adding and removing these transactions on the Master Fund’s +books and records had the effect of obscuring the TCA Funds’ true monthly performance. At all +relevant times, TCA had no written policies and procedures for when loan transactions were to be +recorded or reversed on the Master Fund’s books. + + 6 +20. Press’ severely reckless actions resulted in TCA providing data relating to the term +sheet only deals to the fund administrator in order to calculate the TCA Funds’ NAV and +performance figures, and in TCA recording those deals on the Master Fund’s books and records. + +21. After the Commission began investigating this matter, TCA stopped its practice +of recognizing loan fees as revenue prior to loan funding effective January 1, 2017. As a result, +TCA caused certain downward adjustments to be made to the NAV. TCA paid approximately +$1.5 million to investors adversely impacted by its improper revenue recognition of loan fee +revenue. + +2. Inflating of NAV through Improperly +Recorded Investment Banking Fees + +22. From January 2016 and continuing through November 2019, TCA improperly +recorded on the Master Fund’s books a cumulative total of at least $176 million in revenue from IB +Fees associated with numerous IB Agreements that were uncollectible. Once recorded as revenue, +these IB Fees became part of the TCA Funds’ monthly NAV going forward, thereby inflating +NAV for every month the IB Fees were captured in the calculation. TCA entered into these IB +Agreements in order to inflate the TCA Funds’ NAV and performance results. + +23. Despite recognizing revenue from these IB Fees upon execution of the IB +Agreements, TCA was aware that the Master Fund would not be able to collect the $176 million in +fees owed because: (i) TCA never rendered any significant services to the companies with whom it +had signed IB Fee agreements; (ii) TCA did not have staff with sufficient knowledge and +experience to provide IB services; (iii) most companies that signed IB Agreements understood that +the IB Fee was not payable until after they received that financing; and (iv) in many instances, the +IB Agreements associated with these deals were signed with companies that had no significant +assets or ability to pay the IB Fees involved. + +24. The revenue recognition standards set forth in IAS 18 and IFRS 15 (which +superseded IAS 18 on January 1, 2018) were not all met when TCA fraudulently recorded the $176 +million in IB Fees on the Master Fund’s books. In this situation, because it was not probable that +the IB Fees would be collected given the financial condition of the companies involved, the +revenue recognition requirements set forth in IAS 18 and IFRS 15 had not been met when TCA +recorded the IB Fees on the Master Fund’s books. In addition, at the time of the signing of these +IB Agreements, no significant services had been provided by the Master Fund to the companies +involved. Although the IB Agreements stated that the IB Fees were earned upon execution, +because it was not probable that the IB Fees could be collected, they should not have been recorded +as revenue. + +25. TCA sent the data relating to these fraudulent IB Agreements to the fund +administrator. Press reviewed and approved a monthly “Pipeline Report” of signed IB Agreements +and associated IB Fees, and made the final decision on which IB Fees to record as revenue. +Information from the Pipeline Report was included in data TCA sent to the fund administrator in +order to calculate the TCA Funds’ monthly NAV and performance figures. TCA had no written + 7 +policies and procedures in place with regard to recording IB Fees for the Master Fund until about +the fourth quarter of 2018, and once such policies and procedures were in place, TCA did not +follow them. + +26. Press’ severely reckless actions resulted in TCA providing data relating to the $176 +million in fraudulent IB Fees to the fund administrator in order to calculate the TCA Funds’ NAV +and performance figures, and in TCA recording those transactions as revenue on the Master Fund’s +books and records. + +3. Dissemination of False and Misleading Information to +Investors Regarding NAV and Performance Figures + +27. TCA distributed monthly “Fact Sheets” and newsletters, and GP distributed account +statements, to the TCA Funds’ investors and/or prospective investors that included inflated NAV +balances, and false performance figures and monthly returns from the fraudulently recorded term +sheet only deals and the IB Agreements. In fact, the TCA Funds had never reported a down +month. However, without these transactions, the TCA Funds would have had at least 34 months of +negative returns since inception. Moreover, as a result of the revenue recognition practices +described above, the statements that TCA and GP made in the TCA Funds’ PPMs that NAV inputs +would be calculated in accordance with IFRS were false and misleading. + +4. Manipulation of Performance Figures through Fee Waivers + +28. In at least 14 separate months between May 2014 and November 2019, TCA and +GP waived management and performance fees to further achieve the higher performance +figures. For those months, after the fund administrator would send TCA the initial monthly NAV +and performance figures for review and approval, TCA’s staff would write back requesting that the +administrator recalculate the NAV based on Press’ decision to now waive management or +performance fees. For at least one month, waiving the fees also changed what was originally a +month of negative returns for the TCA Funds into positive gains. Although the TCA Funds’ PPMs +stated that TCA and GP could waive fees for any period of time, there was never any disclosure to +investors in the PPMs or in other communications that these waivers, rather than the successful +result of TCA’s strategies, were one of the reasons for the TCA Funds’ consistent, positive +performance. + +5. Overcharging of Management and Performance Fees by TCA and GP + +29. As a result of TCA artificially inflating the TCA Funds’ NAV and performance +figures, the funds were overcharged monthly management and performance fees by TCA and GP, +respectively. In total, the TCA Funds were overcharged fees of approximately $10.5 million. + +D. Promissory Note between TCA and the Master Fund + +30. In preparing the 2015 financial statements, the TCA Funds’ outside auditor +identified a $29 million markdown in investment income that would have resulted in a net + 8 +operating loss to be reported in the TCA Funds’ financial statements. To avoid having to report +this loss, TCA recorded as “Other Income” on the Master Fund’s 2015 financial statements a $34.3 +million assignment of income from TCA to the Master Fund in the form of a promissory note. +Pursuant to this assignment, TCA agreed to assign certain income to the Master Fund in 2015, +which would not be payable until 2018. Both the assignment of income agreement and promissory +note were signed by Press and dated as of December 31, 2015. This assigned income increased the +Master Fund’s gross income by that amount and resulted in the fund reporting a net income of +about $30.7 million for the year. + +31. The $34.3 million assignment of income and promissory note had the effect of +misleading investors into believing that the TCA Funds had positive performance derived from +their investment activity. Without the purported income from the promissory note, TCA faced the +prospect of reporting operating losses on the TCA Funds’ year-ended 2015 audited financial +statements because of the adjustments to revenue the outside auditor had identified. Since TCA +was required to provide these financial statements to investors, the loss would have contradicted +the 12 months of positive gains already reported in the TCA Funds’ monthly Fact Sheets and +account statements throughout the year. Press approved TCA’s recording of the assignment of +income on the Master Fund’s financial statements. + +E. Untrue Statements in TCA’s Form ADV Filings + +32. TCA was required to file annual Forms ADV with the Commission. Press signed +Forms ADV on behalf of TCA that reported overstated regulatory assets under management for +TCA and gross asset value for the Master Fund figures in Forms ADV filed with the Commission +on September 30, 2015, March 29, 2016, September 15, 2016, March 21, 2017, April 17, 2018, +and September 14, 2018. The asset values in the Forms ADV were overstated because they +included deals booked at the non-binding term sheet only stage of the lending process and the +fraudulent IB Fees. + +Violations + +33. As a result of the conduct described above, Press willfully violated Section 17(a) of +the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit +fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of +securities. + + 34. As a result of the conduct described above, Press willfully violated Section 206(1) +of the Advisers Act, which prohibits an investment adviser from employing any device, scheme, or +artifice to defraud, and Section 206(2) of the Advisers Act, which prohibits an investment adviser +from engaging in any transaction, practice, or course of business which operates as a fraud or +deceit on any client or prospective client. + + 35. As a result of the conduct described above, Press willfully violated Section 206(4) +of the Advisers Act and Rule 206(4)-8 thereunder, which prohibit an investment adviser to a +pooled investment vehicle from making misrepresentations or omissions to or otherwise engaging + 9 +in any act, practice, or course of business that is fraudulent, deceptive or manipulative with respect +to any investor or potential investor in the pooled investment vehicle. + +36. As a result of the conduct described above, Press willfully aided and abetted and +caused TCA’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, +which require investment advisers registered with the Commission to, among other things, adopt +and implement written policies and procedures reasonably designed to prevent violations of the +Advisers Act and the rules promulgated thereunder. + +37. As a result of the conduct described above, Press willfully violated Section 207 of +the Advisers Act, which makes it unlawful for any person willfully to make any untrue statement +of a material fact in any registration application or report filed with the Commission, or willfully to +omit to state in any such application or report any material fact which is required to be stated +therein. + +Disgorgement and Civil Penalties + +38. The disgorgement and prejudgment interest ordered in paragraph IV.D. below, are +consistent with equitable principles and does not exceed Respondent’s net profits from his +violations, and will be distributed to harmed investors to the extent feasible. + +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Press’ Offer. + + Accordingly, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange +Act, Sections 203(f) and 203(k) of the Advisers Act, and Section 9(b) of the Company Act, it is +hereby ORDERED that: + + A. Respondent Press cease and desist from committing or causing any violations and +any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and +Rule 10b-5 thereunder, and Sections 206(1), 206(2), 206(4) and 207 of the Advisers Act and Rules +206(4)-7 and 206(4)-8 thereunder. + +B. Respondent Press be, and hereby is: + +barred from association with any broker, dealer, investment adviser, municipal +securities dealer, municipal advisor, transfer agent, or nationally recognized +statistical rating organization; and + +prohibited from serving or acting as an employee, officer, director, member of an +advisory board, investment adviser or depositor of, or principal underwriter for, a +registered investment company or affiliated person of such investment adviser, +depositor, or principal underwriter. + + 10 + C. Any reapplication for association by the Respondent will be subject to the +applicable laws and regulations governing the reentry process, and reentry may be conditioned +upon a number of factors, including, but not limited to, compliance with the Commission’s order +and payment of any or all of the following: (a) any disgorgement or civil penalties ordered by a +Court against the Respondent in any action brought by the Commission; (b) any disgorgement +amounts ordered against the Respondent for which the Commission waived payment; (c) any +arbitration award related to the conduct that served as the basis for the Commission order; (d) any +self-regulatory organization arbitration award to a customer, whether or not related to the conduct +that served as the basis for the Commission order; and (e) any restitution order by a self-regulatory +organization, whether or not related to the conduct that served as the basis for the Commission +order. + +D. Respondent shall pay disgorgement of $4,409,546, prejudgment interest of +$755,178, and civil penalty in the amount of $292,570 as follows: + +1. Payment shall be made in the following installments: the first installment of +$1,364,326 upon the entry of this Order; subsequent installments of $500,000, +$750,000, $1,000,000, and $1,842,968 shall be paid within 90 days, 180 days, 270 +days, and 360 days, respectively, from the date of this Order. Payments shall be +applied first to post order interest, which accrues pursuant to SEC Rule of Practice +600 and/or pursuant to 31 U.S.C. §3717. Prior to making the final payment set +forth herein, Respondent shall contact the staff of the Commission for the amount +due. If Respondent fails to make any payment by the date agreed and/or in the +amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-order interest, minus any payments made, shall +become due and payable immediately at the discretion of the staff of the +Commission without further application to the Commission. + +2. Payments shall be made to Jonathan E. Perlman, Esq. of Genovese Joblove & +Battista, P.A., the Receiver appointed by the United States District Court for the +Southern District of Florida in the action SEC v. TCA Fund Management Group +Corp. et al., Case No. 1:20-cv-21964 (S.D. Fla.), for inclusion in the receivership +estate established in that action and distribution pursuant to a Court-approved +distribution plan. Payment must be made in one of the following ways: + +(a) Respondent may transmit payment electronically to Jonathan E. Perlman, +Receiver, who will provide detailed ACH transfer/Fedwire instructions +upon request; or + +(b) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to Jonathan E. Perlman, Receiver, +and hand-delivered or mailed to: + +Jonathan E. Perlman, Esq., Receiver +Genovese Joblove & Battista, P.A. + 11 +100 SE 2nd Street, Suite 400 +Miami, Florida 33131 + +Payments must be submitted under cover letter that identifies Press as Respondent +in these proceedings, and the file number of these proceedings. Respondent shall +simultaneously transmit photocopies of evidence of payment and the cover letter +sent to the Receiver to: Chedly C. Dumornay, Assistant Regional Director, Division +of Enforcement, Securities and Exchange Commission, 801 Brickell Ave., Suite +1950, Miami, FL 33131. + + E. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is +created for the disgorgement, prejudgment interest, and penalties referenced in paragraph D. +above. This Fair Fund may receive the funds from and/or be combined with funds paid by other +respondents or defendants, including without limitation defendants in the SEC v. TCA Fund +Management Group Corp. et al. litigation. The amount ordered to be paid as a civil money penalty +pursuant to this Order shall be treated as penalties paid to the government for all purposes, +including all tax purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees +that in any Related Investor Action, he shall not argue that he is entitled to, nor shall he benefit by, +offset or reduction of any award of compensatory damages by the amount of any part of +Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court in any +Related Investor Action grants such a Penalty Offset, Respondent agrees that he shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. Such +a payment shall not be deemed an additional civil penalty and shall not be deemed to change the +amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a “Related +Investor Action” means a private damages action brought against Respondent by or on behalf of +one or more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + 12 +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4264.txt b/raw/aaer/2021/AAER-4264.txt new file mode 100644 index 0000000000000000000000000000000000000000..0a66fdfc60b2628d906aeaafd00c4bc9c1305756 --- /dev/null +++ b/raw/aaer/2021/AAER-4264.txt @@ -0,0 +1,309 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93341 / October 15, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4264 / October 15, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20624 + +In the Matter of + +AMYRIS, 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 Amyris, Inc. (“Amyris” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +And-Desist Proceedings Pursuant To Section 21C Of The Securities Exchange Act Of 1934, +Making Findings, And Imposing A Cease-And-Desist Order (“Order”), as set forth below. + +2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +Summary +1. During the first two quarters of 2018, Amyris improperly recognized certain royalty +revenues that rendered its financial statements materially inaccurate. These revenue recognition +errors resulted from internal accounting control failures that led to important information not being +communicated to the company’s internal accounting staff concerning certain significant royalty +payments, which also resulted in Amyris’s failure to make and keep accurate books and records. +2. Amyris failed to devise internal accounting controls to provide reasonable +assurance that relevant information was communicated to its accounting staff so that transactions, +including the estimation of royalty revenue could be recorded in accordance with U.S. generally +accepted accounting principles (“GAAP”). Amyris also lacked sufficient resources within its +finance and accounting function to provide reasonable assurance that the company properly +applied GAAP to its royalty revenue transactions. +3. As a consequence of Amyris’s control insufficiencies, it overstated its royalty +revenues in the first two quarters of 2018, rendering the company’s financial statements materially +inaccurate and leading to the Company’s restatement of its quarterly revenue results for the first +three quarters of 2018. As a result of this conduct, Amyris violated Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 13a-11 and 13a-13 thereunder. +Respondent +4. Amyris is a Delaware corporation with its principal place of business in +Emeryville, California. It researches and develops chemical products. At all relevant times, +Amyris’s stock was registered with the Commission pursuant to Section 12(b) of the Securities +Exchange Act of 1934 and traded on the NASDAQ Global Select Market under the ticker +“AMRS.” +Background +5. In April 2016, Amyris entered into a contract with Company A to supply it with +farnesene, a chemical compound that Amyris had developed. Company A intended to use this +farnesene to create and sell Vitamin E products. The contract between Amyris and Company A +included a “value sharing” component, whereby Company A would remit a portion of the sales of +its Vitamin E products to Amyris as royalties, so long as the sales price for these products +exceeded certain specified price floors. +6. About eighteen months later, in December 2017, Amyris entered into an agreement +with Company B, under which Amyris, among other things, transferred its farnesene- + +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 +manufacturing capabilities to Company B and entered into a license agreement with Company B to +create farnesene using Amyris’s intellectual property. Under this agreement, Amyris entered into a +value sharing arrangement with Company B and assigned to Company B Amyris’s rights under the +farnesene supply agreement with Company A. As a result, after December 2017, Company A was +contractually obligated to send its Vitamin E royalty payments to Company B, and Company B +was in turn contractually obligated to send those payments to Amyris. +7. At all relevant times, in its Forms 10-Q filed with the Commission, Amyris +represented that the financial statements included in those forms were prepared in accordance with +GAAP. Under Accounting Standards Codification 606-10-55-65 (“ASC 606”) sales-based +royalties promised in exchange for a license to intellectual property, such as the value sharing +payments described above, are considered variable consideration and should only be recognized to +the extent it is probable a significant reversal of cumulative revenue recognized will not occur +when the uncertainty associated with the variable consideration is subsequently resolved, as +specified in Accounting Standards Codification 606-10-32-11 through 32-14. +8. Amyris reported material weaknesses in its internal control over financial reporting, +applicable to its fiscal year 2018, in its Form 10-K that was filed with