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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 Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of +the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary +1. These proceedings involve the role of Michael Mendes in Diamond Foods, Inc.’s +(“Diamond”) inaccurate accounting of costs related to its walnut business in 2010 and 2011. In +publicly-disclosed financial statements for fiscal years ending July 31, 2010 and 2011, Diamond +understated the costs associated with acquiring walnuts from growers, resulting in overstated +earnings. Diamond restated its annual and periodic financial statements beginning with the +quarter ended January 31, 2010 and continued through the year-ended July 31, 2011. When +Diamond restated its financial results from those periods, the company’s reported earnings +decreased by $10.5 million for its 2010 fiscal year, and $23.6 million for its 2011 fiscal year. +2. As Diamond’s CEO during the relevant time, Mendes had an important role in +ensuring the accuracy of the financial reporting of the company, including certifying the +financial statements contained in Form 10-K annual reports filed with the Commission, +reviewing and approving other periodic reports and earnings releases, and signing representation +letters relied on by the company’s independent auditors. +3. During the relevant time period, Mendes was involved in the determination of the +walnut prices that Diamond would pay walnut growers, and he was aware of reports of prices +paid by other walnut purchasers to growers for their 2009 and 2010 crops which were +significantly higher than prices paid by Diamond. At the same time, Mendes was involved in the +decision to make two special payments to growers, paid around the same time that Diamond paid +the final installment for the walnut crops delivered by its growers. These payments are +described further below as the “continuity” and “momentum” payments. Mendes was also aware +that these special payments were not recognized as costs associated with walnuts acquired during +fiscal years 2010 and 2011, respectively. +4. Mendes acted unreasonably under the circumstances in certifying the accuracy of +financial statements that Diamond included in public filings, including several filings related to +offers of Diamond stock. Mendes’ conduct in connection with the two special payments made to +Diamond growers also caused Diamond to violate various provisions requiring accurate books +and records and controls designed to ensure accurate financial reporting. +Respondent +5. Michael Mendes, age 50, is a resident of San Francisco, California. Mendes +joined Diamond’s International Sales and Marketing Division in 1991, and was appointed chief +executive officer in 1997. Mendes joined the Diamond Board of Directors in 2005 and became +its Chairman in 2010. Mendes served as Diamond’s CEO and Chairman until February 2012. + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + 3 +Other Relevant Entity +6. Diamond is a Delaware corporation headquartered in San Francisco, California +that markets and sells various snack foods and nuts. Diamond was founded in 1912 as a +cooperative by California walnut growers, and became a public company after an initial public +offering (“IPO”) in 2005. Since its IPO, Diamond has expanded into snack foods through +acquisitions while maintaining its original walnut business. Diamond’s common stock is +registered with the Commission pursuant to Section 12(b) of the Exchange Act and is listed on +NASDAQ under the ticker “DMND.” +Facts +A. Diamond Foods and its Walnut Business +7. Diamond’s stock has been publicly traded since its initial public offering in 2005. +At that time, Diamond’s principal business was buying walnuts from California-based growers +and reselling the walnuts through various distribution channels to the retail market. Since its +2005 IPO, Diamond has expanded into other snack food businesses and by 2010 it was a fast- +growing snack food conglomerate. While no longer the sole focus of Diamond’s business, +walnuts still represented Diamond’s largest commodity cost as of fiscal year 2010. +8. During the relevant time period, 2009 through 2011, Diamond acquired its +walnuts through long-term supply contracts with walnut growers. These contracts generally +obligated the growers to sell, and Diamond to buy, the grower’s entire crop each year, and +Diamond was obligated to pay a price determined by Diamond “in good faith.” +9. Diamond’s business model focused on selling the walnuts to established retailers +under annual sales contracts. These sales contracts were often negotiated in advance of the fall +harvest and delivery of the walnuts to Diamond. Diamond’s growers would deliver the walnut +crops each fall and Diamond would pay the growers for those walnuts in a series of payments +starting with a “delivery payment” at the time of the fall harvest and culminating in a “final +payment” in August of the following year. +B. Determining and Accounting for the Walnut Cost +10. Because Diamond would begin selling delivered walnuts before the final payment +was made to growers, in its quarterly financial statements Diamond accounted for the costs of +walnuts sold using an estimate of the total price Diamond would pay to growers for a particular +crop. Once the final payment was made, in August of the year following delivery, Diamond +would use the total payments made to growers for the crop as the basis for recording the cost of +the walnuts sold during the fiscal year. +11. The actual prices Diamond paid growers varied by walnut variety, size of a +grower’s crop, quality of the crop, and other factors, but the accounting department and +management referred to an average price paid for a given crop across all growers, varieties, and +qualities. For example, for fiscal year ended July 31, 2009, Diamond reported a blended total +walnut cost of 71 cents per pound, though individual growers might have received more or less +than that amount. + 4 +12. Diamond’s contracts with its growers stated: “The Final Price will be determined +in good faith, taking into account market conditions, quality, variety, and other relevant factors.” +Diamond also disclosed how it determined walnut prices in the “Critical Accounting Policies” +section of its Forms 10-K for 2010 and 2011: “This purchase price will be a price determined by +us in good faith, taking into account market conditions, crop size, quality, and nut varieties, +among other relevant factors.” +13. Generally accepted accounting principles (“GAAP”) required Diamond to record +inventory at acquisition cost in the period that the walnuts were purchased, and to record cost of +sales in the period in which the inventory was sold. +14. Each quarter, Diamond’s finance department would prepare a memorandum +justifying the walnut price used to value walnut inventory and the cost of the walnuts sold during +the quarter. This memorandum was provided to the company’s independent auditors, and the +auditors relied on the memorandum as a representation that the walnut price had been determined +in accordance with the accounting policy disclosed in the company’s Forms 10-K. +C. The Q2 2010 Walnut Cost Estimate +15. In the first quarter of the 2010 fiscal year, Diamond recorded an estimated cost for +the 2009 walnut crop of 82 cents per pound. At the end of the second quarter, ending January +31, 2010, Diamond recorded an estimated walnut cost of 72 cents per pound. The recorded +estimated walnut cost was adjusted by 10 cents per pound although Diamond management was +aware of reports that some other walnut purchasers were paying some growers prices higher than +the second quarter estimate. +16. Diamond filed a Form 10-Q with the Commission on February 25, 2010, and +included financial statements that accounted for walnut costs at the adjusted estimate of 72 cents +per pound. On March 1, 2010, Diamond filed a prospectus related to a proposed stock sale to +pay a portion of the acquisition costs associated with Diamond’s acquisition of a snack food +company, and the prospectus incorporated the Form 10-Q. +D. 2010 Final Payment Includes a Special “Continuity” Payment +17. In the spring and summer of 2010, Diamond management, including Mendes, +began discussing a special payment to walnut growers they termed a “continuity” payment. +Some of Diamond’s growers had been voicing increasing dissatisfaction with the estimated final +walnut price of 71 cents per pound that had been communicated in the spring of 2010. In July +2010, with the final payment to growers for the 2009 crop just a month away, Mendes and three +other senior Diamond employees visited several large growers. During these meetings, Diamond +management told the growers that they would receive a competitive price for the 2009 crop they +had delivered to Diamond. +18. The next month, in August 2010, Diamond made its final 2009 crop payment to +its growers and included in that final payment an additional amount that Diamond described in a +letter to growers as a “continuity” payment. The additional payment amount, above the average +71 cents per pound “final price” already communicated, was an additional payment of +approximately 10 cents per pound. The letter to growers did not clearly explain the purpose of + 5 +the payment or inform growers that the payment was an advance payment for the 2010 crop. +Mendes reviewed and approved the letter before it was sent to growers. +19. Instead, the letter stated that the August check “represents both the final payment +on the 2009 crop and a continuity payment reflecting the value of the multi-year supply +arrangement with our Diamond walnut growers.” The additional payment, if considered in +conjunction with the previous installments and final payment amounts, would have brought +Diamond closer to the walnut prices paid by some other walnut purchasers for the 2009 crop. +Some growers believed that the continuity payment was an additional payment for the already- +delivered 2009 crop. +20. The total amount of the “continuity” payment included in payments to Diamond’s +growers was about $20 million. Diamond’s finance department did not record the impact of the +continuity payment to inventory, payables to growers, or costs of goods sold for the walnuts +acquired and sold during fiscal year 2010. Diamond’s financial statements prepared for the +fiscal year ending July 31, 2010, as disclosed in an earnings release attached to a Form 8-K and +in Diamond’s Form 10-K, failed to recognize the continuity payment in that fiscal year. +21. Diamond’s independent auditors inquired about the additional payment included +with the final payment to growers, and employees in Diamond’s finance department told the +auditors that the payment was an advance for the next year’s crop. The auditors required the +issue be addressed in the management representation letter prepared by Diamond’s finance +department and signed by Mendes and other senior management, and the letter specifically stated +that the continuity payment was for the upcoming crop and did not represent a payment for the +2009 crop. +22. In a Form S-4 registration statement filed on June 20, 2011, Diamond offered +securities to be issued in connection with Diamond’s proposed acquisition of a snack food +division of a large consumer products company. The registration statement incorporated the +financial statements included in the Form 10-K for the fiscal year ended July 31, 2010. +23. On November 11, 2012, Diamond issued restated financial statements for the year +ended July 31, 2010. The restated financial statements recognized the impact of the continuity +payment and increased the reported value of inventory, payables to growers, and cost of goods +sold during the fiscal year. Diamond’s 2010 restated earnings were 40 percent lower than had +been originally reported. +E. 2011 Walnut Payment Is Followed By a Special “Momentum” Payment +24. In the fall of 2010, growers delivered the 2010 crop to Diamond. Based on the +amount Diamond paid its growers in the initial installment of the delivery payments, some +growers once again expressed concern that Diamond was paying significantly below what some +other walnut purchasers were paying growers. The quarterly estimate of the walnut price was +recorded as 74 cents per pound at the end of the quarter ending April 30, 2011. Diamond’s +grower relations department learned of some of these grower concerns regarding Diamond’s +walnut payments being significantly below prices that some other walnut purchasers were paying +some growers. + 6 +25. In the spring and summer of 2011, Diamond management began discussing a +special additional payment to walnut growers they termed the “momentum payment.” The +growers were paid a final payment for the 2010 crop on August 31, 2011, and then two days later +Diamond paid these same growers an additional amount averaging about 30 cents per pound. +The additional special payments totaled about $60 million for Diamond. +26. An August 31, 2011 letter to growers told the growers that they would be +receiving two payments, a final payment and a “momentum payment.” The letter did not clearly +identify the momentum payment as an advance on the next year’s crop. The letter stated that +“Enclosed you will find your 2010 crop value statement summary and payment. . . . +Additionally, on September 2nd we will mail a momentum payment designed to reflect the +projected market environment prior to your delivery of the 2011 crop. …The momentum +payment is independent of and incremental to your upcoming delivery payment.” Some growers +were unclear about whether the momentum payment was an additional payment that should be +associated with the delivered crop or as an advance on the next year’s undelivered crop. +27. Diamond’s finance department did not record the momentum payment to +inventory, payables to growers, or costs of goods sold for the walnuts acquired and sold during +fiscal year 2011. As such, Diamond’s annual financial statements prepared for the fiscal year +ending July 31, 2011, as disclosed in an earnings release attached to a Form 8-K and in +Diamond’s Form 10-K, failed to recognize the momentum payment in fiscal year 2011. +28. On September 16, 2011, Diamond filed an amendment to the Form S-4 +registration statement offering securities in connection with the proposed acquisition of a snack +food division of a large consumer products company, and incorporated by reference the Form +10-K filed for the year ended July 31, 2011. +29. On November 11, 2012, Diamond issued restated financial statements for the year +ended July 31, 2011. The restated financial statements recognized the impact of the momentum +payment as an increase to acquiring inventory, payables to growers, and cost of goods +sold. Diamond’s 2011 restated earnings were 47 percent lower than had been originally +reported. +F. Mendes’ Role in Diamond’s Inaccurate Financial Statements +30. As CEO, Mendes was responsible for certifying the accuracy of Diamond’s +financial statements and other disclosures in Diamond’s periodic reports. Mendes supervised the +company’s chief financial officer, who in turn supervised the finance department and grower +relations department. The grower relations department was responsible for communicating with +and making payments to growers. Mendes received reports of prices that some other walnut +purchasers were paying growers for walnuts in 2010 and 2011, and in some instances Mendes +met directly with Diamond growers. Mendes was also involved in determining quarterly walnut +cost estimates and approved the amount of the total payment made to growers for each crop. +31. Mendes signed and certified the Form 10-K for the year ended July 31, 2010, +which included financial statements that did not account for the “continuity payment” as a cost +of the walnuts acquired during the fiscal year. Likewise, Mendes signed and certified the Form + 7 +10-K for the year ended July 31, 2011, which included financial statements that did not account +for the “momentum payment” as a cost of the walnuts acquired during that fiscal year. Mendes +also signed and certified the Forms 10-Q for the second and third quarters of 2010, and the first, +second, and third quarters of 2011. All of those financial statements were subsequently restated. +Mendes also signed and certified the January 1, 2010, June 20, 2011, and September 16, 2011 +registration statements which incorporated the financial statements which were later restated. +32. Mendes reasonably should have known that Diamond’s Form 10-Ks for fiscal +year 2010 and 2011, earnings releases for those years attached to Forms 8-K, and Diamond’s 10- +Qs for the second and third quarters of 2010, and the first, second, and third quarters of 2011, all +of which were subsequently restated, were inaccurate. Among other things, Mendes received +reports that some walnut purchasers were paying higher walnut prices for the 2009 and 2010 +crops compared with Diamond, participated in discussions regarding the continuity payment and +momentum payment, and reviewed grower correspondence regarding the payments which did +not clearly identify the continuity and momentum payments as advance payments. Mendes thus +did not act reasonably in certifying the accuracy of Diamond’s financial statements in the fiscal +years that were restated, and his conduct caused Diamond to violate various provisions requiring +accurate books and records and controls designed to ensure accurate financial reporting. +33. Although he was not directly involved in discussions with Diamond’s auditors +regarding the accounting treatment for the continuity payment or momentum payment, Mendes +was aware of representations made to the auditors and signed a representation letter sent to the +independent auditors in connection with the audit of the 2010 financial statements. That letter +stated that the continuity payment was unrelated to the 2009 crop delivery, but omitted facts that +Mendes knew or should have known, including that growers had expressed confusion about the +purpose of the continuity payment, that some growers considered the continuity payment as a +part of the final payment for the 2009 crop, and that Diamond’s recorded 2009 crop payment was +significantly below the price paid by some other walnut purchasers. Because of these omissions, +Mendes reasonably should have known that the statement to the auditors was incomplete. +34. Mendes received $2.7 million in bonuses related to Diamond’s fiscal year 2010 +and fiscal year 2011 results. Of this amount, approximately $1.6 million of the bonus amounts +were directly tied to earnings per share (EPS) goals, while the remaining $1.1 million of the +bonus amounts related to other management objectives. Mendes has voluntarily repaid these +bonus amounts to Diamond. Mendes also forfeited claims to an additional $1.8 million in +employment benefits. +Violations +35. Section 17(a)(2) of the Securities Act makes it unlawful “in the offer or sale of +any securities . . . to obtain money or property by means of any untrue statement of a material +fact or any omission to state a material fact necessary in order to make the statements made, in +light of the circumstances under which they were made, not misleading.” Section 17(a)(3) of the +Securities Act makes it unlawful “in the offer or sale of any securities . . . to engage in any +transaction, practice, or course of business which operates or would operate as a fraud or deceit +upon the purchaser.” No finding of scienter is required to establish a violation of Sections +17(a)(2) and 17(a)(3); negligent conduct is sufficient. Aaron v. SEC, 446 U.S. 680, 696-97 + 8 +(1980). Negligence is a failure by an actor to conform conduct to the standard of “a reasonable +[person] under like circumstances.” See Restatement (Second) of Torts §§ 282 and 283. As a +result of the conduct described above, Mendes violated Sections 17(a)(2) and (a)(3) of the +Securities Act. +36. Rule 13a-14 of the Exchange Act requires every principal executive of an issuer +to certify reports required pursuant to Section 13(a) at the time of the filing of the report. As a +result of the conduct described above, Mendes violated Exchange Act Rule 13a-14. +37. Rule 13b2-1 of the Exchange Act prohibits any person from falsifying or causing +to be falsified any book, record, or account subject to Section 13(b)(2)(A) of the Exchange Act. +As a result of the conduct described above, Mendes violated Exchange Act Rule 13b2-1. +38. Rule 13b2-2 of the Exchange Act 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 subject to the reporting requirements of Section 13(a). As a +result of the conduct described above, Mendes violated Rule 13b2-2 of the Exchange Act. +39. Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1, 13a-11, and +13a-13 require issuers of securities registered pursuant to Section 12 of the Exchange Act to file +with the Commission accurate periodic reports, including annual reports on Form 10-K, current +reports Form 8-K, and 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, +Mendes caused violation of these provisions by Diamond Foods. +40. 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, +Mendes caused violation of Section 13(b)(2)(A) of the Exchange Act by Diamond Foods. +41. 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, +Mendes caused violation of Section 13(b)(2)(B) of the Exchange Act by Diamond Foods. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + 9 + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 8A of the Securities Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 17(a)(2) and (a)(3) of the +Securities Act. +B. 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 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1, and +13b2-2 thereunder. +C. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $125,000 to the Securities and Exchange Commission. If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must be made +in one of the following ways: + +(1) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(2) 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 Mendes 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 Michael S. Dicke, Division of +Enforcement, Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San +Francisco, California 94104. + + D. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the penalty referenced in paragraph C 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, 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 United States Treasury or to a Fair Fund, as the +Commission directs. 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 + 10 +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. + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3534.txt b/raw/aaer/2014/AAER-3534.txt new file mode 100644 index 0000000000000000000000000000000000000000..1d5f92f1521400371199fbd9614e0a77dc8498da --- /dev/null +++ b/raw/aaer/2014/AAER-3534.txt @@ -0,0 +1,138 @@ + + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71523 / February 11, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3534 / February 11, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15747 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + DAVID M. MARTIN CPA, : 102(e)(3) OF THE COMMISSION’S RULES + : OF PRACTICE, MAKING FINDINGS, AND + Respondent. : 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 David +M. Martin (“Respondent” or “Martin”) 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. David M. Martin, age 55, is and has been a certified public accountant +licensed to practice in the State of Texas. He served as Chief Financial Officer of Life Partners +Holdings, Inc. (“LHPI”) between February 2008 and July 2012. + + 2. LPHI was, at all relevant times, a Texas corporation with its principal place +of business in Waco, Texas. LPHI is engaged in facilitating the purchase and sale of fractional +interests of life insurance policies in the secondary market known as “life settlements.” At all +relevant times, LPHI’s common stock was registered with the Commission pursuant to Section +12(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and traded on the NASDAQ +National Market. + + 3. On January 9, 2014, a final judgment was entered against Respondent, +permanently enjoining him from future violations of Section 13(b)(5) of the Exchange Act and +Rules 13b2-1 and 13b2-2 thereunder, and aiding and abetting violations of Sections 13(a), +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, +in the civil action entitled Securities and Exchange Commission v. Life Partners Holdings, Inc., et +al., Civil Action Number 1:12-CV-33-JRN in the United States District Court for the Western +District of Texas. Respondent was ordered to pay a civil penalty of $34,961. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Martin’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Martin is suspended from appearing or practicing before the Commission as an +accountant. After three years from the date of this order, Respondent may request that the + 3 +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 +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/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 +he/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 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/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. + +B. 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. + + By the Commission. + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3536.pdf b/raw/aaer/2014/AAER-3536.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bfa08b74d40dc4cf8a74066373daea906d428aab Binary files /dev/null and b/raw/aaer/2014/AAER-3536.pdf differ diff --git a/raw/aaer/2014/AAER-3540.txt b/raw/aaer/2014/AAER-3540.txt new file mode 100644 index 0000000000000000000000000000000000000000..a3b74601b5676a243c421824c9ee7daaf1549227 --- /dev/null +++ b/raw/aaer/2014/AAER-3540.txt @@ -0,0 +1,1372 @@ + + + + + + + + + + + + + + + + SEC.gov | China MediaExpress Holdings, Inc. and Zheng Cheng + + + + + + + + !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\/515201","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + China MediaExpress Holdings, Inc. and Zheng Cheng + + + + + + + + + + + + China MediaExpress Holdings, Inc. and Zheng Cheng + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22932 / February 24, 2014 + Accounting and Auditing Enforcement Release No. 3540 / February 14, 2014 + Securities and Exchange Commission v. China MediaExpress Holdings, Inc. and Zheng Cheng , Civil Action No. 1:13-cv-00927 (D.D.C.) + + Court Enters Final Judgment by Default Against SEC Defendant Zheng Cheng + + + The Securities and Exchange Commission ("Commission" or "SEC") has announced that on February 19, 2014, the Honorable Ellen S. Huvelle, United States District Court Judge for the District of Columbia, issued a final judgment by default against Defendant Zheng Cheng ("Cheng"), the Chairman and CEO of China MediaExpress Holdings, Inc. ("China Media"), a China-based media and advertising company, whose stock was previously publicly traded in the United States. The final judgment permanently enjoins Cheng from future violations of various provisions of the federal securities laws, including Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Exchange Act Rules 13a-14, and 13b2-2. The final judgment further permanently bars Cheng from serving as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, and also holds him liable for total combined disgorgement and prejudgment interest of $17,718,359.07, and a civil monetary penalty in the amount of $1,500,000. + + +On June 20, 2013, the SEC filed a complaint against China Media and Zheng (collectively, the "Defendants") alleging that from at least October 2009, the Defendants engaged in a scheme to mislead and defraud investors by, among other things, grossly overstating China Media's cash balances. The complaint alleged that after China Media materially misrepresented its financial condition and business operations, its stock price tripled to more than $20 per share, making the company attractive to the investing public and allowing it to raise more than $53 million from stock sales to investors. The complaint further alleged that, among other things, Cheng knowingly signed public filings with the Commission in which China Media materially misrepresented its cash balances and business operations, and that he improperly sought to influence the result of an independent investigation of the authenticity of bank records and other documents China Media provided its external auditor by attempting to bribe a member of the investigative team. + + +In a previous order issued on October 9, 2013, Judge Huvelle also entered final judgment by default against China Media, permanently enjoining the company from future violations of various provisions of the federal securities laws and also holding the company liable for total combined disgorgement and prejudgment interest of $41,894,082.05, and a civil monetary penalty in the amount of $7,250,000. +For further information, please see Litigation Release Number 22731 (June 20, 2013) [SEC Charges China-Based Company and CEO in Latest Cross Border Working Group Case]. + + + + + 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/2014/AAER-3544.txt b/raw/aaer/2014/AAER-3544.txt new file mode 100644 index 0000000000000000000000000000000000000000..4339cebf267a0de8a22dc5dcd87a88bda841fca7 --- /dev/null +++ b/raw/aaer/2014/AAER-3544.txt @@ -0,0 +1,115 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71770 / March 21, 2014 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3544 / March 21, 2014 +ADMINISTRATIVE PROCEEDING +File No. 3-12105 + +In the Matter of +Brendon P. McDonald, +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 November 18, 2005, Brendon P. McDonald, CPA (“McDonald”) 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 McDonald pursuant to Rule +102(e)(3)(i) of the Commission's Rules of Practice. +1 This order is issued in response to +McDonald’s application for reinstatement to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + In a civil action entitled Securities and Exchange Commission v. Fred Gold, et al., a final +judgment was entered against McDonald permanently enjoining him from future violations of +Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 +thereunder, and from aiding and abetting violations of Section 15(d) of the Exchange Act and +Rules 12b-20 and 15d-1 thereunder. The Commission’s complaint alleged that American Tissue, +Inc. (“American Tissue”) materially overstated its assets, shareholders’ equity, revenue and net +income in periodic reports filed with the Commission during 2000 and 2001 by capitalizing +previously recorded expenses as inventory and overvaluing finished goods inventory. The +complaint further alleged that Arthur Andersen LLP (“Andersen”) issued an unqualified audit +report on American Tissue’s financial statements for its fiscal year ended September 30, 2000 + +1 See Accounting and Auditing Enforcement Release No. 2346 dated November 18, 2005. McDonald +was permitted, pursuant to the order, to apply for reinstatement after five years upon making certain +showings. + + 2 +though its audit was not conducted in accordance with generally accepted auditing standards and +American Tissue’s financial statements were not fairly presented in conformity with generally +accepted accounting principles. According to the complaint, McDonald, an experienced senior +at Andersen, was one of the auditors responsible for the audit failure. In addition, the Complaint +alleged that, subsequent to the completion of the audit, McDonald altered audit workpapers in +preparation for a peer review by another audit firm and he instructed members of the audit +engagement team to gather all American Tissue related documents for shredding, other than the +“official” work paper file. + +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, McDonald +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. McDonald 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 suspension order in this regard. Therefore, McDonald’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 McDonald, it appears that he has complied with the terms of the November 18, 2005 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 McDonald, 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 +Brendon P. McDonald, 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. + + +Jill M. Peterson +Assistant Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3550.pdf b/raw/aaer/2014/AAER-3550.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b4f273466f7cf9e3852915b74ccc3cc58d85c5c0 Binary files /dev/null and b/raw/aaer/2014/AAER-3550.pdf differ diff --git a/raw/aaer/2014/AAER-3552.pdf b/raw/aaer/2014/AAER-3552.pdf new file mode 100644 index 0000000000000000000000000000000000000000..fd4ce05b5f7cbb302f6a8aa7823a90c9569f2fb3 Binary files /dev/null and b/raw/aaer/2014/AAER-3552.pdf differ diff --git a/raw/aaer/2014/AAER-3555.txt b/raw/aaer/2014/AAER-3555.txt new file mode 100644 index 0000000000000000000000000000000000000000..69dc224a2ed546b7b56598e83f648d757bc984ac --- /dev/null +++ b/raw/aaer/2014/AAER-3555.txt @@ -0,0 +1,653 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72199 / May 20, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3555 / May 20, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15877 + + + +In the Matter of + +BRYCE WALKER, CA and +SPENCE WALKER, CA, 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 +Bryce Walker and Spence Walker, CPA (collectively “Respondents”) pursuant to Sections 4C +1 +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 thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + 2 +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting +Public Administrative 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. From 2007 until December 2010, DNTW Chartered Accountants, LLP +(“DNTW”), an accounting firm based in Canada, and Bryce Walker and Spence Walker, two of +its partners, served as the independent auditors of Subaye, Inc. (“Subaye”), a company whose +stock is registered with the Commission and trades in the U.S. These proceedings arise out +of the Respondents’ failure to comply with Public Company Accounting Oversight Board +(“PCAOB”) Auditing Standards (“PCAOB Standards”) in their 2010 audit of Subaye. Among +other failures, Bryce Walker failed to: (a) properly supervise assistants; (b) obtain sufficient +competent evidence; (c) properly perform the confirmation process; and (d) act with due +professional care. In his role as filing quality review partner, Spence Walker failed to act with due +professional care because he should have been aware of audit deficiencies but did not address those +deficiencies. Had Respondents properly conducted the audit, they might have uncovered that +Subaye was a fraudulent company that lacked credible books and records. + +B. RESPONDENTS + +2. Bryce Walker +, age 36, is a Chartered Accountant (“CA”) licensed through the +Institute of Chartered Accountants of Ontario (“ICAO”). Bryce Walker served as the +engagement partner on the 2010 audit of Subaye. He was a partner of DNTW Chartered +Accountants operating out of the Markham office. He is a resident of Markham, Ontario and a +Canadian citizen. + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + + 3 + +3. Spence Walker, age 38, is a CA licensed through the ICAO and a CPA licensed to +practice in Illinois. Spence Walker served as the engagement partner on DNTW’s audits and +reviews of Subaye from 2007 through the third quarter of 2010 and the file quality review +partner for DNTW’s 2010 audit of Subaye. He was a partner of DNTW Chartered Accountants +operating out of the Markham office. He is a resident of Markham, Ontario and a Canadian +citizen. + +C. RELEVANT ENTITIES4 + +4. Subaye, Inc., is a Delaware incorporated company that purported to have primary +operations in the People’s Republic of China. Subaye claimed to be a leading online services +provider for small-to-medium sized businesses in China. Its stock was registered with the +Commission, and DNTW served as its independent auditor between 2007 and 2010. Subaye’s +fiscal year ends on September 30. + +5. DNTW Chartered Accountants, LLP + (alternatively, “DNTW”) was a Canadian +partnership of Chartered Accounting firm that was registered with the PCAOB and operated in +seven major Canadian cities, including Markham, Ontario. From 2008 until February 28, 2013, +the Markham office of DNTW performed public company audits and was registered with the +PCAOB.5 DNTW served as the independent auditor for Subaye from 2007 through December +31, 2010. On February 28, 2013, the DNTW partnership was dissolved. + +D. FACTS + + +Background + +6. During at least 2010, Subaye promoted itself as “a leading online business +services provider in China.” These online services were initially said to include video +advertising and entertainment media services, and subsequently a cloud computing business. +Customers purportedly paid monthly for the service. Sales agents supposedly interacted with the +customers and collected the monthly fees in cash. + +7. In its public filings for fiscal year 2010 ending September 30, 2010, Subaye +claimed approximately $39 million in revenues and over 1,500 employees. In addition, the +company claimed that, as of the end of calendar year 2010, it had more than 14,600 customers. + + +4 On May 8, 2013, the Commission filed a civil injunctive action against Subaye and its former Chief Financial +Officer, James T. Crane (“Crane”) alleging that Subaye and Crane violated the antifraud, books and records, internal +controls and reporting provisions of the Exchange Act, and that Crane violated Section 105(c)(7)(B) of the +Sarbanes-Oxley Act of 2002 (“SOX”). + +5 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 Securities Exchange Act of 1934. + + 4 +8. On December 23, 2010, the same day Subaye filed its 2010 Form 10-K, Subaye +dismissed DNTW as its independent auditor and hired PricewaterhouseCoopers Hong Kong +(“PwC HK”) as Subaye’s new independent auditor. This set in motion a chain of events that, by +mid-2011 had exposed Subaye to be a fraud, without the infrastructure to support its claimed +cloud computing and other online business, few paying customers, few, if any, employees, no +real revenues and no cash in bank accounts. + +Accounting for Subaye’s Fraud + +9. In its Form 10-K and corresponding earnings press release for the period ended +September 30, 2010, Subaye reported that $22.1 million of revenues collected by its sales agents +had been reinvested into “growth orientated marketing expenses to help us penetrate attractive +new markets.” In reality, Subaye had almost no paying customers for its online membership +business and claimed to have reinvested in marketing expenses so as to conceal the fact that the +money did not exist. During the fourth quarter of 2010, Subaye had recorded an $18.8 million +asset called “Cash Held in Trust” on its balance sheet. In discussions with Respondents, Subaye’s +management claimed that the cash was being held by Subaye’s third-party sales agents to be used +for marketing and promotional expenses, as directed by the company. During the 2010 audit, +Subaye provided DNTW with general ledger and journal entries showing funds recorded as +“development” in various provinces, with an offset to accounts receivable from third party sales +agents. But when DNTW asked for documents to support the existence of this cash, said to be held +by sales agents for development, Subaye’s management could not produce any bank account +statements, receipts, or other direct proof. In reality, Subaye’s offset of the accounts receivable +balances purportedly in exchange for marketing by its sales agents was a device used to hide the +fact that those receivables would never be converted to cash, because the sales had never +occurred. + +10. Similarly, Subaye’s financial statements reported “Deposits for Purchases of +Inventoriable Assets” as an asset on its balance sheet beginning in 2009. In its Form 10-K for +the period ended September 30, 2009, Subaye reported $8.1 million in Deposits for Purchases of +Inventoriable Assets. Subaye’s management told the Respondents that the deposits were related +to Subaye’s future launch of its online 3D mall. Like the reinvestment in “marketing +promotions” scheme, the general ledger and journal entries provided to DNTW during the 2009 +audit showed amounts being recorded as “deposits” for various types of purchases with an offset +to accounts receivable due from third-party sales agents. + +11. By the fourth quarter of fiscal year 2010, the $8.1 million in deposits had been +reduced to $2.8 million on Subaye’s books after a series of write-offs and a purported refund. At +the insistence of DNTW, Subaye expensed the remaining $2.8 million in the 2010 Form 10-K for +the period ended September 30, 2010. This write-off was another device used by Subaye to +cover the fact that it had collected no cash for its outstanding receivables. + +12. In its 2010 financial statements, Subaye should not have recognized over $21 +million in revenues or the corresponding expenses related to the reinvestment of those revenues +into “marketing” or “deposits” because the company never had cash or a claim to cash for the + 5 +purported revenues. In fact, Subaye had almost no customers and its representations of earning +more than $39 million in revenues for fiscal year 2010 were false and misleading. + +13. Subaye made numerous false and misleading statements in its Form 10-K for +fiscal year 2010. Among other things, the Form 10-K overstated Subaye’s revenues, falsified +marketing expenses, overstated the number of employees, and failed to disclose material related +party transactions. For fiscal year 2010, Subaye’s income statement was overstated by at least +$21.6 million for the period ended September 30, 2010. In addition, Subaye’s 2009 balance +sheet, as reported in the Form 10-K for the period ended September 30, 2010, overstated the +Deposits for Purchases of Inventoriable Assets by $8.1 million. The effects of Subaye’s false and +misleading statements were material to Subaye’s reported results. + +Respondents Failed to Conduct the 2010 Audit in Accordance with PCAOB Standards + +14. Respondents performed the fiscal year 2010 audit of Subaye’s financial +statements and issued an unqualified audit report. The Respondents failed to ensure that the +fiscal year 2010 Subaye audit was conducted in accordance with PCAOB standards. As set forth +below, Bryce Walker failed to: (a) properly supervise assistants; (b) obtain sufficient competent +evidence; (c) properly perform the confirmation process; and (d) act with due professional care. +Further, in his role as file quality review partner, Spence Walker failed to act with due professional +care because he should have been aware of audit deficiencies but did not address those +deficiencies. + +a. Failure to properly supervise assistants + +15. Supervision involves directing the efforts of assistants who are involved in +accomplishing the objectives of the audit and determining whether those objectives were +accomplished. [AU§311, Planning and Supervision, at .11] +6 DNTW, under Bryce Walker’s +direction, failed to appropriately supervise China-based assistants engaged to perform the audit +fieldwork for the 2010 audit of Subaye. + +16. No employee of DNTW ever traveled to Subaye’s offices in China. Instead, +DNTW contracted with a China-based firm to employ assistants to conduct the audit fieldwork. +During the 2010 audit, Bryce Walker did not know the scope of the procedures being performed +by the China-based assistants. Furthermore, DNTW’s work papers are unclear as to chain of +custody of the accounts receivable confirmations or what, if any, role the China-based assistants +had in the process. By failing to understand what procedures the China-based assistants +performed during the audit, and how they performed them, Bryce Walker failed to properly +supervise assistants as required under PCAOB Standards. + +b. Failure to obtain sufficient competent evidence + +17. Under PCAOB Standards, auditors are required to obtain sufficient competent +evidential matter by performing audit procedures to afford a reasonable basis for an opinion + +6 References in this Order are to the PCAOB standards in effect at the time of the relevant conduct. + 6 +regarding the financial statements under audit. [AU§326, Evidential Matter, at .01] DNTW +failed to obtain sufficient competent evidence regarding Subaye’s claims about cash, marketing +expenses, and deposits for purchases of Inventoriable Assets. + +i. Cash + +18. Despite the materiality of the cash balance, DNTW, under Bryce Walker’s +direction, failed to gather sufficient competent evidence of its existence by relying solely on bank +statements obtained from Subaye’s management. As of September 30, 2010, Subaye’s financial +statements showed a balance of $7.1 million. Beginning with the 2009 audit, DNTW stopped +testing cash through confirmations to banks because in prior year audits there had not been any +exceptions with bank confirmations. + +19. Instead, DNTW relied solely on bank statements provided to DNTW’s China- +based audit assistants by Subaye’s management. Under PCAOB Standards, audit evidence is +more reliable when it is obtained from independent sources outside the entity than from solely +within the entity. [AU§326, Evidential Matter, at .21] During the 2010 audit, DNTW, under +Bryce Walker’s direction, failed to obtain sufficient competent evidence in its testing of Subaye’s +cash balances because it relied solely on information provided by Subaye’s management despite +the materiality of the balance and the lack of evidence gathered from an independent source. + +ii. Marketing expenses + +20. DNTW failed to obtain sufficient competent evidence regarding the purported +marketing and promotional expenses Subaye reported in its 2010 financial statements. + +21. During the fourth quarter of fiscal year 2010 Subaye had recorded an $18.8 +million asset called “Cash Held in Trust” on its balance sheet. Subaye’s management informed +both Bryce and Spence Walker that the cash was held by Subaye’s various third-party sales +agents to be used at the company’s direction for development costs related to marketing and +promotional expenses. When DNTW requested documentation to support the existence of the +cash and marketing expenses, Subaye’s management was unable to produce any reliable +evidence. Instead, Subaye’s management suggested the amount remain an asset but instead be +labeled, “advances to third party agents for business development.” + +22. Bryce Walker and Spence Walker ultimately determined that there was not +sufficient evidence to account for the $18.8 million as an asset and insisted that it instead be +booked as a marketing expense. However, DNTW did not obtain