the Commission on October +1, 2019. These weaknesses were based upon, among other things, a lack of processes sufficient to +provide reasonable assurance that relevant and reliable information was communicated timely to +the company’s accounting staff, and a lack of sufficient resources within its finance and accounting +function to provide reasonable assurance regarding the proper application of GAAP to its royalty +revenue transactions. +Amyris Improperly Recognized Certain Royalty Revenues Because it Failed to Share +Important Information with its Accounting Staff +9. After Amyris’s first fiscal quarter of 2018 ended on March 31, 2018, Amyris’s +accounting staff began estimating its royalty revenues for the quarter under the value sharing +arrangement described above. Using a combination of information provided by Company A +regarding its sales of Vitamin E products and publicly-available market pricing data for Vitamin E, +Amyris’s accounting staff eventually estimated Amyris would receive royalty revenues of $11.4 +million. +10. On or about April 13, 2018, Company A told an Amyris employee responsible for +Amyris’s relationship with Company A that it calculated the first-quarter value sharing payment at +about $8 million, which was significantly below Amyris’s estimate of $11.4 million. The Amyris +employee shared this information with Amyris senior executives. Based on this information, +Amyris should have reduced its estimated royalty revenue for the first quarter to $8 million, since it +was probable that a significant portion of a revenue figure of $11.4 million would be subject to +reversal. The Amyris executives, however, doubted the accuracy of Company A’s calculations and +the data supporting those calculations because the data included below-market prices. Although +Amyris’s accounting staff received some information regarding Company A’s first-quarter sales +volume and pricing, it did not receive complete sales and pricing information for the entire quarter, +nor did it receive Company A’s $8 million royalty calculation. As a result, the accounting staff did + +4 +not have all the information it needed in order to assess whether Amyris’s revenue estimate should +be reduced by $3.4 million. +11. Accordingly, in its books and records for the first quarter of 2018, Amyris +improperly recognized $11.4 million of license and royalty revenue related to the value sharing +arrangement with Company B described above, but as the company later determined, it should +have recognized only $8 million. On May 14, 2018, Amyris furnished a Form 8-K to the +Commission in which it reported first-quarter 2018 revenue of $23 million and license and royalty +revenues of $11.4 million. On May 18, 2018, Amyris filed its Form 10-Q for the first quarter of +2018, which repeated these figures. +12. Amyris’s royalty arrangement with Company B was a significant transaction that +would constitute substantially all of the royalty revenue presented in Amyris’s income statement. +Amyris’s insufficient internal accounting controls relating to communications with accounting +personnel and Amyris’s ability to account for significant royalty revenue transactions contributed to +the financial errors in the first-quarter 2018 Form 10-Q. +13. After Amyris’s second fiscal quarter of 2018 ended on June 30, 2018, Amyris’s +accounting staff again began estimating its royalty revenues for the quarter. On July 13, the +company’s accounting staff estimated second-quarter royalty revenues at $7.4 million. This +estimate was based on an analysis of farnesene volumes shipped to Company A and publicly- +available market pricing data for Vitamin E. +14. On or about July 18, Company A told Company B that the second-quarter value +sharing payment would be $0 because Company A’s sales of Vitamin E products occurred at +prices lower than the contractually specified price floors. Company B shared this information with +an Amyris executive, who shared it with other Amyris senior executives. Based on this +information, Amyris should have reduced its estimated royalty revenue for the second quarter to +zero, since it was probable that a significant portion of the $7.4 million would be subject to +reversal. However, Amyris’s executives again doubted the accuracy of Company A’s calculations +and the data supporting those calculations because it included below-market prices. No one at +Amyris communicated Company A’s underlying sales data or its royalty calculation to the +accounting staff and, as a result, the accounting staff did not have all of the information it needed +in order to assess whether Amyris’s revenue estimate should be reduced. +15. Accordingly, in its books and records for the second quarter of 2018, Amyris +improperly recognized $7.4 million of license and royalty revenue related to the value sharing +arrangement described above. On August 6, 2018, Amyris furnished a Form 8-K to the +Commission in which it reported second-quarter 2018 revenue of $24.8 million and license and +royalty revenue of $6.9 million.2 On August 14, 2018, Amyris filed its Form 10-Q for the second +quarter of 2018, which repeated these figures. + +2 The second-quarter financial statements reported $6.9 million in royalty revenues, rather than +$7.4 million, due to an adjustment to certain payments accounted for in an earlier period. + +5 +16. Amyris’s insufficient internal accounting controls relating to communications with +accounting personnel and Amyris’s inability to account for significant royalty revenue transactions +contributed to the financial errors in the second-quarter 2018 Form 10-Q. +17. After Amyris’s third fiscal quarter of 2018 ended on September 30, 2018, the +company’s accounting staff began preparing the company’s quarter-end financial statements. By +this time, Amyris’s accounting staff had received certain information regarding Company A’s +actual first-quarter and second-quarter Vitamin E sales which suggested that Amyris’s first-quarter +and second-quarter royalty revenue estimates were materially overstated. Amyris’s accounting +staff discussed with a senior Amyris executive the possibility of reversing some of the license and +royalty revenue recognized in the first and second quarters described above, but the senior +executive continued to believe that Company A’s sales data and royalty calculations for those +quarters were inaccurate and believed Company B would pay the previously-recognized royalty +revenues. In reliance on this information, Amyris’s accounting staff erroneously concluded that +the company did not need to reverse any of its first-quarter or second-quarter royalty revenues. +18. Amyris’s insufficient internal accounting controls relating to communications with +accounting personnel and Amyris’s ability to account for significant royalty revenue transactions +contributed to Amyris’s failure to reverse any of its first-quarter or second-quarter royalty revenues +in the third-quarter 2018 Form 10-Q. +19. Although Amyris did not recognize any additional royalty revenues in the third +quarter of 2018, on November 13, 2018, Amyris furnished a Form 8-K to the Commission in +which it reported that its revenues for the first nine months of 2018 were $61.1 million; this +amount included the improperly-recognized royalty revenues from the first two quarters. On +November 15, 2018, Amyris filed its Form 10-Q for the third quarter of 2018, which repeated this +figure. +20. On March 18, 2019, Amyris furnished a Form 8-K to the Commission in which it +reported that its revenues for the 2018 fiscal year were $80.4 million; this amount included the +improperly-recognized royalty revenues from the first two quarters of the year. +21. After the company furnished its March 18, 2019 Form 8-K, Amyris’s auditor +obtained information showing when Amyris had received Company A’s royalty calculations from +the first and second quarters of 2018. After subsequent discussions with the auditor, Amyris +decided to restate its financial statements to reverse the revenue it had improperly recognized in +those quarters. +22. On April 11, 2019, Amyris filed a Form 8-K with the Commission in which it +disclosed that its recognition of the royalty payments discussed above were materially erroneous +and that its system of internal control over financial reporting was not effective as of December 31, +2018. The company further disclosed that it anticipated restating its financial statements for the +first three quarters of 2018, and that its full-year 2018 financial results, as announced on March 18, +2019, would likely be reduced by between $12 million and $16 million. + +6 +23. On October 1, 2019, Amyris filed its Form 10-K for 2018, in which it restated the +financial results it had reported in its Forms 10-Q for the first three quarters of 2018. The restated +figures reduced Amyris’s first-quarter and second-quarter royalty revenues to $8 million and $0, +respectively, decreasing the company’s total revenues for the first and second quarters by 15% and +32%, respectively. +24. In determining whether to accept Amyris’s Offer, the Commission has considered +the company’s current financial condition. +Violations +25. As a result of the conduct described above, Amyris violated Section 13(a) of the +Exchange Act and Rules 13a-11 and 13a-13 thereunder, which require issuers to file accurate +current and quarterly reports. +26. As a result of the conduct described above, Amyris violated Section 13(b)(2)(A) of +the Exchange Act, which requires an issuer to make and keep books, records, and accounts which, +in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of Assets. +27. As a result of the conduct described above, Amyris violated Section 13(b)(2)(B) of +the Exchange Act, which requires an issuer 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 and specific authorization; transactions are recorded as necessary to +permit preparation of financial statements in conformity with GAAP or any other criteria +applicable to such statements, and to maintain accountability for assets; access to assets is +permitted only in accordance with management’s general or specific authorization; and the +recorded accountability for assets is compared with the existing assets at reasonable intervals and +appropriate action is taken with respect to any differences. +Remediation +28. Since the conduct described above, the company hired multiple additional +experienced accounting personnel, hired a Chief Financial Officer with greater accounting +expertise, and retained an external consultant to help design and test its internal control over +financial reporting. In particular, Amyris enhanced its controls around the quarter-end closing +process and around its accounting for significant transactions. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Amyris’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 13a-11 and 13a-13 thereunder. + +7 + +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $300,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Amyris 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 Monique C. Winkler, Associate Regional +Director, Division of Enforcement, Securities and Exchange Commission, 44 Montgomery Street, +Suite 2800, San Francisco, California 94104. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a + + +8 +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4266.txt b/raw/aaer/2021/AAER-4266.txt new file mode 100644 index 0000000000000000000000000000000000000000..3102e8e4da6714a71b3b358b0bc930b10913f8b9 --- /dev/null +++ b/raw/aaer/2021/AAER-4266.txt @@ -0,0 +1,84 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93548 / November 10, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4266 / November 10, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20649 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +DOUGLAS A. ROTH, : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Douglas A. Roth (“Roth”) pursuant to Rule 102(e)(2) of the +Commission’s Rules of Practice [17 C.F.R. § 201.102(e)(2)].1 + + II. + +The Commission finds that: + +1. Roth, age 64, was Chief Financial Officer (“CFO”) of Aceto Corporation (“Aceto”) +from 2001 until his retirement on March 31, 2018. As CFO, Roth was Aceto’s principal +financial and accounting officer. +2. On November 9, 2020, Roth pleaded guilty to an Information charging him with +insider trading. The Information alleged that, contrary to his duty to maintain confidentiality of +information concerning Aceto’s business and not engage in trading while in possession of +material, non-public information (“MNPI”) about Aceto, Roth engaged in a fraudulent scheme + +1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + + + + +2 + +whereby he executed and caused others to execute securities transactions in Aceto based on +MNPI that he obtained in his capacity as an employee of Aceto. + +3. On July 7, 2021, a judgment of conviction was entered against Roth in United +States v. Douglas Roth, 20-cr-00481, in the United States District Court for the Eastern District +of New York, finding him guilty of one count of securities fraud, in violation of 15 U.S.C. §§ +78j(b) and 78ff. + +4. As a result of this conviction, Roth was sentenced to 6 months’ imprisonment in a +federal penitentiary, to be followed by 6 months of home confinement and 1 year of supervised +release, and ordered to pay a fine of $150,000 and to forfeit $147,802.64. + +III. + +In view of the foregoing, the Commission finds that Roth has been convicted of a felony +within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + +Accordingly, it is ORDERED, that Roth is forthwith suspended from appearing or +practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of +Practice. + + +By the Commission. + + +Vanessa A. Countryman + Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4270.pdf b/raw/aaer/2021/AAER-4270.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bf0e786b29c24b957b624530498af9ecb2e68a69 --- /dev/null +++ b/raw/aaer/2021/AAER-4270.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:19e912c52bc4e4758b3464dcd6a00b856dc3035e56c51073f2ca5eaaf3100d8c +size 198291 diff --git a/raw/aaer/2021/AAER-4271.txt b/raw/aaer/2021/AAER-4271.txt new file mode 100644 index 0000000000000000000000000000000000000000..08f5467e7d8b698a7a7d022eff3bf303b94a8472 --- /dev/null +++ b/raw/aaer/2021/AAER-4271.txt @@ -0,0 +1,452 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93749 / December 10, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4271 / December 10, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3 - 20671 + + + +In the Matter of + +ADAM D. BERING, ESQ., + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Adam +Bering (“Respondent”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This matter involves aiding and abetting and causing violations of the auditor +independence rules arising from Ernst & Young, LLP (“EY”), a public accounting firm, +performing non-audit services for its audit client Cintas Corporation (“Cintas”) on a contingent fee +basis.4 EY billed and received payment from Cintas on invoices calculated on a contingent fee +basis for tax credit and incentive services (“C&I services”) performed between July 2009 and +August 2018. An audit firm is not independent of its audit client if it provides any non-audit +services to the audit client for a contingent fee. As a result, EY was not independent of Cintas +during that time period, and Cintas filed annual and quarterly reports with the Commission that +were not audited or reviewed by an independent public accountant, as required by Section 13(a) of +the Exchange Act and Rules 13a-1 and 13a-13 thereunder. +2. Respondent, an attorney, is an EY tax principal. He was the engagement partner for +C&I services that EY provided to Cintas from July 2009 through June 2018, although he did not + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +4 Contingent fee means … any fee established for the sale of a product or the performance of +any service pursuant to an arrangement in which no fee will be charged unless a specified +finding or result is attained, or in which the amount of the fee is otherwise dependent upon +the finding or result of such product or service. See 17 CFR § 210.2-01(f)(10). + +3 +himself perform the underlying work and relied on others to manage EY’s billing of Cintas for +C&I services. By at least 2016, Respondent failed to perform a reasonable inquiry in response to +information that EY staff under his supervision were billing Cintas for C&I services on a +contingent fee basis. Respondent failed to investigate and halt the practice. As a result of his +conduct, Respondent willfully aided and abetted and caused EY’s violation of Rule 2-02(b)(1) of +Regulation S-X, which, during the relevant period, required an auditor to state whether the audit +was made in accordance with generally accepted auditing standards (“GAAS”). Respondent also +willfully aided and abetted and caused Cintas to violate Exchange Act Section 13(a) and Rules +13a-1 and 13a-13, which require the company to file annual and quarterly reports audited and +reviewed by an independent public accountant. +RESPONDENT + +3. Adam D. Bering, age 49, is a principal of EY. Bering is an attorney licensed in the +state of Ohio. Respondent was the engagement partner for C&I services that EY provided to +Cintas from July 2009 through June 2018. +OTHER RELEVANT ENTITIES +4. Cintas Corporation is a Washington corporation headquartered in Cincinnati, Ohio. +Its common stock is registered with the Commission pursuant to Section 12(b) of the Exchange +Act and is traded on the Nasdaq Global Select Market. Cintas’s fiscal year end is the last day in +May. At the time of the conduct described herein, Cintas had reporting obligations under Section +13(a) of the Exchange Act. +5. Ernst & Young LLP, a partnership organized under the laws of Delaware, is a +public accounting firm with principal offices in New York, New York. EY has been registered +with the Public Company Accounting Oversight Board (“PCAOB”) since 2003. EY has served as +the auditor for Cintas since 1968. +FACTS + +6. Under the Commission’s auditor independence rules, external accountants are +required to be independent—in fact and in appearance—of their audit clients. The Commission’s +auditor independence rules set forth a general standard of independence in Rule 2-01(b) of +Regulation S-X which, among other things, states that, in determining whether an accountant is +independent, the Commission will consider “all relevant circumstances, including all relationships +between the accountant and the audit client . . .” Rule 2-01(c)(5) of Regulation S-X provides that +“[a]n accountant is not independent if, at any point during the audit and professional engagement +period, the accountant provides any service or product to an audit client for a contingent fee … or +receives a contingent fee … from an audit client.” EY’s policies and procedures also prohibited +billing audit clients on a contingent fee basis. +7. Between July 2009 and August 2018, EY audited Cintas’s annual financial +statements that the issuer included in filings made with the Commission on Forms 10-K. EY +issued an audit report for Cintas’s annual financial statements (included in Forms 10-K), stating + +4 +that it had conducted its audit of Cintas in accordance with the standards of the PCAOB, which +include the requirement that auditors be independent of their audit clients. During this period, EY +also reviewed Cintas’s quarterly financial statements that the issuer included in Commission filings +on Forms 10-Q. +8. As Cintas’s auditor, EY had to obtain pre-approval from Cintas’s audit committee +under Section 10A(h) of the Exchange Act in order to provide non-audit tax services to Cintas. +EY’s policies and procedures required that requests for pre-approval of non-audit services to the +audit committee comply with PCAOB Rule 3524, which requires written disclosure of a fee +structure that complies with the auditor independence rules. +9. EY provided C&I services to Cintas between July 2009 and August 2018. In +obtaining pre-approval from the audit committee to provide those services, EY represented that it +would bill for C&I services on a time and materials basis. EY’s engagement letters with Cintas +similarly represented that EY would bill for C&I services on a time and materials basis. +Respondent was the engagement partner for C&I services for almost the entire period and knew +that EY was supposed to bill Cintas on a time and materials basis. As the engagement partner, +Respondent was responsible for overseeing the billing of Cintas for C&I services, including +supervising staff who prepared EY’s bills to Cintas for those services. Respondent knew that the +auditor independence rules and EY’s policies and procedures prohibited EY from providing audit +and review services while also providing any services to Cintas on a contingent fee basis. +10. Notwithstanding representations that EY would bill for C&I services on a time and +materials basis, in fact EY improperly billed Cintas for C&I services based on a percentage of the +relevant tax cedit or incentive secured. Specifically, from July 2009 through August 2018, EY +charged, and Cintas paid, fees of approximately—sometimes exactly—10% of the benefit Cintas +received for federal tax credits and 15% of the benefit Cintas received for state and local tax credits +resulting from EY’s C&I engagements. +11. By at least 2016, Respondent became aware of information that EY staff under his +supervision were billing Cintas for C&I services on a contingent fee basis. In March 2016, in +response to questions he raised to EY staff about Cintas invoices, an EY manager emailed +Respondent that “[h]istorically [Cintas] has agreed to pay us fees that reflect the amount of benefit +we bring.” In that same email, the EY manager included a chart showing Cintas’s tax credits and +EY’s corresponding fees, which were a percentage of the tax credits. Respondent failed to +investigate the information in the email suggesting that a contingent fee arrangement existed +between EY and Cintas. +12. In January 2017, Respondent did not respond to an email from an EY manager +specifically raising concerns that EY had been invoicing Cintas on a contingent fee basis for C&I +services. When the manager followed up during a phone call, Respondent directed the manager to +discuss the issue with the person responsible for invoicing Cintas and otherwise failed to perform a +reasonable inquiry as to the manager’s concerns. +13. As a result of the contingent fees, EY was not independent of Cintas between July +2009 and August 2018. Consequently, the Forms 10-K and 10-Q that Cintas filed with the + +5 +Commission during this period contained financial statements that were not audited or reviewed by +an independent public accountant. +VIOLATIONS +14. During the relevant period, Rule 2-02(b)(1) of Regulation S-X required each +auditor’s report on a public issuer’s financial statements to state “whether the audit was made in +accordance with generally accepted auditing standards.” GAAS includes the auditing standards set +forth in PCAOB standards and applicable Commission rules, both of which require an auditor to be +independent of its client.5 Circumstances in which an auditor will—and will not—be deemed +independent are set forth in Rule 2-01 of Regulation S-X. Rule 2-01(c)(5) of Regulation S-X +provides that “[a]n accountant is not independent if, at any point during the audit and professional +engagement period, the accountant provides any service or product to an audit client for a +contingent fee … or receives a contingent fee … from an audit client.” EY stated in its audit report +attached to Cintas’s Forms 10-K during the relevant period that EY conducted its audit of Cintas in +accordance with the standards of the PCAOB, when it had not. +15. By his conduct described above, Respondent willfully aided and abetted and caused +EY to violate Rule 2-02(b)(1) of Regulation S-X. +16. Section 13(a) of the Exchange Act and Exchange Act Rule 13a-1 require issuers +with equity securities registered under Section 12 to file annual reports with the Commission that +include financial statements audited by an independent public accountant. Exchange Act Rule +13a-13 requires issuers with securities to file with the Commission quarterly reports on Form 10- +Q. Rule 10-01(d) of Regulation S-X requires the interim financial statements included in a Form +10-Q to be reviewed by an independent public accountant. +17. By his conduct described above, Respondent willfully6 aided and abetted and +caused Cintas to violate Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 + +5 The Commission has stated that for audit reports issued on or after May 24, 2004, the +reference in Rule 2-02(b)(1) to GAAS means the standards of the PCAOB and applicable +Commission rules, both of which require an auditor to be independent of its client. See +Commission Guidance Regarding the Public Company Accounting Oversight Board’s +Auditing and Related Professional Practice Standard No. 1, Exchange Act Rel. No. +49708, 2004 WL 1439831, at *2 (May 14, 2004); see also PCAOB AS 3101 (superseding +PCAOB Auditing Standard No. 1 for audits of fiscal years ending on or after December 15, +2017); PCAOB Rule 3520 (“A registered public accounting firm and its associated +persons must be independent of the firm’s audit client throughout the audit and +professional engagement period.”); PCAOB Auditing Standards, Independence, AU § +220.03 (PCAOB auditor independence standards effective prior to December 31, 2016); +PCAOB AS 1005.03 (PCAOB auditor independence standards effective on or after +December 31, 2016). +6 “Willfully” for purposes of imposing relief under Section 102(e) “means no more than +the person charged with the duty knows what he is doing.” Wonsover v. SEC, 205 F.3d +408, 414 (D.C. Cir. 2000). + +6 +promulgated thereunder. +18. Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules +of Practice, permit the Commission to censure a person or deny a person the privilege of appearing +or practicing before it after finding that a person willfully violated or willfully aided and abetted +the violation of any provisions of the federal securities laws or the rules and regulations thereunder. +By his conduct described above, Respondent willfully aided and abetted EY’s and Cintas’s +violations of the federal securities laws within the meaning of Exchange Act Section 4C(a)(3) and +Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. +FINDINGS + +19. Based on the foregoing, the Commission finds that Respondent willfully aided and +abetted and caused EY’s violations of Rule 2-02(b)(1) of Regulation S-X. +20. Based on the foregoing, the Commission finds that Respondent willfully aided and +abetted and caused Cintas’s violations of Section 13(a) of the Exchange Act and Rules 13a-1 and +13a-13 promulgated thereunder. +21. Based on the foregoing, the Commission finds that Respondent willfully aided and +abetted Cintas’s violations of the federal securities laws 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. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the Exchange Act and +Rules 13a-1 and 13a-13 promulgated thereunder. + + B. Respondent is denied the privilege of appearing or practicing before the +Commission as an attorney. + + C. After one year from the date of this Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the +attention of the Office of the General Counsel. + +D. In support of any application for reinstatement to appear and practice before the +Commission as an attorney, Respondent shall provide a certificate of good standing from each state +bar where Respondent is a member. + + +7 +E. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in these +proceedings or any related Commission proceedings, including any orders +requiring payment of disgorgement or penalties; + +2. That Respondent is not currently suspended or disbarred as an attorney by a +court of the United States (or any agency of the United States) or the bar or +court of any state, territory, district, commonwealth, or possession; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the Commission’s +Rules of Practice, except for any charge concerning the conduct that +was the basis for the Order; + +b. has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities laws, +and has not been enjoined from violating the federal securities laws, +except for any finding or injunction concerning the conduct that was +the basis for the Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge +concerning the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of +the United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding +concerning the conduct that was the basis for the Order; + +e. has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act of +moral turpitude, except for any charge concerning the conduct that +was the basis for the Order; and + +8 + +f. has not been subject to disciplinary action by a bar, court or agency +of any state for violations of applicable rules of professional +conduct, except for any charge concerning the conduct that was the +basis for the Order; + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement or any criminal law +enforcement investigation. + +6. That Respondent is not the subject of any complaints to, or investigations +by, the bar or court of any state, territory, district, commonwealth, or +possession, except to the extent that such complaints concern the conduct +that was the basis for the Order; + +7. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by the bar or court of any state, territory, district, commonwealth, or +possession, or other regulatory body; and + +8. That Respondent undertakes to notify the Office of General Counsel +immediately in writing if any information submitted in support of the +application for reinstatement becomes materially false or misleading or +otherwise changes in any material way while the application is pending. + +F. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; + +2. The circumstances under which Respondent’s membership in a state bar or any +court for which Respondent was a member has lapsed or otherwise is no longer +active and an explanation of why for each; and + +3. Respondent’s plans for any future appearance or practice before the +Commission. + +G. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + + +9 +H. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph G, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +I. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph G, the burden shall be on the Respondent to provide an explanation as +to the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +J. If the Commission declines to reinstate Respondent pursuant to Paragraphs H and I, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an attorney. + + K. Respondent Bering shall, within 14 days of the entry of this Order, pay a civil +money penalty in the amount of $10,000.00 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § +3717. + +Payment must be made in one of the following ways: + +(1) 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 Adam D. + +10 +Bering as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Carolyn Welshhans, Division of +Enforcement, Securities and Exchange Commission, 100 F St. NE, Washington, DC 20549. + + L. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4272.txt b/raw/aaer/2021/AAER-4272.txt new file mode 100644 index 0000000000000000000000000000000000000000..c09994c94c9008ea04a4ea283a63511d26d6d714 --- /dev/null +++ b/raw/aaer/2021/AAER-4272.txt @@ -0,0 +1,515 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93750 / December 10, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4272 / December 10, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3 - 20672 + + + +In the Matter of + +ALAN C. GREENWELL, +CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Alan C. +Greenwell, CPA (“Respondent”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act +of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This matter involves improper professional conduct and causing violations of the +auditor independence rules arising from Ernst & Young, LLP (“EY”), a public accounting firm, +performing non-audit services for its audit client Cintas Corporation (“Cintas”) on a contingent fee +basis.4 EY billed and received payment from Cintas on invoices calculated on a contingent fee +basis for tax credit and incentive services (“C&I services”) performed between July 2009 and +August 2018. An audit firm is not independent of its audit client if it provides any non-audit +services to the audit client for a contingent fee. As a result, EY was not independent of Cintas +during that time period, and Cintas filed annual and quarterly reports with the Commission that +were not audited or reviewed by an independent public accountant, as required by Section 13(a) of +the Exchange Act and Rules 13a-1 and 13a-13 thereunder. +2. Respondent, a certified public accountant, was an EY partner who served as the tax + + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have engaged +in unethical or improper professional conduct. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +4 Contingent fee means … any fee established for the sale of a product or the performance of +any service pursuant to an arrangement in which no fee will be charged unless a specified +finding or result is attained, or in which the amount of the fee is otherwise dependent upon +the finding or result of such product or service. See 17 CFR § 210.2-01(f)(10). + +3 +account leader for tax services EY provided to Cintas from 2005 through 2018. Respondent +obtained pre-approval from the audit committee of Cintas’s board of directors for EY to perform +C&I services for Cintas on a time and materials basis. EY subsequently billed Cintas for that work +through invoices calculated on a contingent fee basis between 2009 and August 2018. Respondent +failed to investigate red flags. He directed subordinates to execute engagement letters between EY +and Cintas that described the method for calculating bills as time and materials, when EY in fact +billed Cintas on a contingent fee basis. Respondent also completed audit work papers stating that +EY was independent of Cintas. As a result of his conduct, Respondent engaged in improper +professional conduct. He caused EY to violate Rule 2-02(b)(1) of Regulation S-X, which, during +the relevant period, required an auditor to state whether the audit was made in accordance with +generally accepted auditing standards (“GAAS”), and caused Cintas to violate Exchange Act +Section 13(a) and Rules 13a-1 and 13a-13, which require the company to file annual and quarterly +reports audited and reviewed by an independent public accountant. +RESPONDENT + +3. Alan C. Greenwell, age 55, was an EY partner throughout the relevant time period. +EY required Greenwell to involuntarily separate in March 2019. Respondent is a certified public +accountant (“CPA”) licensed in the states of Illinois, Indiana, Kentucky and Ohio. At all relevant +times, Respondent was the tax account leader for tax services EY provided to Cintas, including +C&I services, and he also served as an EY team member on the Cintas audit. +OTHER RELEVANT ENTITIES +4. Cintas Corporation is a Washington corporation headquartered in Cincinnati, Ohio. +Its common stock is registered with the Commission pursuant to Section 12(b) of the Exchange +Act and is traded on the Nasdaq Global Select Market. Cintas’s fiscal year end is the last day in +May. At the time of the conduct described herein, Cintas had reporting obligations under Section +13(a) of the Exchange Act. +5. Ernst & Young LLP, a partnership organized under the laws of Delaware, is a +public accounting firm with principal offices in New York, New York. EY has been registered +with the Public Company Accounting Oversight Board (“PCAOB”) since 2003. EY has served as +the auditor for Cintas since 1968. +FACTS + +6. Under the Commission’s auditor independence rules, external accountants are +required to be independent—in fact and in appearance—of their audit clients. The Commission’s +auditor independence rules set forth a general standard of independence in Rule 2-01(b) of +Regulation S-X which, among other things, states that, in determining whether an accountant is +independent, the Commission will consider “all relevant circumstances, including all relationships +between the accountant and the audit client . . .” Rule 2-01(c)(5) of Regulation S-X provides that +“[a]n accountant is not independent if, at any point during the audit and professional engagement +period, the accountant provides any service or product to an audit client for a contingent fee … or + +4 +receives a contingent fee … from an audit client.” EY’s policies and procedures also prohibited +billing audit clients on a contingent fee basis. +7. Between July 2009 and August 2018, EY audited Cintas’s annual financial +statements that the issuer included in filings made with the Commission on Forms 10-K. EY +issued an audit report for Cintas’s annual financial statements (included in Forms 10-K), stating +that it had conducted its audit of Cintas in accordance with the standards of the PCAOB, which +include the requirement that auditors be independent of their audit clients. During this period, EY +also reviewed Cintas’s quarterly financial statements that the issuer included in Commission filings +on Forms 10-Q. +8. As the tax account leader (“TAL”), Respondent was the EY partner responsible for +tax services EY provided to Cintas, including assisting Cintas in obtaining tax credits and +incentives from federal, state and local authorities. Respondent knew that the auditor +independence rules and EY’s policies and procedures prohibited EY, as the company’s auditor, +from providing any services to Cintas on a contingent fee basis. +9. As Cintas’s auditor, EY had to obtain pre-approval from Cintas’s audit committee +under Section 10A(h) of the Exchange Act in order to provide non-audit tax services to Cintas. +EY’s policies and procedures required that requests for pre-approval of non-audit services to the +audit committee comply with PCAOB Rule 3524, which requires written disclosure of a fee +structure that complies with the auditor independence rules. +10. EY provided C&I services to Cintas between July 2009 and August 2018. As the +TAL, Respondent participated in obtaining pre-approval for these services from Cintas’s audit +committee. During this time period, Respondent participated in presentations to Cintas’s audit +committee requesting pre-approval for EY to perform these C&I services. Respondent represented +to Cintas’s audit committee that EY would bill for C&I services on a time and materials basis. +11. During this time period, Respondent also reviewed and approved for signature EY’s +engagement letters with Cintas for the C&I services. These engagement letters similarly +represented that EY would bill Cintas for C&I services on a time and materials basis. +12. For example, in April 2016, Respondent participated in a presentation to Cintas’s +audit committee to request pre-approval of EY services in connection with certain federal and state +employment and hiring-related tax credits. The presentation stated that EY would bill Cintas for +the C&I services on a time and materials basis. Cintas’s audit committee pre-approved EY +performing these C&I services on a time and materials basis. Subsequently, EY and Cintas +executed engagement letters that similarly represented that EY would perform these C&I services +on a time and materials basis. +13. Despite EY’s and Respondent’s representations that EY would perform C&I +services for Cintas on a time and materials basis, in fact EY improperly billed Cintas for C&I +services based on a percentage of the relevant tax credit or incentive secured. Specifically, from +July 2009 through August 2018, EY charged, and Cintas paid, fees of approximately—sometimes + +5 +exactly—10% of the benefit Cintas received for federal tax credits and 15% of the benefit Cintas +received for state and local tax credits resulting from EY’s C&I engagements. +14. For example, from 2009 through 2018, EY assisted Cintas in obtaining certain +federal tax credits related to hiring. Initially, EY billed Cintas for this work annually at exactly +10% of the credits Cintas obtained. In later years, EY billed Cintas for this work on a quarterly +basis and reconciled the bills at the end of the year so that EY’s annual fees were approximately +10% of the total credits Cintas obtained for that year. Certain EY bills to Cintas summarized the +amount of each credit and then stated the applicable charges. It was clear on the face of the +invoices that the charges were 10% of the amount of the tax credits. +15. While Respondent did not himself perform any of EY’s C&I services for Cintas, as +the TAL, he had overall responsibility for overseeing EY’s tax services engagements with Cintas, +including the engagements for C&I services. During the relevant period, Respondent failed to +investigate red flags indicating that EY was billing Cintas on a contingent fee basis for C&I +services. For example, in February 2016, Respondent received an email from Cintas indicating +that, for 2014 and 2015, EY had billed Cintas estimated amounts for federal tax credit work and +that a reconciliation would occur once the precise amount of the federal tax credits was known. +The email suggested that the final fee would be contingent on the amount of credit Cintas received +for the work, which Respondent failed to investigate. +16. Similarly, in March 2017, Respondent was copied on several emails regarding an +EY invoice to Cintas for certain state tax credits. In the emails, EY managers told Cintas that the +final invoice would be calculated and sent to the company once Cintas had secured the expected +incentives. This suggested that EY’s fees would depend upon the final amount of the tax credits, +and Respondent again failed to investigate. +17. During the relevant period, Respondent completed audit work papers certifying that +EY complied with applicable auditor independence requirements. Respondent also verbally told +Cintas’s audit committee that there were no issues that impacted EY’s independence. As described +above, EY was not independent of Cintas. Respondent failed to investigate red flags indicating +that EY was performing certain C&I services for Cintas on a contingent fee basis, which violated +the auditor independence rules. +18. As a result of the contingent fees, EY was not independent of Cintas between July +2009 and August 2018. Consequently, the Forms 10-K and 10-Q that Cintas filed with the +Commission during this period contained financial statements that were not audited or reviewed by +an independent public accountant. +VIOLATIONS +19. During the relevant period, Rule 2-02(b)(1) of Regulation S-X required each +auditor’s report on a public issuer’s financial statements to state “whether the audit was made in +accordance with generally accepted auditing standards.” GAAS includes the auditing standards set +forth in PCAOB standards and applicable Commission rules, both of which require an auditor to be + +6 +independent of its client.5 Circumstances in which an auditor will – and will not – be deemed +independent are set forth in Rule 2-01 of Regulation S-X. Rule 2-01(c)(5) of Regulation S-X +provides that “[a]n accountant is not independent if, at any point during the audit and professional +engagement period, the accountant provides any service or product to an audit client for a +contingent fee … or receives a contingent fee … from an audit client.” EY stated in its audit report +attached to Cintas’s Forms 10-K during the relevant period that EY conducted its audit of Cintas in +accordance with the standards of the PCAOB, when it had not. +20. By his conduct described above, Respondent caused EY to violate Rule 2-02(b)(1) +of Regulation S-X. +21. Section 13(a) of the Exchange Act and Exchange Act Rule 13a-1 require issuers +with equity securities registered under Section 12 to file annual reports with the Commission that +include financial statements audited by an independent public accountant. Exchange Act Rule +13a-13 requires issuers with securities to file with the Commission quarterly reports on Form 10- +Q. Rule 10-01(d) of Regulation S-X requires the interim financial statements included in a Form +10-Q to be reviewed by an independent public accountant. +22. By his conduct described above, Respondent caused Cintas to violate Section 13(a) +of the Exchange Act and Rules 13a-1 and 13a-13 promulgated thereunder. +23. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice, permit the Commission to censure a person or deny a person the privilege of appearing +or practicing before it after finding that a person engaged in improper professional conduct. With +respect to persons licensed to practice as accountants, “improper professional conduct” includes (1) +a single instance of highly unreasonable conduct that results in a violation of applicable +professional standards in circumstances in which an accountant knows, or should know, that +heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct, each resulting +in a violation of applicable professional standards, that indicate a lack of competence to practice +before the Commission. Rule 102(e)(1)(iv)(B). By his conduct described above, Respondent +engaged in “improper professional conduct” within the meaning of Exchange Act Section 4C(a)(2) + +5 The Commission has stated that for audit reports issued on or after May 24, 2004, the reference +in Rule 2-02(b)(1) to GAAS means the standards of the PCAOB and applicable Commission +rules, both of which require an auditor to be independent of its client. See Commission Guidance +Regarding the Public Company Accounting Oversight Board’s Auditing and Related +Professional Practice Standard No. 1, Exchange Act Rel. No. 49708, 2004 WL 1439831, at *2 +(May 14, 2004); see also PCAOB AS 3101 (superseding PCAOB Auditing Standard No. 1 for +audits of fiscal years ending on or after December 15, 2017); PCAOB Rule 3520 (“A registered +public accounting firm and its associated persons must be independent of the firm’s audit client +throughout the audit and professional engagement period.”); PCAOB Auditing Standards, +Independence, AU § 220.03 (PCAOB auditor independence standards effective prior to December +31, 2016); PCAOB AS 1005.03 (PCAOB auditor independence standards effective on or after +December 31, 2016). + +7 +and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. +FINDINGS + +24. Based on the foregoing, the Commission finds that Respondent caused EY’s +violations of Rule 2-02(b)(1) of Regulation S-X. +25. Based on the foregoing, the Commission finds that Respondent caused Cintas’s +violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 promulgated +thereunder. +26. Based on the foregoing, the Commission finds that Respondent engaged in +“improper professional conduct” within the meaning of Exchange Act Section 4C(a)(2) and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the Exchange Act and +Rules 13a-1 and 13a-13 promulgated thereunder. + + B. Respondent is denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. After two years from the date of this Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the +attention of the Office of the Chief Accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +E. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the + +8 +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Respondent shall +submit a statement prepared by the audit committee(s) with which Respondent will be associated, +including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +F. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the PCAOB and Respondent shall submit +the following additional information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +G. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a CPA and that Respondent has +resolved all other disciplinary issues with any applicable state boards of accountancy. If +Respondent is not currently licensed as a CPA, Respondent shall provide documentation showing +that Respondent’s licensure is dependent upon reinstatement by the Commission. + + +9 +H. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in these +proceedings or any related Commission proceedings, including any orders +requiring payment of disgorgement or penalties; + +2. That Respondent undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise changes +in any material way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +finding or injunction concerning the conduct that was the basis for the +Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, + +10 +except for any charge concerning the conduct that was the basis for the +Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis for +the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. +I. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + + J. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +K. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under paragraph J, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +L. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph J, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause + +11 +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +M. If the Commission declines to reinstate Respondent pursuant to Paragraphs K and +L, it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + +N. Respondent shall, within 28 days of the entry of this Order, pay a civil money +penalty in the amount of $15,000.00 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Alan +C. Greenwell as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Carolyn Welshhans, Division of +Enforcement, Securities and Exchange Commission, 100 F St. NE, Washington, DC 20549. + + O. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed + +12 +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4273.pdf b/raw/aaer/2021/AAER-4273.pdf new file mode 100644 index 0000000000000000000000000000000000000000..54b12ea7f384d4e4858d41effdda5f5fd564b851 --- /dev/null +++ b/raw/aaer/2021/AAER-4273.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:6f9cd322819da1c8918bd9b275723872a798b1c6a96ebe249b0e1161e88a98c6 +size 360700 diff --git a/raw/aaer/2021/AAER-4274.txt b/raw/aaer/2021/AAER-4274.txt new file mode 100644 index 0000000000000000000000000000000000000000..39f1a111f9d89f5713738a91155357bdfeb77cde --- /dev/null +++ b/raw/aaer/2021/AAER-4274.txt @@ -0,0 +1,448 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93752 / December 10, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4274 / December 10, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3 - 20674 + + + +In the Matter of + +SCOTT D. CLARK, CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Scott D. +Clark, CPA (“Respondent” or “Clark”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + +2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This matter involves aiding and abetting and causing violations of the auditor +independence rules arising from Ernst & Young, LLP (“EY”), a public accounting firm, +performing non-audit services for its audit client Cintas Corporation (“Cintas”) on a contingent fee +basis.4 EY billed and received payment from Cintas on invoices calculated on a contingent fee +basis for tax credit and incentive services (“C&I services”) performed between July 2009 and +August 2018. An audit firm is not independent of its audit client if it provides any non-audit +services to the audit client for a contingent fee. As a result, EY was not independent of Cintas +during that time period. +2. Respondent, a certified public accountant, was Cintas’s Vice President of Corporate +Taxation. Throughout the above time period, Respondent approved on behalf of Cintas the +payment of invoices for EY C&I services calculated on a contingent fee basis. As a result of his + + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +4 Contingent fee means … any fee established for the sale of a product or the performance of +any service pursuant to an arrangement in which no fee will be charged unless a specified +finding or result is attained, or in which the amount of the fee is otherwise dependent upon +the finding or result of such product or service. See 17 CFR § 210.2-01(f)(10). + +3 +conduct, Respondent willfully aided and abetted and caused Cintas to violate Exchange Act +Section 13(a) and Rules 13a-1 and 13a-13, which require the company to file annual and quarterly +reports audited and reviewed by an independent public accountant. +RESPONDENT + +3. Scott D. Clark, age 61, was a tax manager, tax director, and Vice President of +Corporate Taxation for Cintas since 2000 before retiring from the company in 2020. He is +registered as a certified public accountant (“CPA”) in the state of Ohio, but does not have a permit +to engage in the practice of public accounting. Respondent was responsible for negotiating and +approving Cintas’s payment of fees to EY for C&I services. +OTHER RELEVANT ENTITIES +4. Cintas Corporation is a Washington corporation headquartered in Cincinnati, Ohio. +Its common stock is registered with the Commission pursuant to Section 12(b) of the Exchange +Act and is traded on the Nasdaq Global Select Market. Cintas’s fiscal year end is the last day in +May. At the time of the conduct described herein, Cintas had reporting obligations under Section +13(a) of the Exchange Act. +5. Ernst & Young LLP, a partnership organized under the laws of Delaware, is a +public accounting firm with principal offices in New York, New York. EY has been registered +with the Public Company Accounting Oversight Board (“PCAOB”) since 2003. EY has served as +the auditor for Cintas since 1968. +FACTS + +6. Under the Commission’s auditor independence rules, external accountants are +required to be independent—in fact and in appearance—of their audit clients. The Commission’s +auditor independence rules set forth a general standard of independence in Rule 2-01(b) of +Regulation S-X which, among other things, states that, in determining whether an accountant is +independent, the Commission will consider “all relevant circumstances, including all relationships +between the accountant and the audit client . . .” Rule 2-01(c)(5) of Regulation S-X provides that +“[a]n accountant is not independent if, at any point during the audit and professional engagement +period, the accountant provides any service or product to an audit client for a contingent fee … or +receives a contingent fee … from an audit client.” +7. Between July 2009 and August 2018, EY audited Cintas’s annual financial +statements that the issuer included in filings made with the Commission on Forms 10-K. EY +issued an audit report for Cintas’s annual financial statements (included in Forms 10-K), stating +that it had conducted its audit of Cintas in accordance with the standards of the PCAOB, which +include the requirement that auditors be independent of their audit clients. During this period, EY +also reviewed Cintas’s quarterly financial statements that the issuer included in Commission filings +on Forms 10-Q. + +4 +8. As Cintas’s auditor, EY had to obtain pre-approval from Cintas’s audit committee +under Section 10A(h) of the Exchange Act in order to provide non-audit tax services to Cintas. +EY’s policies and procedures required that requests for pre-approval of non-audit services to the +audit committee comply with PCAOB Rule 3524, which requires written disclosure of a fee +structure that complies with the auditor independence rules. +9. During this period, EY made presentations to Cintas’s audit committee to request +pre-approval to perform tax services that included assisting Cintas in obtaining credits and +incentives from federal, state, and local tax authorities. EY obtained signed engagement letters +from Cintas’s management regarding these services. The audit committee presentations and signed +engagement letters both claimed EY would bill Cintas for C&I services on a time and materials +basis. Respondent was aware of the audit committee presentations and reviewed and/or signed the +engagement letters. +10. EY provided C&I services to Cintas between July 2009 and August 2018. +Respondent was the Cintas Vice President for Corporate Taxation responsible for supervising EY’s +C&I services. Respondent knew that, as Cintas’s auditor, EY was not permitted to provide +services to Cintas on a contingent fee basis. +11. Respondent negotiated arrangements by which EY billed Cintas based upon a +percentage of the relevant tax credit or incentive secured. Specifically, from July 2009 through +August 2018, EY charged, and Cintas paid, fees of approximately—sometimes exactly—10% of +the benefit Cintas received for federal tax credits and 15% of the benefit Cintas received for state +and local tax credits resulting from EY’s C&I engagements. Respondent approved payment of EY +invoices to Cintas that contained contingent fees for C&I services. This included supervising other +Cintas employees who processed the invoices for payment. +12. For example, from 2009 through 2018, EY assisted Cintas in obtaining certain +federal tax credits related to hiring. Initially, EY billed Cintas for this work annually at exactly +10% of the credits Cintas obtained. In later years, EY billed Cintas for this work on a quarterly +basis and reconciled the bills at the end of the year so that EY’s annual fees were approximately +10% of the total credits Cintas obtained for that year. EY’s bills to Cintas summarized the amount +of each credit and then stated the applicable charges. On the face of the invoices, the charges were +10% of the amount of tax credits. Respondent approved each of Cintas’s payments for these +invoices. +13. As a result of the contingent fees, EY was not independent of Cintas between July +2009 and August 2018, causing Cintas to violate Exchange Act Section 13(a) and Rules 13a-1 and +13a-13, which require the company to file annual and quarterly reports audited and reviewed by an +independent public accountant. +VIOLATIONS +14. Section 13(a) of the Exchange Act and Exchange Act Rule 13a-1 require issuers +with equity securities registered under Section 12 to file annual reports with the Commission that + +5 +include financial statements audited by an independent public accountant. Exchange Act Rule +13a-13 requires issuers with securities to file with the Commission quarterly reports on Form 10- +Q. Rule 10-01(d) of Regulation S-X requires the interim financial statements included in a Form +10-Q to be reviewed by an independent public accountant. +15. By his conduct described above, Respondent willfully5 aided and abetted and +caused Cintas to violate Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +thereunder. +16. Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules +of Practice permit the Commission to censure a person or deny a person the privilege of appearing +or practicing before it to any person who is found by the Commission to have willfully violated or +willfully aided and abetted the violation of any provisions of the federal securities laws or the rules +and regulations thereunder. As a result of the conduct described above, Respondent willfully aided +and abetted Cintas’s violations of the federal securities laws within the meaning of Exchange Act +Section 4C(a)(3) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. +FINDINGS + +17. Based on the foregoing, the Commission finds that Respondent willfully aided and +abetted and caused Cintas’s violations of Section 13(a) of the Exchange Act and Rules 13a-1 and +13a-13 promulgated thereunder. +18. Based on the foregoing, the Commission finds that Respondent willfully aided and +abetted Cintas’s violations of the federal securities laws 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. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +promulgated thereunder. + + B. Respondent is denied the privilege of appearing or practicing before the +Commission as an accountant. + + +5 “Willfully” for purposes of imposing relief under Section 102(e) “means no more than +the person charged with the duty knows what he is doing.” Wonsover v. SEC, 205 F.3d +408, 414 (D.C. Cir. 2000). + +6 + C. After one year from the date of this Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the +attention of the Office of the Chief Accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +E. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Respondent shall +submit a statement prepared by the audit committee(s) with which Respondent will be associated, +including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +F. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the PCAOB and Respondent shall submit +the following additional information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +7 + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +G. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a CPA and that Respondent has +resolved all other disciplinary issues with any applicable state boards of accountancy. If +Respondent is not currently licensed as a CPA, Respondent shall provide documentation showing +that Respondent’s licensure is dependent upon reinstatement by the Commission. + +H. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in these +proceedings or any related Commission proceedings, including any orders +requiring payment of disgorgement or penalties; + +2. That Respondent undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise changes +in any material way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any + +8 +finding or injunction concerning the conduct that was the basis for the +Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis for +the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. +I. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + + J. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +9 + +K. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under paragraph J, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +L. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph J, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +M. If the Commission declines to reinstate Respondent pursuant to Paragraphs K and +L, it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + +N. Respondent Clark shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $30,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). 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 + +10 + +Payments by check or money order must be accompanied by a cover letter identifying Scott +D. Clark as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Brian O. Quinn, Division of +Enforcement, Securities and Exchange Commission, 100 F St. NE, Washington, DC 20549. + + O. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4275.txt b/raw/aaer/2021/AAER-4275.txt new file mode 100644 index 0000000000000000000000000000000000000000..1dfa17f49c24680134d6af0df117e6f2ec76db05 --- /dev/null +++ b/raw/aaer/2021/AAER-4275.txt @@ -0,0 +1,344 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93753 / December 13, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4275 / December 13, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20676 + + +In the Matter of + +WEX 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 WEX Inc. (“WEX” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + + 2 + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary +1. WEX, a Maine-based reporting company that describes itself as a financial +technology service provider, failed properly to devise and maintain a sufficient system of internal +accounting controls at its Brazilian subsidiary, UNIK S.A. (“WEX Brazil”). The correction of +accounting errors at the subsidiary resulted in WEX’s net income under U.S. Generally Accepted +Accounting Principles (“GAAP”) being reduced by 61.2% in its fiscal year 2016. In 2016 and +2017, in connection with certain accounting errors at the subsidiary, WEX’s independent auditor +found significant deficiencies in WEX Brazil’s Internal Control Over Financial Reporting +(“ICFR”). Additional accounting issues at WEX Brazil came to light during the close of WEX’s +2018 fiscal year. There were errors in WEX Brazil’s financial statements back to fiscal year 2013 +totaling approximately $85.5 million, mostly relating to the overstatement of unbilled receivables. +This amount included about $8 million in suspected theft or unauthorized transactions by former +WEX Brazil employees. These accounting errors were the result of WEX’s insufficient internal +accounting controls. +2. As a result of the conduct detailed herein, WEX violated Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder. +Respondent +3. WEX Inc. is a Delaware corporation with its principal place of business in +Portland, Maine. WEX’s common stock is registered with the Commission pursuant to Section +12(b) of the Exchange Act. WEX’s common stock trades on the New York Stock Exchange +(“NYSE”) and it has been an SEC reporting company since 2005. +Facts +WEX’s Business and Brazilian Subsidiary + +5. WEX describes itself as a company that provides corporate payment solutions +relating to commercial and government vehicle fleets, corporate travel, health care and employee +benefits. For example, WEX’s largest business segment is the Fleet Solutions business, which +issues the WEX Fleet credit card to customers who maintain fleets of vehicles. The customers’ +employees can use the card to buy fuel for the vehicles when needed. WEX derives revenue by +collecting payment processing fees from the fuel providers for purchases, in addition to account +servicing and finance fees. WEX’s annual revenue exceeded $1 billion and total assets exceeded + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + 3 +$5 billion from fiscal year 2016 through 2018. In addition to the company’s U.S. operations, WEX +has several wholly-owned international operations, including, until recently, WEX Brazil. +6. WEX acquired a 51 percent controlling interest in a Brazilian company, Unik S.A., +which became WEX Brazil in August 2012. WEX acquired the remaining 49 percent in August +2015. WEX Brazil had a Fleet Solutions business, but its major source of revenue was a salary +advance business. Under the salary advance program, WEX Brazil issued payroll debit cards +whereby customer employees could withdraw an advance payment of their salary and pay back the +amount plus fees in monthly installments. WEX sold WEX Brazil in September 2020. + +2016 Significant Deficiencies at WEX Brazil + +7. Since before the acquisition of WEX Brazil in 2012, WEX Brazil had been using +accounts receivable (money owed to WEX Brazil by customers) in the salary advance program as +security to obtain loans (also known as “collateralizing”) under a debt agreement with a third party. +Under GAAP, accounts receivable would typically be treated by a company as a current asset of +the company because it is money owed to the company by others. WEX Brazil had previously +incorrectly recorded the debt arrangement in its accounting system as a credit to accounts +receivable (i.e. a reduction in accounts receivable). WEX’s independent auditor determined in +2016 that the debt transaction did not constitute a sale of accounts receivable, and therefore, under +U.S. GAAP, the debt arrangement should not have been recorded in WEX Brazil’s accounting +system as a credit to accounts receivable. Instead, the debt arrangement should have been recorded +as Other Debt, which included amounts related to credit facilities and accounts receivable loan +arrangements. To correct this error in accounting treatment, WEX recorded in its accounting +books and records and reported in its financial statements, an adjustment of $17.9 million, to +record the amount within Other Debt on WEX’s balance sheet and an offsetting increase to +accounts receivable. + +8. WEX Brazil had made the accounting error related to the collateralized accounts +receivable because the WEX Brazil employees lacked knowledge of U.S. GAAP accounting +guidance for the debt structure. Personnel at WEX headquarters had not identified the error +because local management in Brazil did not disclose the secured debt arrangement to personnel in +WEX’s U.S. headquarters. +9. As part of its 2016 year end audit, WEX’s independent auditor identified +significant deficiencies in ICFR relating to the the way the collateralized debt at WEX Brazil was +recorded in WEX Brazil’s accounting system. The independent auditor reported to the WEX Audit +Committee that neither WEX Brazil’s account reconciliations controls nor WEX headquarters’ +monitoring and oversight controls appropriately identified the audit adjustment. +10. WEX took steps during 2017 to remediate the accounting and related issues at WEX +Brazil, including, restructuring the credit agreement, requiring WEX’s headquarters treasury staff +to approve all debt structures globally, conducting more formal quarterly accounting reviews for all +key accounts at the account level, providing additional training to all international subsidiaries on +reporting certain items to WEX’s U.S. headquarters in what are known as management +representation letters, training all international subsidiaries in U.S. GAAP, and adding WEX U.S. + 4 +headquarters accounting personnel to oversee WEX Brazil. WEX also decided to hire a resource +with substantial knowledge of U.S. GAAP at WEX Brazil. +2017 Significant Deficiencies at WEX Brazil +11. WEX Brazil had historically recorded as revenue money it earned from salary +advances and related fees at the time of the salary advances, and had recorded in its internal +accounting system a corresponding amount in accounts receivable. In 2018, after consulting with +WEX’s independent auditor, WEX concluded that WEX Brazil should record the revenue from +these salary advances over the life of the salary advance instead of recognizing the entire amount of +the salary advance immediately. WEX Brazil’s accounting error resulted in WEX Brazil revenue +being overstated by approximately $7 million in 2016 and $5.8 million in 2017. + +12. In connection with the improper accounting for the revenue earned on the salary +advance program, WEX’s independent auditor again identified significant deficiencies in ICFR. +The independent auditor reported to the WEX Audit Committee that the WEX Brazil finance team +lacked sufficient U.S. GAAP revenue recognition knowledge and WEX headquarters’ monitoring +and oversight controls did not appropriately identify the legacy revenue recognition misstatement +on a timely basis. + +13. WEX’s efforts to remediate this significant deficiency included requiring its +accounting staff to review revenue recognition treatment of contracts at newly acquired companies, +reviewing appropriate revenue recognition treatment for all material contracts and contracts with +nonstandard terms on a quarterly basis, and in the second quarter 2018, assigning additional +corporate personnel to oversee WEX’s emerging markets (including Brazil). WEX also decided +that WEX’s headquarters’ internal audit group would hire a local internal audit employee located +in Brazil. + +WEX Revises Its Financial Statements After Discovering Errors + +14. During the 2018 year-end close of WEX Brazil’s accounting books and records, +WEX identified several additional potential accounting issues. The December 31, 2018 WEX +Brazil balance sheet (a financial statement that reports a company’s assets, liabilities, and +shareholders’ equity at a particular date) reflected a large accounts receivable balance (i.e., an +amount owed to WEX Brazil), from the only customer in WEX Brazil’s Fleet Solutions segment. +That relationship had ended in September 2018 and the amounts purportedly owed to WEX Brazil +from the customer were due within five days of invoicing. Under these circumstances, the +accounts receivable balance did not appear to be appropriate. WEX Brazil did not have processes +to ensure the completeness and accuracy of data flowing from the local transaction processing +systems into WEX Brazil’s accounting books and records. WEX Brazil also used a manual +process for calculating and recording the accounts receivable. + +15. On February 22, 2019, WEX furnished a Form 8-K to the Commission disclosing +the anticipated delay in filing its Form 10-K for the fiscal year ended December 31, 2018, due to +the ongoing review of balance sheet discrepancies at the Brazilian subsidiary. At the time, WEX + 5 +was unable to identify the periods impacted by the discrepancies, but believed the amount of the +errors could total approximately $70 million. + +16. After hiring an outside accounting firm to conduct an investigation of the issues +raised at WEX Brazil, WEX identified errors in WEX Brazil’s accounting that were primarily +related to accounts receivable and accounts payable in WEX Brazil’s Fleet Solutions segment. The +errors included overstatement of unbilled receivables from the only Fleet Solutions customer. +WEX Brazil had been doing business with that customer since the fourth quarter of 2013 when +WEX Brazil acquired another company with a relationship with the customer. As part of the +Brazil investigation, WEX, with the assistance of the outside accounting firm, reconstructed +historical balance sheets dating back to fiscal year 2013. + +17. In addition to the errors identified during the accounting investigation, WEX +reconsidered prior accounting decisions and judgments reached regarding all errors previously +discovered by WEX. + +18. On March 18, 2019, WEX filed with the Commission its fiscal year 2018 Form 10- +K, revising its financial statements for fiscal years 2016 and 2017 and interim reporting periods for +fiscal years 2017 and 2018 to correct the errors at WEX Brazil and the errors that were previously +discovered by WEX. As a result of these revisions, fiscal year 2016 GAAP net income was +reduced from $60.6 million to $23.5 million (61.2%) or $0.91 on a per share basis, and Adjusted +Net Income was reduced from $189.2 million to $154.7 million (18.3%) or $0.85 per share. The +impact of WEX Brazil adjustments alone during fiscal year 2016 reduced GAAP net income by +more than $30 million, or $0.75 on a per share basis. The revisions also caused GAAP net income +in each quarter of fiscal 2017 to be revised as follows: the first quarter of 2017 was reduced by +8.6%; the second quarter of 2017 was increased by 15.7%; the third quarter of 2017 was reduced +by 22.8%; and the fourth quarter of 2017 was increased by 9.2%. + +Material Weaknesses In WEX’s Internal Control Over Financial Reporting + +19. In its fiscal year 2018 annual report on ICFR, WEX management concluded that the +misstatements identified at WEX Brazil were a result of several control deficiencies, including the +following noted in the 2018 Form 10-K: + +- “We did not maintain an effective control environment at our Brazilian subsidiary as +evidenced by: (i) an insufficient number of personnel with an appropriate level of +knowledge of the Company's processing platforms and overall financial reporting +process, and (ii) an insufficient number of personnel appropriately qualified to perform +control activities. + +- We did not have control activities that were designed and operating effectively at our +Brazilian subsidiary as evidenced by: (i) reconciliation of balance sheet accounts not +being prepared consistently, (ii) lack of precision in review controls to identify all +potential errors and (iii) lack of oversight and approval of journal entries. + + 6 +- We did not have sufficient monitoring activities in place to ensure effective corporate +oversight and monitoring of control activities at our individually insignificant +subsidiaries.” + +20. WEX management further concluded that these control deficiencies represented +“material weaknesses in our internal control over financial reporting.” + +Unauthorized Transactions By WEX Brazil Employees + +21. Following the 2018 year-end close process, the WEX Audit Committee hired a law +firm to investigate potential causes of the errors at WEX Brazil. The investigation concluded that +former WEX Brazil employees had potentially misappropriated between $7.6 million to $9.1 +million. There was evidence that one employee set up fictitious vendors and, by using those +vendors and a credit card terminal at home, stole approximately $5 million using the Fleet +Solutions card. The other potential misappropriations involved the misuse of company benefit +cards and credit cards. These unauthorized transactions were a subset of the $85.5 million in errors +previously identified. + +Remediation of Deficient Controls and Material Weaknesses +22. In order to remediate the control deficiencies, WEX, with the assistance of the +outside accounting firm, undertook steps to address the specific issues at WEX Brazil, evaluate +other small foreign subsidiaries in light of the issues in Brazil, and enhance corporate oversight. +WEX disclosed in its fiscal year 2019 Form 10-K specific remediation actions completed during +2019: (1) evaluating the sufficiency, experience, and training of internal personnel at WEX Brazil +and hiring additional qualified personnel or using external resources; (2) implementing control +activities at WEX Brazil that address relevant financial statement risks, including account +reconciliations, variance analysis and journal entry procedures; and (3) implementing additional +corporate monitoring activities over small foreign subsidiaries. +23. WEX stated in its fiscal year 2019 Form 10-K filed with the Commission that the +company had remediated the material weaknesses in Brazil and its independent auditor issued an +unqualified opinion over WEX’s ICFR. +Violations +24. As a result of the conduct described above, WEX violated Section 13(a) of the +Exchange Act and Rules 13a-1, 13a-11, and 13a-13 thereunder, which require companies with a +class of securities registered pursuant to Exchange Act Section 12 to file with the Commission +complete and accurate annual, quarterly and current reports. +25. In addition, as a result of the conduct described above, WEX violated Section +13(b)(2)(A) of the Exchange Act, which requires Exchange Act reporting companies to make and +keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. + 7 +26. In addition, as a result of the conduct described above, WEX violated Section +13(b)(2)(B) of the Exchange Act, which, among other things, requires Exchange Act reporting +companies to devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that transactions are recorded as necessary to permit preparation of financial +statements in accordance with GAAP or any other criteria applicable to such statements. +WEX’s Remedial Efforts + + In determining to accept WEX’s Offer, the Commission considered the investigation and +remedial acts promptly undertaken by Respondent WEX 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’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-11, and 13a-13 thereunder. + +B. Respondent WEX shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $350,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +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 + + 8 +Payments by check or money order must be accompanied by a cover letter identifying the +paying Respondent as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Celia Moore, +Assistant Regional Director, Division of Enforcement, Securities and Exchange Commission, 33 +Arch Street, 24th Floor, Boston, MA 02110. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of its payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +Respondent agrees that it shall, within 30 days after entry of a final order granting the Penalty +Offset, notify the Commission's counsel in this action and pay the amount of the Penalty Offset to +the Securities and Exchange Commission. Such a payment shall not be deemed an additional civil +penalty and shall not be deemed to change the amount of the civil penalty imposed in this +proceeding. For purposes of this paragraph, a “Related Investor Action” means a private damages +action brought against Respondent by or on behalf of one or more investors based on substantially +the same facts as alleged in the Order instituted by the Commission in this proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4276.txt b/raw/aaer/2021/AAER-4276.txt new file mode 100644 index 0000000000000000000000000000000000000000..34b2152f985646c06f6257d142ecf36f969db710 --- /dev/null +++ b/raw/aaer/2021/AAER-4276.txt @@ -0,0 +1,53 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93756 / December 13, 2021 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5922 / December 13, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4276 / December 13, 2021 + +Admin. Proc. File No. 3-20395 + + +In the Matter of + +STOCKMAN KAST RYAN & CO. LLP; +ELLEN S. FISHER, CPA; AND +DAVID H. KAST, CPA + + +STAY ORDER + +On July 13, 2021, the Securities and Exchange Commission issued an order instituting an +administrative proceeding against Stockman Kast Ryan & Co. LLP, Ellen S. Fisher, CPA, and +David H. Kast, CPA (collectively, “Respondents”), pursuant to Section 4C of the Securities +Exchange Act of 1934, Section 203(k) of the Investment Advisers Act of 1940, and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice.1 On December 9, 2021, the Division of +Enforcement and Respondents filed a joint motion for a stay based on the parties’ agreement in +principle to a settlement on all major terms of this proceeding. +Rule of Practice 161(c)(2) governs stays pending Commission consideration of an offer +of settlement only in administrative proceedings that have been set before a hearing officer.2 +This proceeding was set before the Commission, so Rule 161(c)(2) does not apply; nevertheless +it appears appropriate to apply similar standards to this motion. +It is ORDERED that the joint motion is GRANTED and that this proceeding is stayed. +The stay is contingent on the submission to the Commission of Respondents’ signed offer of +settlement and the Division’s accompanying recommendation no later than February 11, 2021. + +1 Stockman Kast Ryan & Co., Exchange Act Release No. 92382, 2021 WL 2953521 (July +13, 2021). +2 17 C.F.R. § 201.161(c)(2). +2 + +If this deadline is not met or if the Commission rejects the offer of settlement, the parties shall +file a joint status report within 7 days of that event. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2021/AAER-4277.txt b/raw/aaer/2021/AAER-4277.txt new file mode 100644 index 0000000000000000000000000000000000000000..5d20306984a17c9c44fd8b60f4c3205e0e7318de --- /dev/null +++ b/raw/aaer/2021/AAER-4277.txt @@ -0,0 +1,1388 @@ + + + + + + + + + + + + + + + + SEC.gov | Sequential Brands Group, Inc. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/526926","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Sequential Brands Group, Inc. + + + + + + + + + + + + Sequential Brands Group, Inc. + + + + + + + + + + + + + + + + + + + + + --> + + SEC Obtains Final Judgment Against Sequential Brands Group, Inc. for Failing to Timely Impair Goodwill + + Litigation Release No. 25289 / December 15, 2021 + + Accounting and Auditing Enforcement Release No. 4277 / December 15, 2021 + + Securities and Exchange Commission v. Sequential Brands Group, Inc. , Case No. 20-CV-10471 (JPO) (SDNY filed Dec. 11, 2020) + + + + + + + + + The Securities and Exchange Commission today announced that Sequential Brands Group, Inc., agreed to the entry of a final judgment permanently enjoining Sequential from future violations of the antifraud provision of Section 17(a)(3) of the Securities Act of 1933 and certain reporting, books and records, and internal control provisions under the Securities Exchange Act of 1934. The U.S. District Court for the Southern District of New York entered the final judgment against Sequential on December 1, 2021. + + The SEC's complaint alleged that Sequential failed to properly assess its goodwill for potential impairment after several months of declining stock prices followed by a precipitous drop in early November 2016.  