sufficient competent evidence +to verify that the cash had ever existed or that the purported cash provided to sales agents for +marketing was, or would be, used for marketing expenses. + +iii. Deposits for purchase of Inventoriable Assets + +23. DNTW failed to obtain sufficient competent evidence regarding the purported +deposits for Inventoriable Assets. As stated in DNTW’s own work papers, no “third party + 7 +evidence of the existence of this cash, either by examining bank accounts or similar documents” +was provided to the auditors. DNTW failed to obtain sufficient competent evidence that the cash +purportedly provided to vendors for future inventory had ever existed. In 2010, Subaye wrote +off the remaining $2.8 million balance for Deposits for Purchase of Inventoriable Assets despite +Subaye’s inability to produce sufficient competent evidence to support the amounts recorded. + +24. In addition, DNTW failed to recognize that, if sufficient competent evidence was +not available in 2010 to support the deposits, then sufficient competent evidence of the 2009 +balance of $8.1 million in deposits may not have been obtained in the prior year. PCAOB +Standards require an auditor who subsequently becomes aware of facts that may have existed as of +the date of a previously issued audit report to, among other things, take action to determine the +effect of the information on previously issued audit reports. [AU§561, Subsequent Discovery of +Facts Existing at the Date of the Auditor’s Report] After learning that there was not sufficient +competent evidence to support the Deposits for Purchases of Inventoriable Assets, DNTW failed to +take any action to determine the effect of that information on Subaye’s 2009 financial statements +and DNTW’s corresponding audit report. + +c. Failure to properly perform the confirmation process + +25. During the performance of confirmation procedures for items like accounts +receivable, the auditor should maintain control over the confirmation requests and responses. +Maintaining control means that the auditor establishes direct communications between the +intended recipient and the auditor so as to minimize the possibility that the results will be biased +because of interception and alteration of the confirmation requests or responses. [AU§330, The +Confirmation Process, at .28] There is no evidence that DNTW established direct contact with +the independent parties. Therefore, DNTW failed to maintain control over the accounts +receivable confirmation process. + +26. DNTW’s work papers contain copies of the returned accounts receivable +confirmations. However, there is insufficient documentation or evidence of how those +confirmations were sent and received by the auditors. Bryce Walker and his junior associate on +the engagement testified that DNTW’s China-based audit assistants had handled the sending and +receipt of the confirmations. However, an employee of the China-based audit assistants said that +they had no role in the accounts receivable confirmation process. In addition, one of the returned +confirmations in DNTW’s work papers includes a handwritten note at the top that indicates four +of the confirmations were faxed from Subaye’s bookkeeper to the DNTW offices. By allowing +Subaye to gain control over the confirmations, DNTW failed to maintain control of the process +and increased the likelihood that the results were biased based on interception and alteration. + +d. Failure to act with due professional care + +27. The auditor must exercise due professional care in the performance of the audit +and the preparation of the audit report. [AU§230, Due Professional Care in the Performance of +Work, at .01] Due professional care requires the auditor to exercise professional skepticism. +Professional skepticism is an attitude that includes a questioning mind and a critical assessment + 8 +of audit evidence. [AU§230, Due Professional Care in the Performance of Work, at .07] It also +requires that the auditor not be satisfied with less than persuasive evidence because of a belief +that management is honest. [AU§230, Due Professional Care in the Performance of Work, at +.09] During the 2010 audit of Subaye, there were multiple instances where DNTW failed to +exercise professional skepticism. + +28. Respondents did not probe Subaye’s management about the company’s inability +to produce any evidence to support the over $18 million in purported cash that was later +reclassified as a marketing expense. Additionally, a Subaye officer emailed both Bryce and +Spence Walker regarding the marketing expenses - “There is no control over the bank accounts. +That was something I suggested they [Subaye] do but confirmed yesterday that it was not agreed +to by the agents.” Despite receiving an email from the Subaye officer stating that there were no +controls over the cash, Respondents made no further inquiries and conducted no additional +procedures. + +29. In another example, Subaye’s initial position had been that the deposit contracts +for “inventoriable assets” were fully refundable, and yet by the end of fiscal 2010, two of the +contracts had been canceled and Subaye reported that it had only been refunded for $1.9 million +of the $5.9 million in outstanding deposits. Despite being aware of this disparity, Respondents +failed to probe the inconsistencies in a Subaye officer’s representations that the deposits were +fully refundable. Respondents should have been attentive to evidence about the Subaye officer’s +credibility because he was their sole point of contact at Subaye. As such, any questions about +the Subaye officer’s credibility required Respondents to exercise professional skepticism and to +seek additional evidence. + +30. Additionally, even though bank statements were the only evidence obtained to +verify Subaye’s cash balances, Respondents failed to question suspicious transfers on those +statements. For example, $6.7 million of Subaye’s $7.1 million cash balance as of September +30, 2010 resulted from deposits into Subaye’s accounts during the last seven days of September. +Despite this suspicious timing, Respondents performed no testing to ascertain the basis for the +cash infusion during the final week of fiscal year 2010 + +31. In addition to Respondents’ failing to maintain control over the accounts +receivable confirmation process, they also failed to address questions raised by the return of +those confirmations to the audit team. DNTW’s work papers indicate that 10 confirmations for +accounts receivable were purportedly sent out to independent parties on November 19, 2010 and +all were returned without exception by November 30, 2010. Despite the fact that DNTW +personnel, including Bryce Walker, recognized that it was very unusual for all audit +confirmations to be returned so quickly, Respondents never performed additional procedures to +address the unusual timing, once again failing to exercise the adequate level of professional +skepticism that was required based on the circumstances. + +32. Finally, in accordance with DNTW’s audit quality control process, Spence Walker +was designated as the file quality review partner who had responsibility for reviewing the audit +work of DNTW for the 2010 year-end audit of Subaye. Spence Walker failed in this role because + 9 +he should have been aware of the shortcomings of the audit in obtaining sufficient competent +evidence regarding cash, the marketing expenses, and deposits for Inventoriable Assets, yet did not +assure that these deficiencies were appropriately addressed before completion of the audit. He also +failed to exercise due professional care in evaluating numerous significant risks during the 2010 +audit, including that Subaye was unable to produce sufficient competent evidence to support a +purported $21 million asset during the 2010 audit. + +E. VIOLATIONS + +Improper Professional Conduct Under Rule 102(e)(1)(ii) + +33. Rule 102(e)(1)(ii) of the Commission’s Rules of Practice provides that the +Commission may deny to any person the privilege of practicing before it, if that person is found +to have engaged in improper professional conduct. Section 4C(a)(2) of the Exchange Act +provides for the same authority. Improper professional conduct may be intentional or reckless; it +can also be one of two types of negligent conduct: a single instance of highly unreasonable +conduct in circumstances for which heightened scrutiny is warranted; or repeated instances of +unreasonable conduct that indicate a lack of competence. + +34. Bryce Walker, the engagement partner, was responsible for ensuring that +DNTW’s audit of Subaye’s 2010 financial statements met applicable professional standards. He +failed in this regard, as DNTW’s audit of Subaye was not conducted in accordance with PCAOB +Standards. DNTW’s audit failures demonstrate that Bryce Walker’s conduct was unreasonable +and support an action against him under Rule 102(e)(1)(ii). + +35. Spence Walker, in his role as file quality review partner, took on certain +responsibilities to ensure DNTW’s audits were conducted in accordance with PCAOB Standards. +As discussed herein, upon assuming this responsibility, Spence Walker should have become aware +of audit deficiencies in multiple areas but did not address those deficiencies. These failures +demonstrate that Spence Walker’s conduct was unreasonable and support an action against him +under Rule 102(e)(1)(ii). + +Respondents Caused Subaye’s Violation of Exchange Act Section 13(a) and Rule 13a-1 +Thereunder + +36. 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 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. + +37. Included in Subaye’s annual report for the fiscal year ended 2010 was an audit +report from DNTW that stated DNTW’s audit was conducted “in accordance with the standards +of the Public Company Accounting Oversight Board (United States).” The statement in + 10 +DNTW’s audit report was false, because Respondents failed to conduct their audit of Subaye in +accordance with PCAOB Standards. Accordingly, Respondents were a cause of Subaye’s +violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. + +Spence Walker and Bryce Walker caused DNTW’s direct violation of Rule 2-02 of +Regulation S-X + +38. 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.” +“[R]eferences in Commission rules and staff guidance and in the federal securities laws to GAAS +(“Generally Accepted Auditing Standards”) 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 In re Andrew Sims, CPA +, Rel. +No.34-59584, AAER No. 2950 (Mar. 17, 2009). + +39. DNTW issued an audit report on Subaye’s 2010 financial statements stating that it +had conducted its audit in accordance with PCAOB Standards. DNTW’s audit, however, was not +conducted in accordance with PCAOB Standards. As such, DNTW directly violated Rule 2- +02(b)(1) of Regulation S-X. Bryce Walker, as engagement partner, and Spence Walker, as file +quality review partner, should have known that DNTW had not conducted its audit in accordance +with PCAOB Standards. Accordingly, Bryce Walker and Spence Walker caused DNTW’s +violation of Rule 2-02(b)(1). + +F. FINDINGS + + Based on the foregoing, the Commission finds that the 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. + + Based on the foregoing, the Commission finds that Respondents caused Subaye’s +violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. Additionally, the +Commission finds that DNTW directly violated Regulation S-X Rule 2-02(b)(1) and that Spence +Walker and Bryce Walker caused DNTW’s violation of Regulation S-X Rule 2-02(b)(1). + +G. UNDERTAKINGS + + Respondents Bryce Walker and Spence Walker undertake the following: + + +Cooperation + +A. Respondents Bryce Walker and Spence Walker agree that each shall cooperate +fully with the Commission with respect to any matter relating to the Commission's investigation +of Subaye or its current or former officers, directors or employees, including but not limited to + 11 +any litigation or other proceeding related to or resulting from that investigation, including +litigation in SEC v. Subaye, Inc. and James T. Crane, Civil Action No. 13 CIV 3114 (S.D.N.Y.). + +a. Producing any document, record, or other tangible evidence reasonably +requested by Commission staff in connection with the Commission's +investigation, litigation or other proceedings; + +b. Providing all information reasonably requested by Commission staff in +connection with the Commission's investigation; and + +c. Attending and providing truthful statements or testimony at any meeting, +interview, testimony, deposition, trial, or other legal proceeding reasonably +requested by the Commission staff. + +In determining whether to accept the Offer, the Commission has considered these undertakings. + +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondents Bryce Walker and Spence Walker shall cease and desist from +committing or causing any violations and any future violations of Section 13(a) of the Exchange +Act and Rule 13a-1 promulgated thereunder and Regulation S-X Rule 2-02(b)(1). + +B. Respondent Bryce Walker is denied the privilege of appearing or practicing +before the Commission as an accountant. + +C. After three (3) years from the date of this order, Respondent Bryce Walker 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 Bryce Walker’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: + + 12 +(a) Respondent Bryce Walker, 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 Bryce Walker, or the registered public accounting firm + with which he is associated, has been inspected by the Board and + that inspection did not identify any criticisms of or potential + defects in Respondent Bryce Walker’s or the firm’s quality control + system that would indicate that Respondent Bryce Walker will not + receive appropriate supervision; + +(c) Respondent Bryce Walker 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 Bryce Walker acknowledges his responsibility, as long + as Bryce Walker 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 Bryce Walker 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 Bryce Walker’s character, integrity, professional conduct, or qualifications to +appear or practice before the Commission. + +E. Respondent Spence Walker is denied the privilege of appearing or practicing +before the Commission as an accountant. + +F. After one (1) year from the date of this order, Respondent Spence Walker 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 Spence Walker’s work in his practice before the Commission + 13 + 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 Spence Walker, 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 Spence Walker, 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 Spence Walker’s or the firm’s quality control system + that would indicate that Spence Walker will not receive + appropriate supervision; + +(c) Respondent Spence Walker 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 Spence Walker acknowledges his responsibility, as + long as Respondent Spence Walker 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 Respondent Spence Walker 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 Spence Walker’s character, integrity, professional conduct, or qualifications to +appear or practice before the Commission. + +H. Respondents Bryce Walker and Spence Walker, jointly and severally, shall, +within ten (10) days of the entry of this Order, pay disgorgement of $128,000 and prejudgment +interest of $10,954 to the Securities and Exchange Commission. Payment shall be made in the +following installments: $38,954 to be paid with the entry of this Order and $100,000 to be paid + 14 +within one-year from the date of the Order. 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 +Spence Walker or Bryce Walker 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, Division of Enforcement, Securities and Exchange Commission, 33 Arch Street, 23 +rd +Floor, Boston, MA 02110. + + By the Commission. + + + + Jill M. Peterson + Assistant Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3557.pdf b/raw/aaer/2014/AAER-3557.pdf new file mode 100644 index 0000000000000000000000000000000000000000..07c28ea784076c922161fb5d0d13aa92ed388f8f Binary files /dev/null and b/raw/aaer/2014/AAER-3557.pdf differ diff --git a/raw/aaer/2014/AAER-3558.txt b/raw/aaer/2014/AAER-3558.txt new file mode 100644 index 0000000000000000000000000000000000000000..b61b7424f1a708d88673d1c396cdd7e6dffb3a8e --- /dev/null +++ b/raw/aaer/2014/AAER-3558.txt @@ -0,0 +1,104 @@ +1 + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72427 / June 18, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3558 / June 18, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15938 + + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + I. JOHN BENSON, CPA, : 102(e) OF THE COMMISSION’S RULES OF + : PRACTICE, MAKING FINDINGS, AND + Respondent. : 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 I. John +Benson (“Respondent” or “Benson”) 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 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. Benson, age 67, held a Texas CPA license until voluntarily surrendering it in +2008. He served as Chief Financial Officer of DGSE Companies Inc. (“DGSE”) from 1992 until +2011. + + 2. DGSE was, at all relevant times, a Nevada corporation headquartered in +Dallas, Texas that buys and sells jewelry and bullion products for individual consumers, dealers, +and institutions. Its common stock is registered with the Commission under Section 12(b) of the +Securities Exchange Act of 1934 (“Exchange Act”) and is traded on the NYSE MKT under the +symbol “DGSE.” + + 3. On June 2, 2014, a final judgment was entered against Benson, permanently +enjoining him from future violations of Section 17(a) of the Securities Act of 1933 (“Securities +Act”) and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1, and +13b2-2 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13, in the civil action entitled +Securities and Exchange Commission v. DGSE Companies Inc. and I. John Benson +, Civil Action +Number 3:14-cv-01909-B, in the United States District Court for the Northern District of Texas. +Benson was also ordered to pay a $75,000 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Benson +engaged in a fraudulent scheme which resulted in DGSE filing materially false and misleading +financial statements in the company’s annual report on DGSE’s Forms 10-K for the Fiscal Years +Ended December 31, 2009 and December 31, 2010, as well as quarterly filings for the same +period. Benson also allegedly signed false management certifications, which were attached to +these filings. In addition, the complaint alleged that while Benson was DGSE’s CFO, DGSE +failed to maintain sufficient accounting controls, and that Benson circumvented the controls +that DGSE did have. Finally, the complaint alleged that Benson made false statements to +DGSE’s external auditors. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Benson’s Offer. + + 3 + Accordingly, it is hereby ORDERED, effective immediately, that Benson is suspended +from appearing or practicing before the Commission as an accountant. + + + By the Commission. + + + + Jill M. Peterson + Assistant Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3566.txt b/raw/aaer/2014/AAER-3566.txt new file mode 100644 index 0000000000000000000000000000000000000000..d9a6fe54527c48bc557cc8369b6629197dbb5e65 --- /dev/null +++ b/raw/aaer/2014/AAER-3566.txt @@ -0,0 +1,269 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72602 / July 14, 2014 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3566 / July 14, 2014 +ADMINISTRATIVE PROCEEDING +File No. 3-15970 + + +In the Matter of + +ERNST & YOUNG 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 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule +102(e)(1)(ii)2 of the Commission’s Rules of Practice against Ernst & Young LLP (“Respondent” +or “EY”). + +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 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. + +2 + +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. +III. +On the basis of this Order and Respondent’s Offer, the Commission finds that: +A. SUMMARY +These proceedings arise out of certain legislative advisory services provided by +Washington Council EY (“WCEY”), which has been part of EY since 2000. +3 Prior to 2009, +certain conduct related to WCEY’s provision of legislative advisory services violated the +independence rules with respect to two of EY’s SEC-registrant audit clients. For example, WCEY +sent letters urging passage of bills to congressional staff on behalf of one of its clients (hereinafter, +“Client A”). These bills were important to Client A’s business interests. In another instance, +WCEY asked congressional staff to insert into a bill a provision favorable to Client A. For another +audit client (hereinafter, “Client B”), WCEY attempted to persuade congressional offices to +withdraw their support for legislation detrimental to that client’s business interests. In addition, +WCEY worked closely with congressional staff in drafting an alternative bill more favorable to +Client B. WCEY also marked up a draft of the alternative bill, inserting specific language written +by Client B, and sent the mark-up to congressional staff. +Despite providing the services described herein, EY repeatedly represented that it was +“independent” in audit reports issued on Client A’s and Client B’s financial statements, which +were included or incorporated by reference in public filings with the Commission. By doing so, +EY violated Rule 2-02(b)(1) of Regulation S-X and caused Client A and Client B to violate +Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. EY’s conduct also 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. RESPONDENT +EY is a professional services limited liability partnership, headquartered in New York +City, with offices located throughout the United States. It is a member firm of Ernst &Young + +3 In May 2000, Washington Counsel, P.C. merged into EY. The firm now operates as Washington Council +EY. + +3 + +Global Limited and provides auditing, consulting, and tax services to a variety of companies, +including companies whose securities are registered with the Commission and trade in the U.S. +markets. +C. RELEVANT ISSUERS +At all relevant times, Client A and Client B had shares registered with the Commission +pursuant to Exchange Act Section 12(b) and filed annual Reports on Form 10-K with the +Commission. +D. FACTS +WCEY +1. WCEY’s legislative advisory services include meeting with congressional staff and +attempting to influence pending legislation on behalf of its clients. At the time of the conduct +discussed herein, some of WCEY’s clients were also SEC-registrant audit clients of EY. +2. EY issued a written independence policy intended to provide guidance on the +provision of legislative advisory services to audit clients. While EY provided some guidance on +the policy, it did not provide WCEY with formal, in-person training specifically tailored to the +policy. +Legislative Advisory Work for Client A +3. On at least three occasions prior to 2009, WCEY’s provision of legislative advisory +services for Client A placed WCEY, and therefore EY, in the position of being an advocate for an +audit client in violation of the independence rules. +4 Each instance involved legislation important +to Client A. +4. On the first occasion, WCEY learned about an upcoming vote in the U.S. House of +Representatives. WCEY informed Client A about the vote and obtained a letter from a top +executive at Client A addressed to the House leadership and supporting passage of the bill. Just a +few hours before the scheduled vote, WCEY e-mailed the letter to staff in various congressional +offices. In the e-mail, WCEY congratulated the congressional staff on bringing the bill to the floor +and noted that the attached letter encouraged immediate passage of the bill. After the vote, WCEY +e-mailed Client A to inform it that the letters made it to the House prior to the vote. +5. On the second occasion, WCEY sent a letter signed by Client A to the leadership in +the U.S. Senate and House of Representatives. The letter urged Congress to pass certain +legislation of strategic importance to Client A. The letter also listed specific items to be included +in the legislation. + +4 The services described herein, with respect to both Client A and Client B, occurred over a several-year +period in the mid-2000s, ceasing in 2008. + +4 + +6. On the third occasion, Client A was interested in inserting a specific provision into +a pending bill. Client A asked WCEY to raise the issue with a U.S. Senate staffer. WCEY +reported back to Client A, stating that the firm had asked the Senate staffer about the provision. +The Senate staffer indicated that it would be difficult to get the provision included in the bill, but +WCEY said it could make a case for it. Several months later, WCEY again contacted the Senate +staffer about the chance of having the specific provision included in the legislative package. +Legislative Advisory Work for Client B +7. On at least two occasions prior to 2009, WCEY’s provision of legislative advisory +services for Client B placed WCEY, and therefore EY, in the position of being an advocate for an +audit client in violation of the independence rules. This instance involved legislation important to +Client B. +8. Client B retained WCEY in an effort to defeat a legislative proposal that Client B +believed would be detrimental to its business interests. +9. WCEY met with staff representing U.S. Senators who were in favor of the +proposal. The purpose of these meetings was for WCEY to persuade the Senate staff to withdraw +their support for the proposal. +10. After these meetings, Client B sought an amendment related to the proposal. +WCEY identified third parties and urged them to approach a U.S. Senator and ask for an +amendment. WCEY provided the third parties with two alternative draft amendments to be +presented to the Senator. +11. WCEY also developed a strategy to push for an alternative bill more favorable to +Client B than the original proposed legislation. Specifically, WCEY and Client B worked closely +with a staffer for a U.S. House of Representatives member who planned to introduce the +alternative bill. WCEY exchanged drafts of the alternative bill with the staffer. In an e-mail to +WCEY, the staffer acknowledged that the current draft incorporated a number of suggestions from +WCEY. +12. Subsequently, WCEY and Client B met again with the House staffer and provided +additional suggestions for the alternative bill. The House staffer provided WCEY with a draft of +the alternative bill and requested additional feedback. WCEY then shared the draft with Client B. +When a Client B employee saw the draft, he said he was highly encouraged because his language +was included. +13. WCEY conferred further with Client B and then conveyed to the House staffer +additional suggestions for the alternative bill. For example, WCEY told the staffer about concerns +that Client B had about some specific language in the alternative bill. WCEY provided the staffer +with new language that had been written by Client B. +14. WCEY pointed to its influence in a memorandum to Client B’s president. WCEY +wrote that it “helped to tamp down activity” on legislation that would have harmed Client B’s +business. WCEY described how it worked with congressional staff prior to the introduction of the +bill to minimize any impact on Client B’s business. + +5 + +E. LEGAL ANALYSIS + +Basic Principles + +15. “Public faith in the reliability of a corporation’s financial statements depends upon +the public perception of the outside auditor as an independent professional.” SEC v. Arthur +Young, 465 U.S. 805, 819 n.15 (1984). In fact, “[i]f investors were to view the auditor as an +advocate for the corporate client, the value of the audit function itself might well be lost.” Id. +16. The Commission has stated that it +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. +Rule 2-01(b) of Regulation S-X (emphasis added). +17. “In considering this standard, the Commission looks in the first instance to whether +a relationship or the provision of a service . . . places the accountant in a position of being an +advocate for the audit client.” Preliminary Note to Rule 2-01 of Regulation S-X, ¶ 2; see +“Revision of the Commission’s Auditor Independence Requirements,” Exchange Act Rel. 42994, +45 Fed. Reg. 43148, 43149 (July 12, 2000) (Proposing Release) (“an accountant is not independent +whenever, during the audit and professional engagement period, the accountant . . . acts as an +advocate for the audit client”). +Violations +18. As a result of the conduct described above, EY violated Rule 2-02(b)(1) of +Regulation S-X, which requires that each accountant’s report state whether the audit was made in +accordance with generally accepted auditing standards. Exchange Act Release No. 49708 +provides that, for financial statements dated after May 24, 2004, the Rule’s reference 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, e.g., PCAOB +Auditing Standards, Independence, AU § 220.03. A violation occurred each time that EY issued +an audit report for one of the two audit clients (or issued a consent for the filing of an audit report in +later filings) that incorrectly stated that the audits were performed in accordance with the standards +of the PCAOB, where either the period covered by the audit, or the period of the audit work, or +both, overlapped with prohibited conduct. +19. As a result of the conduct described above, EY caused Client A and Client B to +violate Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, which require that financial +statements included in annual reports filed with the Commission be audited by an independent + +6 + +accountant. EY knew, or should have known, that its conduct would cause the audit clients to +violate these provisions. +20. As a result of the conduct described above, EY also 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. +EY’s Remedial Efforts +21. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Respondent and cooperation afforded the Commission staff. For example, in June +2012, EY voluntarily issued new guidance restricting such legislative advisory services. EY +issued similar final guidance in May 2013. +F. FINDINGS +Based on the foregoing, the Commission finds that Respondent EY: (a) committed +violations of 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 Client B; 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 EY 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 EY is hereby censured. +C. Respondent EY shall, within ten (10) days of the issuance of this Order, pay +disgorgement of $1,240,000, together with prejudgment interest thereon of $351,925.98, and a +civil money penalty of $2,480,000, for a total of $4,071,925.98, to the United States Treasury. 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 + +7 + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying EY +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 Scott W. Friestad, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., N.E., +Washington, DC 20549. +By the Commission. + +Jill M. Peterson +Assistant Secretary + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3574.txt b/raw/aaer/2014/AAER-3574.txt new file mode 100644 index 0000000000000000000000000000000000000000..7a1763cafbd45ae990383024c6850ddaceeed42f --- /dev/null +++ b/raw/aaer/2014/AAER-3574.txt @@ -0,0 +1,209 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72753 / August 4, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3574 / August 4, 2014 + +Admin. Proc. File Nos. 3-14872, 3-15116 + + + +In the Matter of + +BDO CHINA DAHUA CPA CO., LTD., +ERNST & YOUNG HUA MING LLP, KPMG +HUAZHEN (SPECIAL GENERAL +PARTNERSHIP), DELOITTE TOUCHE +TOHMATSU CERTIFIED PUBLIC +ACCOUNTANTS LTD., and +PRICEWATERHOUSECOOPERS ZHONG +TIAN CPAS LIMITED + + +ORDER GRANTING LEAVE TO +THE ZLCA TO FILE AN AMICUS +BRIEF + + +On May 28, 2014, the Zhongguancun Listed Companies Association ("ZLCA") filed a +motion for leave to file an amicus brief. The Division of Enforcement opposes the motion and +ZLCA, in turn, has filed a reply. We have determined to grant the motion as set forth herein. +By way of background, these proceedings concern respondents' alleged willful refusal to +provide the Commission with audit work papers in violation of their obligations under Section +106 of the Sarbanes-Oxley Act as amended by Section 929J of the Dodd-Frank Wall Street +Reform and Consumer Protection Act.1 The initial decision denied, for a period of six months, +the privilege of practicing or appearing before the Commission to four of the five respondents +and censured the remaining one. The Commission granted review and the opening brief of the +appealing respondents is due September 19, 2014. +In support of its request to file an amicus brief, ZLCA states that the initial decision, +unless modified or reversed by the Commission, will have a "significant adverse impact" on +ZLCA's members who are U.S. listed and who are audited by a China-based accounting firm. +More specifically, ZLCA asserts that respondents have issued audit opinions for certain of its +members and that these companies will "face the possibility of having their shares delisted" if +they cannot obtain audited financial statements. It desires to file an amicus brief discussing the +"broad based policy interests" that, in its view, are implicated by the initial decision. In its reply + +1 15 U.S.C. § 7216(b)(1). +2 + +brief, ZLCA additionally represents that it "did not speak to or collaborate with any party" in +connection with seeking to file an amicus brief in this proceeding.2 +Rule of Practice 210(d) governs amicus participation in the Commission's administrative +proceedings. In relevant part, it provides that: "An amicus brief may be filed conditionally with +the motion for leave. The motion for leave shall identify the interest of the movant and shall +state the reasons why a brief of an amicus curiae is desirable."3 The Division contends that the +Commission should deny the motion for four reasons. None of them is persuasive. + +The Division leads off with the argument that the Rules of Practice categorically forbid +the filing of amicus briefs in disciplinary proceedings. It relies on Rule 210(a)(1), which states +that "[n]o person shall be granted leave to become a party or a non-party participant on a limited +basis in an enforcement or disciplinary proceeding," subject to an exception inapplicable here, +and that the instant proceeding is a "disciplinary proceeding" within the meaning of that rule.4 +This reliance is misplaced, as the structure of Rule 210 demonstrates. Rule 210 envisions four +categories of potential participation in Commission proceedings: Persons can participate or +intervene as a party (paragraph (b)), participate as a non-party on a limited basis (paragraph (c)), +participate as an amicus (paragraph (d)), or participate by filing a statement of views (paragraph +(e)). Thus, even though party participation pursuant to paragraph (b) and limited, non-party + +2 We note that ZLCA's reply is technically untimely because the Division served its +opposition on June 9 and the reply was filed on June 18. Rule of Practice 154(b) provides that +"[r]eply briefs [in support of motions] shall be filed within three days after service of the +opposition." 17 C.F.R. § 201.154(b). Under Rule 160(a), intermediate weekends and legal +holidays are "excluded from the computation when," as here, "the period of time prescribed or +allowed is seven days or less." Id. § 201.160(a). Here, there were no intermediate weekends and +legal holidays, which makes June 12 the end of the three-day response period. Because service +of the Division's opposition was by mail, three additional days are "added to the prescribed +period for response" under Rule 160(b). June 15 falls on a Sunday, so the due date for the reply +was the next day, or June 16. In short, Rule 160(a) and Rule 160(b) work together as follows: +(1) the underlying period is computed, excluding intermediate weekends and holidays if the +period is seven days or less; (2) if service is by mail, then three additional calendar days are +appended to that period; and (3) finally, if the resulting day itself falls on a weekend or holiday, +the period runs until the next day that is not a weekend or holiday. E.g., Nat'l Sav. Bank of +Albany v. Jefferson Bank, 127 F.R.D. 218, 221-222 & nn.6-7 (S.D. Fla. 1989) (interpreting +analogous provisions of former Fed. R. Civ. P. 6(a) and 6(e)); 4A Wright & Miller, Federal +Practice and Procedure § 1171 (2d ed. 1987). Because the Commission has not previously +clarified the interaction of these rules and no prejudice would result from accepting ZLCA's two- +day-late filing, we will consider its reply. +3 17 C.F.R. § 201.210(d)(2). Rule 210(d)(2) also provides that, "[e]xcept as all parties +otherwise consent, any amicus curiae shall file its brief within the time allowed the party whose +position the amicus will support." It is uncontested that ZLCA's motion is timely. +4 17 C.F.R. § 201.210(a)(1). +3 + +participation pursuant to paragraph (c) are generally forbidden in disciplinary proceedings, Rule +210 nonetheless allows a "person . . . [to] seek to participate in such proceedings as an amicus, +pursuant to paragraph (d)."5 The Commission has previously allowed amicus participation in +disciplinary proceedings.6 + +Next the Division contends that ZLCA's motion for leave is deficient because it does not +attach the amicus brief that ZLCA proposes to file. Although the Division is correct to note that +Rule 210(d) is "based on Rule 29" of the Federal Rules of Appellate Procedure, and that Rule 29 +does direct that the "motion . . . be accompanied by the proposed brief," Rule 210(d) itself +contains no such requirement.7 To the contrary, the Commission's Rules of Practice state that +that an "amicus brief may"—not must—"be filed conditionally with the motion for leave."8 + +The Division's third argument is that ZLCA's motion failed "even to identify its +members" whose financial statements are audited by respondents, and so did not adequately set +forth ZLCA's interest in the proceeding. It relies, again, on Federal Rule of Appellate Procedure +29, which requires amicus briefs filed in the federal courts of appeals to include, among other +things, a corporate disclosure statement and "a concise statement of the identity of the amicus +curiae." +9 Rule 210 imposes no comparable requirements, however. At any rate, it appears clear +what ZLCA's asserted interest is: The motion represents that some of ZLCA's members are +audited by respondents and face a risk of being delisted if the initial decision is upheld and they +cannot find a replacement auditor. +10 Although it remains to be determined how well-founded +this fear is, Rule 210(d) does not require that an amicus prove with certainty that its interests will +be harmed by an adverse result in the proceeding. + +Finally, the Division argues that the ZLCA's intended brief will not assist with the +Commission's decisionmaking, and so is not "desirable" within the meaning of Rule 210. It + +5 Adopting Release: Rules of Practice, Exchange Act Release No. 35833, 1995 WL +368865, 60 Fed. Reg. 32738, 32759 (June 9, 1995). +6 E.g., David J. Checkosky, Exchange Act Release No. 31094, 1992 WL 211479 (Aug. 26, +1992). The Division cites a law judge's order denying leave to file an amicus brief, but the +Commission is "not bound by a law judge's initial decision and decline[s] to apply the law +judge's reasoning here." Absolute Potential, Inc., Exchange Act Release No. 71866, 2014 WL +1338256, at *8 n.48 (Apr. 4, 2014). +7 Adopting Release, 60 Fed. Reg. at 32759; Fed. R. App. P. 29(b). +8 17 C.F.R. § 201.210(d)(2) (emphasis added). +9 Fed. R. App. P. 29(c)(1), (4). +10 See generally Securities Industry and Financial Markets Association, Exchange Act +Release No. 72182, 2014 WL 1998525, at *7 (May 16, 2014) (explaining that associational +standing standard employed by the federal courts allows an association to raise claims that do +"not turn on the identity of the particular member" advancing them). +4 + +asserts that ZLCA lacks any special expertise regarding the issues and that its brief likely would +repeat many of the same arguments raised by respondents themselves—e.g., ZLCA's argument +that imposing practice restrictions on respondents would have adverse collateral consequences +on issuers and investors. ZLCA replies that its amicus brief will offer the "perspective of issuers +and their shareholders" and "policy insights" that otherwise will not be presented by the parties. + +In part, the Division's point is well taken. The purpose of an amicus brief is to set forth a +position on the "legal or policy issues in the proceeding" in a way that "add[s] something +distinctive to the presentation of the issues, rather than serving as a mere conduit for the views of +one of the parties." +11 An amicus brief that "merely duplicate[s] the arguments of the parties . . . +waste[s] the court's time."12 But some amount of overlap is inevitable—especially since an +amicus may not inject new "issues that have not been presented by the parties"13 or enlarge the +record with new evidence bearing on adjudicative facts14—so an amicus need not show that the +parties are inadequately or incompletely briefing the case.15 Furthermore, because the decision +whether to grant leave to file typically is made at an early stage of review proceedings, and +because the Commission's rules do not require that the proposed amicus brief be tendered along + +11 Adopting Release, 60 Fed. Reg. at 32759; 16AA Wright, Miller & Cooper, Federal +Practice and Procedure: Jurisdiction § 3975.1 (4th ed. 2014). +12 Neonatology Assocs., P.A. v. C.I.R., 293 F.3d 128, 133 (3d Cir. 2002) (Alito, J., in +chambers); Nat'l Org. for Women, Inc. v. Scheidler, 223 F.3d 615, 617 (7th Cir. 2000). +13 Eldred v. Reno, 239 F.3d 372, 378 (D.C. Cir. 2001); see also Federal Practice and +Procedure: Jurisdiction § 3975.1 & n.4 (collecting cases). +14 See, e.g., Weinstock v. Columbia University, 224 F.3d 33, 46 (2d Cir. 2000); Eagle- +Picher Industries, Inc. v. Liberty Mut. Ins. Co., 682 F.2d 12, 22 n.8 (1st Cir. 1982); Smith v. +United States, 343 F.2d 539, 541 (5th Cir. 1965). +15 Neonatology Assocs., 293 F.3d at 131. The Division asserts that the Commission applied +a different standard in KMPG Peat Marwick LLP, Exchange Act Release 44050, 2001 WL +223378 (Mar. 8, 2001). There, the Commission issued an opinion finding that the respondent, an +accounting firm, had violated Rule 2-02(b) of Regulation S-X. Almost a month after the +respondent filed a motion for reconsideration, a professional association sought leave to file an +amicus brief. Id. at *7 n.18. In denying the motion for leave to file an amicus brief, the +Commission relied upon the untimeliness of that motion, the association's failure to provide any +explanation for the delay, and the fact that the Rules of Practice explicitly forbid unsolicited +responses to motions for reconsideration. Thus, in the context of "amicus filings on +reconsideration," the Commission held that "only under extraordinary circumstances" would +leave to file an amicus brief be granted. Id.; cf. also D.C. Cir. R. 35(f) ("No amicus curiae brief +in response to or in support of a petition for rehearing en banc will be received by the clerk +except by invitation of the court."). The professional association's proposed brief, which "merely +reiterate[d]" the respondent's arguments urging reconsideration, did not satisfy that standard. +Amicus participation in other contexts—e.g., before the Commission issues a final order—is not +governed by KMPG Peat Marwick LLP's "extraordinary circumstances" test. +5 + +with the motion seeking leave, it would be difficult, as a practical matter, to determine in +advance that amicus participation could not possibly contribute to the briefs of the parties. + +Considering these circumstances, we find that ZLCA has sufficiently described how its +intended brief might be "desirable" within the meaning of Rule 210(d)(2) and, accordingly, have +determined to allow ZLCA to file an amicus brief. If that brief merely repackages respondents' +arguments, it is unlikely to make a contribution to the Commission's resolution of this +proceeding. After the amicus brief has been filed, the Division may seek leave for a modest +expansion of the length limitation for its combined principal and response brief if it demonstrates +that additional space is essential to answering the amicus. + +Accordingly, it is ORDERED that ZLCA's motion for leave to file an amicus brief is +GRANTED. ZLCA shall file its amicus brief, not to exceed 5,000 words in length, within the +time allowed for the appealing respondents to file their consolidated opening brief. + +For the Commission, by the Office of General Counsel, pursuant to delegated authority. + + + Lynn M. Powalski + Deputy Secretary + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3575.pdf b/raw/aaer/2014/AAER-3575.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0a060447910adb42cddc1b7371f0c1cf17110184 Binary files /dev/null and b/raw/aaer/2014/AAER-3575.pdf differ diff --git a/raw/aaer/2014/AAER-3580.pdf b/raw/aaer/2014/AAER-3580.pdf new file mode 100644 index 0000000000000000000000000000000000000000..859f3f3df2bbce6ab8c3eeeb5f201f73bd43991c Binary files /dev/null and b/raw/aaer/2014/AAER-3580.pdf differ diff --git a/raw/aaer/2014/AAER-3589.txt b/raw/aaer/2014/AAER-3589.txt new file mode 100644 index 0000000000000000000000000000000000000000..db0ce553ebad621e7fc24cf734d561ab21e81772 --- /dev/null +++ b/raw/aaer/2014/AAER-3589.txt @@ -0,0 +1,193 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73294 / October 3, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3589 / October 3, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16186 + + + +In the Matter of + + PETER A. JENSON, Chartered +Accountant + +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 Peter A. Jenson, +Chartered Accountant (“Respondent” or “Jenson”) pursuant to Section 4C1 of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +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 + + 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. Respondent admits +the facts set forth in Annex A attached hereto, acknowledges that his conduct violated federal +securities laws, admits the Commission’s jurisdiction over him and the subject matter of these +proceedings, and consents to the entry of this Order Instituting Public Administrative +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. RESPONDENT +Peter A. Jenson, age 48, was a Managing Director and the Chief Operating Officer of +Harbinger Capital Partners LLC (“Harbinger”) from April 2009 through July 2011. Jenson is an +Australian citizen and resides in Winnetka, Illinois. Jenson was at one time licensed as a certified +public accountant in Maryland, but his license expired in 2007. Jenson has active designation as +a Chartered Accountant. Jenson previously was a Member of the Financial Services Institute of +Australia and previously held a Series 27 license. +B. FACTS +1. On August 13, 2013, Philip A. Falcone (“Falcone”) and Harbinger entered into a Final +Consent Judgment to resolve the claims asserted against them in the civil action 12-CV-5028 +(PAC) (the “Action”) pending in the United States District Court for the Southern District of +New York. As part of the Consent Judgment, Falcone and Harbinger admitted, among other +things, that on October 14, 2009, without seeking or obtaining investor consent, in connection +with the purchase, offer or sale of a security, Falcone improperly borrowed $113.2 million from +the Harbinger Capital Partners Special Situations Fund, L.P. (“SSF”) to pay his state and federal +taxes. +2. Jenson, Harbinger’s Chief Operating Officer, among other things, executed the loan +agreement and other transaction documents on behalf of the SSF in connection with the loan. +3. The loan agreement provided that “[t]he Lender’s counsel shall have provided advice to +the Lender to the effect that the making of the Loan … would not be inconsistent with the + +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 +Borrower’s fiduciary obligation to the Lender.” Jenson, however, did not ensure that SSF as +lender had separate counsel, and did not ensure that the loan was consistent with the Borrower’s +fiduciary obligation to the Lender. +4. Jenson also failed to ensure that Falcone paid an “above market” interest rate on the loan, +failed to timely disclose the loan to investors, and failed to take actions to cause the SSF to +accelerate Falcone’s payment on the loan once investors in the SSF were permitted to begin +redeeming their investments. +5. Jenson, with knowledge of Falcone’s and Harbinger’s violations in connection with the +loan, substantially assisted these violations. +6. On October 1, 2014, the U.S. District Court for the Southern District of New York +entered a final consent judgment against Jenson enjoining him from acting or being an associated +person of any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, +transfer agent, or nationally recognized statistical rating organization, as those terms are defined +in Section 3 of the Exchange Act and Section 202 of the Investment Advisers Act of 1940 +(“Advisers Act”). Jenson was further ordered to pay a civil penalty in the amount of $200,000 to +the Commission. +IV. +In view of the foregoing, the Commission finds that Jenson willfully aided and abetted +violations of Section 206 of the Advisers Act and further the Commission deems it appropriate +pursuant to Rule 102(e)(1)(iii) of the Commission’s Rules of Practice to impose the sanctions +agreed to in Jenson’s Offer. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Jenson is denied the privilege of appearing or practicing before the Commission +as an accountant. +B. After two 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 +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: + + 4 +(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. +C. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that he obtains a state CPA license 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. + +By the Commission. + +Brent J. Fields +Secretary + + + 5 +ANNEX A +Peter A. Jenson (“Jenson”) admits to the facts set forth below and acknowledges that his +conduct violated the federal securities laws: +1. On August 13, 2013, Philip A. Falcone (“Falcone”) and Harbinger Capital +Partners LLC (“Harbinger”) entered into a Final Consent Judgment to resolve the claims asserted +against them in the civil action 12-CV-5028 (PAC) (the “Action”) pending in the United States +District Court for the Southern District of New York. As part of the Consent Judgment, Falcone +and Harbinger admitted, among other things, that on October 14, 2009, without seeking or +obtaining investor consent, in connection with the purchase, offer or sale of a security, Falcone +improperly borrowed $113.2 million from the Harbinger Capital Partners Special Situations +Fund, L.P. (“SSF”) to pay his state and federal taxes. +2. Jenson, Harbinger’s Chief Operating Officer, among other things, executed the +loan agreement and other transaction documents on behalf of the SSF in connection with the +loan. +3. The loan agreement provided that “[t]he Lender’s counsel shall have provided +advice to the Lender to the effect that the making of the Loan … would not be inconsistent with +the Borrower’s fiduciary obligation to the Lender.” Jenson, however, did not ensure that SSF as +lender had separate counsel, and did not ensure that the loan was consistent with the Borrower’s +fiduciary obligation to the Lender. +4. Jenson also failed to ensure that Falcone paid an “above market” interest rate on +the loan, failed to timely disclose the loan to investors, and failed to take actions to cause the SSF +to accelerate Falcone’s payment on the loan once investors in the SSF were permitted to begin +redeeming their investments. +5. Jenson, with knowledge of Falcone’s and Harbinger’s violations in connection +with the loan, substantially assisted these violations. + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3593.pdf b/raw/aaer/2014/AAER-3593.pdf new file mode 100644 index 0000000000000000000000000000000000000000..334e5cf57f38a5209f872cc7c14ebbc77cc45ae8 Binary files /dev/null and b/raw/aaer/2014/AAER-3593.pdf differ diff --git a/raw/aaer/2014/AAER-3615.txt b/raw/aaer/2014/AAER-3615.txt new file mode 100644 index 0000000000000000000000000000000000000000..d5158bf0e31b5ffec19a20d39b7da61c849eb8b1 --- /dev/null +++ b/raw/aaer/2014/AAER-3615.txt @@ -0,0 +1,763 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73862 / December 17, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3615 / December 17, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16324 + + +In the Matter of + +BAKER TILLY HONG +KONG LIMITED, ANDREW +DAVID ROSS, CPA, and +KWOK LAIHA HELENA, +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 Baker Tilly +Hong Kong Limited (“Baker Tilly”), Andrew David Ross (“Ross”), and Kwok Laiha Helena +(“Kwok”) (collectively, the “Respondents”), pursuant to Sections 4C1 and 21C of the Securities + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess the +requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to have engaged in +unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder. + +2 + +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice.2 + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (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 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 Respondents’ Offers, the Commission finds3 that: + +A. SUMMARY + + Baker Tilly, a PCAOB-registered audit firm located in Hong Kong, was retained to audit the +December 31, 2009, financial statements of China North East Petroleum Holdings Limited +(“CNEP”), a Nevada corporation with operations exclusively in the People’s Republic of China +(“China”). During that audit, from January 2010 until at least September 2010, Baker Tilly and +two of its directors (the equivalent of a partner at a U.S. firm), Ross and Kwok, engaged in +improper professional conduct, including violations of PCAOB auditing standards, with regard to +material related-party transactions among CNEP, its Chief Executive Officer (“CEO”), Wang +Hongjun (“Wang”), the CEO’s mother, Ju Guizhi (“Ju”), and others.4 Respondents also violated +Section 10A(a)(2) of the Exchange Act, dealing with audit procedures to identify related-party +transactions. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +4 On November 29, 2012, the Commission filed a lawsuit in the U.S. District Court for the Southern District +of New York against CNEP, its Chief Executive Officer (Wang Hongjun), the CEO’s mother (Ju Guizhi), and a +CNEP vice president (Chao Jiang), alleging fraud and related charges. The complaint also named two relief +defendants, Wang’s wife and Chao’s father, to whom large sums had been transferred from company funds. See +SEC v. China North East Petroleum Holdings Limited et al., Case No. 12-cv-8696 (S.D.N.Y.). +3 + + + During the course of the CNEP audit, Respondents were advised that CNEP had engaged +in 176 related-party transactions totaling over $59 million in 2009. Respondents also encountered +numerous “red flags” suggesting that these related-party transactions involved a high risk of fraud, +e.g., the chairman of CNEP’s Audit Committee resigned due to concerns relating to these +transactions, and Baker Tilly itself determined that CNEP’s internal controls relating to such +transactions were seriously deficient. Respondents, however, failed to plan and implement an +appropriate audit response to these related-party transactions in compliance with PCAOB +standards. Further, contrary to generally accepted accounting principles in the United States of +America (“U.S. GAAP”), CNEP’s December 31, 2009 financial statements did not disclose the +related-party transactions other than as a single entry showing a small, net balance due to the CEO. +Nonetheless, Baker Tilly issued an audit report containing an unqualified opinion regarding +CNEP’s 2009 financial statements. That report, which Respondents knew would be filed with the +company’s 2009 Form 10-K, inaccurately stated that the audit had been conducted in accordance +with PCAOB standards and that CNEP’s financial statements fairly presented the company’s +position and results in conformity with U.S. GAAP. + +B. RESPONDENTS + +1. Baker Tilly Hong Kong Limited (“Baker Tilly”) is a PCAOB-registered audit +firm based in Hong Kong. + +2. Andrew D. Ross (“Ross”), age 60, is a subject of the United Kingdom and resides +in Hong Kong. Ross is a member of the Hong Kong Institute of Certified Public Accountants +(“HKICPA”) and the Institute of Chartered Accountants of Scotland. Ross is the managing +director of Baker Tilly and is the Chairman of its executive committee. Ross was the lead +engagement director on the December 31, 2009 CNEP audit and authorized the issuance of Baker +Tilly’s audit report. As lead engagement director with primary responsibility for the audit, Ross +was ultimately responsible for being satisfied that: (1) the direction, supervision, performance, and +review of the audit engagement was in compliance with professional standards, applicable legal +and regulatory requirements, and the firm’s policies and procedures; (2) the auditor’s report was +appropriate in the circumstances of the audit engagement; (3) sufficient competent evidential +matter had been obtained to support the conclusions reached and the auditor’s report to be issued; +and (4) the audit team had engaged in appropriate consultation on significant matters. + +3. Kwok Laiha Helena a/k/a Helena Kwok (“Kwok”), age 47, is a Hong Kong +citizen and resides in Hong Kong. Kwok is a member of the HKICPA and is a fellow member of +the Association of Chartered Certified Accountants and an international affiliate of the American +Institute of Certified Public Accountants. Kwok was a shareholder and director at Baker Tilly and +functioned as the director in charge of the 2009 year-end audit of CNEP. Kwok was responsible +for the day-to-day supervision of the 2009 audit, but did not have authority to sign the audit report. +In particular, following the merger of CNEP’s prior auditor with Baker Tilly, Kwok became +directly responsible for: (1) planning and designing the audit, (2) supervising the Baker Tilly staff +in performing the audit steps, (3) reviewing their work and the workpapers and signing off on those +4 + +steps, (4) considering the competence and capabilities of individual engagement team members, +(5) addressing significant findings or issues arising during the audit engagement and, if necessary, +making appropriate modifications to the planned audit approach, and (6) identifying matters for +consultation or consideration by qualified engagement team members during the audit engagement. +Kwok essentially had delegated responsibility for overall engagement performance. + +C. OTHER RELEVANT ENTITY + +4. China North East Petroleum Holdings Limited (“CNEP”) is a Nevada +corporation engaged in oil exploration, production and drilling in the People’s Republic of China +(“China”). CNEP became a U.S. issuer in April 2004 through a reverse merger with a British +Virgin Islands shell corporation. CNEP’s common stock was registered with the Commission +pursuant to Section 12(b) of the Exchange Act and was listed on the NYSE MKT, LLC (“NYSE”). +On July 6, 2012, NYSE filed a Form 25 delisting the common stock effective on July 16, 2012, +and deregistering the common stock from Section 12(b) effective on October 4, 2012. Upon +deregistration from Section 12(b), the common stock reverted to its previous registration pursuant +to Section 12(g) of the Exchange Act. On April 5, 2013, the Commission entered an order +pursuant to Section 12(j) of the Exchange Act revoking the registration of each class of CNEP’s +securities registered pursuant to Section 12 of the Exchange Act. + +D. FACTS + +CNEP’s December 31, 2009 Financial Statements Filed on Form 10-K +Failed To Disclose Material Related-Party Transactions + +5. CNEP conducts business through four subsidiaries in China: Song Yuan North +East Petroleum Technical Services Co., Ltd.; Song Yuan Yu Qiao Oil & Gas Development Co., +Ltd.; Song Yuan Tiancheng Drilling Engineering Co., Ltd.; and Changling Longde Oil and Gas +Exploration Co., Ltd. + +6. From 2004 through 2008, CNEP’s annual financial statements were not audited by +Baker Tilly, but by another firm also located in Hong Kong (the “Former Auditor”). In late 2009, +the Former Auditor and Baker Tilly began discussions regarding a potential merger of the Former +Auditor’s U.S. audit practice into Baker Tilly. That merger became effective on January 29, 2010, +at which time the Former Auditor resigned as CNEP’s auditor and CNEP engaged Baker Tilly as +the auditor for its 2009 year-end financial statements. At the time of the merger, a majority of the +audit field work had been completed by the staff of the Former Auditor, several of whom joined +Baker Tilly following the merger. + +7. On April 14, 2010, the chairman of CNEP’s audit committee raised questions +concerning a line item in the draft financial statements indicating that $3.89 million was due to +CNEP from a shareholder. The company’s chief financial officer (“CFO”) indicated that this +reflected monies due to the company from another CNEP director, Ju, the mother of CNEP’s CEO. +Thereafter, the CFO acknowledged to the audit committee that Wang and Ju regularly transferred +5 + +cash to and from the company and their personal bank accounts. + +8. This information regarding related-party transactions prompted the audit committee +to retain a forensic accounting firm to review the $3.89 million balance and evaluate the +company’s internal controls over such transactions. After receiving a preliminary report from the +forensic accounting firm, the Board of Directors placed CEO Wang on leave and accepted his +resignation as Chairman of the Board on May 23, 2010. The same day, the Board also accepted his +mother’s resignation as a director. + +9. On July 10, 2010, the forensic accounting firm submitted its final report, which +identified 176 related-party transactions totaling approximately $59 million during 2009, and found +that there were “critical deficiencies in [CNEP’s] internal control procedures” (the “July 2010 +Forensic Report”). The $59 million in related-party transactions included approximately $28 +million paid from CNEP to Wang and Ju.5 It also included approximately $11 million that Wang +and Ju allegedly loaned to CNEP, as well as expenses paid by Wang and Ju on behalf of CNEP. +The report also noted that the approximately $20 million that would have remained due from +Wang and Ju at the end of 2009 was reduced to zero through year-end consolidation and post-year- +end closing adjustments that lacked supporting documentation or were otherwise questionable. + +10. The forensic accounting firm stated in its report that “[o]ur review has found no +evidence to suggest that funds transferred to either Ms. Ju or Mr. Wang were withdrawn for her/his +personal use, but has identified that funds transferred to the personal accounts of Ms. Ju and Mr. +Wang have been recorded . . . and applied to make payments related to the operations of” +CNEP. The forensic accounting firm also stated in its report that “[w]hilst our review has involved +an analysis of financial information and accounting records, it does not constitute an audit or an +assurance assignment in accordance with Hong Kong or International Standards on Auditing, on +Review Engagements or on Assurance Engagements and accordingly, no such assurance is +provided in this report.” Moreover, notwithstanding what the forensic accounting firm wrote in its +report, there is substantial evidence that company funds were transferred to company insiders and +their family members for personal use. + +11. The July 2010 Forensic Report identified numerous additional red flags and internal +control deficiencies and failures, including: + + The ability of management to override internal controls and access CNEP’s bank +accounts. + + Unauthorized related-party transactions, including cash withdrawals, payments to +vendors, and investments made by insiders on behalf of CNEP without +authorization were possible, in part, because of insufficient verification of +payments. + +5 The approximately $28 million that went from CNEP to Wang and Ju was approximately 41% of CNEP’s +2009 reported annual revenues of approximately $68 million. +6 + + Inadequate segregation of duties among employees in accounts payable and cash +management areas that could result in the misappropriation of company funds. + Failure to implement and comply with Chinese Interim Cash Control Regulations +and Internal Policy concerning cash disbursements, including the lack of a policy +related to amounts that could be advanced to company personnel to make purchases +on behalf of the company. + Incomplete audit trail for the related-party transactions. + Convoluted and inappropriate account offsets of amounts owed to CNEP by +insiders, including Wang and Ju, based on agreements that were largely unsigned +and contained contradictory statements or amounts. + Insufficient internal controls to require written approval for the period-end +adjustments could result in intentional or unintentional errors in financial +statements. + Varied explanations and numerous other anomalies were noted in documentation of +the transactions related to fixed assets prepayments to suppliers purportedly paid +through the Ju’s personal account. + +12. The July 2010 Forensic Report stated that it was not an audit of the related-party +transactions or any other part of the CNEP financial statements. Nevertheless, after receiving the +July 2010 Forensic Report on or about July 12, 2010, Ross, Kwok and the engagement team failed +to (i) adequately review the report, (ii) adequately revise the firm’s audit planning regarding fraud +risks, or (iii) audit the material related-party transactions in accordance with PCAOB standards. + +13. On May 27, 2010, CNEP announced that its CFO had resigned. The new (acting) +CFO was unwilling to sign the management representation letter because he was unfamiliar with +CNEP’s historical financial information. Ross, Kwok, and the engagement team ultimately +accepted a management representation letter signed only by the acting CEO, who had only three +weeks earlier been assigned principal financial officer responsibilities. On August 8, 2010, the +chairman of CNEP’s audit committee resigned, indicating that he believed the company had not +adequately addressed the findings of the July 2010 Forensic Report. + +14. On September 3, 2010, CNEP’s financial statements were filed with the +Commission as part of CNEP’s 2009 Form 10-K. The material related-party transactions were +not disclosed in detail in the notes to the financial statements. CNEP disclosed only that as of +December 31, 2009, the company owed a stockholder $89,269. CNEP did not disclose that the +stockholder was CEO Wang or that the $89,269 was the net result of 176 separate transactions +between the company and Wang or his mother or that they totaled approximately $59 million. +Thus, the financial statements and notes thereto provided no information regarding the description +of the transactions, the nature of the relationships involved, the amounts involved, the terms and +manner of settlement of the transactions, and such other information as may be deemed necessary +7 + +to understand the effects of the significant and unusual transactions on the financial statements as +required by U.S. GAAP. Nor did the financial statements indicate that many of the transactions +involved the CEO’s family members. + +15. Nonetheless, Baker Tilly issued an audit report containing an unqualified opinion +that was filed with CNEP’s financial statements in the Form 10-K. In that report, Baker Tilly +inaccurately stated that the audit had been conducted in accordance with PCAOB standards and +that CNEP’s financial statements fairly presented the company’s position and results in conformity +with U.S. GAAP. + +Baker Tilly, Ross, and Kwok Failed to Conduct +the CNEP Audit in Accordance with PCAOB Standards + + Failed to exercise due professional care and lacked professional skepticism + (AU §§ 230 and 334) + +16. 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 should be +assigned and supervised commensurate with their level of knowledge, skill, and ability, so that +they can evaluate the audit evidence they are examining. The auditor with final responsibility for +the engagement should know, at a minimum, the relevant accounting and auditing standards and +should be knowledgeable about the client. (AU § 230.06) 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) +Additionally, PCAOB standards dealing directly with related-party transactions require that “an +auditor should view related-party transactions within the framework of existing [accounting] +pronouncements, placing primary emphasis on the adequacy of disclosure.” (AU § 334.02) + +17. Ross, Kwok, and other Baker Tilly personnel exhibited a lack of understanding of +applicable U.S. professional accounting and auditing standards regarding: (i) disclosure of related- +party transactions and (ii) audit procedures and documentation. Generally, Ross, Kwok, and the +Baker Tilly staff involved in this audit lacked adequate professional training in U.S. GAAP. Ross +and Kwok indicated that they received approximately two days of training in U.S. GAAP each +year. Kwok had never previously been involved in the audit of a U.S. issuer. + +18. Respondents failed to exercise the requisite level of care or perform a critical +assessment of the audit evidence. Well before the audit report was issued, they were aware that +CNEP was engaged in material related-party transactions, including loans to and from insiders, +convoluted offsetting agreements, payments to vendors on behalf of CNEP, investments by +insiders on behalf of CNEP, and reimbursements to insiders. Nevertheless, Baker Tilly issued an +audit report containing an unqualified opinion even though CNEP failed to properly disclose the +8 + +material related-party transactions in its financial statements as required by U.S. GAAP.6 + +19. Respondents also failed to exercise an appropriate level of skepticism about the +significant and unusual related-party transactions and the explanations and documentation +provided by CNEP. They failed to: (i) obtain an adequate understanding of their nature, purpose +and extent; (ii) determine whether such transactions were approved at appropriate levels within the +organization; (iii) adequately consider the implications of significant deficiencies in the system of +internal controls surrounding related-party transactions; (iv) address the risks associated with +routine transfers of significant CNEP funds into the personal bank accounts of insiders; (v) obtain +sufficient evidence to substantiate the related-party transactions, including significant post-year- +end adjustments; and (vi) resolve inconsistencies in the evidence presented and explanations +obtained. There is insufficient evidence in Respondents’ workpapers that they questioned these +transactions or instructed the audit team that specific testing must be designed to address the risks +associated with these unusual transactions. + + Failed to adequately plan the audit (AU §§ 311 and 316) + +20. Ross, Kwok, and the Baker Tilly engagement team failed to adhere to the PCAOB +standards relating to audit planning because they did not obtain adequate knowledge of CNEP’s +business or properly consider the risks of material misstatement due to fraud at CNEP. + +21. An auditor must adequately plan the audit and properly supervise assistants. (AU +§ 311.01) In planning the audit, the auditor should obtain a level of knowledge of the entity’s +business that will enable him to plan and perform his audit in accordance with PCAOB Standards. +As the audit progresses, changed conditions may make it necessary to modify planned audit +procedures. (AU § 311.05.) The auditor should obtain an understanding the events, transactions, +and practices that, in his judgment, may have a significant effect on the financial statements. +Knowledge of the entity’s business helps the auditor to, among other things, identify areas that +may need special consideration, assess conditions under which accounting data are produced, +processed, reviewed and accumulated within the organization, and evaluate the reasonableness of +management representations. (AU § 311.06.) In planning the audit, the auditor should also +consider, among other matters, the entity’s accounting policies and procedures, and planned +assessed level of control risk. (AU § 311.03.) + +22. The auditor must plan and perform the audit to obtain reasonable assurance about +whether the financial statements are free of material misstatement, whether caused by error or +fraud. (AU § 316.01) The audit engagement team, including the auditor with final responsibility + +6 In particular, Financial Accounting Standards Board Accounting Standards Codification Topic 850 (“ASC +850”), formerly known as Statement of Financial Accounting Standards No. 57, provides that financial statements +shall include disclosures of material related-party transactions, including a description of the transactions, the nature +of the relationships involved, the dollar amount of the transactions, the terms and manner of settlement of amounts +due from or to related parties (if not otherwise apparent), and such other information deemed necessary to an +understanding of the effects of the transactions on the financial statements. +9 + +for the audit, is required to discuss the risk of material misstatement due to fraud and obtain +information needed to identify such risk. This includes the obligation to make inquiries of +management, those charged with governance, and others within the company regarding such risk. +(AU § 316, at .14-.27.) + +23. Respondents failed to obtain an adequate understanding of CNEP’s business and +business environment, including its accounting policies and procedures, internal controls, and the +risk of material error or fraud from related-party transactions. Kwok did not meet any CNEP +personnel in person until 2011. Ross never visited CNEP’s offices or any of its field operations, +and never spoke to Baker Tilly’s main contact, the CFO, prior to finalizing the 2009 audit opinion +and therefore was not knowledgeable about the client or its business. + +24. Respondents failed to adequately plan the audit. There is no indication in the +workpapers that Ross reviewed the audit planning documents. As the audit progressed, new +information and changed conditions should have caused Respondents to re-evaluate and modify +the procedures in accordance with AU 311.05. However, the audit plan was not revised after the +Respondents received the July 2010 Forensic Report, which noted that the 176 related-party +transactions occurred during 2009. + +25. Ross and Kwok failed to consider numerous indications of possible fraud risk in the +overall risk analysis and audit planning. Correspondingly, Respondents failed to develop audit +procedures tailored to the true risks presented by the related-party transactions. In particular, +related-party transactions were not identified as a risk area. + +Failed to design procedures tailored to the risk of misstatement and failed to +properly document audit risk (AU §§ 311 and 312) + +26. The auditor is required to perform risk assessment procedures when planning and +performing an audit of financial statements in accordance with PCAOB Standards. (AU § 312.01) +Ordinarily, higher risk requires more experienced personnel or more extensive supervision, during +both the planning and the conduct of the engagement. Additionally, higher risk may cause the +auditor to expand the procedures applied or modify the procedures to obtain more persuasive +evidence. (AU § 312.17) + +27. Further, the auditor should consider conditions that may require extension or +modification of audit tests, such as the existence of related-party transactions. (AU § 311.03g) An +audit of financial statements is a cumulative process and the audit evidence obtained may cause the +auditor to modify the planned procedures. (AU § 312.33) + +28. In view of the information in the July 2010 Forensic Report, including the +significant deficiencies in internal controls surrounding the related-party transactions and the +ability of management to override internal controls to access CNEP’s bank accounts, Respondents +should have considered identifying additional risk areas and requiring corresponding additional +testing. +10 + +Failed to obtain sufficient competent evidential matter and properly audit related- +party transactions (AU §§ 326, 330, and 334) + +29. An auditor must obtain sufficient competent evidential matter to provide a +reasonable basis for an audit opinion. (AU § 326.01) In selecting particular substantive tests to +achieve the audit objectives, an auditor considers, among other things, the risk of material +misstatements. (AU § 326.11) Evidential matter from independent sources outside the issuer +provides greater assurance of reliability than information obtained solely from within the entity. +(AU § 326.21) With respect to related-party transactions, after an auditor identifies related-party +transactions, he or she 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) Where disclosure of a transaction is required, the auditor +must satisfy himself that the transaction is adequately disclosed in the financial statements. (AU +§ 334.11) The higher the auditor’s assessment of risk regarding related-party transactions, the +more extensive or effective the audit tests should be. (AU § 9334.19) + +30. If an entity has entered into an unusual or complex transaction and the combined +assessed level of inherent and control risk is high, the auditor should consider confirming the terms +of the transaction with the other parties. (AU § 330.08) The auditor should assess whether the +evidence provided by confirmations reduces audit risk for the related assertions to an acceptably +low level. In making that assessment, the auditor should consider the materiality of the account +balance and the control risk assessment. If the evidence provided by confirmations is not +sufficient, additional procedures should be performed. (AU § 330.09) + +31. Respondents failed to obtain sufficient evidence regarding CNEP’s related-party +transactions to support an unqualified audit opinion. Respondents failed to identify related parties, +failed to identify all related-party transactions, and failed to perform adequate procedures to gain +an understanding of the business purposes, nature and impact of the material related-party +transactions that were identified. Respondents also failed to obtain audit evidence that would +justify CNEP’s failure to adequately disclose the material related-party transactions. + +32. CNEP engaged in approximately $59 million in related-party transactions in 2009. +However, the scope of the Hong Kong accounting firm’s engagement and its July 2010 Forensic +Report focused on the $3.89 million balance identified by the audit committee chairman. Baker +Tilly’s workpapers do not reflect that Ross Kwok, or anyone on the engagement team made +meaningful inquiry as to the nature or business purpose of the other material related-party +transactions, or that they performed sufficient substantive procedures to verify those transactions. + +33. Post year-end closing adjustments significantly reduced the amounts that Wang and +Ju owed CNEP; however, Respondent’s testing in this area was limited. According to the July +2010 Forensic Report, the post year-end adjustments included transactions to record $5.0 million in +“balance transfers” due from CNEP to Wang and Ju and $6.7 million related to the “amount paid +11 + +by Ms. Ju for acquiring Tian Cheng.” Nothing in Respondents’ workpapers indicates that they +applied sufficient procedures to substantiate these post year-end adjustments. + +34. Another of the 176 related-party transaction involved Wang’s purported capital +infusion of $4.6 million into CNEP’s subsidiary Song Yuan Technical on September 23, 2009. +However, according to the bank statement for the account in which CNEP’s 2009 offering +proceeds were deposited, the $4.6 million was transferred from CNEP, not Wang. Baker Tilly’s +workpapers contain conflicting accounts of the source of the $4.6 million. Respondents failed to +determine and document the true source of the $4.6 million before issuing the audit report +containing an unqualified opinion. + +35. To test whether Wang was owed substantial sums by CNEP, Respondents sent the +confirmation papers to Wang himself. Wang was not a third-party and, given the risk, this +“confirmation process” was not sufficient to determine the completeness, existence or accuracy of +the purported debt to Wang. As such, additional evidence should have been obtained but was not. + + Failed to prepare and retain adequate audit documentation (AS 3) + +36. PCAOB Auditing Standard (“AS”) No. 3 requires that audit documentation contain +sufficient information to enable an experienced auditor, having no previous connection with the +engagement, to understand: the procedures performed; the results and evidence obtained; the +conclusions reached; who performed and reviewed the work; and the dates such work was +completed and reviewed. (AS 3.06) Respondents failed to comply with these requirements. + +37. The audit documentation maintained by Ross, Kwok, and the Baker Tilly +engagement team 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. The work papers +frequently do not reflect the name of the preparer, the date the work was done, the date the papers +were prepared, or the date the papers were reviewed. + +38. The audit documentation does not adequately reflect Respondents’ findings and +conclusions regarding the related-party transactions, including post year-end adjustments. Nor do +the workpapers address the fundamental questions of whether CNEP was required by U.S. GAAP +to disclose the material related-party transactions in its financial statements. + +39. Respondents’ workpapers do not contain sufficient evidence with respect to the +accounts payable and related payments by Ju purportedly paid to reduce amounts she owed to +CNEP. The main focus of the July 2010 Forensic Report was the $3.89 million of vendor +payments purportedly made by Ju to eight suppliers on behalf of the company. + + +12 + +E. VIOLATIONS + +Rule 102(e) and Section 4C of the Exchange Act + +40. 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. These provisions 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. + +41. 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. + +42. Ross’s and Kwok’s failures to abide by PCAOB standards in the audit of CNEP’s +year-end financial statements for 2009 constitute repeated instances of unreasonable conduct, +and also satisfy the highly unreasonable conduct standard. + +43. Baker Tilly’s failures to abide by PCAOB standards in the audit of CNEP’s year- +end financial statements for 2009 satisfy the one instance of highly unreasonable conduct +standard. + +Respondents Violated Section 10A(a)(2) of the Exchange Act + +44. Section 10A(a)(2) of the Exchange Act requires 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.” +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). + +45. In connection with the 2009 CNEP audit, Respondents violated Section 10A(a)(2) +of the Exchange Act by failing to plan, design, and carry out audit procedures to identify CNEP’s +material related-party transactions that required disclosure in the financial statements. + +13 + +F. FINDINGS + +46. Based on the forgoing, the Commission finds that Baker Tilly, Ross, and Kwok +engaged in improper professional conduct pursuant to Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice and Section 4C of the Exchange Act. + +47. Additionally, the Commission finds that Baker Tilly, Ross, and Kwok violated +Section 10A(a)(2) of the Exchange Act. + +G. UNDERTAKINGS + +Baker Tilly Shall Retain an Independent Consultant +47. Baker Tilly has undertaken to retain, within thirty days after the entry of this +Order, an independent consultant (“Independent Consultant”), not unacceptable to the +Commission staff. The Independent Consultant will review and evaluate the audit and interim +review policies and procedures of Baker Tilly regarding: (i) identifying and disclosing related- +party transactions; (ii) training in client fraud detection; (iii) exercising due professional care and +professional skepticism; (iv) audit planning; (v) performing proper risk assessment; (vi) +designing procedures tailored to the risk of misstatement; (vii) obtaining sufficient appropriate +audit evidence; (viii) document retention; (ix) third-party confirmations; (x) work paper sign-off +and dating; and (xi) adequate audit documentation. The Independent Consultant’s review and +evaluation will assess the forgoing areas to determine whether Baker Tilly’s policies and +procedures are adequate and sufficient to ensure compliance with Commission regulations and +with PCAOB standards and rules. Baker Tilly will cooperate fully with the Independent +Consultant and will provide reasonable access to firm personnel, information, and records as the +Independent Consultant may reasonably request for the Independent Consultant’s reviews and +evaluations. Baker Tilly will provide to the Commission staff a copy of the engagement letter +detailing the scope of the Independent Consultant’s responsibilities. +48. Within sixty days of being retained, the Independent Consultant will issue a +written report (“Report”) to Baker Tilly: (a) summarizing the Independent Consultant’s review +and evaluation; and (b) making recommendations, where appropriate, reasonably designed to +ensure that audits conducted by Baker Tilly comply with Commission regulations and with +PCAOB standards and rules. The Independent Consultant will provide a copy of the Report to +the Commission staff and the PCAOB staff when the Report is issued. +49. Baker Tilly 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, Baker Tilly may advise the Independent Consultant in writing of any +recommendation that it considers to be unnecessary, unduly burdensome, or impractical. Baker +Tilly 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. Baker Tilly and the Independent Consultant +will engage in good-faith negotiations in an effort to reach agreement on any recommendations +objected to by Baker Tilly. +14 + +50. In the event that the Independent Consultant and Baker Tilly are unable to agree +on an alternative proposal within thirty days, Baker Tilly will abide by the determinations of the +Independent Consultant. +51. 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, Baker Tilly will certify to the Staff in +writing that it has adopted and has implemented or will implement all recommendations of the +Independent Consultant (“Certification of Compliance”). Baker Tilly will provide a copy of the +Certification of Compliance to the PCAOB staff. +52. Baker Tilly 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 Baker Tilly, 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 Baker Tilly, 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. +53. Baker Tilly 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 +Baker Tilly agrees to provide such evidence. The certification and supporting material shall be +submitted to Antonia Chion, Associate Director, Division of Enforcement, Securities and +Exchange Commission, 100 F St., N.E., Washington, D.C. 20549-5720B SP2, 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. +Baker Tilly Shall Not Accept New Audit Clients +54. Baker Tilly will not accept any new U.S. issuer audit clients between the date of +this Order and the issuance of the Certification of Compliance by the Independent Consultant. + +Baker Tilly Shall Provide Notice to its Current Audit Clients +55. Within 15 days of the entry of this order, Baker Tilly will provide notice of this +settlement to its current U.S. audit clients. +Respondents Shall Cooperate with the +Commission’s Investigation and Related Litigation +56. Baker Tilly, Ross, and Kwok hereby undertake that they shall cooperate fully with +the Commission in any and all investigations, litigations, administrative or other proceedings +15 + +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 Respondents agree to the following: (i) to produce, without service of a +notice or subpoena, any 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 Offers, the Commission has considered these undertakings. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Baker Tilly, Ross, and Kwok shall cease and desist from committing or causing any +violations and any future violations of Section 10A(a)(2) of the Exchange Act. + + B. Baker Tilly is censured. + + C. Ross and Kwok are denied the privilege of appearing or practicing before the +Commission as accountants. + + D. After three years from the date of this order, Ross and/or Kwok may request +that the Commission consider their 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) Ross or Kwok, or the public accounting firm with which he or she +is associated, is registered with the Public Company Accounting +Oversight Board (“PCAOB”) in accordance with the Sarbanes- +Oxley Act of 2002, and such registration continues to be effective; + +16 + + (b) Ross or Kwok, 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 Ross or Kwok +that would indicate that Ross or Kwok will not receive appropriate +supervision; + (c) Ross and/or Kwok have 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) Ross and/or Kwok acknowledges his or her responsibility, as long +as they appear or practice 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 reviews, and quality control standards. + +E. The Commission will consider an application by Ross and/or Kwok 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 Ross’s or Kwok’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission. + + F. Baker Tilly shall, within 30 days of the entry of this Order, pay disgorgement of +$75,000, which represents profits gained as a result of the conduct described herein, and +prejudgment interest of $9,101 to the Securities and Exchange Commission. If timely payment is +not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. + +G. Ross and Kwok shall, within 30 days of the entry of this Order, pay civil money +penalties in the amounts of $20,000 and $10,000, respectively, to the Securities and Exchange +Commission. If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +3717. + +H. Payments ordered in paragraphs F and G 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; + +17 + + (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 +Baker Tilly, Ross, or Kwok 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 St., NE, Washington, DC +20549. + +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 admitted by +Respondents, 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/2014/AAER-3618.pdf b/raw/aaer/2014/AAER-3618.