According to the complaint, in December 2016, shortly after Sequential passed its annual goodwill testing, the company conducted internal calculations showing that, in light of the declining stock price, Sequential would fail the first step of its disclosed two-step impairment test. The complaint alleged that the company ignored this objective evidence of impairment. Instead, the complaint alleges, Sequential performed a qualitative analysis that omitted any mention of its internal calculations, as well as numerous other negative developments in the company's business, leading it to unreasonably conclude that goodwill was not impaired. As alleged, by avoiding an impairment to its goodwill in 2016, Sequential inflated its income from operations, created a false impression of its financial condition, and misstated its financial statements and reports for almost a year. Sequential allegedly continued to improperly account for goodwill in the next three quarters, before belatedly impairing all of its goodwill-totaling $304 million-in the fourth quarter of 2017. + + Without admitting or denying the allegations of the complaint, Sequential agreed to be permanently enjoined from violating the antifraud provision of Section 17(a)(3) of the Securities Act; the reporting provisions of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; the books and records provision of Exchange Act Section 13(b)(2)(A); and the internal control provisions of Exchange Act Section 13(b)(2)(B). + + In light of Sequential's financial condition as set forth in filings before the bankruptcy court in the case Sequential Brands Group, Inc., et al., Chapter 11, Case No. 21-11194 (JTD) pending in the U.S. Bankruptcy Court District of Delaware, the final judgment does not impose a monetary penalty. + + The SEC's litigation was conducted by Christopher M. Bruckmann and John Bowers, and supervised by Frederick Block. The SEC's investigation was conducted by Ellen Bortz, Richard Johnston, and Paul Gunson, under the supervision of Paul Pashkoff, Jennifer Leete, and Melissa Hodgman. + + + + + + + + + SEC Complaint + + +--> + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2021/AAER-4278.txt b/raw/aaer/2021/AAER-4278.txt new file mode 100644 index 0000000000000000000000000000000000000000..2af8d2b9218d3c1abd63e2995b27fd9d33f56299 --- /dev/null +++ b/raw/aaer/2021/AAER-4278.txt @@ -0,0 +1,257 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 93884 / December 30, 2021 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4278 / December 30, 2021 + +ADMINISTRATIVE PROCEEDING +File No. 3-20693 + +: +: +In the Matter of : ORDER INSTITUTING +: PUBLIC ADMINISTRATIVE +: PROCEEDINGS PURSUANT TO RULE +Vicent C. Petrescu, aka Vincent : 102(e) OF THE COMMISSION’S RULES OF +Petrescu, CPA, : PRACTICE, MAKING FINDINGS, AND +: IMPOSING REMEDIAL SANCTIONS +Respondent. : +: + : + + +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 Vicent +C. Petrescu, aka Vincent Petrescu, CPA (“Respondent” or “Petrescu”) pursuant to Rule +102(e)(3)(i) of the Commission’s Rules of Practice.1 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, and the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + +The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . +suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently +enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the +Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of +the rules and regulations thereunder. +2 +findings contained in Section III.2 below, which are admitted, Respondent consents to the entry of +this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s +Rules of Practice, Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth +below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Petrescu, age 49, resides in Algonquin, Illinois. Petrescu has held an active CPA +license in Illinois since October 2018. Petrescu also held a CPA license in Indiana that expired in +June 2021. As of August 2021, Petrescu owns an accounting firm, CPA Wit, LLC, an Illinois +limited liability company. Petrescu is the founder and CEO of TruCrowd, Inc. (“TruCrowd”), an +SEC-registered funding portal. + +2. On September 20, 2021, the Commission filed a complaint against Petrescu in SEC +v. Robert Samuel Shumake, Jr., et al. (Civil Action No. 21-cv-12193), in the United States District +Court for the Eastern District of Michigan. On December 23, 2021, the court entered an order +permanently enjoining Petrescu, by consent, from future violations of Section 4A(a)(5) of the +Securities Act of 1933 and Rule 301(c)(2) thereunder. + +3. The Commission’s complaint alleged, among other things, that Petrescu permitted +two issuers to conduct fraudulent crowdfunding offerings through TruCrowd’s platform despite +multiple warning signs of possible fraud or other harm to investors. Petrescu assisted these issuers +and their affiliated individuals with preparing and filing Forms C and offering statements. Petrescu +never questioned why the Forms C and offering statements omitted any mention of another +individual with a criminal record who was actively involved with the offerings and the +management of the issuers. Petrescu also failed to address a series of red flags concerning +possible fraud and investor harm, including but not limited to complaints and concerns raised by +investors, an attorney, and individuals affiliated with the issuers. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Petrescu’s Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Petrescu is suspended from appearing or practicing before the Commission as an +accountant. + +B. After three years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. +3 +C. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Exchange Act of +1934 (“Exchange Act”), Respondent shall submit a written statement attesting to an undertaking to +have Respondent’s work reviewed by the independent audit committee of any public company for +which Respondent works or in some other manner acceptable to the Commission, as long as +Respondent practices before the Commission in this capacity and will comply with any +Commission or other requirements related to the appearance and practice before the Commission +as an accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Respondent shall +submit a statement prepared by the audit committee(s) with which Respondent will be associated, +including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +E. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +4 +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +F. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a certified public accountant +(“CPA”) and that Respondent has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Respondent is not currently licensed as a CPA, Respondent shall provide +documentation showing that Respondent’s licensure is dependent upon reinstatement by the +Commission. + +G. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in SEC v. +Robert Samuel Shumake, Jr., et al. (Civil Action No. 21-cv-12193), in the +United States District Court for the Eastern District of Michigan, or any +related Commission proceedings, including any orders requiring payment of +disgorgement or penalties; + +2. That Respondent undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise changes +in any material way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +5 +finding or injunction concerning the conduct that was the basis for the +Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis +for the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. +H. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + +I. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. +6 +J. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph I, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +K. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph I, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +L. If the Commission declines to reinstate Respondent pursuant to Paragraphs J and K, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4279.pdf b/raw/aaer/2022/AAER-4279.pdf new file mode 100644 index 0000000000000000000000000000000000000000..47eddb8aa14e690a6ee7805c6fac48b3c99b8e5b --- /dev/null +++ b/raw/aaer/2022/AAER-4279.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9ffd16bff064d1cd1dadf763b237ad1ce150aa3bf74cfa660e1bf28a6e221825 +size 131219 diff --git a/raw/aaer/2022/AAER-4280.pdf b/raw/aaer/2022/AAER-4280.pdf new file mode 100644 index 0000000000000000000000000000000000000000..43ba4849605c90e87e5ec4949b8ec731c4518a37 --- /dev/null +++ b/raw/aaer/2022/AAER-4280.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:5a5967b97ddff6588c058a380b01b26dbefbd95a49a24f0200544ac5b4b73954 +size 258646 diff --git a/raw/aaer/2022/AAER-4282.pdf b/raw/aaer/2022/AAER-4282.pdf new file mode 100644 index 0000000000000000000000000000000000000000..6a30097eadf181b6d347402beff245af0e941bb0 --- /dev/null +++ b/raw/aaer/2022/AAER-4282.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b1d08987ad4839077af29ecfab9d4ec6a82151c40545c7c21c90d917420081a4 +size 125861 diff --git a/raw/aaer/2022/AAER-4283.pdf b/raw/aaer/2022/AAER-4283.pdf new file mode 100644 index 0000000000000000000000000000000000000000..118550417e3ec2a848dfd459a03dff339e8605b4 --- /dev/null +++ b/raw/aaer/2022/AAER-4283.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:351d381aa91fd200089173cc1f453cc99edb176a20b4e51222b01160a2a60cfd +size 262843 diff --git a/raw/aaer/2022/AAER-4284.pdf b/raw/aaer/2022/AAER-4284.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ea7550aa5ffc6544a25ea3fc437fd75db3017a13 --- /dev/null +++ b/raw/aaer/2022/AAER-4284.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9d9028a7e281b94a7800786fd7d43820b0dd87fa17996e7a4c7ca016cdb0b6b6 +size 354372 diff --git a/raw/aaer/2022/AAER-4285.pdf b/raw/aaer/2022/AAER-4285.pdf new file mode 100644 index 0000000000000000000000000000000000000000..561f6e61253cb4ad8cd0e9967e587a27cdd344f0 --- /dev/null +++ b/raw/aaer/2022/AAER-4285.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:91f474bda46813bd0f8d044ce0ade53ce5a7973c9354b6d6d8e5f4656cf003e4 +size 356008 diff --git a/raw/aaer/2022/AAER-4287.pdf b/raw/aaer/2022/AAER-4287.pdf new file mode 100644 index 0000000000000000000000000000000000000000..1a6156721d8a30ad201d4773b5a3c759b4e319c5 --- /dev/null +++ b/raw/aaer/2022/AAER-4287.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b8a034b6161bdd32f154b1566d388d384edc278eeff69c7912eb22a4cb6313ef +size 129982 diff --git a/raw/aaer/2022/AAER-4288.pdf b/raw/aaer/2022/AAER-4288.pdf new file mode 100644 index 0000000000000000000000000000000000000000..58e9f779803a602ba6d34f7a695ec85fb018dc4d --- /dev/null +++ b/raw/aaer/2022/AAER-4288.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:48e45fe1297b1c439304a2ab3d454d9a8caf7724fbcd90f4a90cee48638b63e8 +size 440015 diff --git a/raw/aaer/2022/AAER-4289.pdf b/raw/aaer/2022/AAER-4289.pdf new file mode 100644 index 0000000000000000000000000000000000000000..df8f6134adf3295d65ac5718f880511b5038a56c --- /dev/null +++ b/raw/aaer/2022/AAER-4289.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:86654e428e601c562c71ce75d8cd847e20a9acdfe66be3f89b033682f1c02a84 +size 284801 diff --git a/raw/aaer/2022/AAER-4290.pdf b/raw/aaer/2022/AAER-4290.pdf new file mode 100644 index 0000000000000000000000000000000000000000..99d808b8f510cc77554f84a96e5d50eb6c8891a0 --- /dev/null +++ b/raw/aaer/2022/AAER-4290.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8110632d5d6df78812334222d94e016d4056904f68559369adf9226e17424c95 +size 128223 diff --git a/raw/aaer/2022/AAER-4291.pdf b/raw/aaer/2022/AAER-4291.pdf new file mode 100644 index 0000000000000000000000000000000000000000..06f8550bd07f3d43f967eedafd40fd742547d779 --- /dev/null +++ b/raw/aaer/2022/AAER-4291.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:1b58ec7e3b10ff82d91ac7593feb61f42bb050badd3e6efffa52276d5b51327a +size 320208 diff --git a/raw/aaer/2022/AAER-4292.pdf b/raw/aaer/2022/AAER-4292.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2a7a31a7946e9ea2c8f171894d1cb7c59a6c0bb5 --- /dev/null +++ b/raw/aaer/2022/AAER-4292.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:ebd68d2b616d3a356f959a311d08cea576cf3bf806a4d3f7fb094a4497675ab1 +size 219769 diff --git a/raw/aaer/2022/AAER-4294.pdf b/raw/aaer/2022/AAER-4294.pdf new file mode 100644 index 0000000000000000000000000000000000000000..974637b68403c0a75e8ac8b1948a254dc4f72176 --- /dev/null +++ b/raw/aaer/2022/AAER-4294.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c842e3195c41a79f0a926f0dbd2b54a2f32400c61850ce4d097bfc02064cf880 +size 289134 diff --git a/raw/aaer/2022/AAER-4295.pdf b/raw/aaer/2022/AAER-4295.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a1a29395f6df896b330959c8e0bbdeea49c2531c --- /dev/null +++ b/raw/aaer/2022/AAER-4295.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:d90e34b55aa1cda845bb15572528ffc9fcaeda01fe23fd009404e49d333ab7c7 +size 227925 diff --git a/raw/aaer/2022/AAER-4297.pdf b/raw/aaer/2022/AAER-4297.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b4e30d09d5eb940af0b5a61a2777189e67dbc35e --- /dev/null +++ b/raw/aaer/2022/AAER-4297.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:ce9d1f39e356b5a58800919eff2139098856332d284f80816f55ea51b61237c7 +size 231343 diff --git a/raw/aaer/2022/AAER-4299.pdf b/raw/aaer/2022/AAER-4299.pdf new file mode 100644 index 0000000000000000000000000000000000000000..dc671e1e0a45553d040ea3593f3fd638ca996a3e --- /dev/null +++ b/raw/aaer/2022/AAER-4299.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:1ec63cfb65abd40365b49094f85eaff8e20981161c70b01c98d0b56ebc1e3428 +size 242480 diff --git a/raw/aaer/2022/AAER-4300.pdf b/raw/aaer/2022/AAER-4300.pdf new file mode 100644 index 0000000000000000000000000000000000000000..1e171d3d5b0b67a5930be7839f5c9535937d3f4c --- /dev/null +++ b/raw/aaer/2022/AAER-4300.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:7777e8c406d1b92613b7df44508be1d104191309d3fc937834ce46f6f29acb0b +size 261180 diff --git a/raw/aaer/2022/AAER-4301.pdf b/raw/aaer/2022/AAER-4301.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2ea6d5585b4982999c3234b8dd30cd535f53b2cd --- /dev/null +++ b/raw/aaer/2022/AAER-4301.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:48f926f6004b2696c8f5b24f69bedca93b9e00ef9dcfce34e511b9f591b5c588 +size 128811 diff --git a/raw/aaer/2022/AAER-4302.pdf b/raw/aaer/2022/AAER-4302.pdf new file mode 100644 index 0000000000000000000000000000000000000000..28d82b7ce1a57fe8035eeeb7845958d95207f8cf --- /dev/null +++ b/raw/aaer/2022/AAER-4302.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8ca45be5da51506cba0d5326d16a68246d65c51edcf1991478d1c300087ab0e3 +size 480773 diff --git a/raw/aaer/2022/AAER-4303.pdf b/raw/aaer/2022/AAER-4303.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7fd1fb4ad1e14a562081e011a3b8ae3ebef8099f --- /dev/null +++ b/raw/aaer/2022/AAER-4303.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c807f20f2d91949814f1fb29099f1acf1b5591e8cdca9b0fa84d17d65a46c307 +size 285835 diff --git a/raw/aaer/2022/AAER-4304.pdf b/raw/aaer/2022/AAER-4304.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2fb41d51d47d9f98db4704d28151f1119fc4d2d3 --- /dev/null +++ b/raw/aaer/2022/AAER-4304.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:53eb42e33637c7f88a81a696daf509fc484a6d600038acd0fb0e79e45487cd86 +size 293995 diff --git a/raw/aaer/2022/AAER-4305.pdf b/raw/aaer/2022/AAER-4305.pdf new file mode 100644 index 0000000000000000000000000000000000000000..54484719e598fc086607767b13bd7fe181e4cf1f --- /dev/null +++ b/raw/aaer/2022/AAER-4305.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:00a04ab30d175c60e7d528b783a25c1f9536abb23b2095078804446bfa7fff66 +size 163259 diff --git a/raw/aaer/2022/AAER-4306.pdf b/raw/aaer/2022/AAER-4306.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9d61a629c7af2c2f117e21bfcccf8c2e295bde1c --- /dev/null +++ b/raw/aaer/2022/AAER-4306.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e81da455dec642e4cbafbf2919d210aad37be7ad146d22a73308bf324ec526dd +size 285016 diff --git a/raw/aaer/2022/AAER-4307.pdf b/raw/aaer/2022/AAER-4307.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e8293aafaf2effa26cf74f1c0bcc4142cbf7465b --- /dev/null +++ b/raw/aaer/2022/AAER-4307.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:03170883d79a1fb88bb792bb14b69aa5ec4cc2d08c27036a42506a06adba9706 +size 146871 diff --git a/raw/aaer/2022/AAER-4308.pdf b/raw/aaer/2022/AAER-4308.pdf new file mode 100644 index 0000000000000000000000000000000000000000..3cee1361dd7553e699e452e616a999a7f448ddfe --- /dev/null +++ b/raw/aaer/2022/AAER-4308.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:140e6eb1e9cd7f395382d372097effe9746f0053ef5b5960b480968ace5e8883 +size 271361 diff --git a/raw/aaer/2022/AAER-4309.pdf b/raw/aaer/2022/AAER-4309.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ca6f0f7e7b16e62a68869e0f813896755011d6f7 --- /dev/null +++ b/raw/aaer/2022/AAER-4309.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:30b4375f1c219c349a8b23dba5ba863a5239a36da1f16cff30c71ecee1fa1e68 +size 485890 diff --git a/raw/aaer/2022/AAER-4310.pdf b/raw/aaer/2022/AAER-4310.pdf new file mode 100644 index 0000000000000000000000000000000000000000..1830797d66a7b55895c6e44971e44bc6516d9262 --- /dev/null +++ b/raw/aaer/2022/AAER-4310.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:315fd535d7e200d763f7c0401c85407e42b297af9a556160d643bc257804f2e4 +size 382634 diff --git a/raw/aaer/2022/AAER-4311.pdf b/raw/aaer/2022/AAER-4311.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d932f25f4900e096f043ad0d628751d0989d91b3 --- /dev/null +++ b/raw/aaer/2022/AAER-4311.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:27577d8efffa1044e4c97ad37ea43d85531b0c255788640ebbfb11fd4db4d845 +size 573104 diff --git a/raw/aaer/2022/AAER-4312.pdf b/raw/aaer/2022/AAER-4312.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9756d3fc6664a8115fae5e6d16e979dba0ada99c --- /dev/null +++ b/raw/aaer/2022/AAER-4312.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a4bd71d01759a95988a95bfee6593e66117cb20f64ac2be44cc45cf43bbf4797 +size 259097 diff --git a/raw/aaer/2022/AAER-4313.pdf b/raw/aaer/2022/AAER-4313.pdf new file mode 100644 index 0000000000000000000000000000000000000000..733d438fb58a763db73387421094030fcb63b3ca --- /dev/null +++ b/raw/aaer/2022/AAER-4313.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:d0242ee8eb36697509d9a6606ae41a90308c9c1cf453023e6bd4847a815b63c4 +size 498191 diff --git a/raw/aaer/2022/AAER-4314.pdf b/raw/aaer/2022/AAER-4314.pdf new file mode 100644 index 0000000000000000000000000000000000000000..260bb5d7d6fa6b890f451fc1ed4206efa3a92139 --- /dev/null +++ b/raw/aaer/2022/AAER-4314.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e190cc59fb252162173ca3e1a0670e8636238de81235f0e237bf7358f06c8817 +size 270681 diff --git a/raw/aaer/2022/AAER-4315.pdf b/raw/aaer/2022/AAER-4315.pdf new file mode 100644 index 0000000000000000000000000000000000000000..27389050ecabfb187e0bf1f2b4663afbc2d0ca7b --- /dev/null +++ b/raw/aaer/2022/AAER-4315.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:3744af1b659e613403688e5e265aee635a10aef0fc158285754339d300a880f2 +size 223079 diff --git a/raw/aaer/2022/AAER-4316.pdf b/raw/aaer/2022/AAER-4316.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b6cb7a197bbab68657a9cd1e54adec1a66fdf3ee --- /dev/null +++ b/raw/aaer/2022/AAER-4316.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:eab18a2b2be9afb61f5be1dcf6647cf844bf79224a9657eca6e126588c042eac +size 126658 diff --git a/raw/aaer/2022/AAER-4318.pdf b/raw/aaer/2022/AAER-4318.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d0d5510470d5fa4c80235492f3b3d49136381067 --- /dev/null +++ b/raw/aaer/2022/AAER-4318.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:1eb70635f4624fc13d871bcd7edd395472c9114ba96ea97d76f1cac2d1afa8ef +size 311882 diff --git a/raw/aaer/2022/AAER-4320.pdf b/raw/aaer/2022/AAER-4320.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4c7c464f2e82cfc413adb8cf8d50169406f25ec0 --- /dev/null +++ b/raw/aaer/2022/AAER-4320.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:09c7a8fd8a2d09c01cd0373b437b301519e08ed65c14c15affa5f06e0d425740 +size 223255 diff --git a/raw/aaer/2022/AAER-4321.pdf b/raw/aaer/2022/AAER-4321.pdf new file mode 100644 index 0000000000000000000000000000000000000000..94e653421f173f0c8b74f1f199add7f2f17d71fd --- /dev/null +++ b/raw/aaer/2022/AAER-4321.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:02279f0218d0131bd8cafb00bc9b9b6e5f0411b2b79354af7a4d00684e7e6e72 +size 236010 diff --git a/raw/aaer/2022/AAER-4323.pdf b/raw/aaer/2022/AAER-4323.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b1e71c7e5896270be6327c323e778f3e0167be6a --- /dev/null +++ b/raw/aaer/2022/AAER-4323.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:219fbf522375fd20061e78405dcb7aa135ed3dd80c5edd77fab830111cbeb924 +size 183847 diff --git a/raw/aaer/2022/AAER-4324.pdf b/raw/aaer/2022/AAER-4324.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d9906359e7ded48e4a253dfa344d4afe51025996 --- /dev/null +++ b/raw/aaer/2022/AAER-4324.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:6c6a0c3922393b1b3a13a63182565d995596607f774cdc69d308615dc24d0c63 +size 371113 diff --git a/raw/aaer/2022/AAER-4325.pdf b/raw/aaer/2022/AAER-4325.pdf new file mode 100644 index 0000000000000000000000000000000000000000..896cfbf29287fbfb5b76cd11f49e7101ce07f375 --- /dev/null +++ b/raw/aaer/2022/AAER-4325.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4ce5018a3c3257e1cb3fdad40f6e628d1630173e1afa25c7d4eccb66330876b0 +size 139547 diff --git a/raw/aaer/2022/AAER-4326.pdf b/raw/aaer/2022/AAER-4326.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ac0111c113390b468bc711308f6bd21686020a8f --- /dev/null +++ b/raw/aaer/2022/AAER-4326.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:af0883261e1a72d9467e4ec40fc2e577d804436d88db9912d0dc66dfab05fb94 +size 134747 diff --git a/raw/aaer/2022/AAER-4327.pdf b/raw/aaer/2022/AAER-4327.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4020322dc49aa1b737ae5f26d31ade0393ce3f7e --- /dev/null +++ b/raw/aaer/2022/AAER-4327.