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9f2c3c0658f4170954b148d5abc0c6db1e9e8fcd Binary files /dev/null and b/raw/aaer/2014/AAER-3618.pdf differ diff --git a/raw/aaer/2014/AAER-3618.txt b/raw/aaer/2014/AAER-3618.txt new file mode 100644 index 0000000000000000000000000000000000000000..50506affadf23723a00e10c371ed748ebf590212 --- /dev/null +++ b/raw/aaer/2014/AAER-3618.txt @@ -0,0 +1,43 @@ + + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73931 / December 23, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3618 / December 23, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15659 + + : +In the Matter of : + : + THOMAS D. MELVIN, CPA, : + : EXTENSION ORDER +Respondent. : + : + + + On December 23, 2014, Thomas D. Melvin, CPA (“Respondent”) requested an +extension to file a brief in support of the petition for review. Respondent represents that +the Division consents to this request. The briefing schedule in this matter ordered +Respondent to file his brief in support of the petition for review by December 26, 2014, +with a brief in opposition due January 26, 2015, and the reply brief, if any, by February 9, +2015. + Extensions of time are disfavored. It appears appropriate, however, to +grant an extension. + +Therefore, it is ORDERED that the time for filing Respondent’s brief is extended +to January 16, 2015. A brief in opposition shall be filed by February 17, 2015, and any +reply brief shall be filed by March 3, 2015. + + For the Commission, by its Secretary, pursuant to delegated authority. + + + + Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3917.txt b/raw/aaer/2018/AAER-3917.txt new file mode 100644 index 0000000000000000000000000000000000000000..0f798f56706a024b4898f95c103e860ed8fef972 --- /dev/null +++ b/raw/aaer/2018/AAER-3917.txt @@ -0,0 +1,168 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82554 / January 19, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3917 / January 19, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18344 + +In the Matter of + +JUSTIN SAMUEL CARY, 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 Justin +Samuel Cary (“Respondent” or “Cary”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice.1 + +II. + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III(2) below, which are admitted, Respondent +consents to the entry of this Order Instituting 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. Cary, age 35, is and has been a certified public accountant licensed to practice in the +State of California since April 2009. In his accounting career, Cary has worked in several positions +as an outside auditor and as an in-house accountant. From September 2013 until fall 2017, Cary +had been a consultant for NOW CFO, LLC (“NOW CFO”), an accounting outsourcing firm. In +addition, from July 2015 until fall 2017, Cary has been the chief financial officer, chief operating +officer, and a member of the board of directors for Praxsyn Corp., whose common stock is publicly- +traded and registered with the Commission. + +2. On January 5, 2018, a final judgment was entered against Cary, permanently +enjoining him from future violations of Sections 10(b) of the Exchange Act and Rule 10b-5 +thereunder, in the civil action entitled Securities and Exchange Commission v. Justin Samuel Cary, +Civil Action Number 8:17-cv-01649-DOC-JCG, in the United States District Court for the Central +District of California. Cary was also ordered to pay $8,140.25 in disgorgement of ill-gotten gains +from his sales of stock while participating in the fraud, and $514.78 in prejudgment interest, and an +$8,140.25 civil money penalty. + + 3. The Commission’s complaint alleged, among other things, that Cary engaged in +insider trading in the stock of Adaptive Medias, Inc. (“Adaptive Medias”), in advance of the +company’s February 1, 2016 announcement of an offer from a rival advertising technology firm +to acquire it in a cash-for-stock transaction at a steep premium to Adaptive Medias’ prevailing +market price. The complaint also alleged that in 2016, Cary was working at Adaptive Medias as +a consultant responsible for the company’s accounting. The complaint further alleged that on +January 28, 2016, Cary received an internal email from Adaptive Medias’ controller about a +soon-to-be-issued press release announcing that the company had received an acquisition offer at +a price nearly ten times its current trading price. According to the Commission’s complaint, just +six minutes later, Cary logged on to his personal online brokerage account and bought shares of +Adaptive Medias on the basis of that material non-public information. The complaint alleged +that after Adaptive Medias issued its press release announcing the acquisition offer, the +company’s share price increased 428%. Last, the complaint alleged that Cary quickly sold his +stock and netted a profit of $8,140.25 on his original $2,880.00 investment. + + 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 Doe’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Justin Samuel Cary is suspended from appearing or practicing before the +Commission as an accountant. + + B. After five years from the date of this order, Justin Samuel Cary 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 Cary’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 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) Justin Samuel Cary, 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) Justin Samuel Cary, 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 Cary’s or the firm’s quality control system that would +indicate that the respondent will not receive appropriate supervision; + 4 + (c) Justin Samuel Cary 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) Justin Samuel Cary acknowledges his/her 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. + +C. The Commission will consider an application by Justin Samuel Cary 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 Justin Samuel Cary’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. + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3918.txt b/raw/aaer/2018/AAER-3918.txt new file mode 100644 index 0000000000000000000000000000000000000000..f67187d57c78ad31070c4fabad1ec34bd2866dfa --- /dev/null +++ b/raw/aaer/2018/AAER-3918.txt @@ -0,0 +1,514 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82556 / January 22, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3918 / January 22, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18346 + + +In the Matter of + +CYNTHIA HOLDER, CPA, +JEFFREY WADA, CPA, +DAVID MIDDENDORF, CPA, +THOMAS WHITTLE, CPA, and +DAVID BRITT, 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, 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 Cynthia +Holder, CPA; Jeffrey Wada, CPA; David Middendorf, CPA; Thomas Whittle, CPA; and David +Britt, CPA (collectively, “Respondents”), 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 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 willfull y +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found to be lacking in character or integrity or to have +engaged in unethical or improper professional conduct. + + 2 +II. + +After an investigation, the Division of Enforcement and the Office of the Chief Accountant +allege that: + +SUMMARY + +1. This case involves the unauthorized disclosures of confidential information from +the Public Company Accounting Oversight Board (“PCAOB” or “Board”) relating to its +Inspections program, and a concerted effort by the proposed respondents to use that information to +benefit KPMG LLP and, consequently, themselves. +2. On his last day at the PCAOB in 2015, Brian Sweet took sensitive inspections- +related documents from the PCAOB to use as a resource in his new job in KPMG’s Department of +Professional Practice. Shortly after he joined KPMG, Sweet asked Cynthia Holder, then a PCAOB +employee, to send him confidential PCAOB materials. She did as he requested, then sent him +additional confidential information relating to a planned inspection of a KPMG client. Holder +made these unauthorized disclosures while she was seeking employment at KPMG. 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. Wada’s leaks to Holder in 2017 similarly occurred while he was seeking employment +with KPMG. +3. Most of the information Sweet, Holder, and Wada disclosed without authorization +related to the PCAOB’s inspections of KPMG audits, including the audit engagements the PCAOB +planned to inspect, the criteria the PCAOB used to select engagements for inspection, and the +focus areas of the inspections. 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. Sweet told his supervisors in KPMG’s National Office, David Middendorf and +Thomas Whittle, along with another partner in that office, David Britt, that he had taken +confidential materials from the PCAOB and received, from time to time, additional confidential +information from PCAOB employees. Middendorf and Whittle encouraged Sweet to share the +PCAOB’s confidential information with them, with other KPMG colleagues, and with an outside +contractor. After Wada sent Holder the list of the PCAOB’s planned inspections for 2016, +Middendorf, Whittle, Britt, Sweet, and Holder undertook an effort to analyze and review audit + + + 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 +workpapers and to suggest revisions to them to avoid possible findings of deficiencies by the +PCAOB. +5. Middendorf, Whittle, Britt, Sweet, and Holder also received from Wada +confidential information relating to the PCAOB’s upcoming 2017 inspections. However, their +misconduct came to light early in the year and did not affect any PCAOB inspections of the firm. + +RESPONDENTS + +6. Cynthia Holder, 51, of Houston, Texas was an Executive Director in KPMG’s +Department of Professional Practice group from August 2015 until April 2017. Prior to joining +KPMG, Holder was an Inspections Leader at the PCAOB from December 2011 until August 2015. +Holder is licensed as a CPA in Texas. +7. Jeffrey Wada, 42, of Tustin, California was an Inspections Leader at the PCAOB +from February 2012 until February 2017. Wada is licensed as a CPA in California. +8. David Middendorf, 53, of Marietta, Georgia, was KPMG’s National Managing +Partner for Audit Quality and Professional Practice until April 2017. Middendorf is licensed as a +CPA in Georgia, New York, and Ohio and was previously licensed in Texas. +9. Thomas Whittle, 54, of Gladstone, New Jersey, was KPMG’s National Partner-In- +Charge for Inspections until April 2017. Whittle is licensed as a CPA in New York and New +Jersey and was previously licensed in Pennsylvania and Connecticut. +10. David Britt, 54, of New Canaan, Connecticut, was KPMG’s Banking and Capital +Markets Group Co-Leader until February 2017. Britt is licensed as a CPA in New York and +California and was previously licensed in the District of Columbia. + +OTHER RELEVANT PERSON AND ENTITY + +11. Brian Sweet, 40, of Fresno, California, was a Partner in KPMG’s Department of +Professional Practice group until March 2017. Prior to joining KPMG, Sweet was an Associate +Director in the PCAOB’s inspections group from March 2014 until April 2015. Sweet is licensed +as a CPA in New York and Illinois and was previously licensed in California. The Commission +has charged Sweet 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. +FACTS + +The PCAOB’s Inspections Process + +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 securities laws in order to protect the interests of + 4 +investors and further the public interest in the preparation of informative, accurate, and +independent audit reports. +14. One of the critical 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 analysis and thereafter notifies +firms 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 are complete. +15. 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. All PCAOB employees must certify that they are complying with PCAOB +Ethics Rules that prohibit employees from using confidential PCAOB information for private gain +(or even merely creating the appearance that they are) and that bar them from making unauthorized +disclosures of confidential information obtained during their employment. The PCAOB’s Ethics +Rules and the employees’ ethics certifications state these prohibitions continue to apply even after +their employment with the Board ends. +KPMG’s Pursuit of Sweet + +16. 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 were deficient. +This 46 percent deficiency rate, which placed KPMG third among the “big four” accounting firms, +reflected a significant decline from KPMG’s 34 percent deficiency rate the previous year. As a +result, KPMG leadership exerted meaningful pressure within the firm to improve the results. One +of the steps KPMG took to improve its results was to hire Sweet, an Associate Director at the +PCAOB who worked on the team inspecting KPMG audits, to join the firm. KPMG’s Vice Chair +of Audit characterized Sweet’s recruitment as a “top priority.” +17. KPMG hired Sweet as a partner in the Department of Professional Practice (“DPP”) +group in the firm’s National Office.3 Among other things, Sweet was responsible for conducting +internal inspections of KPMG audits. +Sweet Divulges Confidential PCAOB Information to KPMG + +18. In April 2015, shortly before leaving the Board, Sweet copied from an internal +PCAOB database to his office computer various confidential inspection-related materials he +believed might help him at KPMG. On his last day at the Board, Sweet transferred these +documents and 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 confidential PCAOB +documents he had previously brought home. + +3 KPMG’s National Office is responsible for technical accounting and auditing leadership, risk management, +and quality control for the firm. + + 5 +19. These documents 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. +20. Upon joining KPMG in May 2015, Sweet transferred the PCAOB documents from +his personal hard drive to his computer at the firm. +A. Sweet Divulges Confidential PCAOB Information Regarding 2015 Inspections to +Middendorf, Whittle, and Britt + +21. At KPMG, Sweet reported to Thomas Whittle, who was responsible for overseeing +both the PCAOB’s and KPMG’s internal inspections. Whittle, in turn, reported to David +Middendorf, who oversaw the National Office’s audit quality and professional practice work. +22. On his first day at the firm in May 2015, Sweet had lunch with Middendorf and +other KPMG National Office colleagues, including David Britt, another National Office partner +who was co-leader of KPMG’s Banking and Capital Markets Group. During the lunch, Sweet’s +new colleagues asked him various questions about the PCAOB’s inspections of KPMG. 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. +23. Several days later, Whittle asked Sweet to provide him the list of the PCAOB’s +planned inspections for 2015.4 Sweet showed Whittle a hard copy of a PCAOB inspection +planning document that identified 46 KPMG audits the PCAOB intended to inspect that year and +included the PCAOB’s confidential areas of focus for those inspections. +24. 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 +replied, “got it and understand the sensitivity.” Whittle forwarded this information to Middendorf +the same day, writing, “The complete list. Obviously, very sensitive. We will not be broadcasting +this.”5 +25. In June 2015, Sweet identified for Britt a number of KPMG banking clients the +PCAOB planned to inspect in 2015. The next day, Britt emailed Sweet, “I thin[k] when we were + +4 By that time, the PCAOB had informed KPMG of less than half of the audit engagements it intended to +inspect in 2015. + +5 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, locked the +audit workpapers for all but two of the engagements from editing absent special circumstances. + + 6 +going through the list of Bank selections, you couldn’t recall the last 3 Bank names without your +notes, would you be able to get me the last three for 2015.” Sweet gave Britt the information later +that day, asking him to “please note there is some sensitivity with these, and some of the teams +have not yet been officially notified by the PCAOB, so please use your discretion with this info.” +26. Sweet shared the information he had taken from the PCAOB with his new +colleagues to benefit himself and the firm. He believed, based on comments Middendorf and +Whittle had made to him, that his position as a partner at KPMG was not secure. Sweet believed it +would help him in his position at KPMG if he were perceived as a team player working to help the +firm. +B. Middendorf and Whittle Direct Sweet to Divulge Confidential PCAOB Information to +An Outside Consultant + +27. In April 2015, KPMG engaged an outside consultant to help it predict which audit +engagements the PCAOB would inspect in 2016. In June 2015, Middendorf and Whittle both +approached Sweet in his office and directed him to share everything he knew with the outside +consultant. Sweet understood this to be an instruction to give the consultant all of the information +he took from the PCAOB. +28. Sweet complied with Middendorf and Whittle’s directive by providing information +about the Board’s selection criteria to a KPMG colleague, who then gave that information to the +consultant. In September 2015, Sweet spoke directly with the consultant and gave them additional +confidential information regarding the inspections selection process.6 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.” +C. Sweet Divulges Confidential PCAOB Information to Others + +29. Sweet also used the confidential information he had taken from the PCAOB in +other ways. In August 2015, Sweet informed a KPMG National Office colleague that the PCAOB +was unlikely to inspect certain engagements in 2016. Sweet wrote, “I checked my old planning +notes and can confirm that [four KPMG audit clients] are NOT on the PCAOB’s planning radar. +They don’t have any of them included in the issuer count, so it is fairly safe to say those have a +very remote chance of ever being evaluated for inspection!” +30. In April 2016, Sweet provided confidential PCAOAB information to an audit +partner preparing a client pitch for a Spanish bank’s audit business.7 Sweet sent the partner +confidential PCAOB comment forms related to the Board’s inspection of another Spanish bank, + +6 Among other things, Sweet explained how the PCAOB’s Inspections group used confidential information +received from the Board and the SEC. + +7 The Spanish bank’s auditor was rotating off pursuant to the European Union’s mandatory audit firm +rotation rules. Securing this audit business was a global priority for KPMG (which marketed its banking expertise) +as a result of recent failures to win the audit business of several other large multinational banks. + + 7 +writing that he had attached “some examples of the types of issues that have been raised in the +past. I hope this helps!” The comment forms discuss specific ways in which that bank’s auditor +had failed to adequately test the valuation of its allowance for loan loss. +Holder Divulges Confidential PCAOB Information to KPMG + +31. After KPMG offered Sweet a position at the firm, Whittle asked Sweet for a list of +PCAOB employees whom KPMG should consider recruiting. Before he left the PCAOB, Sweet +had discussed with Cynthia Holder, a friend who was then a PCAOB Inspections Leader, the +prospect of her joining him at KPMG. On Sweet’s first day at KPMG (May 4, 2015), he informed +Holder that he would be meeting with Whittle to push for the firm to hire her. On May 11, 2015, +Sweet told Holder he was going to hand-deliver her resume to Whittle and “make a sell again” in +person. +32. On May 12, 2015, Sweet asked Holder to send him a confidential PCAOB +document reflecting comments he had written about KPMG’s audits while he was at the Board. At +that time, KPMG personnel were preparing for a meeting with the PCAOB to discuss the firm’s +performance on its audits, during which KPMG would make a presentation on the root causes of +the firm’s audit failures. Sweet asked Holder for a document he had written while he was at the +PCAOB so he could review it before helping his KPMG colleagues prepare that presentation. That +day, Holder sent Sweet the document he requested from her personal email account. +33. About two weeks later, Holder notified the PCAOB’s ethics group that she had +recused herself from any work related to KPMG in order to pursue employment at the firm. +34. On June 17, 2015, Holder again shared confidential PCAOB information with +Sweet, telling him that the Board had decided to cancel its planned inspection of a KPMG audit +client for 2015, and that the Board did not intend to replace it with another selection. Sweet +immediately relayed this information to Whittle. +35. KPMG sent Holder an employment offer in July 2015. She joined the firm the +following month as an Executive Director in DPP performing internal inspections and advising +banking engagement teams on their audits. +Wada Divulges Confidential PCAOB Information to KPMG in 2016 + +36. In early March 2016, Wada, an Inspections Leader at the PCAOB who had +previously performed work on KPMG inspections but was then assigned to inspect another audit +firm, learned that he had not been selected for a promotion. Wada reacted angrily, telling a +colleague the PCAOB had “screwed” him by passing him over. +37. After learning he had not been selected for promotion, Wada accessed the +PCAOB’s confidential list of KPMG engagements the Board had selected for inspection in 2016 + 8 +from an internal database of KPMG-related documents.8 Because Wada was no longer working on +KPMG matters, he had no legitimate reason to access this information. +38. On March 28, 2016, Wada, who remained friends with Holder after she left the +PCAOB, called her and read to her the names of twelve KPMG clients the Board planned to +inspect.9 Holder provided this information to Sweet, who then immediately relayed the list to +Whittle, Middendorf, and Britt, informing them that it had come from a former colleague at the +PCAOB. +Use of Confidential PCAOB Information to Change KPMG Audit Workpapers + +39. Wada gave KPMG the list of the PCAOB’s planned inspections at a critical time in +two respects. +40. First, in early February 2016, Middendorf and other members of KPMG’s +leadership team had met with staff from the SEC’s Office of the Chief Accountant (“OCA”). +During that meeting, OCA personnel expressed significant concerns about the firm’s audit quality +and questioned whether KPMG was adequately addressing these issues. On the same day they +received the list of inspection targets from Wada, Middendorf, Whittle, Sweet, and Britt discussed +how to use the information. Middendorf told the group his highest priority was to protect one of +the efforts KPMG’s National Office had instituted to improve audit quality from criticism. As the +PCAOB found an increasing number of audit deficiencies by KPMG beginning in 2013, KPMG +created “monitoring programs” run by DPP that reviewed workpapers to ensure compliance with +professional standards.10 One of these programs focused on the audits of certain banking clients’ +Allowances for Loan and Lease Losses (“ALLL”). KPMG created the ALLL monitoring program +in 2015 in response to numerous deficiencies the PCAOB had identified in this area. The success +of the ALLL monitoring program was especially important to KPMG because the firm had +promoted it as proof of the seriousness with which it was working to improve its audit quality. +41. Second, Wada alerted KPMG to the PCAOB’s planned inspections at a time when +KPMG personnel were able to access and change audit workpapers. Though KPMG had already +issued audit reports for each of these engagements, KPMG was within the 45-day period in which +KPMG’s policy allowed audit teams to complete the administrative process of assembling the final +audit file. In general, KPMG could only perform certain clerical work during this period. At the +end of this 45-day period, KPMG locked audit workpapers from editing absent special +circumstances. + +8 When accessing the internal database, users are warned that they are accessing a restricted site that contains +privileged information and that misuse of the information can lead to civil or criminal penalties. + +9 Of the 12 clients, 10 were bank holding companies and 2 were other issuers that Wada appears to have +thought were also bank holding companies. It appears that Wada identified these engagements for Holder because +her responsibilities at KPMG included advising banking engagement teams. + +10 KPMG’s monitoring programs included both “in flight” reviews (reviews conducted prior to the issuance +of the audit opinion) and post-issuance programs that were intended to assess the engagement team’s performance +after its audit work was complete. + + 9 +42. 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 examination +of the audit workpapers for the seven banks on the list Wada had provided that were part of +KPMG’s ALLL monitoring program to determine whether anything could be done to minimize the +risk that the PCAOB would find deficiencies in those audits. +43. Middendorf and Whittle instructed that no one in the briefing should disclose that +they had obtained confidential PCAOB information. +44. To provide cover for their project, Britt told others at KPMG that they were +performing work in the ordinary course of business on all 35 banking engagements in the firm’s +ALLL monitoring program. On March 28, 2016, Britt sent the engagement partners for these +audits an email stating that, as part of the “wrap up and reporting of the results” of the ALLL +program, DPP needed to gather “some additional information” from their audit workpapers.11 +45. Over the next few weeks, Sweet, Holder, and various partners and managing +directors in DPP engaged in a review of the audit workpapers of the seven banks in the monitoring +program that were on the list Wada provided. The DPP professionals suggested edits and proposed +changes to the engagement teams, which then decided what changes to incorporate into the final +audit workpapers.12 +Wada Divulges Confidential PCAOB Information to KPMG in 2017 + +46. 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, and together, they briefed Whittle. That night, Sweet, Whittle, and Britt discussed this +information. After that meeting, Sweet, as instructed by Whittle, contacted the engagement +partners for two of the audits on the January 2017 list to warn them about the potential inspections. +47. On January 10, Wada sent Holder his resume and a narrative of his work +experience, writing, “I am now trying to sell myself to KPMG.” +48. On February 2, Wada sent Holder two text messages in quick succession: first, +“Okay, I have the grocery list,” then “All the things you’ll need for the year.” The next day, he +called Holder and read her a list of 47 ticker symbols that Holder understood to be the final list of +2017 inspections. 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.” + +11 Britt also asked a subordinate in the National Office to conduct his own secret review of one KPMG +client’s audit workpapers. + +12 Middendorf, Whittle, Sweet, and Britt had agreed that Sweet would lead a team of DPP professionals to +review the workpapers of the banks in the monitoring program, and that Middendorf, Whit tle, and Britt would +handle the other five issuers on the list they received from Wada. + + 10 +49. Holder relayed the information to Sweet, who then shared it with Middendorf, +Whittle, and Britt. Whittle instructed Sweet to warn certain engagement partners about the +impending inspections. Though Whittle had warned Sweet to be circumspect in how he +communicated this to KPMG colleagues, Sweet’s notice to one KPMG engagement partner caused +her to suspect that the firm may have received confidential PCAOB information. KPMG began to +investigate these issues after its Office of General Counsel learned of her concerns. +50. During the initial stage of KPMG’s investigation, Sweet and Holder agreed to +conceal how they learned of the PCAOB’s 2017 inspection targets.13 They agreed to tell +investigators that Holder had received a list of ticker symbols by mail with no return address or +other identifying information. Sweet then created a document consisting solely of the ticker +symbols, which he provided to KPMG attorneys after they interviewed him. +51. Holder destroyed evidence during KPMG’s investigation. KPMG attorneys asked +Holder to provide them her phone so they could analyze whether there were relevant documents. +Before providing her phone to the firm, Holder deleted her texts with Wada. +VIOLATIONS + +52. As a result of the conduct described above, Holder and Wada willfully violated +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. +53. As a result of the conduct described above, Holder and Wada willfully violated +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. +54. As a result of the conduct above, Holder 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. +55. As a result of the conduct described above, Middendorf, Whittle, and Britt willfully +violated PCAOB Rule 3500T, and willfully aided and abetted and caused Sweet’s violations of +Sections EC3 and EC9. +56. As a result of the conduct above, Holder, Wada, Middendorf, Whittle, and Britt are +lacking in integrity and/or 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. + + + +13 Holder told Sweet that she had sworn to Wada she would never identify him as the source. + 11 +III. + +In view of the allegations made by the Division of Enforcement and the Office of the Chief +Accountant, the Commission deems it necessary and appropriate in the public interest that public +administrative and cease-and-desist proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondents an opportunity to establish any defenses to such allegations; + +B. Whether pursuant to Section 21C of the Exchange Act, Respondent Holder should +be ordered to cease and desist from committing or causing violations of, and any future violations +of, PCAOB Ethics Code Sections EC3, EC9, and PCAOB Rule 3500T; + +C. Whether pursuant to Section 21C of the Exchange Act, Respondent Wada should be +ordered to cease and desist from committing or causing violations of, and any future violations of, +PCAOB Ethics Code Sections EC3 and EC9; + +D. Whether pursuant to Section 21C of the Exchange Act, Respondents Middendorf, +Whittle, and Britt should be ordered to cease and desist from committing or causing violations of, +and any future violations of, PCAOB Rule 3500T and PCAOB Ethics Code Sections EC3 and +EC9; + +E. Whether pursuant to Sections 21(B)(e) and 21C(e) of the Exchange Act, +Respondents Holder, Wada, Middendorf, Whittle, and Britt should be ordered to pay +disgorgement; + +F. Whether pursuant to Section 21(B)(a)(2) of the Exchange Act, Respondents Holder, +Wada, Middendorf, Whittle, and Britt should be ordered to pay a civil penalty; and + +G. Whether pursuant to Section 4C of the Exchange Act and Section 102(e) of the +Commission’s Rules of Practice, Respondents Holder, Wada, Middendorf, Whittle, and Britt +should be censured or denied, temporarily or permanently, the privilege of appearing or practicing +before the Commission as an accountant. + +IV. + +IT IS ORDERED that a public hearing for 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 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. + + 12 +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, pursuant to Rule 360(a)(2) of the Commission’s Rules +of Practice, 17 C.F.R. § 201.360(a)(2), the Administrative Law Judge shall issue an initial +decision no later than 120 days from the occurrence of one of the following events: (A) The +completion of post-hearing briefing in a proceeding where the hearing has been completed; (B) +Where the hearing officer has determined that no hearing is necessary, upon completion of +briefing on a motion pursuant to Rule 250 of the Commission’s Rules of Practice, 17 C.F.R. § +201.250; or (C) The determination by the hearing officer that a party is deemed to be in default +under Rule 155 of the Commission’s Rules of Practice, 17 C.F.R. § 201.155 and no hearing is +necessary. + +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/2018/AAER-3919.txt b/raw/aaer/2018/AAER-3919.txt new file mode 100644 index 0000000000000000000000000000000000000000..2ad744ddf59c50b4122af590e33ef59b97ac18a4 --- /dev/null +++ b/raw/aaer/2018/AAER-3919.txt @@ -0,0 +1,512 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82557 / January 22, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3919 / January 22, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18347 + + + +In the Matter of + +BRIAN SWEET, CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND- DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER, AND NOTICE OF +HEARING + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Brian Sweet, +CPA (“Respondent” or “Sweet”) 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. + +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”), 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”) relating to its +Inspections program, and a concerted effort to use that information to benefit KPMG LLP and, +consequently, Brian Sweet. +2. On his last day at the PCAOB in 2015, Sweet took sensitive inspections-related +documents from the PCAOB to use as a resource in his new job in KPMG’s Department of +Professional Practice. Shortly after he joined KPMG, Sweet asked Cynthia Holder, then a PCAOB +employee, to send him confidential PCAOB materials. She did as he requested, then sent him +additional confidential information relating to a planned inspection of a KPMG client. Holder +made these unauthorized disclosures while she was seeking employment at KPMG. 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. Wada’s leaks to Holder in 2017 similarly occurred while he was seeking employment +with KPMG. +3. Most of the information Sweet, Holder, and Wada disclosed without authorization +related to the PCAOB’s inspections of KPMG audits, including the audit engagements the PCAOB + + 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 +planned to inspect, the criteria the PCAOB used to select engagements for inspection, and the +focus areas of the inspections. 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. Sweet told his supervisors in KPMG’s National Office, David Middendorf and +Thomas Whittle, along with another partner in that office, David Britt, that he had taken +confidential materials from the PCAOB and received, from time to time, additional confidential +information from PCAOB employees. Middendorf and Whittle encouraged Sweet to share the +PCAOB’s confidential information with them, with other KPMG colleagues, and with an outside +contractor. After Wada sent Holder the list of the PCAOB’s planned inspections for 2016, +Middendorf, Whittle, Britt, Sweet, and Holder undertook an effort to analyze and review audit +workpapers and to suggest revisions to them to avoid possible findings of deficiencies by the +PCAOB. +5. Middendorf, Whittle, Britt, Sweet, and Holder also received from Wada +confidential information relating to the PCAOB’s upcoming 2017 inspections. However, their +misconduct came to light early in the year and did not affect any PCAOB inspections of the firm. +RESPONDENT + +6. Brian Sweet, 40, of Fresno, California, was a Partner in KPMG’s Department of +Professional Practice group until March 2017. Prior to joining KPMG, Sweet was an Associate +Director in the PCAOB’s inspections group from March 2014 until April 2015. Sweet is licensed +as a CPA in New York and Illinois and was previously licensed in California. +OTHER RELEVANT PERSONS AND ENTITY + +7. Cynthia Holder, 51, of Houston, Texas was an Executive Director in KPMG’s +Department of Professional Practice group from August 2015 until April 2017. Prior to joining +KPMG, Holder was an Inspections Leader at the PCAOB from December 2011 until August 2015. +Holder is licensed as a CPA in Texas. The Commission has charged Holder for her role in the +misconduct described in this Order. +8. Jeffrey Wada, 42, of Tustin, California was an Inspections Leader at the PCAOB +from February 2012 until February 2017. Wada is licensed as a CPA in California. The +Commission has charged Wada for his role in the misconduct described in this Order. +9. David Middendorf, 53, of Marietta, Georgia, was KPMG’s National Managing +Partner for Audit Quality and Professional Practice until April 2017. Middendorf is licensed as a +CPA in Georgia, New York, and Ohio and was previously licensed in Texas. The Commission has +charged Middendorf for his role in the misconduct described in this Order. +10. Thomas Whittle, 54, of Gladstone, New Jersey, was KPMG’s National Partner-In- +Charge for Inspections until April 2017. Whittle is licensed as a CPA in New York and New +4 +Jersey and was previously licensed in Pennsylvania and Connecticut. The Commission has +charged Whittle for his role in the misconduct described in this Order. +11. David Britt, 54, of New Canaan, Connecticut, was KPMG’s Banking and Capital +Markets Group Co-Leader until February 2017. Britt is licensed as a CPA in New York and +California and was previously licensed in the District of Columbia. 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. +FACTS + +The PCAOB’s Inspections Process + +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 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 critical 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 analysis and thereafter notifies +firms 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 are complete. +15. 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. All PCAOB employees must certify that they are complying with PCAOB +Ethics Rules that prohibit employees from using confidential PCAOB information for private gain +(or even merely creating the appearance that they are) and that bar them from making unauthorized +disclosures of confidential information obtained during their employment. The PCAOB’s Ethics +Rules and the employees’ ethics certifications state these prohibitions continue to apply even after +their employment with the Board ends. +KPMG’s Pursuit of Sweet + +16. 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 were deficient. +This 46 percent deficiency rate, which placed KPMG third among the “big four” accounting firms, +reflected a significant decline from KPMG’s 34 percent deficiency rate the previous year. As a +result, KPMG leadership exerted meaningful pressure within the firm to improve the results. One +of the steps KPMG took to improve its results was to hire Sweet, an Associate Director at the +5 +PCAOB who worked on the team inspecting KPMG audits, to join the firm. KPMG’s Vice Chair +of Audit characterized Sweet’s recruitment as a “top priority.” +17. KPMG hired Sweet as a partner in the Department of Professional Practice (“DPP”) +group in the firm’s National Office.4 Among other things, Sweet was responsible for conducting +internal inspections of KPMG audits. +Sweet Divulges Confidential PCAOB Information to KPMG + +18. In April 2015, shortly before leaving the Board, Sweet copied from an internal +PCAOB database to his office computer various confidential inspection-related materials he +believed might help him at KPMG. On his last day at the Board, Sweet transferred these +documents and 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 confidential PCAOB +documents he had previously brought home. +19. These documents 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. +20. Upon joining KPMG in May 2015, Sweet transferred the PCAOB documents from +his personal hard drive to his computer at the firm. +A. Sweet Divulges Confidential PCAOB Information Regarding 2015 Inspections to +Middendorf, Whittle, and Britt + +21. At KPMG, Sweet reported to Thomas Whittle, who was responsible for overseeing +both the PCAOB’s and KPMG’s internal inspections. Whittle, in turn, reported to David +Middendorf, who oversaw the National Office’s audit quality and professional practice work. +22. On his first day at the firm in May 2015, Sweet had lunch with Middendorf and +other KPMG National Office colleagues, including David Britt, another National Office partner +who was co-leader of KPMG’s Banking and Capital Markets Group. During the lunch, Sweet’s +new colleagues asked him various questions about the PCAOB’s inspections of KPMG. 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. +23. Several days later, Whittle asked Sweet to provide him the list of the PCAOB’s +planned inspections for 2015.5 Sweet showed Whittle a hard copy of a PCAOB inspection + +4 KPMG’s National Office is responsible for technical accounting and auditing leadership, risk management, +and quality control for the firm. + +6 +planning document that identified 46 KPMG audits the PCAOB intended to inspect that year and +included the PCAOB’s confidential areas of focus for those inspections. +24. 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.”6 +25. In June 2015, Sweet identified for Britt a number of KPMG banking clients the +PCAOB planned to inspect in 2015. The next day, Britt emailed Sweet to ask Sweet to review his +notes and provide the “last 3 Bank names.” Sweet gave Britt the information later that day, asking +him to note its sensitivity and “use your discretion with this info.” +26. Sweet shared the information he had taken from the PCAOB with his new +colleagues to benefit himself and the firm. He believed, based on comments Middendorf and +Whittle had made to him, that his position as a partner at KPMG was not secure. Sweet believed it +would help him in his position at KPMG if he were perceived as a team player working to help the +firm. +B. Middendorf and Whittle Direct Sweet to Divulge Confidential PCAOB Information to An +Outside Consultant + +27. In April 2015, KPMG engaged an outside consultant to help it predict which audit +engagements the PCAOB would inspect in 2016. In June 2015, Middendorf and Whittle both +approached Sweet in his office and directed him to share everything he knew with the outside +consultant. Sweet understood this to be an instruction to give the consultant all of the information +he took from the PCAOB. +28. Sweet complied with Middendorf and Whittle’s directive by providing information +about the Board’s selection criteria to a KPMG colleague, who then gave that information to the +consultant. In September 2015, Sweet spoke directly with the consultant and gave them additional +confidential information regarding the inspections selection process.7 At the end of September, + +5 By that time, the PCAOB had informed KPMG of less than half of the audit engagements it intended to +inspect in 2015. + +6 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, locked the +audit workpapers for all but two of the engagements from editing absent special circumstances. + +7 Among other things, Sweet explained how the PCAOB’s Inspections group used confidenti al information +received from the Board and the SEC. + +7 +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.” +C. Sweet Divulges Confidential PCAOB Information to Others + +29. Sweet also used the confidential information he had taken from the PCAOB in +other ways. In August 2015, Sweet informed a KPMG National Office colleague that the PCAOB +was unlikely to inspect certain engagements in 2016. Sweet wrote, “I checked my old planning +notes and can confirm that [four KPMG audit clients] are NOT on the PCAOB’s planning radar. +They don’t have any of them included in the issuer count, so it is fairly safe to say those have a +very remote chance of ever being evaluated for inspection!” +30. In April 2016, Sweet provided confidential PCAOAB information to an audit +partner preparing a client pitch for a Spanish bank’s audit business.8 Sweet sent the partner +confidential PCAOB comment forms related to the Board’s inspection of another Spanish bank, +writing that he had attached “some examples of the types of issues that have been raised in the +past. I hope this helps!” The comment forms discuss specific ways in which that bank’s auditor +had failed to adequately test the valuation of its allowance for loan loss. +Holder Divulges Confidential PCAOB Information to KPMG + +31. After KPMG offered Sweet a position at the firm, Whittle asked Sweet for a list of +PCAOB employees whom KPMG should consider recruiting. Before he left the PCAOB, Sweet +had discussed with Cynthia Holder, a friend who was then a PCAOB Inspections Leader, the +prospect of her joining him at KPMG. On Sweet’s first day at KPMG (May 4, 2015), he informed +Holder that he would be meeting with Whittle to push for the firm to hire her. On May 11, 2015, +Sweet told Holder he was going to hand-deliver her resume to Whittle and “make a sell again” in +person. +32. On May 12, 2015, Sweet asked Holder to send him a confidential PCAOB +document reflecting comments he had written about KPMG’s audits while he was at the Board. At +that time, KPMG personnel were preparing for a meeting with the PCAOB to discuss the firm’s +performance on its audits, during which KPMG would make a presentation on the root causes of +the firm’s audit failures. Sweet asked Holder for a document he had written while he was at the +PCAOB so he could review it before helping his KPMG colleagues prepare that presentation. That +day, Holder sent Sweet the document he requested. +33. About two weeks later, Holder notified the PCAOB’s ethics group that she had +recused herself from any work related to KPMG in order to pursue employment at the firm. + +8 The Spanish bank’s auditor was rotating off pursuant to the European Union’s mandatory audit firm +rotation rules. Securing this audit business was a global priority for KPMG (which marketed its banki ng expertise) +as a result of recent failures to win the audit business of several other large multinational banks. + +8 +34. On June 17, 2015, Holder again shared confidential PCAOB information with +Sweet, telling him that the Board had decided to cancel its planned inspection of a KPMG audit +client for 2015, and that the Board did not intend to replace it with another selection. Sweet +immediately relayed this information to Whittle. +35. KPMG sent Holder an employment offer in July 2015. She joined the firm the +following month as an Executive Director in DPP performing internal inspections and advising +banking engagement teams on their audits. +Wada Divulges Confidential PCAOB Information to KPMG in 2016 + +36. In early March 2016, Wada, an Inspections Leader at the PCAOB who had +previously performed work on KPMG inspections but was then assigned to inspect another audit +firm, learned that he had not been selected for a promotion. Wada reacted angrily, telling a +colleague the PCAOB had “screwed” him by passing him over. +37. After learning he had not been selected for promotion, Wada accessed the +PCAOB’s confidential list of KPMG engagements the Board had selected for inspection in 2016 +from an internal database of KPMG-related documents. Because Wada was no longer working on +KPMG matters, he had no legitimate reason to access this information. +38. On March 28, 2016, Wada, who remained friends with Holder after she left the +PCAOB, called her and read to her the names of twelve KPMG clients the Board planned to +inspect.9 Holder provided this information to Sweet, who then immediately relayed the list to +Whittle, Middendorf, and Britt, informing them that it had come from a former colleague at the +PCAOB. +Use of Confidential PCAOB Information to Change KPMG Audit Workpapers + +39. Wada gave KPMG the list of the PCAOB’s planned inspections at a critical time in +two respects. +40. First, in early February 2016, Middendorf and other members of KPMG’s +leadership team had met with staff from the SEC’s Office of the Chief Accountant (“OCA”). +During that meeting, OCA personnel expressed significant concerns about the firm’s audit quality +and questioned whether KPMG was adequately addressing these issues. On the same day they +received the list of inspection targets from Wada, Middendorf, Whittle, Sweet, and Britt discussed +how to use the information. Middendorf told the group his highest priority was to protect one of +the efforts KPMG’s National Office had instituted to improve audit quality from criticism. As the +PCAOB found an increasing number of audit deficiencies by KPMG beginning in 2013, KPMG +created “monitoring programs” run by DPP that reviewed workpapers to ensure compliance with + +9 Of the 12 clients, 10 were bank holding companies and 2 were other issuers that Wada appears to have +thought were also bank holding companies. It appears that Wada identified these engagements for Holder because +her responsibilities at KPMG included advising banking engagement teams. + +9 +professional standards.10 One of these programs focused on the audits of certain banking clients’ +Allowances for Loan and Lease Losses (“ALLL”). KPMG created the ALLL monitoring program +in 2015 in response to numerous deficiencies the PCAOB had identified in this area. The success +of the ALLL monitoring program was especially important to KPMG because the firm had +promoted it as proof of the seriousness with which it was working to improve its audit quality. +41. Second, Wada alerted KPMG to the PCAOB’s planned inspections at a time when +KPMG personnel were able to access and change audit workpapers. Though KPMG had already +issued audit reports for each of these engagements, KPMG was within the 45-day period in which +KPMG’s policy allowed audit teams to complete the administrative process of assembling the final +audit file. In general, KPMG could only perform certain clerical work during this period. At the +end of this 45-day period, KPMG locked audit workpapers from editing absent special +circumstances. +42. 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 examination +of the audit workpapers for the seven banks on the list Wada had provided that were part of +KPMG’s ALLL monitoring program to determine whether anything could be done to minimize the +risk that the PCAOB would find deficiencies in those audits. +43. Middendorf and Whittle instructed that no one in the briefing should disclose that +they had obtained confidential PCAOB information. +44. To provide cover for their project, Britt told others at KPMG that they were +performing work in the ordinary course of business on all 35 banking engagements in the firm’s +ALLL monitoring program. On March 28, 2016, Britt sent the engagement partners for these +audits an email stating that, as part of the “wrap up and reporting of the results” of the ALLL +program, DPP needed to gather “some additional information” from their audit workpapers.11 +45. Over the next few weeks, Sweet, Holder, and various partners and managing +directors in DPP engaged in a review of the audit workpapers of the seven banks in the monitoring +program that were on the list Wada provided. The DPP professionals suggested edits and proposed +changes to the engagement teams, which then decided what changes to incorporate into the final +audit workpapers.12 + +10 KPMG’s monitoring programs included both “in flight” reviews (reviews conducted prior to the issuance +of the audit opinion) and post-issuance programs that were intended to assess the engagement team’s performance +after its audit work was complete. + +11 Britt also asked a subordinate in the National Office to conduct his own secret review of one KPMG +client’s audit workpapers. + +12 Middendorf, Whittle, Sweet, and Britt had agreed that Sweet would lead a team of DPP professionals to +review the workpapers of the banks in the monitoring program, and that Middendorf, Whittle, and Britt would +handle the other five issuers on the list they received from Wada. + +10 +Wada Divulges Confidential PCAOB Information to KPMG in 2017 + +46. 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, and together, they briefed Whittle. That night, Sweet, Whittle, and Britt discussed this +information. After that meeting, Sweet, as instructed by Whittle, contacted the engagement +partners for two of the audits on the January 2017 list to warn them about the potential inspections. +47. On January 10, Wada sent Holder his resume and a narrative of his work +experience, writing, “I am now trying to sell myself to KPMG.” +48. On February 2, Wada sent Holder two text messages in quick succession: first, +“Okay, I have the grocery list,” then “All the things you’ll need for the year.” The next day, he +called Holder and read her a list of 47 ticker symbols that Holder understood to be the final list of +2017 inspections. 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.” +49. Holder relayed the information to Sweet, who then shared it with Middendorf, +Whittle, and Britt. Whittle instructed Sweet to warn certain engagement partners about the +impending inspections. Though Whittle had warned Sweet to be circumspect in how he +communicated this to KPMG colleagues, Sweet’s notice to one KPMG engagement partner caused +her to suspect that the firm may have received confidential PCAOB information. KPMG began to +investigate these issues after its Office of General Counsel learned of her concerns. +50. During the initial stage of KPMG’s investigation, Sweet and Holder agreed to +conceal how they learned of the PCAOB’s 2017 inspection targets.13 They agreed to tell +investigators that Holder had received a list of ticker symbols by mail with no return address or +other identifying information. Sweet then created a document consisting solely of the ticker +symbols, which he provided to KPMG attorneys after they interviewed him. +VIOLATIONS + +51. As a result of the conduct described above, Respondent willfully violated 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. +52. As a result of the conduct above, Respondent willfully violated 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. + +13 Holder told Sweet that she had sworn to Wada she would never identify him as the source. +11 +53. As a result of the conduct above, Respondent willfully violated PCAOB Rule +3500T, requires members to maintain integrity when performing any professional service in +connection with the preparation or issuance of any audit report. +54. As a result of the conduct above, Respondent willfully aided and abetted and +caused Holder’s violations of PCAOB Ethics Code Sections EC3 and EC9. +FINDINGS + +55. Based on the foregoing, the Commission finds that Sweet willfully violated +PCAOB Ethics Code Sections EC3, EC9, and PCAOB Rule 3500T, and willfully aided and +abetted and caused Holder’s violations of Sections EC3 and EC9. +56. Based on the foregoing, the Commission finds that Sweet 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. +57. Based on the foregoing, the Commission finds that Sweet 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. + + Respondent acknowledges that the Commission is not at this time requiring that +Respondent disgorge any ill-gotten gains or imposing a civil penalty based on his agreement to +cooperate in a related enforcement action. However, pursuant to this Order, Respondent agrees to +additional proceedings in this proceeding to determine what, if any, disgorgement or civil penalties +pursuant to Sections 21C(e) and 21B(a) of the Exchange Act against Respondent are in the public +interest. In connection with such additional proceedings: (a) Respondent agrees that he will be +precluded from arguing that he did not violate the PCAOB Ethics Rules as described in this Order; +(b) Respondent agrees that he may not challenge the validity of this Order; (c) the findings of this +Order shall be accepted as and deemed true by the hearing officer; and (d) the hearing officer may +determine the issues raised in the additional proceedings on the basis of testimony and +documentary evidence. + +V. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Sweet’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Sweet shall cease and desist from committing or causing any violations and any +future violations of PCAOB Ethics Code Sections EC3 and EC 9 and PCAOB Rule 3500T. + +12 +B. Sweet is denied the privilege of appearing or practicing before the Commission as +an accountant. + +C. 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 in the Order Instituting +Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, and +Notice of Hearing in the Matter of Cynthia Holder, CPA, Jeffrey Wada, CPA, David Middendorf, +CPA, Thomas Whittle, CPA, and David Britt, CPA (the “Related Action”). + + If Respondent fails to appear at a hearing after being duly notified, Respondent may +be deemed in default and the proceedings may be determined against his 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 personally or by certified mail. + + D. 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 300 days from the date of +the entry of a final judgment in the Related Action. + + 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/2018/AAER-3920.txt b/raw/aaer/2018/AAER-3920.txt new file mode 100644 index 0000000000000000000000000000000000000000..86043ac8bd2ba62d7af1fcd1c81f7760fb384d33 --- /dev/null +++ b/raw/aaer/2018/AAER-3920.txt @@ -0,0 +1,102 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82710 / February 14, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3920 / February 14, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18372 + +In the Matter of + + Brian S. Block, 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 Brian S. +Block, CPA (“Respondent” or “Block”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice.1 +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings, and the findings contained in + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +Section III.3 and 5 below, and 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. Block, age 45, is and has been a certified public accountant licensed to +practice in the State of Pennsylvania. He served as Chief Financial Officer of American Realty +Capital Properties Inc. (“ARCP”) from 2010 until his resignation in October 2014. + 2. ARCP was, at all relevant times, a Maryland corporation with its principal +place of business in New York, NY. At all relevant times, ARCP was in the business of real +estate investment. At all relevant times, ARCP’s common stock was registered with the +Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange +Act”), and traded on the NASDAQ Stock Market. ARCP is now known as VEREIT, Inc., and its +common stock trades on the New York Stock Exchange. + 3. On September 8, 2016, the Commission filed a complaint against Block in +SEC v. Brian S. Block, et al., No. 16 Civ. 7003 (LGS) (S.D.N.Y.). On February 8, 2018, the +court entered an order permanently enjoining Block, by consent, from future violations of +Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. +§ 240.10b-5], and Rule 13a-14 [17 C.F.R. 240.13a-14], promulgated under Section 13(a) of the +Exchange Act [15 U.S.C. § 78m(a)], and from aiding and abetting violations of Section 13(a) of +the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-11 and 13a-13 thereunder +[17 C.F.R. §§ 240.12b-20, 240.13a-11 and 240.13a-13]. + 4. The Commission’s Complaint alleged, among other things, that Block, +together with the former Chief Accounting Officer of ARCP, engaged in a fraudulent scheme to +manipulate and falsely report ARCP’s Adjusted Funds From Operations (“AFFO”), a key non- +GAAP financial metric, in its public reports for the fiscal quarter ended June 30, 2014. The +Complaint alleged that the inflated figures, among other things, made it appear that ARCP had +met analysts’ consensus AFFO estimates for the quarter and concealed the fact that ARCP had +overstated its AFFO for the previous quarter. + 5. On June 30, 2017, a jury returned a verdict of guilty against Block for +related criminal conduct in United States v. Block, No. 16 Cr. 595 (JPO) (S.D.N.Y.). +Specifically, Block was convicted of violations of Section 10(b) of the Exchange Act and Rule +10b-5 thereunder, Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11, 13a-13, and 13a- +14 thereunder, as well as violations of 18 U.S.C. § 371 (conspiracy) and 18 U.S.C. § 1350(c)(1) +and (c)(2) (false certification). +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Block’s Offer. + 3 + + Accordingly, it is hereby ORDERED, effective immediately, that Block 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/2018/AAER-3921.txt b/raw/aaer/2018/AAER-3921.txt new file mode 100644 index 0000000000000000000000000000000000000000..3f8bd342823ef90a1c0bf29118dc4bb5c59bcab5 --- /dev/null +++ b/raw/aaer/2018/AAER-3921.txt @@ -0,0 +1,1393 @@ + + + + + + + + + + + + + + + + SEC.gov | Brian S. 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Block, et al. + + + + + + + + + + + + Brian S. Block, et al. + + + + + + + + + + + + + + + + + + + + + --> + SEC Obtains Final Judgment Against Former CFO of American Realty Capital Properties Inc. + + Litigation Release No. 24046 / February 14, 2018 + + Accounting and Auditing Enforcement Release No. 3921 / February 14, 2018 + + Securities and Exchange Commission v. Brian S. Block, et al. , No. 16 Civ. 7003 (LGS) (S.D.N.Y. filed Sept. 8, 2016) + + + + + + + + + + + The Securities and Exchange Commission announced that on February 8, 2018, the United States District Court for the Southern District of New York entered a final judgment against Brian S. Block, the former CFO of American Realty Capital Properties Inc. (ARCP), a publicly traded real estate investment trust (REIT) now known as VEREIT, Inc. + + On September 8, 2016, the SEC charged Block with overstating the financial performance of ARCP by purposely inflating a key metric used by analysts and investors to assess the company. The SEC's complaint alleged that Block and then-chief accounting officer Lisa P. McAlister devised a scheme to manipulate the calculation of ARCP's adjusted funds from operations (AFFO), a non-GAAP measure used when the company provided earnings guidance. After warnings from internal accounting staff that an incorrect method was used to calculate AFFO in ARCP's 2014 first quarter financial results, Block falsified the company's AFFO presentation in the final hours before filing the company's second quarter results. With McAlister in his office, Block entered fake numbers that concealed the first quarter overstatement of AFFO and made it appear that the company had met second quarter estimates when, in fact, it had fallen short. + + The SEC's complaint charged Block and McAlister with violating or aiding and abetting violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as aiding and abetting violations of Exchange Act Section 13(a) and Rules 12b-20, 13a-11, and 13a-13. Block also was charged with violating Rule 13a-14 of the Exchange Act. + + On the same day the SEC filed its complaint, the U.S. Attorney's Office for the Southern District of New York announced criminal charges against Block and McAlister based on the same conduct. A jury later convicted Block of fraud and related charges and he was subsequently sentenced to eighteen months' incarceration and a $100,000 fine. McAlister pled guilty to securities fraud and related charges, and she later consented to a final judgment in the SEC's case as well as to an SEC order suspending her from appearing or practicing before the Commission as an accountant. + + Block consented to entry of the final judgment in the SEC's action, which imposed full injunctive relief, a $160,000 civil penalty, and a permanent officer and director bar. Separately, Block also consented to an SEC order suspending him from appearing or practicing before the Commission as an accountant. + + The SEC appreciates the assistance of the U.S. Attorney's Office for the Southern District of New York, the Federal Bureau of Investigation, and the Public Company Accounting Oversight Board. + + For further information, see Press Release No. 2016-180 (Sept. 8 2016). + + + + + + + + + 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/2018/AAER-3922.txt b/raw/aaer/2018/AAER-3922.txt new file mode 100644 index 0000000000000000000000000000000000000000..f24da8faceb839c41201b874159d2f0a36e4a2d9 --- /dev/null +++ b/raw/aaer/2018/AAER-3922.txt @@ -0,0 +1,211 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82736 / February 16, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3922 / February 16, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18374 + + + + +In the Matter of + +SIMCHA BAER, 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 Simcha Baer, CPA (“Respondent” +or “Baer”), pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +to be lacking in character or integrity, or to have engaged in unethical or improper professional +conduct . . . . + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + +2 + + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative Proceedings Pursuant to Section 4C o f 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 + + These proceedings arise out of Respondent’s failure to comply with relevant Public +Company Accounting Oversight Board (“PCAOB”) standards with respect to the performance of +proper engagement quality reviews (“EQRs”) for the audits and interim reviews of the financial +statements of seven issuers. During the relevant period, Baer also repeatedly failed to comply with +relevant documentation requirements while performing EQRs. Indeed, in many instances years +later, Respondent back-dated and falsified audit and review documentation that subsequently was +produced to the Commission’s staff. + As a result, Respondent violated auditing standards and engaged in improper professional +conduct. +B. RESPONDENT + + Simcha Baer, 60, resides in Baltimore, Maryland, and is licensed as a CPA in Maryland. +His license currently is inactive. During the relevant period, he was a partner at, and a 1.5-percent +owner of, a public accounting firm that is based in Baltimore, Maryland and registered with the +PCAOB (“the Accounting Firm”). Baer served as the EQR partner for the audits and interim +reviews of the financial statements included in filings with the Commission for seven issuers (the +“Issuers”) between 2011 and 2016. + + + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. +3 + + + +C. FACTS + +1. Between 2011 and 2016, the Accounting Firm audited and reviewed the Issuers’ +financial statements that were included in filings with the Commission on Form S-1, Form 10-K, +and Form 10-Q. Respondent served as the EQR partner for these audits and reviews. +Failure to Perform and Document EQRs. +2. PCAOB Standards provide 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.” PCAOB Auditing +Standard (“AS”) No. 7.09.4 The EQR should be documented sufficiently and include the +information that identifies: (1) the engagement quality reviewer; (2) the documents reviewed by +the engagement quality reviewer; and (3) the date that the engagement quality reviewer provided +concurring approval of issuance. In addition, PCAOB Standards provide that the firm may grant +permission to the client to use the engagement report in an audit only after the engagement quality +reviewer has performed the review and provides concurring approval of issuance. AS No. 7.12– +.13 and .19. +3. The Accounting Firm’s standard audit program for EQRs included several audit +procedures that the EQR partner was required to consider. In response to subpoenas issued by the +Commission’s staff, the Accounting Firm produced numerous EQR audit programs purportedly +performed by Respondent from audits or interim reviews of the Issuers’ financial statements. At +least forty of these EQR audit programs were not filled out at all. The Accounting Firm also did +not produce any other documentation demonstrating that the requisite EQR procedures had been +performed for those audits and reviews. +4. For example, with regard to an audit conducted by the Accounting Firm of one +Issuer’s financial statements, the Accounting Firm’s audit program required the reviewer to affirm +that he had evaluated 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 engagement quality review. PCAOB Standards require the reviewer to “[e]valuate the +engagement team’s assessment of, and audit responses to . . . [s]ignificant risks identified by the +engagement team, including fraud risks.” AS No. 7.10(b). The work papers produced by the +Accounting Firm in response to the Commission’s subpoenas, however, did not contain any +evidence that Respondent had considered this procedure or any other EQR procedures during the +Accounting Firm’s audit. + +4 Citations to “AU” and “AS” refer to PCAOB Standards that were in effect at the time of the relevant +conduct. +4 + + +5. With regard to an audit conducted by the Accounting Firm of another Issuer’s +financial statements, the Accounting Firm’s audit program required the reviewer to confirm with +the engagement partner that there were no significant unresolved matters, including unresolved +matters relating to significant unusual transactions. PCAOB Standards require the reviewer to +“[r]eview the engagement completion document and confirm with the engagement partner that +there are no significant unresolved matters.” AS No. 7.10(e). However, the work papers produced +by the Accounting Firm in response to the Commission’s subpoenas did not contain any evidence +that Respondent had considered this procedure or any other EQR procedures during the +Accounting Firm’s audit. +6. Respondent’s failure to perform engagement quality reviews violated AS No. 7. +Falsifying and Back-Dating Documents. +7. After the Commission’s staff questioned the engagement partner on the audits and +interim reviews about the deficient EQR work papers referenced above, the Accounting Firm +produced additional purported EQR work papers for certain of the audits and reviews that it had +conducted of the Issuers’ financial statements. At least twenty-one of these additional purported +work papers were completed and signed electronically by Respondent and dated with dates +consistent with the respective audit or review periods. The relevant metadata in these purported +work papers also were consistent with the dates that the corresponding audits or interim reviews +supposedly were completed. +8. In fact, however, Respondent had created those purported work papers after the +Commission staff had served a subpoena for them. Respondent also had altered the metadata in +those purported work papers so that they reflected the dates of the respective audits or interim +reviews of financial statements, rather than the actual dates on which he later had created the +documents. +9. Respondent failed to prepare or maintain any work paper documentation showing +that he had completed the underlying steps of the engagement quality reviews. Respondent also +did not maintain notes or any other documentation demonstrating that the requisite steps of the +engagements quality reviews had been performed. +10. PCAOB Standards provide that a “complete and final set of audit documentation +should be assembled for retention as of a date not more than 45 days after the report release date” +(referred to as the “documentation completion date”). AS No. 3.15. PCAOB Standards further +provide that if documentation is added after the documentation completion date, it “must indicate +the date the information was added, the name of the person who prepared the additional +documentation, and the reason for adding it.” AS No. 3.16. These requirements apply to +engagement quality reviews. AS No. 7.21. +11. AS No. 7.4 requires that “an engagement quality reviewer must have competence, +independence, integrity, and objectivity.” +5 + + +12. Respondent’s backdating and falsification of audit documentation violate AS Nos. +3 and 7. +D. VIOLATIONS + + As a result of the conduct described above, Respondent engaged in improper professional +conduct as defined by Rule 102(e)(1)(iv). Respondent committed intentional and knowing or +reckless conduct that resulted in violations of applicable professional standards, and committed +repeated instances of unreasonable conduct, each resulting in violations of applicable professional +standards, that indicate a lack of competence to practice before the Commission. + +E. FINDINGS + + Based on the foregoing, the Commission finds that Respondent engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) 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 Baer’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Respondent is denied the +privilege of 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/2018/AAER-3923.txt b/raw/aaer/2018/AAER-3923.txt new file mode 100644 index 0000000000000000000000000000000000000000..7362a543f8225d5392731af7bbab8b83f458d682 --- /dev/null +++ b/raw/aaer/2018/AAER-3923.txt @@ -0,0 +1,1426 @@ + + + + + + + + + + + + + + + + SEC.gov | Sharone Perlstein, et al., Jonathan Strum, Alan Weinberg, 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\/520756","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Sharone Perlstein, et al., No. 1:18-cv-01026 (E.D.N.Y. filed Feb. 16, 2018) + + Securities and Exchange Commission v. Jonathan Strum, No. 1:18-cv-00361 (D.D.C. filed Feb. 16, 2018) + + Securities and Exchange Commission v. Alan Weinberg, et al., No. 1:18-cv-00360 (D.D.C. filed Feb. 16, 2018) + + + + + + + + + The Securities and Exchange Commission today announced charges against three Israeli residents, a Washington, D.C. attorney, and an Israeli auditor and his Maryland-based accounting firm for their roles in a fraudulent scheme in the creation of numerous public shell companies.  Under the terms of their settlements with the SEC, the three Israeli residents will be subject to penny stock bars and the attorney and auditor will be prohibited from appearing and practicing before the Commission. + + According to a complaint filed by the SEC in federal district court for the Eastern District of New York, Sharone Perlstein, Aric Swartz, and Hadas Yaron created at least 15 shell companies by filing false and misleading registration statements and periodic reports with the SEC, creating phony business plans, and appointing nominal officers and directors, who also acted as straw-man shareholders for the shell companies.  The defendants also conducted putative initial public offerings of certain shell companies.  In reality, the defendants continued to control the companies' shares and the defendants subsequently sold certain shell companies at a profit of more than $1.8 million. + + The SEC also filed complaints in federal district court for the District of Columbia against gatekeepers who provided substantial assistance in the fraudulent scheme.  According to the SEC's complaint against Jonathan Strum, a Washington, D.C.-based attorney, he assisted in drafting false and misleading registration statements and periodic reports and signed fraudulent opinion letters.  In its complaint against Alan Weinberg, CPA, an Israeli resident, and his Baltimore-based accounting firm Weinberg & Baer LLC, the SEC alleges that they issued misleading audit reports for at least seven of the shell companies.  Despite numerous audit failures and red flags, Weinberg and his firm issued audit reports falsely asserting that the audits had been performed in accordance with the auditing standards promulgated by the Public Company Accounting Oversight Board. + + The SEC's complaints charge Perlstein, Swartz, and Yaron with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; Strum, Weinberg, and Weinberg & Baer with aiding and abetting these violations; Weinberg and Weinberg & Baer with violating Exchange Act Section 10A(a)(2); and Weinberg & Baer with violating Rule 2-02(b)(1) of Regulation S-X. + + To settle the SEC's charges, the defendants agreed, without admitting or denying the allegations, to the entry of permanent injunctions as well as disgorgement and prejudgment interest totaling $1,656,121.18 for Perlstein; $307,510.15 for Swartz; $106,146.64 for Yaron; $62,899.82 for Weinberg and Weinberg & Baer, jointly and severally; and $33,610.89 for Strum.  Perlstein, Swartz, and Yaron have also agreed to the entry of penny stock bars.  Subject to court approval of the settlements, Weinberg and Weinberg & Baer have also consented to be suspended from appearing and practicing before the SEC as accountants, and Swartz and Strum have consented to the entry of orders suspending them from appearing and practicing before the SEC as attorneys. + + The SEC also instituted settled administrative proceedings against Simcha Baer, a Maryland-based accountant.  According to the SEC's order, Baer failed to properly perform and document various engagement quality reviews for audits and interim reviews, and repeatedly back-dated and falsified documentation subsequently produced to SEC staff.  The SEC's order finds that Baer engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the SEC Rules of Practice.  Without admitting or denying the findings of the SEC's order, Baer consented to be permanently barred from appearing and practicing before the SEC as an accountant. + + On Nov. 4, 2016, the  SEC suspended trading in the securities of one of the Perlstein Group's shell companies  based on fraudulent statements contained in the company's public disclosures.  On April 10, 2017, the  SEC suspended the registration statements  of four of the shell companies. + + The investigation was conducted in the SEC's New York Regional Office by Daphne Downes, Joseph Darragh, Peter Pizzani, and Kristine Zaleskas and supervised by Michael D. Paley of the Microcap Fraud Task Force and Sanjay Wadhwa, and in Washington, D.C. by Greg Hillson and Jeffrey Anderson and supervised by Peter Rosario, Yuri B. Zelinsky, and Antonia Chion.  Preethi Krishnamurthy and Daniel Maher provided litigation counsel.  The SEC appreciates the assistance of the Israel Securities Authority, the Financial and Capital Market Commission of the Republic of Latvia, the British Columbia Securities Commission, the Internal Revenue Service Criminal Investigation Division, the Federal Bureau of Investigation, the Office of the United States Attorney for the Eastern District of New York, the Financial Conduct Authority of the United Kingdom, and the Financial Industry Regulatory Authority. + + + + + + + + + Complaints and Orders + Sharone Perlstein et al. + Jonathan Strum + Alan Weinberg and Weinberg & Baer LLC + Simcha Baer, CPA + + + + + + + + + + + + Resources + + + + + Sharone Perlstein et al. + + + + + Jonathan Strum + + + + + Baer LLC + + + + + + + + + + + + + + + + + + + + + + + + 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/2018/AAER-3924.txt b/raw/aaer/2018/AAER-3924.txt new file mode 100644 index 0000000000000000000000000000000000000000..919ad423e9983b63c08066b292b4fe6903f88c74 --- /dev/null +++ b/raw/aaer/2018/AAER-3924.txt @@ -0,0 +1,110 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82744 / February 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3924 / February 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18376 + +In the Matter of + +ALAN WEINBERG, CPA +AND WEINBERG & BAER +LLC, +Respondents. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Alan +Weinberg (“Weinberg”) and Weinberg & Baer LLC (“W&B”) (“Respondents”) pursuant to Rule +102(e)(3)(i) of the Commission’s Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +Commission, or to which the Commission is a party and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondents +consent to the issuance 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 Respondents’ Offer, the Commission finds that: + +1. Alan Weinberg, age 60, resides in Israel and is a certified public accountant licensed +in Maryland. At all relevant times, Weinberg owned approximately 98.5 percent of Weinberg & +Baer LLC. +2. Weinberg & Baer, LLC is a Maryland limited liability company and public +accounting firm based in Baltimore, Maryland. W&B is registered with the Public Company +Accounting Oversight Board (“PCAOB”). At all relevant times, Weinberg was one of two +certified public accountants who worked at W&B. W&B was formerly known as “Alan +Weinberg CPA,” which was registered with the PCAOB in December 2007. +3. On February 16, 2018, the Commission filed a complaint against Weinberg and W&B +in SEC v. Alan Weinberg, et al. (Civil Action No. 1:18-cv-00360-BAH), in the United States +District Court for the District of Columbia. On February 20, 2018, the court entered an order (a) +permanently enjoining Weinberg and W&B, by consent, from future violations of Section 17(a) +of the Securities Act of 1933, Sections 10(b) and 10A(a)(2) of the Securities Exchange Act of +1934 (the “Exchange Act”) and Rule 10b-5 thereunder, and (b) permanently enjoining W&B, by +consent, from future violations of Rule 2-02(b)(l) of Regulation S-X. +4. The Commission’s complaint alleges, among other things, that between 2011 and +2014, Weinberg and W&B aided and abetted a scheme to prepare seven fraudulent shell +companies (the “Issuers”) to issue shares to the public and then to sell the shell companies in +reverse mergers or other changes in control. The complaint alleges that Weinberg served as the +engagement partner for audits of the Issuers’ financial statements, and that Weinberg knew, or +was reckless in not knowing, that certain undisclosed persons, not the Issuers’ purported officers +and directors, exercised control over the Issuers. The complaint further alleges that in violation +of professional standards, Weinberg and W&B failed to implement reasonable client-acceptance +and continuance procedures and demonstrated virtually no professional skepticism regarding the +undisclosed control persons’ relationship with the Issuers, and neither questioned their role with +regard to the Issuers, nor took reasonable steps to investigate whether the purported directors and +officers actually served in those capacities. The complaint also alleges that Weinberg and W&B +failed to (a) properly audit related-party transactions between the undisclosed control persons +and the Issuers, and (b) maintain sufficient work paper documentation of their audits of the +Issuers. The complaint alleges that despite these repeated failures to adhere to PCAOB +standards, W&B recklessly and falsely claimed in each of its audit reports for the Issuers that +W&B had complied with PCAOB standards. + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondents’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Respondents are +suspended from appearing or practicing before the Commission as accountants. + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3925.txt b/raw/aaer/2018/AAER-3925.txt new file mode 100644 index 0000000000000000000000000000000000000000..60b06759ab6e76c6986a0b3dc8ec7c0b656baf4b --- /dev/null +++ b/raw/aaer/2018/AAER-3925.txt @@ -0,0 +1,357 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82849 / March 9, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3925 / March 9, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18397 + +In the Matter of + +ELBIT IMAGING LTD., + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, IMPOSING A CEASE-AND- +DESIST ORDER, AND IMPOSING A +CIVIL MONEY 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 Elbit Imaging Ltd. (“Elbit” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order, and Imposing a Civil Money Penalty (“Order”), +as set forth below. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + This case concerns violations of the books and records and internal accounting controls +provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”) involving millions of dollars of +payments made by Elbit, and its then majority-owned indirect subsidiary Plaza Centers NV +(“Plaza”). Between 2007 and 2012, Elbit and Plaza, directly and indirectly, paid millions of +dollars to third-party offshore consultants and sales agents purportedly for their services related to +a real estate development project in Romania and the sale of a large portfolio of real estate assets in +the U.S. However, Elbit and Plaza made these payments even though they had no evidence that +the consultants and sales agents had actually provided the contracted for services. Elbit and Plaza +failed to properly record those payments in a manner that, in reasonable detail, accurately and +fairly reflected the nature of the payments in their books and records. Elbit and Plaza also failed to +devise and maintain internal accounting controls sufficient to provide reasonable assurances that +company funds would only be used as authorized for legitimate corporate purposes and that +transactions were recorded as necessary to maintain accountability for assets, particularly with +regard to the accounts payable process. + +Respondent + +1. Elbit is an Israeli incorporated company with its headquarters located in Petach +Tikva, Israel. Its ordinary shares are registered with the Commission pursuant to Section 12(b) of +the Securities Act of 1933, and trades on the Tel Aviv Stock Exchange and NASDAQ (ticker: +EMITF). Elbit is an international holding company with several direct and indirect subsidiaries +focused on, among other industries, real estate investment and development. Elbit exerts +functional control over its indirect subsidiary Plaza, and between 2007 and 2012 Elbit consolidated +Plaza’s financial statements into its own financial statements for the purposes of SEC reporting. + +Other Relevant Entity and Person + +2. Plaza is an indirect subsidiary of Elbit, and is incorporated in the Netherlands. Its +securities are listed on the London Stock Exchange, the Warsaw Stock Exchange, and the Tel Aviv +Stock Exchange. Plaza is a Central and Eastern European developer of shopping and +entertainment centers, focusing on developing new Western-style centers and, where there is +significant redevelopment potential, redeveloping existing centers. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + + 3 +3. Executive A, an Israeli citizen, who, prior to February 2014, owned or controlled +approximately 50 percent of Elbit’s equity, served as Elbit’s CEO and Plaza’s Executive Director, +and had a seat on both companies’ boards of directors. Executive A passed away in June 2016. + +The 2006 and 2011 Casa Radio Project Consultancy Contracts + +4. Elbit, through Plaza, has been engaged in the business of real estate development in +Central and Eastern Europe, including in Romania. In 2006, Plaza sought to be included in a large +real estate development project located in Bucharest, Romania – the Casa Radio Project. + +5. In 2006, Plaza hired an international property consultancy firm to value the Casa +Radio Project. The firm projected that the project would be highly profitable for Plaza, if it +obtained the development rights. + +6. In August 2006, at the direction of Executive A, Plaza entered into a contract with a +third-party offshore entity purportedly for consulting services (“2006 Consultant”) to assist Plaza +in (a) procuring an invitation from the Romanian government to participate in the Casa Radio +Project, and (b) thereafter acquiring the governmental approvals needed to perform the +development work. There is no evidence to suggest that Plaza conducted any due diligence on the +2006 Consultant prior to entering into this agreement. + +7. In February 2007, with the Romanian government’s consent, Plaza purchased a 75 +percent interest in the Casa Radio Project for approximately $40 million in cash and an agreement +to develop a Romanian public authority building onsite at Plaza’s expense. There is no +documentation or other evidence showing that the 2006 Consultant provided any services in +connection with this transaction. + +8. In September 2011, once again at the direction of Executive A, Plaza entered into a +second contract with a third-party offshore entity purportedly for consulting services (“2011 +Consultant”) related to the Casa Radio Project. The 2011 Consultant was to assist Plaza in (a) once +again acquiring all of the governmental approvals needed to perform the development work, and +(b) purchasing an additional 15 percent interest in the project from the Romanian government. +There is no evidence to suggest that Plaza conducted any due diligence on the 2011 Consultant +prior to entering into this agreement. + +9. There are no documents or other evidence showing that either of the consultants +performed any work related to Plaza acquiring governmental approvals necessary for the Casa +Radio Project’s development, or that the 2011 Consultant provided any services in furtherance of +Plaza purchasing the Romanian government’s 15 percent interest in the project. For example, the +consultants did not attend any meetings between Romanian officials and Plaza officials and do not +appear to have submitted any other materials evidencing any consulting work. + +10. Between 2007 and 2012, Plaza, directly and indirectly, paid the consultants +approximately $14 million. Plaza’s top officers authorized making these payments, even though +the documentation supporting the payments did not identify the services that the consultants +provided pursuant to the contracts. Plaza characterized the payments to the consultants in its books + 4 +and records as legitimate business expenses for services rendered, when some or all of the funds +may have been used to make corrupt payments to Romanian government officials or were +embezzled. + +The 2011 Real Estate Portfolio Sale Agency Contract + +11. In October 2011, a joint venture of investors (“Joint Venture”), including Elbit and +Plaza who together held a 45.4 percent interest in the Joint Venture, sought to sell a portfolio of 47 +shopping center real estate assets located in the U.S. (the “Portfolio”). + +12. On November 15, 2011, at the direction of Executive A, Elbit and Plaza together +(not the Joint Venture as a whole) entered into a sales agency contract with a third-party offshore +entity (“Sales Agent A”), purportedly to assist in selling the Portfolio (“Sales Agent Contract”). +Elbit and Plaza conducted no due diligence on Sales Agent A, and Executive A did not obtain a +second signature for the Sales Agent Contract that he executed on behalf of Elbit, as required by +Elbit’s signature authorization policy. + +13. Pursuant to the Sales Agent Contract, Sales Agent A was to create marketing +materials, locate potential buyers, and assist in negotiating a sales contract in exchange for a fee of +0.9 percent of the Portfolio’s gross sale price. + +14. Unbeknownst to Elbit and Plaza, the day after the execution of the Sales Agent +Contract, Sales Agent A entered into a subcontract with another offshore entity (“Sales Agent B”), +assigning its rights and obligations under the Sales Agent Contract to Sales Agent B. Under this +agreement, Sales Agent A was to pay Sales Agent B 0.88 percent of the Portfolio sale’s gross +price (i.e. approximately 98 percent of the 0.9 percent commission that Sales Agent A was +entitled to under the Sales Agent Contract). At the time, Sales Agent B was indirectly +beneficially owned by Executive A. Executive A did not disclose this subcontract or his interest +in Sales Agent B to Elbit or Plaza. + +15. Approximately a month and a half prior to the execution of the Sales Agent +Contract, the Joint Venture (as a whole) hired another financial institution to serve as its financial +advisor for the Portfolio sale (“Financial Advisor”). The Financial Advisor was retained to provide +nearly the same services to the Joint Venture as Sales Agent A had agreed to perform for Elbit and +Plaza. + +16. While no evidence suggests that Sales Agent A or Sales Agent B provided any +known financial advisory services to Elbit and Plaza in connection with the Portfolio sale, the +Financial Advisor did fulfill its obligations pursuant to its contract with the Joint Venture. + +17. On June 21, 2012, Elbit announced that the Joint Venture obtained a gross sales +price of $1.428 billion from the Portfolio sale. In August 2012, Elbit and Plaza paid Sales Agent A +a total of $13 million (i.e. nearly double the $6.75 million that the Joint Venture paid to the +Financial Advisor that had actually provided services) for “commissions” and “expenses.” Elbit +and Plaza made these payments despite the fact that the documentation supporting the payments +did not identify the services that the consultants provided pursuant to the contracts. Thereafter, + 5 +unknown to anyone at Elbit or Plaza besides Executive A, Sales Agent A paid Sales Agent B +$12.75 million. + +Elbit and Plaza’s Deficient Books and Records and Internal Accounting Controls + +18. Elbit and Plaza’s applicable internal accounting controls were deficient. Elbit’s and +Plaza’s internal accounting controls failed to identify the approximately $27 million in payments +made to the 2006 Consultant, the 2011 Consultant, and Sales Agent A, despite having no evidence +that these counter-parties actually provided any of the contracted for services. + +19. Elbit and Plaza did not devise and maintain internal accounting controls sufficient +to provide reasonable assurances that transactions were recorded as necessary to maintain +accountability for assets, particularly with regard to the accounts payable process Elbit did not +make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly +reflected its transactions and dispositions of its assets. Plaza’s legal department had limited +involvement with or supervision of contracts entered into between Plaza and third-party +consultants or agents. Elbit and Plaza also did not have policies and procedures in place to detect +corruption risks and provided little, if any, anti-corruption compliance training to employees during +the relevant time period. + +20. Elbit and Plaza mischaracterized the numerous payments made to the 2006 +Consultant, the 2011 Consultant, and Sales Agent A as legitimate business expenses, even though +some or all of the funds may have been used to make corrupt payments to Romanian government +officials or were embezzled. + + +Elbit’s 2014 Debt Arrangement + +21. In February 2014, Elbit completed a debt arrangement (similar to Chapter 11 +reorganization under U.S. bankruptcy law), pursuant to which its former debt holders became the +new majority equity shareholders of the company. Along with this change in ownership and +control, significant changes were made to the composition of Elbit’s board of directors and senior +officers. Similarly, in July 2014, Plaza completed its own debt arrangement. Although Elbit’s +ownership of reorganized Plaza was reduced to approximately 45 percent, Elbit continued to exert +functional control over Plaza. + +Discovery, Internal Investigation, and Self-Report + +22. When Elbit discovered evidence which suggested that certain payments that +Plaza, directly or indirectly, made in connection with the Casa Radio Project were improper and +may have been recorded incorrectly in Plaza’s books and records, Elbit and Plaza self-reported +this information to authorities in both Romania and the U.S., fully cooperated with the +Commission staff’s investigation, and implemented extensive remedial measures. + +23. Elbit, through a special committee of its board of directors, hired outside counsel +(“Counsel”) to conduct an independent investigation to determine the scope of potential issues + 6 +related to Elbit’s and Plaza’s business in connection with the Casa Radio Project. During the +pendency of this investigation, additional facts were learned concerning the payments Elbit and +Plaza made to Sales Agent A and the ownership of Sales Agent B, resulting in the formation of a +joint special committee by Elbit and Plaza to investigate the Portfolio sale transaction as well. +As the investigations progressed, Elbit shared Counsel’s findings with the Commission staff, was +fully responsive to requests for additional information, and provided translations of certain +documents. + +24. The joint special committee also directed Counsel to examine and recommend +revisions to Elbit’s and Plaza’s internal accounting controls and anti-bribery policies and +procedures. Counsel did so, and both Elbit’s and Plaza’s boards accepted all of the +recommendations, and directed management to implement them. + +Books and Records and Internal Accounting Controls Violations + +25. As a result of the conduct described above, Elbit violated Section 13(b)(2)(A) of +the Exchange Act which requires companies with a class of securities registered under Section +12 of the Securities Act to make and keep books, records, and accounts, which, in reasonable +detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer. 15 +U.S.C. § 78m(b)(2)(A). + +26. As a result of the conduct described above, Elbit also violated Section 13(b)(2)(B) +of the Exchange Act which requires companies with a class of securities registered under Section +12 of the Securities 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). + +Commission’s Consideration of Elbit’s Remedial Efforts and Business Wind Down + +27. In determining to accept the Offer, the Commission considered remedial acts that +Respondent promptly undertook, its self-reporting, and its cooperation afforded to the +Commission staff, including having conducted a thorough internal investigation, voluntarily +providing detailed reports to the staff, fully responding to the staff’s requests for additional +information in a timely manner, and providing translations of certain documents. + +28. The Commission also considered that Elbit is in the process of selling its principal +assets in order to service its debt obligations, and does not develop current or new businesses. + + + 7 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. + + B. Respondent shall, within 14 days of the entry of this Order, pay 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 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-41 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Elbit +Imaging Ltd. 