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:ae3272b33b31adff271ab997a811c25fb8c3da0d81986f87540767ca805cc2fd +size 134196 diff --git a/raw/aaer/2022/AAER-4329.pdf b/raw/aaer/2022/AAER-4329.pdf new file mode 100644 index 0000000000000000000000000000000000000000..128c4ee4943a65b89b8b32665c454a68ae2205d1 --- /dev/null +++ b/raw/aaer/2022/AAER-4329.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:7a9b1e53fca111824a205c1353e1280f4774a4345a3c44ac9fabaa2e638feb5b +size 277880 diff --git a/raw/aaer/2022/AAER-4330.pdf b/raw/aaer/2022/AAER-4330.pdf new file mode 100644 index 0000000000000000000000000000000000000000..da2745993bf733a9475aca62364c96c79278b4b2 --- /dev/null +++ b/raw/aaer/2022/AAER-4330.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:dfa3b0883945fa21581cc882477e6349878fce372bc2bd139c17f5bbdabba6b1 +size 239729 diff --git a/raw/aaer/2022/AAER-4332.pdf b/raw/aaer/2022/AAER-4332.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4a4675db37b7f913f89de31e82f42cf3fd8a2600 --- /dev/null +++ b/raw/aaer/2022/AAER-4332.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:2323681d47d3c796bf45c75d8d7f81ca667339d32be2d78c5f6279f5b516b281 +size 155112 diff --git a/raw/aaer/2022/AAER-4333.pdf b/raw/aaer/2022/AAER-4333.pdf new file mode 100644 index 0000000000000000000000000000000000000000..20bf0799f0ff85d2a8dbc6aabb84a9d57df8b507 --- /dev/null +++ b/raw/aaer/2022/AAER-4333.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:ef4990e3fca2b87d977eb36a1ec3d34db230e58b74d901ad31cfad22cfdbaea3 +size 283427 diff --git a/raw/aaer/2022/AAER-4334.pdf b/raw/aaer/2022/AAER-4334.pdf new file mode 100644 index 0000000000000000000000000000000000000000..55e121b3bda349a3110fa55408aad6a96dc173d0 --- /dev/null +++ b/raw/aaer/2022/AAER-4334.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8f100c37fa9a2ea286d9ff9abe59395de0aab10082c8eb8bc745aa075723c235 +size 129040 diff --git a/raw/aaer/2022/AAER-4335.pdf b/raw/aaer/2022/AAER-4335.pdf new file mode 100644 index 0000000000000000000000000000000000000000..63da4451a21a61b077ecc50871831c62ea27d932 --- /dev/null +++ b/raw/aaer/2022/AAER-4335.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:14633b73bd5f09c43c41814222b8c1dc766c262337507bae2342f5e0b933c4b9 +size 282124 diff --git a/raw/aaer/2022/AAER-4336.pdf b/raw/aaer/2022/AAER-4336.pdf new file mode 100644 index 0000000000000000000000000000000000000000..046bd4d73fb803a3c51f37829b7bd489cf078e54 --- /dev/null +++ b/raw/aaer/2022/AAER-4336.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:eac62a0f3fdaf498ad9e13382bd5dedf47d46fc07b041691a8918bbbd6999e2f +size 426083 diff --git a/raw/aaer/2022/AAER-4337.pdf b/raw/aaer/2022/AAER-4337.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c6164f1b54d8ec679f53b62bf553dbbfe9e04b07 --- /dev/null +++ b/raw/aaer/2022/AAER-4337.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a054e3bbd799d6a6457896b86779abb25e200311336a3ed9cab02864b3558889 +size 223454 diff --git a/raw/aaer/2022/AAER-4338.pdf b/raw/aaer/2022/AAER-4338.pdf new file mode 100644 index 0000000000000000000000000000000000000000..334ed23bd253d524754db0788d0dcfd7e3080255 --- /dev/null +++ b/raw/aaer/2022/AAER-4338.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:000e3a198512d5bd25c446a0b19dba62f2c9673fa41414ad5b834290d72bd898 +size 284295 diff --git a/raw/aaer/2022/AAER-4339.pdf b/raw/aaer/2022/AAER-4339.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5c20f13cbac42b599a48875836c6b891337a9222 --- /dev/null +++ b/raw/aaer/2022/AAER-4339.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:89efd3063a4a1421b4f55de80427ac4415526473e5d3a16528cf81331f04514d +size 589333 diff --git a/raw/aaer/2022/AAER-4340.pdf b/raw/aaer/2022/AAER-4340.pdf new file mode 100644 index 0000000000000000000000000000000000000000..70403047343f32599f1b936306d427a63207f1e5 --- /dev/null +++ b/raw/aaer/2022/AAER-4340.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e996053056c0fcaf3542a2b9f7e2ef9a17e2aaa90dff7aec9e40213ec13f9997 +size 223644 diff --git a/raw/aaer/2022/AAER-4342.pdf b/raw/aaer/2022/AAER-4342.pdf new file mode 100644 index 0000000000000000000000000000000000000000..365d6772677484049eb8a50f3274fab0a40a21d5 --- /dev/null +++ b/raw/aaer/2022/AAER-4342.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:85df23e31f311205376f32583b7942f82c07bfa4565de8677d8ef71f383df575 +size 285631 diff --git a/raw/aaer/2022/AAER-4343.pdf b/raw/aaer/2022/AAER-4343.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2bd8c4008735337a7113273a14fc6c1d30dd0f54 --- /dev/null +++ b/raw/aaer/2022/AAER-4343.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:5e14c17ff08c550767f3b345b282db8acd20006bdb681eb9a7de01bf3fb67c43 +size 166021 diff --git a/raw/aaer/2022/AAER-4344.pdf b/raw/aaer/2022/AAER-4344.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7e3f3077334c51b7bfa7b2c4d33946e1b536e6cf --- /dev/null +++ b/raw/aaer/2022/AAER-4344.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:be4b9a223a521089068ffd5563cabb37624d3b6970fcfad630fd1e25da820be3 +size 299576 diff --git a/raw/aaer/2022/AAER-4345.pdf b/raw/aaer/2022/AAER-4345.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c11170dd602326499a390e59cc619ba0c428267b --- /dev/null +++ b/raw/aaer/2022/AAER-4345.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:054bcd450e6220f0dd08e5d6112859186be70c6671faf4115d9ae5a618b419b2 +size 266676 diff --git a/raw/aaer/2022/AAER-4346.pdf b/raw/aaer/2022/AAER-4346.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c7db1debd2e44902c9ff2df80e16a795be98ca0e --- /dev/null +++ b/raw/aaer/2022/AAER-4346.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c2224e90a4b2520c5e6e372ff45631d243f8603e0e15bb3e98188dcc7507f2f7 +size 585466 diff --git a/raw/aaer/2022/AAER-4347.pdf b/raw/aaer/2022/AAER-4347.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b3c5f433004ff79fb758a27cb433b7b22ed6fcbf --- /dev/null +++ b/raw/aaer/2022/AAER-4347.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:d08f3c6e1be423b73b66c92690e6fbed35962f112f851348703d283ac4c61837 +size 392081 diff --git a/raw/aaer/2022/AAER-4348.pdf b/raw/aaer/2022/AAER-4348.pdf new file mode 100644 index 0000000000000000000000000000000000000000..3cae976639b8669362947498cd51770e4a1615e2 --- /dev/null +++ b/raw/aaer/2022/AAER-4348.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f3abd724721d89a168f9eb2253d47f2e6c2353a5a5f47e61475bfe6add3bef20 +size 262035 diff --git a/raw/aaer/2022/AAER-4349.pdf b/raw/aaer/2022/AAER-4349.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f23c9f5c734e985fa58203cf0a0da041900e9829 --- /dev/null +++ b/raw/aaer/2022/AAER-4349.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b8866aa0d44a5e079234502c53aea897271e08f3de3020805071ab71be7847aa +size 429904 diff --git a/raw/aaer/2022/AAER-4350.pdf b/raw/aaer/2022/AAER-4350.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2f0af6d936b8421d6723b09bf7a38f68ce12b0b6 --- /dev/null +++ b/raw/aaer/2022/AAER-4350.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:350985fa4ef48dc38841c705b68e51100b7f9ab5832a2a48a2a5a5f58e72884a +size 428738 diff --git a/raw/aaer/2022/AAER-4353.pdf b/raw/aaer/2022/AAER-4353.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b39f3a3c4f9250a2385dc605bf2402d0912bd1f2 --- /dev/null +++ b/raw/aaer/2022/AAER-4353.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f86f081018c860239d31b8829b21f6f3e67604123980fd6c4ee31247701e6446 +size 203839 diff --git a/raw/aaer/2022/AAER-4354.pdf b/raw/aaer/2022/AAER-4354.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f7236c170beb9f5127dc13d12034cbb89f2a8f27 --- /dev/null +++ b/raw/aaer/2022/AAER-4354.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4445eac026bb02295689808c9932dfdf7cdd21c584b814d52db9ec227d22e0ec +size 128980 diff --git a/raw/aaer/2022/AAER-4355.pdf b/raw/aaer/2022/AAER-4355.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f53507f2b314b7ecc57367048a27b7bf050ab19b --- /dev/null +++ b/raw/aaer/2022/AAER-4355.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:594bbdd52b936e2368da8d50549c1cd30d382f770ca20e833243a50f93acc336 +size 340873 diff --git a/raw/aaer/2022/AAER-4356.pdf b/raw/aaer/2022/AAER-4356.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0677a8923732a6570a5de23234cbe2a96274a14e --- /dev/null +++ b/raw/aaer/2022/AAER-4356.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:65c5cd080f82e1e7d60ef6332d9a0785ee596de68efbe1cc862764ceacd6830a +size 390956 diff --git a/raw/aaer/2022/AAER-4357.pdf b/raw/aaer/2022/AAER-4357.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7f814d94a47dca6a01c71730c8b2cc7a7116c30c --- /dev/null +++ b/raw/aaer/2022/AAER-4357.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8d99c8a8f1decffa61e57db0edc96890933836f4da0bcc3d8481201648c97fcb +size 274843 diff --git a/raw/aaer/2022/AAER-4358.pdf b/raw/aaer/2022/AAER-4358.pdf new file mode 100644 index 0000000000000000000000000000000000000000..32301a63ee48fa24110434e10f8b3934c2511724 --- /dev/null +++ b/raw/aaer/2022/AAER-4358.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:60de63e59b2dd20c7bab623a871e5006694ded42ba636534e8fa473316bca4ea +size 282132 diff --git a/raw/aaer/2022/AAER-4359.pdf b/raw/aaer/2022/AAER-4359.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bcc3b03a023aeb0c999832da5b50eb2f6256b75c --- /dev/null +++ b/raw/aaer/2022/AAER-4359.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f14aa8f0883257845706dc816913e9b072c21ebf82cc49014da4107fcd446b79 +size 267395 diff --git a/raw/aaer/2022/AAER-4360.pdf b/raw/aaer/2022/AAER-4360.pdf new file mode 100644 index 0000000000000000000000000000000000000000..365802a7fb17d5b63990238c64b82d0253b67154 --- /dev/null +++ b/raw/aaer/2022/AAER-4360.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:98fb8a9d970488f7b2f3d009a80a1c4dc07dbe0ba389dea16671546809930401 +size 272382 diff --git a/raw/aaer/2022/AAER-4362.pdf b/raw/aaer/2022/AAER-4362.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0269f09a355a9fbef91173e9c72a9a4637ba6cd3 --- /dev/null +++ b/raw/aaer/2022/AAER-4362.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a9edae1ec555d5afe066e10690b4d43eaad01f852393cbe035d71a1e59b5e7ec +size 204323 diff --git a/raw/aaer/2022/AAER-4363.pdf b/raw/aaer/2022/AAER-4363.pdf new file mode 100644 index 0000000000000000000000000000000000000000..1bbf11a396b20d6349599bcfdf52fcc253341897 --- /dev/null +++ b/raw/aaer/2022/AAER-4363.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:0e970364585829ec15e8c54ec7637467b2e1fc85b875546b4a96d82d4f4d08d3 +size 242461 diff --git a/raw/aaer/2022/AAER-4364.pdf b/raw/aaer/2022/AAER-4364.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5896e1e5c83ae12c45f2284f2686d056bbbb427c --- /dev/null +++ b/raw/aaer/2022/AAER-4364.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:143d3cb62702c4b5441f5a20c6c2e29b39a4a8c2c90a12a66b3d7dfdfc999e7c +size 222958 diff --git a/raw/aaer/2022/AAER-4365.pdf b/raw/aaer/2022/AAER-4365.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e962a08eb869d6e5b26e3f22912ca6ec12c7994e --- /dev/null +++ b/raw/aaer/2022/AAER-4365.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:d9b236c8c9f6fee414195e65566b2c5c114ac87801232ebcdce124796ddb7d35 +size 220026 diff --git a/raw/aaer/2022/AAER-4366.pdf b/raw/aaer/2022/AAER-4366.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a4873a44c790cd023ae95039312de0d621c0c0cc --- /dev/null +++ b/raw/aaer/2022/AAER-4366.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:3a17e47c2926fcd4540d1806db0ea9298be431eacf286aa946ac0a44965b1f65 +size 324080 diff --git a/raw/aaer/2022/AAER-4367.pdf b/raw/aaer/2022/AAER-4367.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0d27ef44b59aa94255ee579c27c5c24380a9af91 --- /dev/null +++ b/raw/aaer/2022/AAER-4367.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4036bf3350a26d8710a62670553264f0dbd39e229983e642e5b2703946308dd7 +size 397289 diff --git a/raw/aaer/2022/AAER-4368.pdf b/raw/aaer/2022/AAER-4368.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f22182133a8ffac61e9ce8a868ca79e44042c2df --- /dev/null +++ b/raw/aaer/2022/AAER-4368.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b1348470c24b926e0b77ff41e4e25692d546910974214b4d468ee55d9fedffcb +size 212573 diff --git a/raw/aaer/2023/AAER-4371.pdf b/raw/aaer/2023/AAER-4371.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2bb09b6db496350666da16faf7c70507afdc5d71 --- /dev/null +++ b/raw/aaer/2023/AAER-4371.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:ab7a78d9f0cfe38e676def7ba3f68313aa979b2fb8746a493b3a6da58d0342e2 +size 269436 diff --git a/raw/aaer/2023/AAER-4373.pdf b/raw/aaer/2023/AAER-4373.pdf new file mode 100644 index 0000000000000000000000000000000000000000..fa2feab45306b2ad0e563581bb4a963166c50388 --- /dev/null +++ b/raw/aaer/2023/AAER-4373.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e877bc15b12ed57b20e561b51847bf487198735a145b4deb69ce4c377b32d54b +size 270763 diff --git a/raw/aaer/2023/AAER-4376.pdf b/raw/aaer/2023/AAER-4376.pdf new file mode 100644 index 0000000000000000000000000000000000000000..adfe4bcd6f3f6c6d13344ae4b51da2e7e9bf1da6 --- /dev/null +++ b/raw/aaer/2023/AAER-4376.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:951d0cc9160461cc4d6047d00285383dd91d90c9b5975c27622ac6a3adb48415 +size 210738 diff --git a/raw/aaer/2023/AAER-4377.pdf b/raw/aaer/2023/AAER-4377.pdf new file mode 100644 index 0000000000000000000000000000000000000000..46568ae16bcafb6799517ed220e30ed898237bf1 --- /dev/null +++ b/raw/aaer/2023/AAER-4377.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:1db5c083d3ef3fb9a7aca5b2db7749891f2cbabfe373cbb629ac3817260c8112 +size 229981 diff --git a/raw/aaer/2023/AAER-4378.pdf b/raw/aaer/2023/AAER-4378.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7965eedc07421aa3b29ec45832e6ab4d28ad380e --- /dev/null +++ b/raw/aaer/2023/AAER-4378.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e59a51847c7c8362739fdc40a09bad241a918588eae32a4fa877f4500aaeb2aa +size 260736 diff --git a/raw/aaer/2023/AAER-4382.pdf b/raw/aaer/2023/AAER-4382.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7f6a8257068024b45515e189002797759bf0eb12 --- /dev/null +++ b/raw/aaer/2023/AAER-4382.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:d08fe92d80e8a3ac14410aad3d6a6c7c2516819d923f5a2819d6147494dcfc98 +size 233132 diff --git a/raw/aaer/2023/AAER-4385.pdf b/raw/aaer/2023/AAER-4385.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5f2b3fbea560a32b3dfcf3105719d6cb33d72709 --- /dev/null +++ b/raw/aaer/2023/AAER-4385.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:5c0b1a4c3ca758223beaa8c76ccfe00218787049edc5380a1496820cba57257f +size 240946 diff --git a/raw/aaer/2023/AAER-4388.pdf b/raw/aaer/2023/AAER-4388.pdf new file mode 100644 index 0000000000000000000000000000000000000000..6771b09e2db99fe3c115234e88aef27ac7d625c7 --- /dev/null +++ b/raw/aaer/2023/AAER-4388.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b236172eba6f9f39c64c9b7bf4494d4e7a5e3eb2d0737c24b30b951e1cad0bdd +size 212306 diff --git a/raw/aaer/2023/AAER-4389.pdf b/raw/aaer/2023/AAER-4389.pdf new file mode 100644 index 0000000000000000000000000000000000000000..854e242928a8cfc9323b33bae9e97d749c03c0c4 --- /dev/null +++ b/raw/aaer/2023/AAER-4389.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:58f6f92295f5934409b91d478a2076ecf0702088df92b69696b6e07340b0dec9 +size 207658 diff --git a/raw/aaer/2023/AAER-4394.pdf b/raw/aaer/2023/AAER-4394.pdf new file mode 100644 index 0000000000000000000000000000000000000000..32510eecb39817b0dfb357ea3397f9941e302362 --- /dev/null +++ b/raw/aaer/2023/AAER-4394.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:3697a84f8473c85b59717c0c43c971fae1ec9fed17325264d572fe13703809a2 +size 416550 diff --git a/raw/aaer/2023/AAER-4395.pdf b/raw/aaer/2023/AAER-4395.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8af4b2ae6c46a20afd183503cf8f937d4c6fe591 --- /dev/null +++ b/raw/aaer/2023/AAER-4395.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:48be8eb7d2bbd06ae5422dd6e1e432b36ed49b08652f89e71478aba88b2ce1c6 +size 127351 diff --git a/raw/aaer/2023/AAER-4396.pdf b/raw/aaer/2023/AAER-4396.pdf new file mode 100644 index 0000000000000000000000000000000000000000..07714b14d7038e82d2aa62be5f1788656a6b5b35 --- /dev/null +++ b/raw/aaer/2023/AAER-4396.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:742c7684eec2a51a009280f4d37389dd4827c6b1bc7f8e26124d7b67e41d17ce +size 286293 diff --git a/raw/aaer/2023/AAER-4397.pdf b/raw/aaer/2023/AAER-4397.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c60c1f3298e782588b7cad5da4b2b00164165771 --- /dev/null +++ b/raw/aaer/2023/AAER-4397.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a5a4ac410bc7da065bce9fcc0ff8ce13841ea3fcaea85823d9ef689ac119151a +size 246244 diff --git a/raw/aaer/2023/AAER-4400.pdf b/raw/aaer/2023/AAER-4400.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8c3b05b9ebdec51a8595a238a94ac41e2c165672 --- /dev/null +++ b/raw/aaer/2023/AAER-4400.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4078239dce1aae1dbfd0acff607f20ddde0e9bb7660dd263ab2129fb3f7d2be3 +size 222849 diff --git a/raw/aaer/2023/AAER-4401.pdf b/raw/aaer/2023/AAER-4401.pdf new file mode 100644 index 0000000000000000000000000000000000000000..19be1f4276109a7d9923a8dde6547810fc8cecbf --- /dev/null +++ b/raw/aaer/2023/AAER-4401.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c8591eb73eacb0f4ae20920157cc6d4ed399dbf1937fade0e7745eea9d5bc5f7 +size 254979 diff --git a/raw/aaer/2023/AAER-4405.pdf b/raw/aaer/2023/AAER-4405.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ab80876a5d057dfaafecd4cbcfa52b1015767c12 --- /dev/null +++ b/raw/aaer/2023/AAER-4405.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:25f21104b6c972322e7457246d8ba09df60b7253734883330b9c81490df42d09 +size 211813 diff --git a/raw/aaer/2023/AAER-4407.pdf b/raw/aaer/2023/AAER-4407.pdf new file mode 100644 index 0000000000000000000000000000000000000000..3e40aa1c1680cb2cace8d33251726fb995bb996c --- /dev/null +++ b/raw/aaer/2023/AAER-4407.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f0d01751094aa5a9c2e8a7e3449ae9543848b15cb9413aa09bdf2c6cab7d940b +size 231398 diff --git a/raw/aaer/2023/AAER-4408.pdf b/raw/aaer/2023/AAER-4408.pdf new file mode 100644 index 0000000000000000000000000000000000000000..03d6e6e7fdfbdc577f23d6f920636186da434352 --- /dev/null +++ b/raw/aaer/2023/AAER-4408.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:219f210847834728d9805e7c7d26bf7ad01f1851e5ad09e0a057fc16964a0913 +size 230118 diff --git a/raw/aaer/2023/AAER-4411.pdf b/raw/aaer/2023/AAER-4411.pdf new file mode 100644 index 0000000000000000000000000000000000000000..244bd1c1682935e30b92635ce5262b41b7f51c8e --- /dev/null +++ b/raw/aaer/2023/AAER-4411.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8e1a50439b76240209b82b9a37942d2e1362114b8e22c91e3c3c0d7f04eef0e9 +size 287375 diff --git a/raw/aaer/2023/AAER-4413.pdf b/raw/aaer/2023/AAER-4413.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4bc151af49d9721bf14d53d25500f1c1758cb2e7 --- /dev/null +++ b/raw/aaer/2023/AAER-4413.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:1f4303be16dc7f540131e81d99158b152d2347bb11619bc03ca388f926e5cfb6 +size 181428 diff --git a/raw/aaer/2023/AAER-4415.pdf b/raw/aaer/2023/AAER-4415.pdf new file mode 100644 index 0000000000000000000000000000000000000000..30591b9db756b05df6eea5fff261fe1dfca12a52 --- /dev/null +++ b/raw/aaer/2023/AAER-4415.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:6d20925283b6983e2121d486cae07305446d8546cfc709bf8ab8507850f31926 +size 185575 diff --git a/raw/aaer/2023/AAER-4418.pdf b/raw/aaer/2023/AAER-4418.pdf new file mode 100644 index 0000000000000000000000000000000000000000..32c4f232059a997716ebde511175c8e158d36767 --- /dev/null +++ b/raw/aaer/2023/AAER-4418.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:bf8a8de63393796f21095d381760f0797aaaac50456ead8225e5423ba96ad670 +size 378325 diff --git a/raw/aaer/2023/AAER-4420.pdf b/raw/aaer/2023/AAER-4420.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2d567bdf96190a8cf4a102d6398ac91a74d12e62 --- /dev/null +++ b/raw/aaer/2023/AAER-4420.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:5dbf7313def66f163c8e62d7f3e387db1762c2227d566ce9322c0d479f864e10 +size 131923 diff --git a/raw/aaer/2023/AAER-4423.pdf b/raw/aaer/2023/AAER-4423.pdf new file mode 100644 index 0000000000000000000000000000000000000000..6b6d81939d1010f293cc52b1d9715a7ddfddc73a --- /dev/null +++ b/raw/aaer/2023/AAER-4423.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:289307d68c111031a37746b94948b165c65f533bcce670a770734c707f86c857 +size 534484 diff --git a/raw/aaer/2023/AAER-4424.pdf b/raw/aaer/2023/AAER-4424.pdf new file mode 100644 index 0000000000000000000000000000000000000000..522706a69ccae1aa45a222c600089295f3bd57d0 --- /dev/null +++ b/raw/aaer/2023/AAER-4424.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:08bbde88ace88ea882eb4e2d6c329457c4f99e4086acbb9c154d1061ffd1a0c7 +size 131522 diff --git a/raw/aaer/2023/AAER-4425.pdf b/raw/aaer/2023/AAER-4425.pdf new file mode 100644 index 0000000000000000000000000000000000000000..96311ce7307bf4c0e0b73fb4a08f8911e56573d6 --- /dev/null +++ b/raw/aaer/2023/AAER-4425.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:87b71668823e91c8305676de9f9d18dbff98c9cab88fb783b0181b8764b35dc9 +size 145437 diff --git a/raw/aaer/2023/AAER-4427.pdf b/raw/aaer/2023/AAER-4427.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d9577d87ef40b46ec7b50f24733fd81c83586d73 --- /dev/null +++ b/raw/aaer/2023/AAER-4427.