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 Lara Shalov Mehraban, +Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, +New York Regional Office, 200 Vesey Street, Suite 400, New York, NY 10281. + +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 + 8 +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors +based on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $500,000 based upon its cooperation 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 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/2018/AAER-3926.txt b/raw/aaer/2018/AAER-3926.txt new file mode 100644 index 0000000000000000000000000000000000000000..374528384970291e5833bbb66d718082e959e155 --- /dev/null +++ b/raw/aaer/2018/AAER-3926.txt @@ -0,0 +1,312 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82859 / March 13, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3926 / March 13, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18399 + + +In the Matter of + +BDO CANADA LLP + (f/k/a BDO DUNWOODY 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 A CEASE-AND- +DESIST ORDER, A CENSURE AND A CIVIL +PENALTY + + +I. + + The Securities and Exchange Commission (“Commission” or “SEC”) deems it appropriate +that public administrative and cease-and-desist proceedings be, and hereby are, instituted against +BDO Canada LLP (f/k/a BDO Dunwoody LLP) (“Respondent” or “BDO Canada”) pursuant to +Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (2) to be lacking in character or integrity, or to +have engaged in unethical or improper professional conduct . . . . + + + 2 +102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +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 A Cease-and-Desist Order, a Censure and a Civil Penalty (“Order”), as set +forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +A. SUMMARY + + These proceedings arise out of BDO Canada’s improper professional conduct in the course +of its audits of Issuer A. In particular, from at least 2006 until 2012, during its audits of Issuer A, +BDO Canada failed to comply with the auditing standards of the Public Company Accounting +Oversight Board (“PCAOB”). + +B. RESPONDENT + + BDO Canada LLP (“BDO Canada”) is a public accounting firm registered with the +PCAOB and located in Toronto, Canada. BDO Canada is a member firm of BDO International +Limited, a private company in the United Kingdom. Prior to January 2010, BDO Canada was +named BDO Dunwoody LLP. + +C. OTHER RELEVANT ENTITIES + +Issuer A is a company that is incorporated in Canada with its principal executive offices in + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + + + 3 +South Africa. Issuer A’s securities are registered with the Commission pursuant to Section 12(b) +of the Securities Exchange Act of 1934 (“Exchange Act”), and were previously registered with the +Commission pursuant to Section 12(g) of the Exchange Act. Issuer A files periodic reports, +including Form 20-F, with the Commission pursuant to Section 13(a) of the Exchange Act and +related rules thereunder. + +Deloitte & Touche Chartered Accountants (“Deloitte Zimbabwe”) is an accounting firm +located in Zimbabwe and is a member firm of a global accounting network. Deloitte Zimbabwe is +not registered with the PCAOB. + +D. FACTS + + From at least 2006 until 2012, BDO Canada audited the financial statements of Issuer A, +a Canadian company with securities registered with the Commission pursuant to Section 12(g) of +the Exchange Act. As such, Issuer A is required to file periodic reports with the Commission and +the financial statements contained in those reports are required to be audited pursuant to PCAOB +standards. + + In each independent auditor’s report of BDO Canada included with Issuer A’s financial +statements filed with the Commission on Form 20-F for fiscal years 2006 through 2012, BDO +Canada inaccurately stated that it had conducted its audits in accordance with the standards of the +PCAOB. Specifically, BDO Canada’s use of the work of another independent auditor failed to +comply with PCAOB auditing standards. + + Applicable Auditing Standards3 + + PCAOB AU Sec. 543, Part of Audit Performed by Other Independent Auditors, establishes +requirements that apply when an auditor of an issuer’s financial statements “use[s] the work and +reports of other independent auditors who have audited the financial statements of one or more +subsidiaries, divisions, branches, components, or investments included in [that issuer’s] financial +statements.” See AU 543.01. + + In circumstances where a significant part of the audit is performed by another auditor, a +firm, in considering whether it can serve as principal auditor, must decide whether its own +participation in the audit is sufficient and enables it to serve as the principal auditor and to report as +such on the financial statements. See AU 543.02. + + In determining whether its participation is sufficient to serve as a principal auditor, the +auditor “should consider, among other things, the materiality of the portion of the financial +statements [the firm] audited in comparison with the portion audited by other auditors, the extent of + +3 The references to PCAOB standards and applicable provisions of the U.S. securities laws are to +those that were in effect at the time of the relevant conduct. + + 4 +[the auditor’s] knowledge of the overall financial statements, and the importance of the +components [the firm] audited in relation to the enterprise as a whole.” See AU 543.02. + + As part of deciding whether it can use the work and report of another auditor, the principal +auditor “should make inquiries concerning the professional reputation and independence of the +other auditor.” See AU 543.10. In addition, the principal auditor “should adopt appropriate +measures to assure the coordination of his activities with those of the other auditor in order to +achieve a proper review of the matters affecting the consolidating or combining of accounts in the +financial statements.” See AU 543.10. + + In addition, PCAOB AU Sec. 230, Due Professional Care in the Performance of Work, +requires “[d]ue professional care [ ] to be exercised in the planning and performance of the audit +and the preparation of the report.” See AU 230.01. + + BDO Canada’s Role as Issuer A’s Principal Auditor and its Improper Professional Conduct + + During the relevant period, BDO Canada served as the principal auditor of Issuer A. In that +capacity, BDO Canada signed and issued the audit reports on Issuer A’s financial statements. +During this same period, Issuer A’s largest subsidiary, located in Africa, accounted for the majority +of Issuer A’s consolidated assets and revenues. For example, for fiscal year 2011, this specific +African subsidiary accounted for approximately 64 and 100 percent of Issuer A’s consolidated total +assets and revenues, respectively. In conducting its audits of Issuer A, BDO Canada used a local +audit firm, Deloitte Zimbabwe, to audit the financial statements of this subsidiary. + + BDO Canada failed to comply with AU 543 in its use of the work of Deloitte Zimbabwe. +At the outset, BDO Canada provided Deloitte Zimbabwe with instructions for performing the audit. +Significantly, BDO Canada directed Deloitte Zimbabwe to perform its audits in accordance with +International Standards on Auditing (“ISAs”). Deloitte Zimbabwe’s report of its audit provided to +BDO Canada made clear that its audit was conducted in accordance with ISAs and not PCAOB +standards. BDO Canada failed to perform procedures to evaluate the potential impact of Deloitte +Zimbabwe having applied ISAs or to determine whether the audit work performed was compliant +with PCAOB standards until 2012. + + In addition, BDO Canada failed to perform any analysis under AU 543 to determine +whether it could serve as Issuer A’s principal auditor and use the work of Deloitte Zimbabwe. +Again, BDO Canada mistook what auditing standards were applicable and considered the issue +under Canadian Auditing Standards. In addition, a factor in deciding to use Deloitte Zimbabwe +was the preference of management of Issuer A to have Deloitte Zimbabwe do the audit work, a +reason with no basis under AU 543. + + The U.S. securities laws and the PCAOB rules require that accounting firms register with +the PCAOB if they “prepare[] or issue[] any audit report with respect to any issuer” or “play[] a +substantial role in the preparation or furnishing of an audit report with respect to any issuer.” See +Section 102 of the Sarbanes-Oxley Act of 2002 and PCAOB Rule 2100. An accounting firm plays + + 5 +a substantial role and is thus required to register when it: (1) “perform[s] material services that a +public accounting firm uses or relies on in issuing all or part of its audit report;” or (2) “perform[s] +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 auditor to issue an audit report.” See PCAOB Rule 1001(p)(ii). + + Deloitte Zimbabwe played a substantial role in the preparation of the audit reports for +Issuer A having audited most of Issuer A’s assets and substantially all of its revenues. As such, +Deloitte Zimbabwe was required to be registered with the PCAOB. However, Deloitte Zimbabwe +failed to register with the PCAOB. Among BDO Canada’s responsibilities under AU 543 was to +inquire concerning the professional reputation and independence of Deloitte Zimbabwe and under +AU 230.01 to plan and perform its work with due professional care. See AU 543.10; AU 230.01. +From 2006 to 2012, BDO Canada simply assumed that Deloitte Zimbabwe was registered with the +PCAOB. An adequate inquiry performed with due professional care under AU 543 and AU 230 +concerning Deloitte Zimbabwe’s professional reputation, based in part, on the significance of the +assets and revenues audited by Deloitte Zimbabwe, would have revealed that Deloitte Zimbabwe +was not registered with the PCAOB. As a result, BDO Canada should not have used Deloitte +Zimbabwe’s audit work. However, for a period of six years, BDO used the audit work of Deloitte +Zimbabwe and during that period failed to identify the fact that Deloitte Zimbabwe was not +registered with the PCAOB. + +E. BDO CANADA’S REMEDIAL EFFORTS + +In determining to accept the Offer, the Commission considered BDO Canada’s cooperation +and remedial measures. + +F. VIOLATIONS + + BDO Canada engaged in improper professional conduct under Section 4C(a)(2) of the +Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by failing (1) to +instruct Deloitte Zimbabwe to perform its audit in accordance with PCAOB standards or to +perform procedures to evaluate the impact of Deloitte Zimbabwe having applied ISAs including +determining whether or not the audit work performed was compliant with PCAOB standards; and +(2) to comply with AU 543 and AU 230 in using the audit work of an unregistered auditing firm; +and (3) to perform an analysis under AU 543 regarding the sufficiency of its participation to serve +as principal auditor. + + Rule 2-02(b)(1) of Regulation S-X of the Exchange Act requires an auditor’s report to state +whether the audit was made in accordance with generally accepted auditing standards. By +indicating that its audit was conducted in accordance with PCAOB standards, when in fact it had +not been, BDO Canada violated Rule 2-02(b)(1) of Regulation S-X. + + Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require every foreign private +issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the + + 6 +Commission such information, documents and reports as the Commission may require. Implicit in +this requirement is that the reports be accurate. By indicating in its audit report accompanying +Issuer A’s financial statements that its audit was conducted in accordance with PCAOB standards, +when in fact, it had not been, BDO Canada caused Issuer A to violate Section 13(a) of the +Exchange Act and Rule 13a-1. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent BDO Canada’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. BDO Canada is censured; + + B. BDO Canada shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02 of Regulation S-X and causing any violations and any future +violations of Section 13(a) of the Exchange Act and Rule 13a-1; and + +C. BDO Canada shall, within 30 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. 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 +BDO Canada 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 Amy L. Friedman, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5010. + + 7 + 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. + + E. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $50,000 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/2018/AAER-3927.txt b/raw/aaer/2018/AAER-3927.txt new file mode 100644 index 0000000000000000000000000000000000000000..c22327361b264522b598b85c67907fdb0372c856 --- /dev/null +++ b/raw/aaer/2018/AAER-3927.txt @@ -0,0 +1,295 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82860 / March 13, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3927 / March 13, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18400 + + +In the Matter of + +KPMG INC. + +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 A CEASE-AND- +DESIST ORDER, A CENSURE AND A CIVIL +PENALTY + + +I. + + The Securities and Exchange Commission (“Commission” or “SEC”) deems it appropriate +that public administrative and cease-and-desist proceedings be, and hereby are, instituted against +KPMG Inc. (“Respondent” or “KPMG South Africa”) pursuant to Sections 4C1 and 21C of the + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + + 2 +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +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 A Cease-and-Desist Order, a Censure and a Civil Penalty (“Order”), as set +forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +A. SUMMARY + + These proceedings arise out of KPMG South Africa’s improper professional conduct in the +course of its audits of Issuer A. In particular, from at least 2013 through 2014 during its audits of +Issuer A, KPMG South Africa failed to comply with the auditing standards of the Public Company +Accounting Oversight Board (“PCAOB”). + +B. RESPONDENT + + KPMG Inc. is a public accounting firm registered with the PCAOB and located in +Johannesburg, South Africa. KPMG Inc. is a member firm of KPMG International Cooperative +(“KPMG International”), a Swiss entity. + +C. OTHER RELEVANT ENTITIES + +Issuer A is a company that is incorporated in Canada with its principal executive offices in +South Africa. Issuer A’s securities are registered with the Commission pursuant to Section 12(b) +of the Securities Exchange Act of 1934 (“Exchange Act”), and were previously registered with the + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + + 3 +Commission pursuant to Section 12(g) of the Exchange Act. Issuer A files periodic reports, +including Form 20-F, with the Commission pursuant to Section 13(a) of the Exchange Act and +related rules thereunder. + + KPMG (“KPMG Zimbabwe”) is an accounting firm located in Zimbabwe and is a member +firm of KPMG International KPMG Zimbabwe is not registered with the PCAOB. + +D. FACTS + + From at least 2013 through 2014, KPMG South Africa audited the financial statements of +Issuer A, a Canadian company with securities registered with the Commission pursuant to Section +12(g) of the Exchange Act. As such, Issuer A is required to file periodic reports with the +Commission and the financial statements contained in those reports are required to be audited +pursuant to PCAOB standards. + + In each independent auditor’s report of KPMG South Africa included with Issuer A’s +financial statements filed with the Commission on Form 20-F for fiscal years 2013 through 2014, +KPMG South Africa stated that it had conducted its audits in accordance with the standards of the +PCAOB. However, those statements were inaccurate because KPMG South Africa had in fact +failed to conduct its audits in accordance with certain PCAOB auditing standards identified below. +Specifically, KPMG South Africa’s use of the work of another independent auditor failed to +comply with PCAOB auditing standards. + + Applicable Auditing Standards3 + + PCAOB AU Sec. 543, Part of Audit Performed by Other Independent Auditors, establishes +requirements that apply when an auditor of an issuer’s financial statements “use[s] the work and +reports of other independent auditors who have audited the financial statements of one or more +subsidiaries, divisions, branches, components, or investments included in [that issuer’s] financial +statements.” See AU 543.01. + + In circumstances where a significant part of the audit is performed by another auditor, a +firm, in considering whether it can serve as principal auditor, must decide whether its own +participation in the audit is sufficient and enables it to serve as the principal auditor and to report as +such on the financial statements. See AU 543.02. + + In determining whether its participation is sufficient to serve as a principal auditor, the +auditor “should consider, among other things, the materiality of the portion of the financial +statements [the firm] audited in comparison with the portion audited by other auditors, the extent of +[the auditor’s] knowledge of the overall financial statements, and the importance of the +components [the firm] audited in relation to the enterprise as a whole.” See AU 543.02. + + +3 The references to PCAOB standards are to those that were in effect at the time of the relevant +conduct. + 4 + As part of deciding whether it can use the work and report of another auditor, the principal +auditor “should make inquiries concerning the professional reputation and independence of the +other auditor.” See AU 543.10. In addition, the principal auditor “should adopt appropriate +measures to assure the coordination of his activities with those of the other auditor in order to +achieve a proper review of the matters affecting the consolidating or combining of accounts in the +financial statements.” See AU 543.10. + + In addition, PCAOB AU Sec. 230, Due Professional Care in the Performance of Work, +requires “[d]ue professional care [ ] to be exercised in the planning and performance of the audit +and the preparation of the report.” See AU 230.01. + + KPMG South Africa’s Role as Issuer A’s Principal Auditor and its Improper Professional +Conduct + + During the relevant period, KPMG South Africa served as the principal auditor of Issuer A. +In that capacity, KPMG South Africa signed and issued the audit reports on Issuer A’s financial +statements. During this same period, Issuer A’s largest subsidiary, located in Africa, accounted for +the majority of Issuer A’s consolidated assets and revenues. For example, for fiscal year 2013, this +subsidiary accounted for approximately 70 percent of Issuer A’s consolidated total assets and 100 +percent of Issuer A’s consolidated revenues, respectively. In conducting its audits of Issuer A, +KPMG South Africa used KPMG Zimbabwe to audit the financial statements of this subsidiary. + + KPMG South Africa failed to comply with AU 543 in its use of the work of KPMG +Zimbabwe. For the fiscal year 2013 audit, KPMG South Africa failed to perform any analysis +under AU 543 to determine whether it could serve as Issuer A’s principal auditor and use the work +of KPMG Zimbabwe. For the fiscal year 2014 audit, KPMG South Africa failed to perform any +analysis under AU 543 to determine whether it could serve as Issuer A’s principal auditor and use +the work of KPMG Zimbabwe until after substantially all of its audit work was completed and less +than two weeks prior to signing its audit report. + + The U.S. securities laws and the PCAOB rules require that accounting firms register with +the PCAOB if they “prepare[] or issue[] any audit report with respect to any issuer” or “play[] a +substantial role in the preparation or furnishing of an audit report with respect to any issuer.” See +Section 102 of the Sarbanes-Oxley Act of 2002 and PCAOB Rule 2100. An accounting firm plays +a substantial role and is thus required to register when it: (1) “perform[s] material services that a +public accounting firm uses or relies on in issuing all or part of its audit report;” or (2) “perform[s] +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 auditor to issue an audit report.” See PCAOB Rule 1001(p)(ii). + + KPMG Zimbabwe played a substantial role in the preparation of the 2013 and 2014 audit +reports for Issuer A having audited most of Issuer’s A assets and substantially all of its revenues. +As such, KPMG Zimbabwe was required to be registered with the PCAOB. However, KPMG +Zimbabwe was not registered with the PCAOB. Among KPMG South Africa’s responsibilities +under AU 543 was to inquire concerning the professional reputation and independence of KPMG + 5 +Zimbabwe and under AU 230.01 to plan and perform its work with due professional care. See AU +543.10; AU 230.01. For the year-end 2013 audit, KPMG South Africa inquired as to KPMG +Zimbabwe’s professional reputation and independence and was informed by KPMG Zimbabwe +that it was not registered with the PCAOB. However, KPMG South Africa failed to follow up on +KPMG Zimbabwe’s response and analyze whether it would prevent KPMG Zimbabwe from +playing a substantial role in the audit because it was apparently unaware of the requirement that +accounting firms playing a substantial role in the audit of an issuer must be registered with the +PCAOB. For the fiscal year 2014 audit, KPMG South Africa was aware that KPMG Zimbabwe +was not registered with the PCAOB but nonetheless failed to perform any analysis as to whether it +could use KPMG Zimbabwe’s audit work until after its audit work was completed and just prior to +signing its audit report. An adequate inquiry and analysis performed with due professional care +under AU 543 and AU 230 concerning KPMG Zimbabwe’s professional reputation, based in part, +on the significance of the assets and revenues audited by KPMG Zimbabwe in 2013 and 2014, +should have revealed that because KPMG Zimbabwe was not registered with the PCAOB, KPMG +South Africa should not have used its audit work. + +E. VIOLATIONS + + KPMG South Africa engaged in improper professional conduct under Section 4C(a)(2) of +the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by failing (1) to +perform an adequate analysis under AU 543 regarding whether it could serve as Issuer A’s +principal auditor and use the work of KPMG Zimbabwe; and (2) to comply with AU 543 and AU +230 in using the audit work of an unregistered auditing firm. + + Rule 2-02(b)(1) of Regulation S-X of the Exchange Act requires an auditor’s report to state +whether the audit was made in accordance with generally accepted auditing standards. By +indicating that its audits were conducted in accordance with PCAOB standards, when in fact they +had not been, KPMG Inc. violated Rule 2-02(b)(1) of Regulation S-X. + + Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require every foreign private +issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission such information, documents and reports as the Commission may require. Implicit in +this requirement is that the reports be accurate. By indicating in its audit reports accompanying +Issuer A’s financial statements that its audits were conducted in accordance with PCAOB +standards, when in fact, they had not been, KPMG Inc. caused Issuer A to violate Section 13(a) of +the Exchange Act and Rule 13a-1. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent KPMG Inc.’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. KPMG Inc. is censured; + 6 + + B. KPMG Inc. shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02 of Regulation S-X and causing any violations and any future +violations of Section 13(a) of the Exchange Act and Rule 13a-1; and + +C. KPMG Inc. shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $100,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury. 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 +KPMG 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 Amy L. Friedman, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5010. + + + + + + + + + 7 + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + By the Commission. + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3928.txt b/raw/aaer/2018/AAER-3928.txt new file mode 100644 index 0000000000000000000000000000000000000000..1d51b539665c059ae621856067a73afef5e2ffe2 --- /dev/null +++ b/raw/aaer/2018/AAER-3928.txt @@ -0,0 +1,180 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82861 / March 13, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3928 / March 13, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18401 + + +In the Matter of + + DELOITTE & TOUCHE + CHARTERED ACCOUNTANTS + +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 REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission” or “SEC”) 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 Deloitte & Touche Chartered +Accountants (“Respondent” or “Deloitte Zimbabwe”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing A Cease-and-Desist Order, and Remedial Sanctions (“Order”), as set forth +below. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +A. SUMMARY + + These proceedings arise out of Deloitte Zimbabwe’s playing a substantial role in the audits +of Issuer A from 2006 until 2012 without being registered with the Public Company Accounting +Oversight Board (“PCAOB”). + +B. RESPONDENT + +Deloitte & Touche Chartered Accountants is an accounting firm located in Zimbabwe +that is a member firm of Deloitte Touche Tohmatsu Limited, a private company located in the +United Kingdom. Deloitte Zimbabwe has never been registered with the PCAOB. + +C. OTHER RELEVANT ENTITIES + +Issuer A is a company that is incorporated in Canada with its principal executive offices in +South Africa. Issuer A’s securities are registered with the Commission pursuant to Section 12(b) +of the Securities Exchange Act of 1934 (“Exchange Act”), and were previously registered with the +Commission pursuant to Section 12(g) of the Exchange Act. Issuer A files periodic reports, +including Form 20-F, with the Commission pursuant to Section 13(a) of the Exchange Act and +related rules thereunder. + + BDO Canada LLP (“BDO Canada”) is a public accounting firm registered with the +PCAOB and located in Toronto, Canada. BDO Canada is a member of a global accounting +network. From at least 2006 until 2012, BDO Canada was the principal auditor of Issuer A and +signed the audit reports on Issuer A’s financial statements. + +D. FACTS + + From at least 2006 until 2012, Issuer A’s financial statements were audited by BDO +Canada which, as Issuer’s A principal auditor, signed and issued the independent auditor’s reports +on Issuer A’s financial statements. During this same period, Issuer A’s largest subsidiary, located +in Africa, accounted for the majority of Issuer A’s consolidated assets and revenues. For example, +for fiscal year 2011, this specific African subsidiary accounted for approximately 64 and 100 +percent of Issuer A’s consolidated total assets and revenues, respectively. Deloitte Zimbabwe +performed audit services for Issuer A by auditing the financial statements of this subsidiary. + + The U.S. securities laws and the PCAOB rules1 require that accounting firms register with +the PCAOB if they “prepare[] or issue[] any audit report with respect to any issuer” or “play[] a + +1 The references to PCAOB standards and applicable provisions of the U.S. securities laws are to +those that were in effect at the time of the relevant conduct. + 3 +substantial role in the preparation or furnishing of an audit report with respect to any issuer.” See +Section 102 of the Sarbanes-Oxley Act of 2002 and PCAOB Rule 2100. An accounting firm plays +a substantial role and is thus required to register when it: (1) “perform[s] material services that a +public accounting firm uses or relies on in issuing all or part of its audit report;” or (2) “perform[s] +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 auditor to issue an audit report.” See PCAOB Rule 1001(p)(ii). + + For a period of six years, Deloitte Zimbabwe played a substantial role in the preparation of +audit reports for Issuer A having audited most of Issuer A’s assets and substantially all of its +revenues. As such, Deloitte Zimbabwe was required to be registered with the PCAOB. However, +Deloitte Zimbabwe failed to register with the PCAOB. + +E. DELOITTE ZIMBABWE’S COOPERATION + +In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by Respondent and cooperation afforded the Commission staff. + +F. VIOLATIONS + + Section 102 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) makes it unlawful for +any person that is not a registered public accounting firm to participate in the preparation or +issuance of, any audit report with respect to any issuer. By participating in the preparation of audit +reports for Issuer A, Deloitte Zimbabwe violated Sarbanes-Oxley Section 102. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Deloitte Zimbabwe’s Offer. + + +Accordingly, it is hereby ORDERED that: + + +A. Deloitte Zimbabwe shall cease and desist from committing or causing any +violations and any future violations of Sarbanes-Oxley Section 102; and + +B. Deloitte Zimbabwe shall, within 60 days of the entry of this Order, pay +disgorgement of $83,077.84, and prejudgment interest of $15,979.50, for a total of $99,057.34 for +transfer to the general fund of the United States Treasury, subject to Exchange Act 21F(g)(3). If +timely payment of disgorgement is not made, additional interest shall accrue pursuant to SEC +Rules 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; + 4 + +(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 +Deloitte Zimbabwe 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 Amy L. +Friedman, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5010. + C. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon its cooperation in a Commission investigation. If at any time following the entry of the +Order, the Division of Enforcement (“Division”) obtains information indicating that Respondent +knowingly provided materially false or misleading information or materials to the Commission, or +in a related proceeding, the Division may, at its sole discretion and with prior notice to the +Respondent, petition the Commission to reopen this matter and seek an order directing that the +Respondent pay a civil money penalty. Respondent may contest by way of defense in any +resulting administrative proceeding whether it knowingly provided materially false or misleading +information, but may not: (1) contest the findings in the Order; or (2) assert any defense to liability +or remedy, including, but not limited to, any statute of limitations defense. + + By the Commission. + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3929.txt b/raw/aaer/2018/AAER-3929.txt new file mode 100644 index 0000000000000000000000000000000000000000..95dcb1dbf2f4bc7c04980ca8ab000a5e98adf552 --- /dev/null +++ b/raw/aaer/2018/AAER-3929.txt @@ -0,0 +1,164 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82862 / March 13, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3929 / March 13, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18402 + + +In the Matter of + + KPMG + +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 REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission” or “SEC”) 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 KPMG (“Respondent” or “KPMG +Zimbabwe”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing A Cease-and-Desist Order, and Remedial Sanctions (“Order”), as set forth +below. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +A. SUMMARY + + These proceedings arise out of KPMG Zimbabwe’s playing a substantial role in the audits of +Issuer A from at least 2013 through 2014 without being registered with the Public Company +Accounting Oversight Board (“PCAOB”). + +B. RESPONDENT + +KPMG is an accounting firm located in Zimbabwe that is a member firm of KPMG +International Cooperative (“KPMG International”), a Swiss entity. KPMG Zimbabwe has never +been registered with the PCAOB. + +C. OTHER RELEVANT ENTITIES + +Issuer A is a company that is incorporated in Canada with its principal executive offices in +South Africa. Issuer A’s securities are registered with the Commission pursuant to Section 12(b) +of the Securities Exchange Act of 1934 (“Exchange Act”), and were previously registered with the +Commission pursuant to Section 12(g) of the Exchange Act. Issuer A files periodic reports, +including Form 20-F, with the Commission pursuant to Section 13(a) of the Exchange Act and +related rules thereunder. + + KPMG Inc. (“KPMG South Africa”) is a public accounting firm registered with the +PCAOB and located in Johannesburg, South Africa. KPMG South Africa is a member of KPMG +International. From at least 2013 through 2014, KPMG South Africa was the principal auditor of +Issuer A and signed the audit reports on Issuer A’s financial statements. + +D. FACTS + + From 2013 through 2014, KPMG South Africa signed and issued the independent auditor’s +reports on Issuer A’s financial statements, as the principal auditor. During this same period, Issuer +A’s largest subsidiary, located in Zimbabwe, accounted for the majority of Issuer A’s consolidated +assets and revenues. For example, for fiscal year 2013, this subsidiary accounted for +approximately 70 percent of Issuer A’s consolidated total assets and 100 percent of Issuer A’s +consolidated total revenues. KPMG Zimbabwe performed audit services for Issuer A by auditing +the financial statements of this subsidiary. + + The U.S. securities laws and the PCAOB rules1 require that accounting firms register with +the PCAOB if they “prepare[] or issue[] any audit report with respect to any issuer” or “play[] a + +1 The references to PCAOB standards and applicable provisions of the U.S. securities laws are to +those that were in effect at the time of the relevant conduct. + 3 +substantial role in the preparation or furnishing of an audit report with respect to any issuer.” See +Section 102 of the Sarbanes-Oxley Act of 2002 and PCAOB Rule 2100. An accounting firm plays +a substantial role and is thus required to register when it: (1) “perform[s] material services that a +public accounting firm uses or relies on in issuing all or part of its audit report;” or (2) “perform[s] +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 auditor to issue an audit report.” See PCAOB Rule 1001(p)(ii). + + From at least 2013 through 2014, KPMG Zimbabwe played a substantial role in the +preparation of audit reports for Issuer A, having audited most of Issuer A’s assets and substantially +all of its revenues. As such, KPMG Zimbabwe was required to be registered with the PCAOB. +However, KPMG Zimbabwe failed to register with the PCAOB. + +E. VIOLATIONS + + Section 102 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) makes it unlawful for +any person that is not a registered public accounting firm to participate in the preparation or +issuance of, any audit report with respect to any issuer. By participating in the preparation of audit +reports for Issuer A, KPMG Zimbabwe violated Sarbanes-Oxley Section 102. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent KPMG Zimbabwe’s Offer. + + +Accordingly, it is hereby ORDERED that: + +A. KPMG Zimbabwe shall cease and desist from committing or causing any violations +and any future violations of Sarbanes-Oxley Section 102; and + +B. KPMG Zimbabwe shall, within 120 days of the entry of this Order, pay +disgorgement of $30,000 and prejudgment interest of $2,757.71, and within 485 days of the entry of +this Order, pay the remaining disgorgement of $99,410 and remaining prejudgment interest of +$9,138.12, for a total of $141,305.83, for transfer to the general fund of the United States Treasury, +subject to Exchange Act 21F(g)(3). If timely payment of disgorgement is not made, additional +interest shall accrue pursuant to SEC Rules 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 + + 4 +(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 +KPMG Zimbabwe 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 Amy L. Friedman, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5010. + By the Commission. + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3930.pdf b/raw/aaer/2018/AAER-3930.pdf new file mode 100644 index 0000000000000000000000000000000000000000..1a423ef1d5520640a6975b770c130250ffdda28d Binary files /dev/null and b/raw/aaer/2018/AAER-3930.pdf differ diff --git a/raw/aaer/2018/AAER-3930.txt b/raw/aaer/2018/AAER-3930.txt new file mode 100644 index 0000000000000000000000000000000000000000..c3493f503b57c081d54286d93ba6f03b8daed629 --- /dev/null +++ b/raw/aaer/2018/AAER-3930.txt @@ -0,0 +1,478 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82946 / March 26, 2018 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3930 / March 26, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18407 + +In the Matter of +KINROSS GOLD 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 (the “Exchange Act”) against Kinross Gold Corporation +(“Kinross” or “Respondent”). +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Cease-and-Desist Proceedings, Pursuant to Section 21C of the Securities Exchange Act of 1934, +Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + +III. + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + +2 + +Summary + +1. This matter concerns violations of the books and records and internal accounting +controls provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”) by Kinross Gold +Corporation, a gold mining company. From September 2010 through at least 2014, Kinross +operated gold mines in Mauritania and Ghana without devising and maintaining a system of +internal accounting controls sufficient to provide reasonable assurances that transactions were +executed in accordance with management’s specific or general authorization. As a result, +Kinross paid vendors and consultants, often in connection with government interactions, without +reasonable assurances that transactions were consistent with their stated purpose or the +prohibition against making improper payments to government officials. For certain of these +transactions, the company used petty cash to pay consultants which it then failed to accurately +and fairly describe in its books and records. + +2. In 2014, Kinross also failed to maintain its internal accounting controls around +contracting and awarded a lucrative logistics contract to a company preferred by government +officials without following its own bidding and tendering procedures. Internal documentation +provided incomplete information concerning the contract award. Additionally, Kinross +contracted with a politically-well-connected third-party consultant to facilitate contacts with +high-level government officials without conducting the heightened due diligence required by the +company’s policies and procedures. + +Respondent + +3. Kinross Gold Corporation (“Kinross”) is a Canadian gold mining company. +Founded in 1993, the company conducts development and mining operations in North and South +America, West Africa, and Russia. Kinross is headquartered in Toronto, Canada. During the +relevant time period, its common stock was registered with the Commission pursuant to Section +12(b) of the Securities Exchange Act of 1934 and listed on the New York Stock Exchange +(NYSE: KGC) and Toronto Stock Exchange (TSX: K). + +Other Relevant Entities + +4. Tasiast Mauritanie Limited S.A. (“Tasiast”) is a wholly-owned indirect +subsidiary of Kinross. Tasiast owns and operates the Tasiast mine in the Islamic Republic of +Mauritania. Throughout the relevant time period, Tasiast’s financial results were included in the +consolidated financial statements that Kinross filed with the Commission. + +5. Chirano Gold Mines Ltd. (Chirano) is a 90 percent-owned indirect subsidiary of +Kinross. Chirano owns and operates the Chirano mine in Ghana. Throughout the relevant time +period, Chirano’s financial results were included in the consolidated financial statements that +Kinross filed with the Commission. + + + + + +3 + +Facts + +Kinross Failed to Timely Implement Sufficient Internal Accounting Controls +and Remediate Known Issues + +6. On September 17, 2010, Kinross acquired Tasiast and Chirano, and their assets +and mining operations in Mauritania and Ghana from Red Back Mining, Inc. (“Red Back”), a +Vancouver-based mining company, for approximately $7.1 billion. Kinross viewed the +development of the Tasiast mine, which was much larger than Chirano, as key and critical to the +realization of the value of the transaction. In the few months prior to the purchase of the mines +from Red Back, Kinross conducted due diligence on Red Back. As part of the process, Red Back +acknowledged that it lacked an anti-corruption compliance program and associated internal +accounting controls. + +7. As part of this initial due diligence, and following the acquisition, Kinross failed +to timely address the adequacy of the internal accounting controls at Red Back pertaining to the +procurement and payment of vendors for goods and services or consider the risks of corruption +associated with the high percentage of vendors that were controlled by government officials or +their relatives. As a result, Kinross failed to make necessary improvements to Red Back’s +inadequate controls in a timely manner. Kinross continued the same practices from Red Back +that allowed low-level employees to contract with vendors and make payments with petty cash +without appropriate controls. +8. In April 2011 Kinross’ internal audit group concluded that the internal accounting +controls surrounding vendor selection and disbursement for goods and services at Tasiast and +Chirano were not adequate to meaningfully assess transactions for accuracy or compliance with +the FCPA. The internal audit group faulted the Enterprise Resource Planning (“ERP”) +accounting and disbursements system, which did not “include much detail on the nature of +disbursements” thus making it “not possible” to identify suspect payments such as excessive +rebates and discounts, advance payments, government commissions and unjustified business +expenses. While internal audit conducted a manual review, this was still not adequate to +meaningfully assess transactions for FCPA compliance. Internal audit also found that the lack of +contract administration procedures prevented it from adequately reviewing the contracting and +tendering processes. + +9. Despite these findings by the internal audit group, company management failed to +take immediate action. Employees in the finance department became increasingly concerned +about the poor internal accounting controls associated with disbursements in Africa and the +continued risk of corrupt activities. These employees suggested internal audits of Chirano and +Tasiast be repeated so that the internal accounting control issues would be found and then, +hopefully, prioritized for solution by regional and international management. In April 2012, +Kinross’ internal audit group issued a nearly-identical memorandum reaching the same +conclusions. + +10. Internal audit conducted reviews at Chirano in January 2012 and Tasiast in +February 2012. The audits found issues requiring significant improvements at both mines. + + +4 + +A. The mines variously lacked formal site Delegations of Authority by which +disbursements were approved; lacked formalized procedures for contract approval +and tendering; and lacked a fully functioning ERP system. As a result, Kinross relied +on manual controls to mitigate against any potential control issues, but they did not +consistently adhere to the manual controls. + +B. At Chirano, specific internal accounting controls in key purchasing and disbursement +areas were adhered to only sporadically. For instance, for 41% of the disbursement +sample, the purchase order was dated and created after the invoice was received and, +for 75% of the sample, there was no contract at all. At Tasiast, there was a +widespread lack of adherence to basic internal accounting controls. For each and +every of the sampled transactions, there was either no purchase order or the purchase +order was created after the invoice was received. + +C. At both mines, most disbursements were made without approval by the required level +of signatories, or based on signatures that did not provide adequate detail, such as +names and positions, to verify whether appropriate approval had been provided. +Kinross failed to maintain supporting documentation required for disbursements, +including invoices, purchase orders, and/or good receipts. Internal audit found +minimal evidence of a functioning bidding or tendering process. + +11. The internal audit reports for the Chirano and Tasiast mines contained +recommendations for extensive remediation steps. While management agreed to swiftly +implement the needed remediation, it failed to follow through on its commitments in a timely +manner. As a result, follow-up internal audits indicated that the issues largely remained. For +example, + +A. At Tasiast, an October 2012 internal audit found no evidence of required bidding or +tendering for any of the sampled transactions for goods or services and no purchase +orders or contracts for the vast majority of them. Fourteen months later, in December +2013, internal audit reported that of the transactions it reviewed; only 53% possessed +a contact and 57% had any evidence of bidding and tendering. + +B. At Chirano, a July 2013 internal audit found that only 56% of the sampled +transactions possessed a contract and only 44% showed evidence of being the result +of required bidding or tendering. As noted by the internal auditor, “100% of the +contracts reviewed were awarded directly by the functional area or department,” +rather than by the procurement department, an indication that the Red Back practice +of low-level employees awarding contracts without independent accounting control or +oversight continued nearly three years after Kinross assumed control of the mine. + +12. As a result of the known control weaknesses, payments were made for a period of +years without reasonable assurances that the payments were for their stated purpose or with +management’s approval. For example, + + +5 + +A. Kinross paid a fixed amount to a Ghanaian government customs officer for his +expenses in traveling to the mine weekly in order to sign papers necessary for the +transfer of the gold’s title and attendant shipping risk from Kinross to the buyer. +While the agreement did not provide for it, during 2012 through 2014, personnel at +Chirano regularly paid the customs officer for weeks in which he did not travel to the +mine and bore no travel expenses. + +B. In 2012, the Ghana Environmental Protection Agency (“Ghana EPA”) delayed +granting Kinross a mining production permit for a planned mine expansion due to +unresolved questions about an Environmental Impact Study that Kinross had +previously submitted with the assistance of a third-party consultant. The consultant +organized a public hearing for the community to discuss the planned expansion’s +impact on infrastructure and employment opportunities. During the delay of several +months, Kinross received a $12,000 invoice from the third-party consultant with no +documentation for services the consultant purportedly provided to Kinross one year +earlier. The consultant represented that the amount was based on an oral contract +between the consultant and the company. Kinross personnel used petty cash to pay +the third-party consultant the $12,000 without obtaining any documentation to +evidence the services were actually provided. Kinross’ books and records did not +fairly and accurately reflect in reasonable detail the nature or intended recipients of +the payment. About a month after the payment, the Ghana EPA approved the mining +production permit. + +C. From 2012 through 2015, Kinross paid the Ghanaian government fees in connection +with the issuance of visas and work permits for expatriate personnel. During this +same period, Kinross paid a consultant, a former government employee, to expedite +the process. With no evidence of actual services being provided, and with no +reasonably detailed description in the books and records, the consultant was paid +approximately $1,000 per visa or permit from petty cash. As a result, the processing +time for visas and work permits decreased from ten weeks to three weeks. + +After Implementing New Internal Accounting Controls, +Kinross Failed to Maintain Them + +13. In 2013, Kinross took steps to enhance internal accounting controls concerning +the procurement and payment of goods and services designed, in part, to provide reasonable +assurances that transactions did not violate the FCPA and Kinross’ code of conduct, which +prohibits providing improper inducements to government officials. However, on at least two +occasions in 2014, Kinross failed to maintain these internal accounting controls. + +14. The first instance arose in April 2014 as Kinross prepared to award an +approximately $50 million, three-year logistical support contract to an international shipping +company. Consistent with Kinross’ new supply chain policy, Kinross was prepared to award the +contract to the bidder that offered the lowest price and possessed the best ability to fulfill the +technical requirements of the contract. Kinross personnel soon learned, however, that a very +high-level Mauritanian government official was unhappy with Kinross’ choice because the + +6 + +shipper’s local affiliate was controlled by persons allegedly active with the political opposition. +Kinross also learned that the official preferred another international shipping company whose +local affiliate recently was acquired by a prominent and influential Mauritanian businessman +with ties to the official. + +15. In July 2014, Kinross regional management in West Africa made a presentation to +Kinross senior management, that showed that Kinross’ original preferred shipper remained by far +the best based on cost, technical capabilities, and ability to provide logistical support in both +Mauritania and Ghana, but its “political affiliations may pose business risk.” The presentation +further noted that the shipper associated with the prominent Mauritanian businessman was +unable to provide support in Ghana, its costs were high and technical capabilities were poor but +excelled in “political risk” as it was the “preferred option of Gov[ernment] stakeholders.” After +the presentation, Kinross management decided to award the approximately $50 million three- +year logistics contract to the shipping company preferred by the high-level government official. + +16. In making this decision, Kinross senior management failed to maintain the +internal accounting controls, which directed that company personnel primarily focus on the +commercial and technical qualifications of bidders when making awards. The internal +accounting controls also required that when multiple bidders met the basic commercial and +technical qualifications company personnel were to make an “in-depth evaluation” from a list of +elements, which included compliance with health/safety/environmental standards and liability for +cost, performance and delay. The preference of government officials was not among those +elements. + +17. In September 2014 Kinross internal contract award recommendation documents +did not, in reasonable detail, accurately and fairly reflect the transaction. As drafted, the award +documents did not reveal that the primary reason for awarding the contract was to satisfy the +preference of a high-level government official. + +18. The concerns about awarding this contract to a vendor with low technical +capabilities and high costs were borne out. After one year, due to its poor performance, Kinross +refused to grant the shipper associated with the prominent Mauritanian businessman an option to +renew. After a subsequent tendering process, Kinross awarded the business to another company +in accordance with company policy. + +19. The second instance also arose in 2014 when an individual Kinross understood +was well-connected with high-level government officials in Mauritania approached Kinross +government-relations department personnel and proposed to work for Kinross in a government- +relations capacity. Specifically, the individual offered to establish a continuing, semi-formal +liaison relationship between a senior executive at Kinross and a particular government official +influential with the same high-level government official who had influenced the award of the +logistical support contract. Initially, Kinross considered hiring the individual as Government +Relations Director for Mauritania and conducted the minimal due diligence required for +prospective employees – checking for an arrest and criminal record. But because the amount of +money the individual demanded for his services was excessive for a salaried employee, senior + +7 + +executives in Kinross’ government-relations department retained him as an independent +consultant. + +20. The consulting agreement was treated as a contract for “Corporate, General, and +Non-Routine Expenditures,” which required “authorization in accordance with [the] procure-to- +pay process set out in Kinross’ Supply Chain Policy . . . .” The Supply Chain Policy required +that prospective vendors undergo a due diligence procedure to determine the FCPA risks in using +the vendor. Greater due diligence was required where there were higher potential risk +indicators. As Kinross’ agent in dealing directly with government officials where known risks of +corruption existed, Kinross’ internal accounting controls required that the consultant be subjected +to the company’s highest level of due diligence, necessitating, among other things, a credit +report, a search of government sanctions and watch lists, a reference check of business partners +and associates, confidential in-field inquiries about his reputation and an enhanced asset search. +However, Kinross did not perform the required due diligence on the consultant and, and between +September 2014 and August 2015, paid the consultant approximately $715,000. + +21. Relatedly, Kinross also failed to provide adequate training to its senior decision- +makers, especially in the government relations department, to recognize the corruption risks in +hiring a consultant to work as a liaison with government officials. + +Kinross’ Remediation Efforts + +22. Kinross has taken steps to remediate the above-described internal control and +recordkeeping issues, including conducting audits, generating management remediation plans +and tracking their progress, implementing a new ERP system to enable finance personnel to +more effectively track and manage expenditures, and replacing personnel at Tasiast and Chirano. +Kinross also increased compliance personnel, updated relevant policies and procedures, and +conducted compliance training. Kinross terminated the use of the third-party consultant +described above to obtain visas and work permits and has instituted more formalized controls +over the use, documentation and approval of petty cash. Kinross continues to improve its +internal accounting controls around third-party consultants and vendors, and enhanced FCPA +training. Kinross also recently hired a consulting firm to assist it in evaluating its current +controls for additional enhancements. Also, Kinross has taken steps to improve training of its +senior decision-makers, especially in the government-relations department, to recognize the +corruption risks in hiring a consultant to work as a liaison. + +Books and Records and Internal Accounting Controls Violations + +23. As a result of the conduct described above, Kinross violated Sections 13(b)(2)(A) +and (B) of the Exchange Act by failing to devise and maintain internal accounting controls +sufficient to provide reasonable assurances that transactions at Chirano and Tasiast were +executed in accordance with management’s general or specific authorization and by failing to +make and keep certain records which, in reasonable detail, fairly reflected the transactions and +disposition of assets. + + + +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 Kinross 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 fourteen days of the entry of this Order, pay a civil +penalty of $950,000 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 + + Payment by check or money order must be accompanied by a cover letter identifying Kinross as +a Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Steven A. Susswein, Senior Counsel, Division of +Enforcement, United States Securities and Exchange Commission, 100 F Street, Northeast, +Washington, District of Columbia, 20549-5631. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order + +9 + +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +D. With respect to its operations in Africa, Respondent undertakes to: + +1) Report to the Commission staff periodically during a one-year term, the status of +its remediation and implementation of compliance measures, particularly as to the +areas of due diligence on prospective and existing third-party consultants and +vendors, FCPA training and the testing of relevant controls including the +collection and analysis of compliance data. During this period, should +Respondent discover credible evidence, not already reported to Commission staff, +that questionable or corrupt payments or questionable or corrupt transfers of value +may have been offered, promised, paid, or authorized by Respondent, or any +entity or person acting on behalf of Respondent, or that related false books and +records have been maintained, Respondent shall promptly report such conduct to +the Commission staff. During this one year period, Respondent shall: (1) +conduct an initial review and submit an initial report and (2) conduct and prepare +one follow-up review and report, as described below: Respondent shall submit to +the Commission staff a written report within 180 calendar days of the entry of this +Order setting forth a complete description of its FCPA and anti-corruption related +remediation efforts to date, its proposals reasonably designed to improve the +policies and procedures of Respondent for ensuring compliance with the FCPA +and other applicable anticorruption laws, and the parameters of the subsequent +review (the “Initial Report”). The Initial Report shall be transmitted to Steven A. +Susswein, Senior Counsel, United States Securities and Exchange Commission, +100 F Street, Northeast, Washington, District of Columbia, 20549-5631. +Respondent may extend the time period for issuance of the Initial Report with +prior written approval of the Commission staff. + +a. Respondent shall undertake a follow-up review, incorporating any comments +provided by the Commission staff on the Initial Report, to further monitor and +assess whether the policies and procedures of Respondent are reasonably +designed to detect and prevent violations of the FCPA and other applicable +anti-corruption laws (the “Follow-Up Report”). + +b. The Follow-up Report shall be completed by no later than 180 days after the +Initial Report. Respondent may extend the time period for issuance of the +Follow-up Report with prior written approval of the Commission staff. + +c. The periodic reviews and reports submitted by Respondent will likely include +proprietary, financial, confidential, and competitive business information. + +10 + +Public disclosure of the reports could discourage cooperation, impede pending +or potential government investigations and thus undermine the objectives of +the reporting requirement. For these reasons, among others, the reports and +the contents thereof are intended to remain and shall remain nonpublic, except +(a) pursuant to court order, (b) as agreed by the parties in writing, (c) to the +extent that the Commission staff determines in its sole discretion that +disclosure would be in furtherance of the Commission’s discharge of its duties +and responsibilities, or (d) is otherwise required by law. + +d. During this one-year period of review, Respondent shall provide its external +auditors with its annual internal audit plan and reports of the results of internal +audit procedures and its assessment of its FCPA compliance policies and +procedures. + +e. During the one-year period of review, Respondent shall provide Commission +staff with any written reports or recommendations provided by Respondent’s +external auditors in response to Respondent’s annual internal audit plan, +reports of the results of internal audit procedures, and its assessment of its +FCPA compliance policies and procedures. +2) Certify, in writing, compliance with the undertaking(s) set forth above. The +certification shall identify the undertaking(s), provide written evidence of +compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests +for further evidence of compliance, and Respondent agrees to provide such +evidence. The certification and supporting material shall be submitted to Steven +A. Susswein, Senior Counsel, United States Securities and Exchange +Commission, 100 F Street, Northeast, Washington, District of Columbia, 20549- +5631 no later than sixty (60) days from the date of the completion of the +undertakings. + + +By the Commission. + + + Brent J. Fields + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3931.txt b/raw/aaer/2018/AAER-3931.txt new file mode 100644 index 0000000000000000000000000000000000000000..4bdb36af677ca089b61fc5e0addd68016eb42a3e --- /dev/null +++ b/raw/aaer/2018/AAER-3931.txt @@ -0,0 +1,1401 @@ + + + + + + + + + + + + + + + + SEC.gov | Akorn, Inc., Timothy Dick, and David Hebeda + + + + + + + + !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\/520911","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Akorn, Inc., Timothy Dick, and David Hebeda, Civil Action No. 18-2150 (N.D. Ill., filed March 26, 2018) + + + + + + + + + The Securities and Exchange Commission today filed a settled civil action in the U.S. District Court for the Northern District of Illinois against Akorn, Inc., a Lake Forest, Illinois pharmaceutical company, its former CFO, Timothy Dick, and its former Controller, David Hebeda, based on financial reporting, books and records, and internal accounting controls violations by Akorn (specifically 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). Akorn, Dick and Hebeda agreed to settle the charges without admitting or denying the Commission's allegations. + + According to the Commission's complaint, in May 2016, Akorn restated its financial statements for fiscal year 2014 acknowledging material weaknesses in its internal control over financial reporting related, in relevant part, to controls surrounding the company's gross-to-net reserve accounts and estimates. In its restatement, the company also disclosed that it overstated net revenue for 2014 by approximately 7 percent and income from continuing operations before income taxes for 2014 by approximately 136 percent. Akorn's material weaknesses persisted over multiple reporting periods and contributed to Akorn's materially inaccurate 2014 financial statements. + + The complaint also alleges that in 2014, Dick, as CFO, and Hebeda, as Controller, had supervisory responsibilities for Akorn's internal accounting controls, gross-to-net revenue accounting and revenue recognition, and exercised control over these company functions. The Commission's complaint charges Dick and Hebeda with control person liability under Section 20(a) of the Exchange Act for Akorn's violations. + + Akorn consented to the entry of an order permanently enjoining it from violations of the financial reporting, books and records, and internal accounting controls provisions of the Exchange Act. Dick and Hebeda consented to the entry of orders: (a) permanently enjoining each of them from controlling any person liable for violations of the financial reporting, books and records, and internal accounting controls provisions of the Exchange Act; and (b) imposing a $20,000 civil penalty against each of them. + + The investigation was conducted by Michael Mueller and Timothy Tatman. + + + + + + + + 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/2018/AAER-3932.txt b/raw/aaer/2018/AAER-3932.txt new file mode 100644 index 0000000000000000000000000000000000000000..2b2ea5ea148cdce805c6603f645ac6090f8b8522 --- /dev/null +++ b/raw/aaer/2018/AAER-3932.txt @@ -0,0 +1,961 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10472/ March 27, 2018 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82950/ March 27, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3932/ March 27, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18408 + + +In the Matter of + +MAXWELL TECHNOLOGIES, +INC., VAN M. ANDREWS, DAVID +J. SCHRAMM, AND JAMES W. +DeWITT, Jr., CPA, + +Respondents. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING +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 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”) against Maxwell Technologies, Inc. (“Maxwell”) and Van Andrews (“Andrews”) and +pursuant to Section 21C of the Exchange Act against David Schramm (“Schramm”) and James +DeWitt, CPA (“DeWitt”), (collectively “Respondents”). + +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 + 2 +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 that: + +SUMMARY + +1. From December 2011 through January 2013, Maxwell, a California-based company +that develops, manufactures, and markets energy storage and power delivery products, engaged in +an accounting fraud scheme that improperly recognized over $19 million in revenue from future +quarters in violation of U.S. Generally Accepted Accounting Principles (“GAAP”). Maxwell, an +SEC recidivist, issued materially false and misleading statements about its revenue, revenue +growth, and gross margins, and inflated its reported financial results to better meet analysts’ +expectations. Maxwell did not have sufficient internal accounting controls to identify and properly +account for its revenue throughout the relevant period. + +2. Maxwell’s primary source of revenue growth during the relevant period was +expected to come from ultracapacitors, essentially small energy storage and power delivery +products used in automotive, heavy transportation, renewable energy, backup power, wireless +communications and industrial and consumer electronics applications. Maxwell’s ultracapacitor +revenue growth was material to analysts and investors and was highlighted in all press releases and +earnings calls. + +3. Maxwell, through Andrews, a former Senior Vice President of Sales and Maxwell +officer, prematurely recorded ultracapacitor revenue as a result of his conduct and the failures of +the company’s finance and accounting department controls. Maxwell, through Andrews, used +several improper tactics to prematurely record revenue, including: customer side deals with +contingent payment terms and full right of return; channel stuffing; extending payment terms; +falsifying purchase orders (“POs”) and third-party confirmations; and by instructing certain +distributors to order product they neither wanted nor needed at quarter-end. The fraud created the +misperception that Maxwell’s ultracapacitor growth was far more successful than reality. + +4. Maxwell’s finance and accounting department, including then-controller DeWitt, +repeatedly overrode and ignored automated controls and missed red flags that should have +alerted them to material revenue recognition departures. Although Andrews and his sales +department took steps to hide the side deals from Maxwell’s senior financial personnel, 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 +repeated override of automated controls allowed the sales to continue each quarter. Then-Chief +Executive Officer (“CEO”) Schramm and Maxwell’s senior financial personnel knew that the +sales took place the last days of each quarter, that certain sales were beyond approved credit +limits and contained extended payment terms for up to 180 days, and that certain prior sales +receivables were significantly past due. Maxwell ultimately recorded the revenue despite the +fact that it should have known the sales terms were not fixed and determinable as required by +GAAP for revenue recognition. Schramm also overrode automated credit limit controls to +authorize large sales to distributors at quarter-end that he should have known those distributors +neither wanted nor needed. + +5. On or about January 9, 2013, Maxwell initiated an internal investigation after its +audit committee received a detailed internal whistleblower letter describing the revenue +recognition fraud. As a result of that investigation, on March 7, 2013, Maxwell announced that its +previously issued financial statements on Form 10-K for 2011 and all quarterly reports on Forms +10-Q in 2011 and 2012 could not be relied upon. Maxwell also disclosed material weaknesses in +its internal control over financial reporting due to “errors” it discovered in the “timing of +recognition of revenue from sales to certain distributors.” Maxwell’s stock price declined 11.09%, +closing at $8.10 per share on March 8, 2013. Soon thereafter, on March 18, 2013, Maxwell’s +external auditor resigned after concluding it could not rely on representations made by senior +financial personnel. After the external auditor’s resignation, Maxwell’s stock price declined an +additional 20.57%, closing at $5.91 per share on the news. + +6. On August 1, 2013, Maxwell filed a restatement of the 2011 Form 10-K and Forms +10-Q for the first three quarters of 2012 that reduced revenue by 6.4% and 7.5% respectively. The +restatement also turned net income gains into net losses for fiscal year-end 2011 and certain +quarters in 2012. + +7. As a result of the conduct described herein, Maxwell violated the antifraud +provisions of Exchange Act Section 10(b) and Rules 10b-5(a) and 10b-5(c) thereunder, and +Securities Act Section 17(a), 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 provisions of Exchange Act +Section 13(b)(2)(A), and the internal accounting control provisions of Section 13(b)(2)(B). + +8. As a result of the conduct described herein, Andrews violated the antifraud +provisions of Securities Exchange Act Section 10(b) and Rules 10b-5(a) and 10b-5(c) thereunder, +and Securities Act Section 17(a) and caused Maxwell to violate 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(a), 10b-5(c), +12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Andrews also violated Exchange Act Section +13(b)(5) and Exchange Act Rules 13b2-1 and 13b2-2. + + 4 +9. As a result of the conduct described herein, Schramm and DeWitt caused Maxwell +to violate Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1, +13a-11, and 13a-13 thereunder. + +RESPONDENTS + + 10. Maxwell Technologies, Inc. develops, manufactures, and markets energy storage +and power delivery products for automotive, heavy transportation, renewable energy, backup +power, wireless communications and industrial and consumer electronics applications. During the +relevant period, Maxwell focused on three product lines: ultracapacitors, high-voltage capacitors, +and radiation-mitigated microelectronic products. Maxwell, which is incorporated in Delaware +and headquartered in San Diego, California, had manufacturing facilities in the United States and +Switzerland during the relevant period and contract manufacturing relationships in China. +Maxwell’s shares are registered with the Commission pursuant to Exchange Act Section 12(b) and +are listed on the NASDAQ under the symbol “MXWL.” Maxwell files periodic reports, including +Forms 10-K and 10-Q, with the Commission pursuant to Exchange Act Section 13(a) and related +rules thereunder. + +11. Maxwell is a recidivist. In January 2011, it paid approximately $14.3 million to +settle Exchange Act Section 13(a) and Foreign Corrupt Practices Act-related charges with the SEC +and the United States Department of Justice, and agreed to undertakings. + +12. Van M. Andrews, age 66, resides in Indiana. He joined Maxwell in February 2010 +as the Vice President of Ultracapacitor Sales and Marketing until December 30, 2010, when he was +promoted to Senior Vice President of Sales & Marketing. Andrews served as a Maxwell officer +from July 2012 until his resignation on February 28, 2013. + + 13. David J. Schramm, age 68, resides in California. He served as Maxwell’s Chief +Executive Officer, President, and Director from July 2007 until December 2013. + +14. James W. DeWitt, Jr., age 60, resides in Arizona. He served as Maxwell’s +Corporate Controller from April 2005 until October 2015. DeWitt, who reported to Maxwell’s +Chief Financial Officer until approximately February 2014, was responsible for testing, +preparing, and reviewing Maxwell’s revenue that was recognized and reported in the company’s +financial statements. DeWitt was licensed as a CPA by the State of Minnesota from 1986 until +1989. + + + + + 5 +FACTS + +Background + +15. During Schramm’s tenure as CEO, Maxwell employed an aggressive strategy to +grow revenue and increase profit margins associated with the company’s important ultracapacitor +product line. Schramm repeatedly stressed in analyst calls that ultracapacitors were the growth +engine that would provide double-digit revenue growth and drive Maxwell toward profitability. +Maxwell’s ultracapacitor sales largely came from three segments: wind; hybrid bus; and +automotive. + +16. In February 2010, Schramm hired his close friend Andrews to help Maxwell meet +the ultracapacitor revenue growth desired. At the time, Andrews was working as an ice-cream +franchisee and had not been employed in corporate sales for nearly three years. Prior to that, +Andrews served in various senior roles at several technology corporations. Once hired, Andrews +often carpooled with Schramm for three hours each day from their Orange County homes to +Maxwell’s San Diego offices. They socialized with one another, golfed together as members of +the same private country club, and shared holidays with one another. + +17. Achieving and sustaining revenue growth was very important to Maxwell’s +business strategy during the relevant period. Maxwell’s senior management understood that +ultracapacitor revenue growth added significant value and was material to analysts and investors +alike. Wall Street analysts closely followed Maxwell’s ultracapacitor revenue growth and assigned +value based on a multiple of revenue. + +18. Schramm put pressure on his sales department to meet the revenue growth and +earnings targets he provided to analysts each quarter. During the relevant period, Schramm +required Andrews to provide weekly regional status updates that identified any shortfall between +actual and forecasted revenue and required a “detailed contingency plan” on how to recover lost +revenue before the end of each quarter. + + 19. Maxwell’s pre-restatement Form 10-K filed for year-end 2011 disclosed that sales +revenue is primarily derived from the sale of products directly to customers. The policy is +characterized as follows: +Assumptions and Approach Used. Product revenue is recognized when all of the following +criteria are met: (1) persuasive evidence of an arrangement exists (upon contract signing or +receipt of an authorized purchase order from a customer); (2) title passes to the customer at +either shipment from our facilities or receipt at the customer facility, depending on shipping +terms; (3) price is deemed fixed or determinable and free of contingencies or significant + 6 +uncertainties; and (4) collectability is reasonably assured. Customer purchase orders and/or +contracts are generally used to determine the existence of an arrangement. Shipping +documents are used to verify product delivery. We assess whether a price is fixed or +determinable based upon the payment terms associated with the transaction. We assess the +collectability of accounts receivable based primarily upon creditworthiness of the customer +as determined by credit checks and analysis, as well as the customer’s payment history. + +20. During the relevant period, Maxwell, through Andrews, employed several schemes +each quarter to inflate Maxwell’s ultracapacitor sales to better align reported revenue with analysts’ +expectations. Such schemes included: altering payment terms, extending altered payment terms to +certain distributors, shipping product at the end of quarters that was not needed, and offering full +rights of return and profit margin protection to customers for products “purchased.” Maxwell +recognized revenue associated with each of these schemes in violation of GAAP and Maxwell’s +own accounting policy. + +Maxwell Initiated a Revenue Recognition Scheme +to Outperform Analyst Expectations + +21. Beginning in 2010, Maxwell sold and shipped certain ultracapacitors to a large +European-based direct supplier of automotive parts (“Global Automotive Customer”). These +ultracapacitors were manufactured specifically for the Global Automotive Customer’s original +equipment manufacturer. The Global Automotive Customer’s agreement with Maxwell called +for it to take Maxwell’s ultracapacitors on Delivery Duty Paid (“DDP”) or Delivery Duty Unpaid +(“DDU”) terms. The use of DDP and DDU terms meant that Maxwell recognized revenue when +the Global Automotive Customer accepted shipment at its delivery point from Maxwell. + +22. From March through September 2011, Maxwell’s deliveries to the Global +Automotive Customer caused an oversupply of ultracapacitors in the Global Automotive +Customer’s inventory. In October 2011, the Global Automotive Customer informed Maxwell +that it refused to accept delivery of 65,000 Maxwell ultracapacitors. Maxwell took possession of +the rejected ultracapacitors into its own European inventory and issued a credit to the Global +Automotive Customer of $829,332. In early November 2011, the Global Automotive Customer +cancelled all remaining shipments from Maxwell through the end of the year, including 125,000 +additional ultracapacitors that already left Maxwell’s warehouse. These credits and cancellations +left Maxwell facing an approximate $3.7 million revenue shortfall for year-end 2011, which +resulted in an 8% revenue gap when measured against the quarterly estimate Maxwell’s senior +management previously disclosed to analysts. + +23. Maxwell’s senior management, including Schramm and Andrews, met several +times in November and early December 2011 to discuss the Global Automotive Customer’s + 7 +cancellation of Maxwell’s product. They also discussed alternative solutions to mitigate the +resulting negative revenue impact on Maxwell’s financial statements before year-end 2011. +Schramm and the finance and accounting department learned Andrews and his sales team +arranged to have a small, family-run distributor in Europe (“German Distributor") take possession +of the rejected ultracapacitors in late December 2011 totaling over $3 million in sales. Maxwell +instructed the German Distributor to deliver the previously rejected ultracapacitors to the Global +Automotive Customer in accordance with a “smoothing plan” previously agreed upon by +Maxwell and the Global Automotive Customer over the first two quarters in 2012. + +24. On the final days of December 2011, Andrews persuaded the German Distributor +to purchase 37,000 additional ultracapacitors totaling $671,180 for eventual delivery to the Global +Automotive Customer sometime in 2012. Maxwell, however, did not inform Global Automotive +Customer of these additional purchases until well after December 31, 2011. This final year-end +transaction, when coupled with Maxwell’s earlier arrangement with the German Distributor, +enabled Maxwell to cover the entire $3.7 million revenue shortfall caused by the Global +Automotive Customer’s fourth quarter cancellations of Maxwell’s product. + +25. The German Distributor purchased the ultracapacitors at a 4% discount from +Maxwell’s contracted price (for the same item) with the Global Automotive Customer. This +arrangement reduced Maxwell’s gross margin but ensured the German Distributor would profit +when it ultimately delivered the ultracapacitors to the Global Automotive Customer. In addition, +the German Distributor made clear to Andrews and his sales staff that it would not pay Maxwell +until it first received payment from the Global Automotive Customer. Maxwell, through +Andrews and his sales team, agreed with the German Distributor’s contingency arrangement +demand that “payment from [the German Distributor] to Maxwell will be done after receiving +payment from [Automotive Customer].” This contingent term was explicitly written into all four +German Distributor POs sent to Maxwell in December 2011 and initially was not hidden from +anyone at Maxwell. + + 26. Maxwell should have known the German Distributor could not pay for the goods +until it first received payment from the Global Automotive Customer. Prior to December 2011, +the German Distributor’s quarterly sales with Maxwell had never been above $300,000 and their +credit limit with Maxwell was only $500,000. The $3.7 million in December 2011 customer +orders was initially blocked by Maxwell’s automated system. Maxwell’s finance and accounting +department, however, increased the German Distributor’s then-existing credit limit from $500,000 +to $4 million to allow the sales to proceed.2 Maxwell’s finance and accounting department did not + +2 A credit block was an internal control designed to prevent Maxwell from shipping product to customers +that had placed orders over their credit limit. Maxwell’s credit limits could be established by a variety of third-party +sources, including Dun & Bradstreet (“D&B”) reports. Despite raising the German Distributor’s credit limit in +December 2011, Maxwell’s credit file for the German Distributor contained only a 2007 D&B report written in + 8 +request any documentation of the German Distributor’s credit worthiness nor did it conduct any +due diligence before raising the limit. + +27. Despite the contingent payment arrangement and the automatic controls designed to +minimize the risk of improper revenue recognition, Maxwell improperly recorded $3.7 million in +revenue on an Ex Works basis (meaning, at the time the goods left Maxwell’s warehouse) for sales +to the German Distributor between December 22 and December 31, 2011. Maxwell’s explicit +contingent payment arrangement with the German Distributor constituted a violation of GAAP as +revenue recognition standards include, among other criteria, that revenue may only be recognized +when collectability is reasonably assured. + +Maxwell Created False Purchase Orders to Conceal +the Revenue Recognition Scheme + +28. In early January 2012, Maxwell’s senior financial personnel knew external auditors +were arriving to perform year-end audit work around January 19, 2012. Between January 4 and +10, 2012, DeWitt conducted internal sales cutoff testing and reviewed the German Distributor POs +containing the contingent payment term that should have precluded Maxwell from recognizing the +revenue for fiscal year-end 2011. DeWitt, Maxwell’s then-Chief Financial Officer (“CFO”), and +Andrews met on January 10, 2012 to discuss the POs. At this meeting, Andrews denied the +existence of a contingent payment arrangement with the German Distributor and indicated he +would obtain corrected POs without the contingent term. + +29. On or around January 19, 2012, the external auditors selected at least one of the +German Distributor POs for audit testing that contained the contingent payment term. On January +20, 2012, DeWitt emailed Andrews with a cc: to the then-CFO that “[n]ot unexpectedly, the +auditors have chosen [the German Distributor] PO . . . that was part of their purchases at the end of +the year. Therefore, we need to get the updated PO copy sent to us as soon as possible.” Andrews +then obtained revised POs for all four transactions from the German Distributor that deleted the +contingent payment term. Without the finance and accounting department’s knowledge, Andrews +and one of his direct reports reassured the German Distributor that Maxwell would continue to +honor the original terms of their agreement. Andrews and his direct report then secretly faxed a +side agreement letter to the German Distributor from a FedEx store near Maxwell’s corporate +office with the contingent payment terms included. This side agreement was hidden from +Maxwell’s finance and accounting department and its external auditors throughout the 2011 fiscal +year-end audit. + + +French that noted a credit maximum of 323,340 EUR (approximately $416,000). Maxwell’s finance and accounting +department did not review that credit file until October 2012. + 9 +30. Maxwell’s finance and accounting department presented these revised POs to the +auditors. Andrews did not inform the finance and accounting department or the external auditors +that the revised POs had been falsified. Maxwell’s senior financial personnel failed to inform the +auditors that the POs were modified, or that two of the POs pertained to sales that had been +rejected by the Global Automotive Customer and rerouted to the German Distributor. Maxwell’s +finance and accounting department should have known that two sales transactions with the German +Distributor prior to December 2011 had DDP shipping terms that did not allow for immediate +revenue recognition. However, these shipping terms in the German Distributor’s revised POs were +altered to allow for immediate revenue recognition. Despite the numerous red flags, Maxwell +prematurely recognized revenue for the German Distributor’s sales at year-end 2011. + +31. On February 16, 2012, Maxwell released its 2011 Form 10-K and reported pre- +restatement earnings and revenue that outperformed analyst estimates. Powered by its fraudulent +revenue recognition scheme, Maxwell reported an artificially inflated fourth-quarter 2011 earnings +per share (“EPS”) of $0.06, beating analyst estimates of $0.04. Maxwell also reported full-year +2011 EPS of $0.03, beating consensus estimates for full year GAAP EPS of $0.012 and showing a +profit for the first time after years of losses. Similarly, Maxwell’s fourth-quarter 2011 revenues +were materially inflated by approximately $5 million for total revenue of $42 million in order to +meet consensus estimates of $42-$43 million. A portion of Schramm’s fiscal year 2011 bonus, +which he received on February 2012, was tied directly to Maxwell’s revenue performance for the +year. + +32. Immediately after Maxwell released its fraudulent 2011 financial statements, the +company announced it had entered into an at-the-market equity offering of up to $30 million (the +“Offering”). In February and March 2012, Maxwell issued $10.3 million worth of common stock +in connection with the Offering. + +Maxwell Perpetuated Its Revenue Recognition Scheme +During the First Three Quarters of 2012 + + 33. The Maxwell/German Distributor contingent arrangement was originally designed +as a one-time event to inflate Maxwell’s financial results for quarter-end and year-end 2011. +Maxwell subsequently perpetuated the fraud during the first three quarters of 2012 after it became +clear that Maxwell could not meet revenue growth expectations for its ultracapacitor product line +because of softening demand in the European automotive market and elsewhere. During the first +three quarters of 2012, Maxwell improperly turned losses into profits and recognized an additional +$10.3 million in premature revenue from quarter-end contingent sales to the German Distributor +ultimately meant for the Global Automotive Customer and other Maxwell customers. Maxwell +also prematurely recognized an additional $5 million in ultracapacitor revenue obtained from other +distributors in arrangements similar to those in place with the German Distributor. + 10 + 34. At the end of the first quarter of 2012, Andrews and his sales staff asked the +German Distributor and other distributors to submit sales orders subject to the contingent +arrangements and other side deals they kept hidden from Maxwell’s finance and accounting +department. As a result, Maxwell’s first quarter 2012 Form 10-Q reported results that improperly +inflated recorded revenue by $3.4 million (or 8.7%) and allowed the company to show a small +profit when it should have shown a net loss for the quarter. Despite Maxwell’s fraud, the company +still fell short of analyst expectations, which resulted in a material drop in market capitalization +after Maxwell released its financial statement results for quarter ended March 31, 2012. + + 35. At the very end of the second quarter of 2012, Maxwell, through Andrews and his +sales team, used the German Distributor to recognize sales to additional Maxwell customers in +order to prematurely record revenue of at least $5.5 million. Maxwell’s second quarter 2012 sales +to the German Distributor once again far exceeded the established credit limit for that distributor. +Maxwell’s automated financial controls initially stopped these sales orders from going forward. +As in December 2011, Maxwell overrode the automated credit blocks placed on the German +Distributor and permitted the German Distributor’s credit limit to fluctuate up to $8 million +without conducting due diligence into the German Distributor’s financial health or +creditworthiness. Maxwell made these sales to the German Distributor in order to allow +Maxwell’s revenue growth and gross margin results to better align with analysts’ expectations and +Maxwell’s previously-announced projected targets. + + 36. Maxwell’s increased sales to the German Distributor during the entirety of the +scheme (Q4 2011 through Q3 2012) are demonstrated in the following chart: + + + + 11 +Maxwell Ignored Red Flags +That the Company Was Prematurely Recording Revenue + + 37. Throughout the first three quarters of 2012, Maxwell witnessed significant growth +in the overdue receivable balances to the German Distributor, collection concerns, and multiple +extensions of payment terms. During this period, Maxwell’s senior financial personnel also did not +sufficiently follow up on emails, accounts receivable reports, extended payment terms and other +documents and information that strongly suggested the German Distributor could not pay for the +orders until it received payment from the Global Automotive Customer. Despite these indicators, +Maxwell repeatedly approved more sales to the German Distributor intended for the Global +Automotive Customer and others. In order to gauge when the German Distributor would pay +Maxwell, DeWitt started tracking the German Distributor delivery dates to the Global Automotive +Customer and the dates the Global Automotive Customer would pay the German Distributor for +Maxwell product. DeWitt, therefore, should have known that the German Distributor was not +making payment without first receiving funds from the Global Automotive Customer, i.e., a +continent payment arrangement. + +38. Maxwell’s senior management and finance and accounting department did not +follow up on additional red flags that a contingent payment arrangement existed between Maxwell, +the German Distributor and certain other distributors. For example, Maxwell’s senior management +and finance and accounting department were keenly aware that a disproportionately large majority +of ultracapacitor sales were taking place during the last few days of the quarter. While the trend +lines associated with Maxwell’s quarter-end sales (i.e., linearity) had reached substandard levels, +the quarter-end sales associated with the German Distributor had changed dramatically during the +revenue recognition scheme and were far worse. + +39. During the period immediately before the fraud, Maxwell’s sales to the German +Distributor before the revenue recognition fraud demonstrated that 66% of these sales were made +during the first two months of the quarter. Only 24% of German Distributor sales were made +during the final two weeks of the quarter before December 2011. During the revenue recognition +scheme, Maxwell made 97% of its sales to the German Distributor during the final two weeks of +the quarter, with 75% made within the final five days: + + 12 + + +Schramm, Andrews and Maxwell’s senior finance and accounting personnel all were aware of +Maxwell’s quarter-end sales to the German Distributor and their impact on the quarterly revenue +growth estimates provided to analysts and