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9683c0a8de6a290dcb07b4ce64400f5708e1e072c0a29debdf0a331ef582895c +size 160359 diff --git a/raw/aaer/2023/AAER-4431.pdf b/raw/aaer/2023/AAER-4431.pdf new file mode 100644 index 0000000000000000000000000000000000000000..042d1450a073f312dca9e62b182ffa7273167aaa --- /dev/null +++ b/raw/aaer/2023/AAER-4431.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:40dd88157ddf333f6494b4647e0d136ed4ad1d69eb4807076ea1e3292ce47f6f +size 143514 diff --git a/raw/aaer/2023/AAER-4433.pdf b/raw/aaer/2023/AAER-4433.pdf new file mode 100644 index 0000000000000000000000000000000000000000..673005d73a5a01c55fc257965a01ac376cd9750f --- /dev/null +++ b/raw/aaer/2023/AAER-4433.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:89c77c6203ba60dd38685a0a0cf14a31b79d0222056f6983079fd3b1bf683dfd +size 322891 diff --git a/raw/aaer/2023/AAER-4441.pdf b/raw/aaer/2023/AAER-4441.pdf new file mode 100644 index 0000000000000000000000000000000000000000..dbac2f0a569398bc672618b18374a29142e15a39 --- /dev/null +++ b/raw/aaer/2023/AAER-4441.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:7cbf5c4c72c69172f5fe6158ef956e4d849cf9ed940f16a89c04a40201bb5046 +size 148208 diff --git a/raw/aaer/2023/AAER-4443.pdf b/raw/aaer/2023/AAER-4443.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2d84dcb06719a23fba0e1985f5b73d9e2d4e1452 --- /dev/null +++ b/raw/aaer/2023/AAER-4443.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:0266243f766b6be39a67d8f5dedc0a382b55d3cf842a9aaa9040a0bf4f3e6618 +size 325885 diff --git a/raw/aaer/2023/AAER-4444.pdf b/raw/aaer/2023/AAER-4444.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5c87cc70ff3ab1c348477c706207955e7abaa104 --- /dev/null +++ b/raw/aaer/2023/AAER-4444.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:d4cc00e3d9ab5596fe007edae7480499cbbd10d78fa5a792f9ca044c2f2abf7c +size 503055 diff --git a/raw/aaer/2023/AAER-4445.pdf b/raw/aaer/2023/AAER-4445.pdf new file mode 100644 index 0000000000000000000000000000000000000000..eeb1fae5ca3bbc79d85803f4b0b63ef78c2d5324 --- /dev/null +++ b/raw/aaer/2023/AAER-4445.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:50abda3c897ad9ead76b51aaf1eb73c5182eeaef1d024bd67d926b60960084da +size 385072 diff --git a/raw/aaer/2023/AAER-4448.pdf b/raw/aaer/2023/AAER-4448.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d3b519ccee1c988d961b6808daf2906f13c18c59 --- /dev/null +++ b/raw/aaer/2023/AAER-4448.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:836a860873f545e524fb18018a46c1382440103a376367ca995a06ef3ec3f434 +size 327178 diff --git a/raw/aaer/2023/AAER-4449.pdf b/raw/aaer/2023/AAER-4449.pdf new file mode 100644 index 0000000000000000000000000000000000000000..07af5662b1bceacd4a90461cf4e93d67079c8873 --- /dev/null +++ b/raw/aaer/2023/AAER-4449.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:15d67bdd72adbde0f069ebc0ed56f72b5facfea4da1a08aec5a1c867610b6b3b +size 265260 diff --git a/raw/aaer/2023/AAER-4451.pdf b/raw/aaer/2023/AAER-4451.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ba7dd14c0b0aa1b00a8b7d91116d229e5c53defa --- /dev/null +++ b/raw/aaer/2023/AAER-4451.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b64e1d157cfeaacb60147ef25f0d7d559ca3b7c5846c85f621f4611d28ea0b9b +size 139974 diff --git a/raw/aaer/2023/AAER-4452.pdf b/raw/aaer/2023/AAER-4452.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e04bdde7f5987105f524ccedaf5aa510024c8043 --- /dev/null +++ b/raw/aaer/2023/AAER-4452.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b937c24f58ca6ebb401dc80cded5fad361d02ac128f530bed91543673bb0317e +size 209443 diff --git a/raw/aaer/2023/AAER-4453.pdf b/raw/aaer/2023/AAER-4453.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4bb57491752762e17e16a10c64129f0cd3e65650 --- /dev/null +++ b/raw/aaer/2023/AAER-4453.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:d2cdc137b85f5a89577c698ccc1c5f85f858d86c135b71bc27104265b5de070d +size 199444 diff --git a/raw/aaer/2023/AAER-4455.pdf b/raw/aaer/2023/AAER-4455.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ae68ab0307ad1ec59482f2c9831dc8d33ad7de6b --- /dev/null +++ b/raw/aaer/2023/AAER-4455.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9fe91e4e183814610a68bf8bb1480f0238a099a533a0e5c93134cf33c1b8a376 +size 148812 diff --git a/raw/aaer/2023/AAER-4458.pdf b/raw/aaer/2023/AAER-4458.pdf new file mode 100644 index 0000000000000000000000000000000000000000..141ecbb7c2481e9c3b3359444eb2dd124cf99d1e --- /dev/null +++ b/raw/aaer/2023/AAER-4458.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c2edaf2fcebc6b1feec0e1ff45385aee942410b774fefea17f7750046b808040 +size 221234 diff --git a/raw/aaer/2023/AAER-4463.pdf b/raw/aaer/2023/AAER-4463.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ae3614e9b0d26004733ec14a13d3cb75bb6c7454 --- /dev/null +++ b/raw/aaer/2023/AAER-4463.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:5e824d6726b7b97bbe2a0a51cbdb802c9d36f139c3008c6227badf898bf83adf +size 153547 diff --git a/raw/aaer/2023/AAER-4466.pdf b/raw/aaer/2023/AAER-4466.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d13268776599da3fa4b09dc07a3620b3a6f90810 --- /dev/null +++ b/raw/aaer/2023/AAER-4466.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e51a1c03770fe81381c2b2537ea424b8abeb74c02015c05707e39f6755d8781f +size 239875 diff --git a/raw/aaer/2023/AAER-4467.pdf b/raw/aaer/2023/AAER-4467.pdf new file mode 100644 index 0000000000000000000000000000000000000000..dbf3fb57689ea0de460d5f530272648e3f38bae7 --- /dev/null +++ b/raw/aaer/2023/AAER-4467.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:fa20b342b8b37e11a0b3ac337640a29c7d017bf28cd2fe9aaa40ad1b05073103 +size 214642 diff --git a/raw/aaer/2023/AAER-4468.pdf b/raw/aaer/2023/AAER-4468.pdf new file mode 100644 index 0000000000000000000000000000000000000000..3ddf5ae25330f6609e607f72168df678be4d21da --- /dev/null +++ b/raw/aaer/2023/AAER-4468.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:38d8d004b5d62042f0422af437aa569e5613a199927576db4d54f39ec029ac6a +size 299089 diff --git a/raw/aaer/2023/AAER-4475.pdf b/raw/aaer/2023/AAER-4475.pdf new file mode 100644 index 0000000000000000000000000000000000000000..230219bb8fdd98d09a27f6412ecd627441e48f3d --- /dev/null +++ b/raw/aaer/2023/AAER-4475.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:47d55b80069a0302bb3b50910f4b0a10a2281dc92a32a4220b77ef12cf7867a5 +size 134271 diff --git a/raw/aaer/2024/AAER-4481.pdf b/raw/aaer/2024/AAER-4481.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7893fb7044461e9b055ff1645f0519225e8e45a2 --- /dev/null +++ b/raw/aaer/2024/AAER-4481.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:0cf658c2c437d0a78372dfc261218f840cc00baf16bbcdc0f22f8ea52df44102 +size 198772 diff --git a/raw/aaer/2024/AAER-4482.pdf b/raw/aaer/2024/AAER-4482.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0e370bdeaef31d4c8e63c11fc8331a7ace9f603f --- /dev/null +++ b/raw/aaer/2024/AAER-4482.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b39a93e7b79095fdcce67e8d96498ff731c5e36a33afabbae8957a7820e2392f +size 126839 diff --git a/raw/aaer/2024/AAER-4483.pdf b/raw/aaer/2024/AAER-4483.pdf new file mode 100644 index 0000000000000000000000000000000000000000..36c7350549a58a043c59eafde4b8c809e712f8f5 --- /dev/null +++ b/raw/aaer/2024/AAER-4483.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:0fd43da0571a3082cb6f609240cfa12fa6f52e3d95368aa8f3c5761f96c4b850 +size 641703 diff --git a/raw/aaer/2024/AAER-4487.pdf b/raw/aaer/2024/AAER-4487.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0609700337fa17e7fa9595a3fbe4e56c8bec5ab3 --- /dev/null +++ b/raw/aaer/2024/AAER-4487.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:0c17b9f04c68e529fb4d7043e3529f250b65ac49020315af6fe2f21d35c3c0a0 +size 145691 diff --git a/raw/aaer/2024/AAER-4488.pdf b/raw/aaer/2024/AAER-4488.pdf new file mode 100644 index 0000000000000000000000000000000000000000..94c1201055af7230f67ec66be2067115a7a1d896 --- /dev/null +++ b/raw/aaer/2024/AAER-4488.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e96ace501b1fd25d979ed582aea3860609dec434abe88c150ccccc1f393574b0 +size 129797 diff --git a/raw/aaer/2024/AAER-4490.pdf b/raw/aaer/2024/AAER-4490.pdf new file mode 100644 index 0000000000000000000000000000000000000000..42779823d176f13ccd38c5ff6d3dfdce6ee1bab3 --- /dev/null +++ b/raw/aaer/2024/AAER-4490.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a8bbd14217aed1faa8aff4eebd94c2b102d91e4427bd9c2ab7fb9e80072ff057 +size 277552 diff --git a/raw/aaer/2024/AAER-4491.pdf b/raw/aaer/2024/AAER-4491.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4d65667b13e9864b3acd1abf439f679b240c5aa3 --- /dev/null +++ b/raw/aaer/2024/AAER-4491.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:35eaa35beb2b9c9f707e805e990c6bc05440007ac3cbfc80434c389f46d51bba +size 203188 diff --git a/raw/aaer/2024/AAER-4492.pdf b/raw/aaer/2024/AAER-4492.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ef2b222f7bd4332a0bc9935d31cb268740f9e5d8 --- /dev/null +++ b/raw/aaer/2024/AAER-4492.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:db6132ace7169ae8a92934a2bb87ae68ed6fa560529d817b8bde48b04f998e18 +size 487700 diff --git a/raw/aaer/2024/AAER-4497.pdf b/raw/aaer/2024/AAER-4497.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7be823c2548b9b53833af339ca05462471465452 --- /dev/null +++ b/raw/aaer/2024/AAER-4497.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c7e71b468d4b6baf44f9b6d182f7c1fc81f0389fdf92b5734517992377ac3598 +size 151358 diff --git a/raw/aaer/2024/AAER-4498.pdf b/raw/aaer/2024/AAER-4498.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d3569c72d084e990a716deeb80f616175878092a --- /dev/null +++ b/raw/aaer/2024/AAER-4498.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b9002e86f1f4ae276ac999a3c1840bf08fb194e13869a3b44fc4b462d552d91b +size 191992 diff --git a/raw/aaer/2024/AAER-4500.pdf b/raw/aaer/2024/AAER-4500.pdf new file mode 100644 index 0000000000000000000000000000000000000000..004a0d8c24ffb8924f88e9f1962cd0d29d07aa85 --- /dev/null +++ b/raw/aaer/2024/AAER-4500.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9e365abe569c14ecdf19642f289cb964725c778798be76060eea006e638a39f8 +size 321957 diff --git a/raw/aaer/2024/AAER-4502.pdf b/raw/aaer/2024/AAER-4502.pdf new file mode 100644 index 0000000000000000000000000000000000000000..1eff4c2694c4260b7bdfe9226c618536652879b0 --- /dev/null +++ b/raw/aaer/2024/AAER-4502.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:44e8dfd3e12acc5aab2ec040f0958146396d892b8c42eeb930a69f9bdc7efbe1 +size 158651 diff --git a/raw/aaer/2024/AAER-4503.pdf b/raw/aaer/2024/AAER-4503.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b2f43aa16250a367cb49ca9a7b95b4154c85644e --- /dev/null +++ b/raw/aaer/2024/AAER-4503.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:525fb3b33c04f7ac5ce523db5b52315264db7588ecae184f0c309542f523a5ec +size 172848 diff --git a/raw/aaer/2024/AAER-4505.pdf b/raw/aaer/2024/AAER-4505.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8e31447bd5561de2a32eae409cb32caeaba51ba0 --- /dev/null +++ b/raw/aaer/2024/AAER-4505.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c4111d598270f8b3d6d8da3286ce6f1bb9f9a31428f214c182e5f22d3697c544 +size 124629 diff --git a/raw/aaer/2024/AAER-4506.pdf b/raw/aaer/2024/AAER-4506.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ecd23e2b3bbc850893320714ced1288721f0370c --- /dev/null +++ b/raw/aaer/2024/AAER-4506.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b504e5af4683da6cc687686b0ab0792164af6b070ca39787267fedd14835596b +size 225830 diff --git a/raw/aaer/2024/AAER-4510.pdf b/raw/aaer/2024/AAER-4510.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b964c51fed3e398ebad1e22ad08981340860906b --- /dev/null +++ b/raw/aaer/2024/AAER-4510.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:53b267c81c23ce3c9db1c840f390cc80bac56ec6739346d0d6cb6ac5f77f91a2 +size 285480 diff --git a/raw/aaer/2024/AAER-4511.pdf b/raw/aaer/2024/AAER-4511.pdf new file mode 100644 index 0000000000000000000000000000000000000000..58cb265cc76499f5281a18b2d11082047fa50fd3 --- /dev/null +++ b/raw/aaer/2024/AAER-4511.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:694ad8a4b32706ffb941f0440583b0f7b036b0a0159218468edb55de249dd796 +size 153047 diff --git a/raw/aaer/2024/AAER-4512.pdf b/raw/aaer/2024/AAER-4512.pdf new file mode 100644 index 0000000000000000000000000000000000000000..03f61ebaa089728e96c1e062ee1bc31baaae90f1 --- /dev/null +++ b/raw/aaer/2024/AAER-4512.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:402c027b663253989d33a6d41d105ad3b792c82bdcbe3a3aff1479cad0c88cc6 +size 329115 diff --git a/raw/aaer/2024/AAER-4514.pdf b/raw/aaer/2024/AAER-4514.pdf new file mode 100644 index 0000000000000000000000000000000000000000..018615650b7898ce6e79b56ca34055645cea9d0b --- /dev/null +++ b/raw/aaer/2024/AAER-4514.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:96ed3778930085b3344c318e67c8a3548811219346016790612034c6d3f8eb27 +size 176362 diff --git a/raw/aaer/2024/AAER-4515.pdf b/raw/aaer/2024/AAER-4515.pdf new file mode 100644 index 0000000000000000000000000000000000000000..629fc111142a78c85af1b49a21ac2b98f96b21f4 --- /dev/null +++ b/raw/aaer/2024/AAER-4515.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f842c526676241811fb255e3c8cb3dab778008abcd7f17b624f3ff8b9ca9fa7e +size 150985 diff --git a/raw/aaer/2024/AAER-4517.pdf b/raw/aaer/2024/AAER-4517.pdf new file mode 100644 index 0000000000000000000000000000000000000000..473de90d2b4882db2747697fd577b17ee0a67b12 --- /dev/null +++ b/raw/aaer/2024/AAER-4517.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e34f507f27b5a829d3b20e1a6ad948c90d47d6cfe1e1b09df5ce4f7152a68129 +size 151974 diff --git a/raw/aaer/2024/AAER-4518.pdf b/raw/aaer/2024/AAER-4518.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9312b0ea630ff76761e92665d4d4423414645da3 --- /dev/null +++ b/raw/aaer/2024/AAER-4518.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:05bc1efe9dc229a827e239b17a2cc8c0ba6691db371d61fc5669bb16e3eaf1b7 +size 187488 diff --git a/raw/aaer/2024/AAER-4519.pdf b/raw/aaer/2024/AAER-4519.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d0cc4a9cd61837d02c2fbd31d1ba82ef153e402b --- /dev/null +++ b/raw/aaer/2024/AAER-4519.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:045bed1587d8bb39caaaa5a261f04d5a711449214589d534c361e6de0742fed4 +size 199409 diff --git a/raw/aaer/2024/AAER-4521.pdf b/raw/aaer/2024/AAER-4521.pdf new file mode 100644 index 0000000000000000000000000000000000000000..93bbb397a08ec04d90d02406014f1f30d69011a5 --- /dev/null +++ b/raw/aaer/2024/AAER-4521.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:0d91c90735e407f6a127f86130508731612f33d3af3343cbba8d5d528fa14f90 +size 163336 diff --git a/raw/aaer/2024/AAER-4522.pdf b/raw/aaer/2024/AAER-4522.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7dff6cd627787b6d0df818066008e4363c159933 --- /dev/null +++ b/raw/aaer/2024/AAER-4522.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:095848a86e44beae3a9b5327433f50d7803cff9c563eccd5b41cd850b55733fd +size 152799 diff --git a/raw/aaer/2024/AAER-4524.pdf b/raw/aaer/2024/AAER-4524.pdf new file mode 100644 index 0000000000000000000000000000000000000000..05f26721f0a046e9a62ff8d75cfbbdcdccb74419 --- /dev/null +++ b/raw/aaer/2024/AAER-4524.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:89f632806e427e8f4b875f22dbd57b835bfd701e87fda737f54e495c10668169 +size 124001 diff --git a/raw/aaer/2024/AAER-4532.pdf b/raw/aaer/2024/AAER-4532.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8860fee61311d3d42ea2ccb90beefbc2a00a07fb --- /dev/null +++ b/raw/aaer/2024/AAER-4532.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f42403ebdee29b60b9aea95e56319d0bdc43ad6f6de2a8bd96fbc7d9f067dc77 +size 121714 diff --git a/raw/aaer/2024/AAER-4533.pdf b/raw/aaer/2024/AAER-4533.pdf new file mode 100644 index 0000000000000000000000000000000000000000..617a275e4855f628f201c9357a1e47943b5987f2 --- /dev/null +++ b/raw/aaer/2024/AAER-4533.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:ceb4d5920cec123783cd5fc85ae8cb7d4f2970e6c48b3e916acf8d589e96afb4 +size 160939 diff --git a/raw/aaer/2024/AAER-4534.pdf b/raw/aaer/2024/AAER-4534.pdf new file mode 100644 index 0000000000000000000000000000000000000000..944d09ab48650977af0bb3b5cfab3b864f266714 --- /dev/null +++ b/raw/aaer/2024/AAER-4534.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f99ff9599051c911f8ab65520af2e7563718262d8ae6737aa1517fbd8a3470cf +size 342953 diff --git a/raw/aaer/2024/AAER-4537.pdf b/raw/aaer/2024/AAER-4537.pdf new file mode 100644 index 0000000000000000000000000000000000000000..784f051b16c799b391a0cb71c2df523f19e7ba24 --- /dev/null +++ b/raw/aaer/2024/AAER-4537.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:3f2f754a668b395db4e688f4adde81118e40aa715df876fecb48872fea0383e8 +size 203605 diff --git a/raw/aaer/2024/AAER-4538.pdf b/raw/aaer/2024/AAER-4538.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f1090f5bb2f4ad919f3331ed7c2f98d6ffd44aeb --- /dev/null +++ b/raw/aaer/2024/AAER-4538.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c7ca6c4b9b0dafdc3f4af3f2a643025054bc28238395307ca972783c2016144a +size 173775 diff --git a/raw/aaer/2024/AAER-4539.pdf b/raw/aaer/2024/AAER-4539.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e56d25cd691e295a99e5f2d058bce35c59e68128 --- /dev/null +++ b/raw/aaer/2024/AAER-4539.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:0d1299282d1d4abe640112fc888f5fa77c0cbeef40158b116d2285fb68369f4d +size 172871 diff --git a/raw/aaer/2024/AAER-4540.pdf b/raw/aaer/2024/AAER-4540.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c7089416b3e224db33f80b4ab5292547004c9570 --- /dev/null +++ b/raw/aaer/2024/AAER-4540.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:efb24093135ee96b89afcd4467b475ac359f230910acc6d6727c489aab4eb86e +size 126092 diff --git a/raw/aaer/2024/AAER-4541.pdf b/raw/aaer/2024/AAER-4541.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ce5b8e8536705d82a3c5d88c48b5f51f66e171ac --- /dev/null +++ b/raw/aaer/2024/AAER-4541.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:023a3154eb6a3a6ef62cbdef2115d5389cf652d49a3ce59636c7898927189225 +size 188374 diff --git a/raw/aaer/2024/AAER-4542.pdf b/raw/aaer/2024/AAER-4542.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9d5b283a27356f41066916cc59752eeaf677ddc6 --- /dev/null +++ b/raw/aaer/2024/AAER-4542.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4f58080bf91bfd6877fe6af190d14d811c3ef00e766120919a1d76db8346470d +size 256517 diff --git a/raw/aaer/2024/AAER-4544.pdf b/raw/aaer/2024/AAER-4544.pdf new file mode 100644 index 0000000000000000000000000000000000000000..88c4ad3f89082a69dfb9ef0b231e622e576709b0 --- /dev/null +++ b/raw/aaer/2024/AAER-4544.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:87a76730edd5b363380fb64eaaf8cc910ff68e87e9204d71b64b998b406fa203 +size 122997 diff --git a/raw/aaer/2024/AAER-4545.pdf b/raw/aaer/2024/AAER-4545.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bcb433e2ab79cc2a58699637552a0d91ad1a00f8 --- /dev/null +++ b/raw/aaer/2024/AAER-4545.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:63392a4375ce7a10ed2f918e8244c46aad31bb3d996432437c02a29ce0b5b0e3 +size 134381 diff --git a/raw/aaer/2024/AAER-4547.pdf b/raw/aaer/2024/AAER-4547.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9524e43094ef0dd7fd56d9e27c35db80e9f43aa5 --- /dev/null +++ b/raw/aaer/2024/AAER-4547.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b25a17eb17403be3b7d4ae08cd77693aed5bd49fb337630e84954759fb5db3ef +size 282606 diff --git a/raw/aaer/2024/AAER-4548.pdf b/raw/aaer/2024/AAER-4548.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d8e93bdb2ba39a1002c32b59c61470bb5e578876 --- /dev/null +++ b/raw/aaer/2024/AAER-4548.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:543141d2db1a77fc8878f0041849d8a5b6a9fe8eb57f4c9096d4dbdfd2a39d0b +size 167189 diff --git a/raw/aaer/2024/AAER-4549.pdf b/raw/aaer/2024/AAER-4549.pdf new file mode 100644 index 0000000000000000000000000000000000000000..07066a0222375b44c0a581d4b3359662bb076576 --- /dev/null +++ b/raw/aaer/2024/AAER-4549.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:3266ff4268c9f275122928e8ca0a04d9f25c6bd0d1b1b2a341eb3b75aa0a2d44 +size 206463 diff --git a/raw/aaer/2024/AAER-4550.pdf b/raw/aaer/2024/AAER-4550.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c822f84c8f8f06a6017ab542e89c9cf5beaa82ab --- /dev/null +++ b/raw/aaer/2024/AAER-4550.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:0916d601109815b1d7fa1a7a4b275b7d38548c9e22df0c508e339408f6f2171f +size 250063 diff --git a/raw/aaer/2024/AAER-4551.pdf b/raw/aaer/2024/AAER-4551.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ec3c1b67834ba9228cad46c65faaf2ff28bcabf8 --- /dev/null +++ b/raw/aaer/2024/AAER-4551.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:15998a9decc964dacfd957bef75f91efb679a36d5f816040371ebb5155ffed8b +size 239324 diff --git a/raw/aaer/2024/AAER-4553.pdf b/raw/aaer/2024/AAER-4553.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ca13018302f922abee1aceeddc9ab3be38088640 --- /dev/null +++ b/raw/aaer/2024/AAER-4553.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:2c9631c09388df602daa7fd200d1c1ee398dc9c5c9a20cdbd475d2e0579607e6 +size 154652 diff --git a/raw/aaer/2024/AAER-4554.pdf b/raw/aaer/2024/AAER-4554.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2e5b68da1b2d68f911e78281b22fabe1b3a1b21b --- /dev/null +++ b/raw/aaer/2024/AAER-4554.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9c71c7a6bc23fee6149e1e1a93609b53e6b50251a12206b2f952bc8fa05ff44a +size 120942