investors. + +40. In addition, Maxwell’s senior management and finance and accounting department +closely tracked and monitored days sales outstanding (“DSO”) (i.e., the average number of days it +takes the company to collect its accounts receivable). During the relevant period, Maxwell’s DSO +on a company-wide basis trended upward from an average of 70 days at the end of the third quarter +in 2011 to 93 days, 108 days and 109 days during the first three quarters of 2012, respectively, and +were at historically substandard levels.3 + +41. Maxwell’s DSO for its sales to the German Distributor, however, were far worse +and nearly doubled (from 61 days to 120 days) between the third and fourth quarters of 2011. +During the first quarter of 2012, Maxwell’s DSO for its sales to the German Distributor continued +to rise from 120 days to 160 days, or over five months on average. During the second quarter of +2012, Maxwell’s senior management and finance and accounting personnel became increasingly +concerned with the German Distributor’s overdue accounts receivable balances, which were +extending between four to six months (120-180 days) after their invoice dates, and began to track +these balances on a weekly basis. Nevertheless, Maxwell’s finance and accounting department +overrode credit blocks that enabled Maxwell to ship and record nearly $5.4 million in sales to the +German Distributor notwithstanding significant delays in payments and resulting payment term +extensions. This same pattern continued during the third quarter of 2012. As a result, senior +management knew before Maxwell filed its Form 10-Q for the period ending September 30, 2012 + +3 Maxwell’s DSO of 70 days in the third quarter of 2011 is consistent with Maxwell’s average DSO of 70.5 days for +the four years (2008-2011) preceding the revenue recognition fraud. + + 13 +that German Distributor receivables for sales for the second and third quarters of 2012 would +remain unpaid, on average, for almost six months. + +42. Beginning in June 2012, and continuing through January 2013, Andrews directed +Maxwell sales personnel to offer the German Distributor extra “commission payments” if it +would pay their invoices to Maxwell before the German Distributor received payment from the +Global Automotive Customer. These “payments” were offset against outstanding receivable +amounts and then mischaracterized as marketing and/or exhibitor fees and improperly recorded as +legitimate marketing expenses to avoid detection by Maxwell’s finance and accounting department +and the external auditors. + +43. During the third quarter, in late July 2012, Maxwell’s finance and accounting +department tried to enforce credit blocks because of significantly overdue accounts receivable from +the German Distributor and certain other distributors of Maxwell’s ultracapacitor products. By +mid-September 2012, the credit blocks became unsustainable as it became apparent to senior +management that Maxwell’s ultracapacitor revenue threatened to perform significantly lower than +the 7-10% revenue growth forecast Schramm provided to analysts during the previous quarterly +earnings call if the sales to the German Distributor and others remained blocked. + +44. During the last week in September 2012, Maxwell’s board of directors met with +Schramm to discuss the anticipated quarterly financial results and expressed concern with +Maxwell’s ultracapacitor revenue for the quarter. Schramm then held an executive meeting and +told Andrews and his sales team that Maxwell needed $45 million in revenue for the third quarter +to meet the mid-range of analyst revenue growth expectations. On the same day as Schramm’s +executive meeting, Maxwell’s senior financial personnel partially overrode a credit block that +permitted Maxwell to ship over $1.6 million in sales to the German Distributor. On Friday, +September 28, 2012, the last business day of the quarter, Schramm overrode the remaining credit +block that permitted Maxwell to ship an additional $2.2 million in product to German Distributor. +At the time, Schramm was aware that the German Distributor would not ship any of the $2.2 +million in product until 2013. Schramm also performed no due diligence before overriding the +credit block, even though he was aware of the German Distributor’s extended payment terms, +overdue accounts receivable, and payment and credit history. Those transactions, improperly +recorded as revenue by Maxwell’s finance and accounting department, enabled Maxwell to report +that revenue increased 7 ½ % to $43.9 million for the quarter, or the lower end of Maxwell’s +estimates of 7% -10% revenue growth. + + 45. After the end of the third quarter, on October 12, 2012, Maxwell’s finance and +accounting department authorized a credit limit increase from $500,000 to $8.5 million that was +not based on, nor supported by, the documented financial condition of the German Distributor. In +particular, Maxwell, through DeWitt, obtained an updated D&B report for the German Distributor + 14 +in October 2012 in an attempt to bolster the credit files, which at the time consisted of only a +2007 D&B report written in French that noted a credit maximum of 323,340 EUR +(approximately $416,000). However, the October 2012 D&B report supported a credit +maximum for the German Distributor of only 180,000 EUR, which, if relied upon, would have +supported a credit limit decrease from the $500,000 credit limit previously established. DeWitt +also attempted to obtain audited financial statements from the German Distributor. Instead, the +German Distributor provided an unaudited spreadsheet with unproven and incomplete figures +that did not support a credit limit increase. In fact, the German Distributor’s unaudited +spreadsheet demonstrated than Maxwell’s approved credit limit of $8.5 million represented more +cash (before expenses) that the German Distributor generated in both 2011 and 2012 combined. +Rather than seeking additional, reliable quantitative financial data to determine the appropriate +credit limit, Maxwell’s senior financial personnel opted to rely upon oral representations from +Schramm and Andrews that the German Distributor was a good partner that was creditworthy at +$8.5 million. + +46. On October 17, 2012, Maxwell’s senior management met with the audit committee +to discuss the company’s financial results for the quarter ended September 30, 2012. At the time, +Maxwell’s outstanding accounts receivable balance with the German Distributor exceeded $8.5 +million, with $4 million long overdue and an additional $4 million representing shipments just +made on or after September 28, 2012. For all of the shipments made on or after September 28, +2012, Maxwell had almost immediately extended payment terms from 60 days to roughly 180 days +into March 2013. The discussion also covered two other distributors exhibiting characteristics +similar to the German Distributor. Nevertheless, the discussion at this meeting focused solely on +the collectability of the outstanding receivable to the German Distributor, an issue relevant to only +one criterion of revenue recognition. Maxwell did not address the possibility that a contingent +payment agreement existed, which was an issue relevant to another criterion of revenue +recognition. As a result, Maxwell recorded all of the revenue associated with the quarter-end +shipments that had initially been blocked. On October 25, 2012, Maxwell filed its Form 10-Q for +the period ending September 30, 2012, falsely reporting that Maxwell had achieved the lower end +of its revenue growth guidance. + +47. Shortly before Maxwell filed its Form 10-Q for the period ending September 30, +2012, Maxwell’s external auditors became increasingly concerned about revenue recognition +issues associated with the German Distributor. As a result, the external auditors employed +additional review procedures by sending a third-party confirmation letter to the German Distributor +and asking it to identify any special arrangements that might impact revenue recognition. DeWitt +furnished that revised confirmation letter to the external auditors, who then sent it to the German +Distributor. On December 12, 2012, at Andrews’ direction, Maxwell’s sales team arranged to have +the German Distributor submit a false confirmation to the external auditor that falsely claimed its +transactions with Maxwell were free of all contingencies. In February 2013, Maxwell, through + 15 +Andrews, arranged for the German Distributor to complete another false confirmation as part of the +year-end 2012 audit. + +48. Ultimately, all of the German Distributor revenue Maxwell recorded for the period +from December 2011 through September 2012 was determined to be recorded prematurely and +restated, although substantially all of the revenue was eventually collected and recognized in +subsequent periods. Similar practices were underway with sales involving at least three other +distributors, which also required restatement. Maxwell’s senior financial personnel and Schramm +overrode automated controls related to multiple distributors. + +Maxwell’s Revenue Recognition Scheme Unravels + +49. In early December 2012, Maxwell, through Andrews and his sales team, asked the +German Distributor to submit a PO for $1.5 million covering 90,000 parts ultimately meant for the +Global Automotive Customer. The German Distributor submitted a PO, but expressed concern to +Maxwell’s sales personnel that it was “running out of space” and “was not willing to let the +snowball become bigger” because of all the Maxwell product the German Distributor had not yet +shipped to the Global Automotive Customer. Maxwell ultimately withdrew the request four days +before the internal whistleblower informed the chairman of Maxwell’s board of directors of +concerns regarding a suspected revenue recognition scheme and the contingency relationship +between Maxwell and the German Distributor. + +50. Thereafter, Maxwell’s audit committee conducted an internal investigation and +concluded that Andrews and certain other Maxwell sales personnel engaged in side agreements +with the German Distributor and certain other distributors that they hid from Maxwell’s finance +and accounting department. On March 1, 2013, Schramm permitted Andrews to resign but +terminated two other sales personnel that reported to Andrews. That next morning, Schramm +and Andrews played a round of golf together at their country club. Schramm and Andrews +remained friends and continued to regularly play golf together until late August of 2013. + +51. After the market close on March 7, 2013, Maxwell filed a Form 8-K with the +Commission, in which it made public for the first time that it would be restating its financial +results for fiscal year 2011 and the first three quarters of 2012 and that those financials should no +longer be relied upon because of errors relating to the premature revenue recognition from sales +to certain distributors. The Form 8-K also disclosed material weaknesses in its internal control +over financial reporting and a default on the covenants governing its credit agreement. +Maxwell’s stock price dropped 11.09% to close at $8.10 per share on the news. + +52. While the internal investigation found Schramm and senior financial personnel +were not aware of the fraud, on March 18, 2013, Maxwell’s external auditors resigned after + 16 +concluding it could no longer rely on the representation of its management, particularly those made +by senior financial personnel. After the market close on March 19, 2013, Maxwell filed a Form +8-K with the Commission announcing the external auditors’ resignation and stating the company +would be unable to file its financial statements for fiscal year 2012 by the required deadline. +Maxwell’s stock price dropped 20.57% to $5.91 per share on the news. + +53. On August 1, 2013, Maxwell filed a restatement of the 2011 Form 10-K and Forms +10-Q for the first three quarters of 2012 that reduced revenue by 6.4% and 7.5% respectively, and +turned modest net income gains into net losses for certain periods. Maxwell’s restatement also +reported the company had successfully remediated its material weakness in internal control over +financial reporting related to its revenue recognition. Maxwell’s restatement included the +discovery of additional transactions for which Andrews purportedly hid, or otherwise provided +false and misleading information to Schramm and Maxwell’s finance and accounting department. + +VIOLATIONS + +54. Securities Act Section 17(a)(1), Exchange Act Section 10(b) and Rules 10b-5(a) +and 10b-5(c) thereunder prohibit fraudulent conduct in the offer or sale of securities and in +connection with the purchase or sale of securities, respectively. + +55. 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. + +56. 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. + +57. Exchange Act Section 13(a) and Rules 13a-1, 13a-11 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, quarterly and other reports as the Commission may +require. + +58. 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. + +59. Exchange Act Section 13(b)(2)(A) requires reporting companies to make and + 17 +keep books, records and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. + +60. 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. + +61. 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). + +62. 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). Rule 13b2-2(a) under the Exchange Act provides that no director or +officer of an issuer shall, 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, +directly or indirectly: (1) make or cause to be made a materially false or misleading statement to +an accountant; or (2) omit to state, or cause 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. + +Findings + +63. As a result of the conduct described above, Maxwell 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(a) and 5(c), 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + +64. As a result of the conduct described above, Andrews: (i) violated Securities Act +Section 17(a), Exchange Act Sections 10(b) and 13(b)(5) and Rules 10b-5(a) and (c), 13b2-1 and +13b2-2 promulgated thereunder; and (ii) caused Maxwell’s violations of Securities Act Section +17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and (B) and Rules 10b-5(a) and (c), 12b- +20, 13a-1, 13a-11, and 13a-13 promulgated thereunder. + +65. As a result of the conduct described above, Schramm and DeWitt caused +Maxwell’s violations of Exchange Act Sections 13(a), 13(b)(2)(A) and (B) and Rules 12b-20, +13a-1, 13a-11, and 13a-13 promulgated thereunder. + + + + 18 +MAXWELL’S REMEDIAL EFFORTS + + In determining to accept Maxwell’s Offer, the Commission considered remedial acts +promptly undertaken by Maxwell and cooperation it afforded the Commission staff. + +UNDERTAKINGS + + Maxwell shall comply with the following undertakings: + +1. Report to the Commission staff during a one-year term, as set forth herein, +Maxwell’s compliance with Commission regulations and GAAP regarding its +revenue recognition, financial reporting, and the status of any remediation, +implementation, auditing and testing of its internal accounting controls and +compliance measures. During this period, should Maxwell discover credible +evidence, not already reported to the Commission staff, that insufficiencies in the +design or operation of its internal accounting controls relating to revenue recognition +exist, Maxwell shall report such insufficiencies to the Commission staff and state +either all such insufficiencies have been remediated or it cannot certify compliance. +During this one-year period, Maxwell shall: (1) conduct an initial review and +submit an initial report, and (2) conduct and prepare a final follow-up report, as +described below: + +a. Maxwell shall submit to the Commission staff a written report within 150 +calendar days of the entry of this Order setting forth a complete description of its +internal accounting controls, policies, and procedures relating to revenue +recognition (the “Initial Report”). The Initial Report should also include +Maxwell’s remediation efforts to date, including a description of the controls, +policies, and procedures in place, and any proposals to make improvements, that +are reasonably designed to improve the internal accounting controls, policies and +procedures of Maxwell for ensuring compliance with Commission regulations and +GAAP, and the parameters of the subsequent reviews. + +b. Maxwell shall undertake a follow-up review, incorporating any comments +provided by the Commission staff on the Initial Report, to further test, monitor +and assess as necessary whether its internal accounting controls, policies and +procedures over revenue recognition are reasonably designed to: (1) provide +reasonable assurance of compliance with Commission regulations and GAAP; and +(2) detect and prevent insufficiencies in the design or operation of its internal +accounting controls, policies, and procedures relating to revenue recognition. +Maxwell shall submit to the Commission staff its final follow-up report within + 19 +365 calendar days of the entry of this Order (the “Final Report”). + +c. The Initial and Final Reports shall be transmitted to Tracy Price, FCPA Unit +Deputy Chief, Division of Enforcement, Securities and Exchange Commission, +100 F Street, NE, Washington, DC 20549-5631. Maxwell may extend the time +period for issuance of the Initial Report with prior written approval of the +Commission staff. Maxwell may extend the time period for issuance of the Initial +and Final Reports with prior written approval of the Commission staff. Maxwell +shall provide its external auditors with copies of the Initial and Final Reports and +shall provide staff with any written reports or recommendations produced by the +external auditors in response to those Reports. + +d. The Initial and Final Reports submitted by Maxwell will likely include +proprietary, financial, confidential, and competitive business information. Public +disclosure of the reports could discourage cooperation, impede pending or +potential government investigations and thus undermine the objectives of the +reporting requirement. For these reasons, among others, the Initial and Final +Reports and the contents thereof are intended to remain and shall remain non- +public, except (a) pursuant to court order, (b) as agreed by the parties in writing, +(c) to the extent that the Commission staff determines in its sole discretion that +disclosure would be in furtherance of the Commission's discharge of its duties and +responsibilities, or (d) is otherwise required by law. + +e. Certify, in writing, compliance with the undertaking(s) set forth above. The +certification shall identify the undertaking(s) provide written evidence of +compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests for +further evidence of compliance, and Maxwell agrees to provide such evidence. The +certification and supporting materials shall be submitted to Tracy Price, FCPA Unit +Deputy Chief, Division of Enforcement, with a copy to the Office of the Chief +Counsel of the Enforcement Division, no later than 30 days from the date of the +completion of the undertakings. + +f. Within one-year of the entry of this Order, should Maxwell discover credible +evidence, not already reported to the Commission staff, that its internal accounting +controls in areas unrelated to revenue recognition are insufficient, Maxwell shall +provide a detailed report to the Commission staff. + + + + 20 +2. Maxwell shall preserve and retain all documentation regarding all certifications and +reports for seven (7) years and will make it available to the Commission staff upon +request. + +3. In determining whether to accept Maxwell’s Offer, the Commission has considered +these undertakings. Maxwell agrees that if the Division of Enforcement believes that +Maxwell has not satisfied these undertakings, it may petition the Commission to reopen +the matter to determine whether additional sanctions are appropriate. For good cause +shown, the Commission staff may in its sole discretion extend any of the procedural +dates relating to the undertakings. + +4. Maxwell (including its officers, directors, and employees, and third-party consultants +within Maxwell’s control) shall cooperate fully with the Commission with respect to +this action and any related judicial or administrative proceeding or investigation +commenced by the Commission or to which the Commission is a party and subject to +compliance with applicable law. Maxwell agrees that such cooperation shall include, +but is not limited to: + +a. Production of Information: at the Commission’s request, upon reasonable notice, +and without subpoena, Maxwell (including its officers, directors, and employees, +and third-party consultants within Maxwell’s control) shall truthfully and +completely disclose all information requested by the Commission staff in +connection with the Commission’s investigation, litigation or other related +proceedings, except with respect to information related to clients other than +Maxwell, which information shall be produced in response to subpoena or other +appropriate legal process; + +b. Production of Documents: at the Commission’s request, upon reasonable notice, +and without subpoena, Maxwell (including its officers, directors, and employees, +and third-party consultants within Maxwell’s control) shall provide any document, +record or other tangible evidence requested by the Commission staff in connection +with the Commission’s investigation, litigation or other related proceedings, except +with respect to documents related to clients other than Maxwell, which information +shall be produced in response to subpoena or other appropriate legal process; and + +c. Production of Cooperative Personnel: at the Commission’s request, upon +reasonable notice, and without subpoena, Maxwell (including its officers, directors, +and employees, and third-party consultants within Maxwell’s control) shall secure +the attendance and truthful statements, deposition, or testimony of any Maxwell +officer, director, or employee or third-party consultant within Maxwell’s control, + 21 +excluding any person who is a party to any related litigated judicial or +administrative proceeding, at any meeting, interview, testimony, deposition, trial, or +other legal proceeding. +The foregoing obligations are subject to Maxwell’s reservation of rights: + +(i) to claim that documents or information requested is subject to attorney- +client privilege or attorney-work-product protection; and +(ii) to seek entry of a confidentiality order as to: sensitive business documents +or information; sensitive personnel documents or information; or +confidential information pertaining to parties other than Maxwell. + +d. Service and Personal Jurisdiction Consents: Maxwell further agrees that, with +respect to this action and any related judicial or administrative proceeding or +investigation commenced by the Commission or to which the Commission is a +party, it will: (i) accept service by email, mail or facsimile transmission of notices, +requests, or subpoenas issued by the Commission for documents or testimony at +depositions, hearings, or trials, or in connection with any related investigation by +the Commission staff (“Commission Service”); (ii) appoint Maxwell’s undersigned +attorney as agent to receive Commission Service; (iii) with respect to Commission +Service, waive the territorial limits upon service contained in Rule 45 for the +Federal Rules of Civil Procedure and any applicable local rules, provided that the +party requesting the testimony reimburses Maxwell’s travel, lodging, and +subsistence expenses at the then-prevailing U.S. Government per diem rates; and +(iv) consent to personal jurisdiction over Maxwell in any United States District +Court for purposes of enforcing any Commission Service. + +IV. + + 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 and Section 21C of the +Exchange Act, it is hereby ORDERED, effective immediately, that: + +A. Maxwell 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) and13(b)(2) (B), and Rules 10b-5(a) and (c), 12b-20, 13a-1, 13a-11, +and 13a-13 promulgated thereunder. + + 22 +B. Andrews 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(a) and (c), 12b-20, 13a-1, +13a-11, 13a-13, 13b2-1, and 13b2-2 promulgated thereunder. + +C. Andrews be, and hereby is, prohibited for five (5) years from the date of this Order +from acting as an officer or director of any issuer that has a class of securities +registered pursuant to Section 12 of the Exchange Act or that is required to file +reports pursuant to Section 15(d) of the Exchange Act. + +D. Schramm cease and desist from committing or causing any violations and any future +violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Rules +12b-20, 13a-1, 13a-11, and 13a-13 promulgated thereunder. + +E. DeWitt cease and desist from committing or causing any violations and any future +violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Rules +12b-20, 13a-1, 13a-11, and 13a-13 promulgated thereunder. + +F. Maxwell shall, within twenty-one (21) days of the entry of this Order, pay a civil +money penalty in the amount of $2.8 million to the Securities and Exchange +Commission. If timely payment is not made, additional interest shall accrue +pursuant to 31 U.S.C. Section 3717. + +G. Andrews shall, within twenty-one (21) days of the entry of this Order, pay a civil +money penalty in the amount of $50,000 to the Securities and Exchange +Commission. Payment shall be made in three installments as follows: one installment +of $25,000 due within 21 days of the date of the entry of this Order; the second +installment of $12,500 due within 180 days of this Order; and the third and final +installment of $12,500 within 360 days of the entry of this Order. Payments shall be +deemed made on the date they are received by the Commission and shall be applied +first to post-judgment interest, which accrues pursuant to 31 U.S.C. Section 3717 on +any unpaid amounts due after 21 days of the entry of this Order. Prior to making the +final payment set forth herein, Andrews shall contact the staff of the Commission for +the amount due for the final payment. If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. Section 3717. + +H. Schramm shall, within twenty-one (21) days of the entry of this Order, pay +disgorgement of $33,878, prejudgment interest of $6,113, and a civil money penalty +in the amount of $40,000 to the Securities and Exchange Commission. If timely + 23 +payment is not made, additional interest shall accrue pursuant to SEC Rule or +Practice 600 and 31 U.S.C. Section 3717. + +I. DeWitt shall, within twenty-one (21) days of the entry of this Order, pay a civil +money penalty in the amount of $20,000 to the Securities and Exchange +Commission. Payment shall be made in three installments as follows: one installment +of $10,000 due within 21 days of the date of the entry of this Order; the second +installment of $5,000 due within 180 days of this Order; and the third and final +installment of $5,000 within 360 days of the entry of this Order. Payments shall be +deemed made on the date they are received by the Commission and shall be applied +first to post-judgment interest, which accrues pursuant to 31 U.S.C. Section 3717 on +any unpaid amounts due after 21 days of the entry of this Order. Prior to making the +final payment set forth herein, DeWitt shall contact the staff of the Commission for the +amount due for the final payment. If timely payment is not made, additional interest +shall accrue pursuant to 31 U.S.C. Section 3717. + +J. 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 Maxwell Technologies, Inc., Van Andrews, David Schramm, and +James DeWitt 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., FCPA Unit Deputy Chief, Division of Enforcement, +Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. + 24 +K. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the disgorgement, prejudgment interest and civil money +penalties referenced in Paragraphs F through I above. Amounts ordered to be paid +as civil money penalties pursuant to this Order shall be treated as penalties paid to +the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Maxwell, Andrews, Schramm, and DeWitt +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 Maxwell’s, Andrews’, Schramm’s, and +DeWitt’s payment of a civil penalty in this action ("Penalty Offset"). If the court in +any Related Investor Action grants such a Penalty Offset, Maxwell, Andrews, +Schramm, and DeWitt 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 Maxwell, Andrews, Schramm, and/or +DeWitt 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. + +L. Respondent Maxwell shall comply with the undertakings enumerated in Section III. +above. + +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 Andrews, Schramm, and DeWitt, and further, any debt for disgorgement, prejudgment +interest, civil penalty or other amounts due by Respondents Andrews, Schramm, and DeWitt under +the 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 Andrews, Schramm, and +DeWitt 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/2018/AAER-3933.txt b/raw/aaer/2018/AAER-3933.txt new file mode 100644 index 0000000000000000000000000000000000000000..910dbf442ae5f77a644af2894a6b838515051df7 --- /dev/null +++ b/raw/aaer/2018/AAER-3933.txt @@ -0,0 +1,395 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10478 / April 9, 2018 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83017 / April 9, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3933 / April 9, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18431 + + + +In the Matter of + +Philip John James, CA and + Kevin Silverwood, CA + +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 Philip John +James, CA and Kevin Silverwood, CA (collectively, “Respondents”) 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 . . . 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: + +2 + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offer”) that the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, Respondents admit the Commission’s jurisdiction over them and +the subject matter of these proceedings, and 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- +A-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 financial reporting fraud conducted by two former employees +of Tech Data’s U.K. subsidiary. In fiscal years 2012 and 2013, Respondents Philip John James, +the subsidiary’s Finance Director, and Kevin Silverwood, the subsidiary’s Financial Management +Controller, fraudulently overstated Tech Data’s income by concealing uncollectible receivables +that should have been written off, reversing previously-recorded expenses and foreign exchange +losses, and prematurely recognizing a vendor rebate. As a result of this fraud, Tech Data +overstated its consolidated pretax income by 7% in the third quarters of fiscal years 2012 and 2013 +and by 5% in the fourth quarter of fiscal year 2013. + +RESPONDENTS + +2. Philip John James, 47, a citizen and resident of the U.K., was Computer 2000’s +Finance Director from January 2007 until he resigned in March 2013. James is a Chartered +Accountant in the U.K. + +3. Kevin Silverwood, 40, a citizen and resident of the U.K, was Computer 2000’s +Financial Management Controller from August 2011 until he resigned in February 2013. +Silverwood is a Chartered Accountant in the U.K. + +OTHER RELEVANT ENTITIES AND PERSONS + +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 + + +4. Tech Data Corp. is a wholesale distributor of technology products. It is a Florida +corporation headquartered in Clearwater, Florida. Tech Data’s common stock is registered with +the Commission pursuant to Exchange Act Section 12(b) and trades on NASDAQ. During the +relevant period, Tech Data sold securities pursuant to registration statements on Forms S-3 and S-8 +that incorporated by reference periodic filings with the material misrepresentations described in +this Order. + +5. Computer 2000 Distribution Limited, now doing business under the name Tech +Data Limited, was at all relevant times a U.K. corporation wholly-owned by Tech Data. For public +reporting purposes, Computer 2000’s financial results were consolidated in the results of Tech +Data. + +FACTS + +The Accounting Fraud in the U.K. Subsidiary + +A. Misconduct in the Company’s Third Quarter of Fiscal Year 2012 + +6. In Q3FY2012, James and Silverwood learned that Computer 2000 had $5 million in +aged receivables that were uncollectible. GAAP required Computer 2000 to write off this amount +by reducing the balance of its receivables account (an asset on its balance sheet) by $5 million and +recording a corresponding $5 million expense.4 This would have reduced Computer 2000’s +income by $5 million. To avoid this result, James and Silverwood made journal entries that +transferred the $5 million from the receivables account to an unrelated liability account on +Computer 2000’s balance sheet, where it remained until Tech Data restated its financials in +February 2014. + +7. This misconduct overstated Tech Data’s reported income before taxes by 7% in +Q3FY2012. + +B. Misconduct in the Company’s Third Quarter of Fiscal Year 2013 + +8. The following year, James and Silverwood again fraudulently overstated Tech +Data’s income. During the process of closing Computer 2000’s Q3FY2013, James and +Silverwood learned that the subsidiary’s expenses were higher than expected. To improve their +results, James and Silverwood made journal entries that transferred over $3 million in costs +relating to wages, car expenses, unrealized foreign exchange currency losses, and product +discounts and rebates – all of which Computer 2000 had previously, and appropriately, recorded as +reductions on its income statement – to the same balance sheet liability account they had used to + +4 GAAP requires that a receivable be recorded as impaired when, based on all available information, it is +probable that a loss has been incurred. See ASC 310-10-35-4. + +4 + +hide the uncollectible receivables in the prior year. Doing so artificially reduced Tech Data’s +expenses, and hence boosted the company’s income, by over $3 million. + +9. James and Silverwood overstated Tech Data’s income further in this period by +again not recording expenses for uncollectible receivables as GAAP required. Though they knew +about $650,000 in receivables from a vendor were uncollectible, and would hence need to be +written off, James and Silverwood avoided the required reduction in Computer 2000’s income by +making journal entries that transferred this amount from the receivables account to an unrelated +balance sheet liability account. + +10. Their fraud in this period overstated Tech Data’s reported income before taxes by +7% in Q3FY2013. + +C. Misconduct in the Company’s Fourth Quarter of Fiscal Year 2013 + +11. James and Silverwood overstated Tech Data’s income yet again in the following +quarter. + +12. First, Silverwood, with James’s knowledge, failed to record about $750,000 in +foreign exchange losses as required by GAAP. At the close of Q4FY2013, Silverwood learned +Tech Data had recorded a $1.8 million loss in its income statement due to fluctuations in the value +of the euro and certain associated hedging transactions. Rather than continuing to record the full +loss, Silverwood directed subordinates to make journal entries that reversed – under the guise of +“deferring” to an unspecified future period – about $750,000 of this loss. There was no basis in +GAAP for this action. + +13. Second, James allowed Tech Data to prematurely recognize about $750,000 in +rebates. In November 2012, James learned that a vendor had agreed to issue a $750,000 credit to +Computer 2000 if it ordered a certain volume of products from the vendor with delivery dates in +February and March 2013. Because the delivery dates were not until Tech Data’s Q1FY2014, +GAAP prohibited Computer 2000 from recognizing the $750,000 credit in Q4FY2013.5 +Nevertheless, Computer 2000, with James’s knowledge, recorded the entire amount of the credit in +Q4FY2013. + +14. Third, as they had done the prior quarter, James and Silverwood overstated Tech +Data’s income by making journal entries that improperly transferred over $350,000 in costs (wages +and car expenses) that had already been recorded in the company’s income statement to a balance +sheet liability account. + + +5 GAAP requires that companies recognize vendor incentives in a systematic fashion that properly allocat es +the cash consideration the vendor offers to the particular underlying transaction that results in progress toward +earning the incentive. ASC 605-50-25-10. + +5 + +15. Fourth, as they had also done previously, James and Silverwood failed to write off +two uncollectible receivables as required by making journal entries that transferred over $2.2 +million from the receivables account to unrelated balance sheet liability accounts. + +16. In all, the misconduct in this period overstated Tech Data’s reported income before +taxes by 5% in Q4FY2013, as reported in its March 4, 2013 earnings release on Form 8-K. + +D. James and Silverwood Concealed Certain of Their Activities + +17. James and Silverwood tracked their fraudulent activity in one of the balance sheet +liability accounts they used to manipulate Computer 2000’s earnings through a reconciliation +spreadsheet maintained by one of Silverwood’s subordinates that included a list of the unrelated +expenses they had transferred to that account. + +18. In Q4FY2013, James and Silverwood falsified the reconciliation by altering the +amounts in the spreadsheet to match the balance in Computer 2000’s accounting system for that +account.6 Silverwood provided the false reconciliation to Tech Data’s internal audit group. Both +he and James understood the company’s external auditors would have access to the reconciliation.7 + +VIOLATIONS + +19. 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. + +20. 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. + +21. 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. + +22. Exchange Act Rule 10b-5(a) prohibits any person from employing any device, +scheme, or artifice to defraud. + + +6 James and Silverwood altered the reconciliation so that it would match the balance in the acco unting +system simply by removing digits from the actual figures. For example, “£394,439.73” became “£94,439.73” and +“£2,417,311.94” became “£17,311.94.” + +7 The external auditors did in fact receive and incorporate the false reconciliation in their audit workpapers. +6 + +23. Exchange Act Rule 10b-5(c) prohibits any person from engaging in any act, +practice, or course of business which operates or would operate as a fraud or deceit upon any +person. + +24. Exchange Act Section 13(a) and Rules 13a-11 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, current and quarterly reports as the Commission may require. + +25. 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. + +26. 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. + +27. 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). + +28. 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). + +29. As a result of the conduct described above, James and Silverwood 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 Tech Data’s violations of +Securities Act Sections 17(a)(2) and (3), and Exchange Act Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) and Rules 13a-11 and 13a-13 thereunder. + +FINDINGS + +30. Based on the foregoing, the Commission finds that James and Silverwood 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 Tech Data’s +violations of Securities Act Sections 17(a)(2) and (3), and Exchange Act Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) and Rules 13a-11 and 13a-13 thereunder. + +7 + +REGULATORY SETTLEMENT + +31. Respondent James has entered into a settlement agreement with the U.K.’s +Financial Reporting Council (FRC) involving conduct relating to the findings in the Order. +Pursuant to the settlement, James admitted his misconduct related to Computer 2000, paid a fine of +£35,625 (approximately $46,300), and agreed to be excluded as a member of the Association of +Chartered Certified Accountants for 10 years. + +32. Respondent Silverwood has also entered into a settlement agreement with the FRC. +Silverwood took responsibility for his actions, fully admitting to his conduct during the FRC’s +investigation. Pursuant to the settlement, Silverwood admitted his misconduct related to Computer +2000, paid a fine of £11,250 (approximately $14,850), and agreed to be excluded as a member of +the Institute of Chartered Accountants in England and Wales for 4 years. + +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. James and Silverwood shall cease and desist from committing or causing any +violations and any future violations 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(a) and (c), 13a-11, 13a-13, and +13b2-1 promulgated thereunder. + + B. James is prohibited from acting as an officer or director of any issuer that has a +class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file +reports pursuant to Section 15(d) of the Exchange Act. + + C. Silverwood is prohibited for five 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. + + D. James and Silverwood are denied the privilege of appearing or practicing before the +Commission as an accountant. + +E. After five years from the date of this Order, Silverwood 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 +8 + +Exchange Act of 1934). Such an application must satisfy the Commission that Silverwood’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) Silverwood, 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) Silverwood, 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 Silverwood will not receive appropriate supervision; +(c) Silverwood 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) Silverwood 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 Silverwood 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 Silverwood’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. +9 + + G. With respect to James, disgorgement of $22,500 and prejudgment interest of $4,200 +is deemed satisfied by James’ payment of approximately $46,300 to the U.K. Financial Reporting +Council. + + H. With respect to Silverwood, disgorgement of $2,190 and prejudgment interest of +$395 is deemed satisfied by Silverwood’s payment of approximately $14,850 to the U.K. Financial +Reporting Council. + + I. The Commission will forgo seeking civil penalties against James or +Silverwood in light of the fines Respondents paid to the U.K. Financial Regulatory Council +in connection with the conduct relating to the findings in this Order. + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3934.txt b/raw/aaer/2018/AAER-3934.txt new file mode 100644 index 0000000000000000000000000000000000000000..4bd5acda63a619258cddf14a6da75e2b4f3266ea --- /dev/null +++ b/raw/aaer/2018/AAER-3934.txt @@ -0,0 +1,623 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10482 / April 12, 2018 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83036 / April 12, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3934 / April 12, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18436 + + + +In the Matter of + +LI AND COMPANY, PC and +TONY ZHICONG LI, CPA, + +Respondents. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 8A OF THE +SECURITIES ACT OF 1933, SECTION 4C +OF THE SECURITIES EXCHANGE ACT +OF 1934, AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted against Li and Company, PC (“Li & Co.”) and Tony Zhicong Li, CPA (“Li”) +(collectively, the “Respondents”) pursuant to Section 8A of the Securities Act of 1933 (“Securities +Act”), Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule +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 + + +2 +II. + + In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, 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, Section 4C of the Securities Exchange Act of +1934, and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing +Remedial Sanctions and a Cease-And-Desist Order (“Order”), as set forth below. +III. + + On the basis of this Order and Respondents’ Offer, the Commission finds3 that: + +A. SUMMARY + +1. These proceedings arise out of improper professional conduct by Li & Co. and Li in +connection with the audit and interim reviews of the financial statements of Wellness Center USA, +Inc. (“Wellness”). Li & Co. acted as the independent public accountant with respect to the financial +statements included in Wellness’ 2013 Form 10-K (“Wellness Audit”) and each of its 2013 Forms +10-Q (“Wellness Reviews”).4 Li was the engagement partner for the Wellness Audit and Wellness +Reviews. +2. Throughout Wellness’ fiscal year ending September 30, 2013, Wellness’ Chief +Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) Andrew Kandalepas made +numerous unauthorized withdrawals of corporate funds. Wellness’ quarterly financial statements + +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. + +3 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 +included in its 2013 Forms 10-Q and 2013 Form 10-K did not properly disclose these withdrawals +by Kandalepas. +3. Li & Co. and Li engaged in improper professional conduct by failing to comply with +the standards of the Public Company Accounting Oversight Board (“PCAOB”) in connection with +the audit and interim reviews of Wellness’ 2013 annual and quarterly financial statements. +Specifically, Li & Co. and Li: (1) failed to satisfy the standards for reviews of interim financial +information with respect to the numerous unauthorized withdrawals of corporate funds by Wellness’ +CEO; (2) failed to design and perform audit procedures to address the material weaknesses in +Wellness’ internal control over financial reporting; (3) improperly relied on management’s +representations concerning the CEO’s unauthorized withdrawals; (4) failed to exercise due +professional care and skepticism regarding a $250,000 back-dated promissory note to the CEO; and +(5) failed to perform appropriate audit procedures for subsequent events. +4. Moreover, Li & Co. and Li caused Wellness’ violations of Section 17(a)(2) of the +Securities Act by proposing during the 2013 audit that Kandalepas execute a promissory note and +classify his unauthorized withdrawals as a Note Payable in Wellness’ financial statements and then +by issuing an unqualified audit opinion on those financial statements despite their inaccurate +description of Kandalepas’ withdrawals. +B. RESPONDENTS +5. Tony Zhicong Li (“Li”), age 54, is a resident of Belle Mead, New Jersey and has +been licensed as a certified public accountant with the State of New Jersey since 2000. Since July +2000, Li has been the President, a partner and fifty-percent owner of Li & Co. Li was the lead +engagement partner for Wellness for the fiscal year 2012 through 2015 audits. On June 14, 2016, +the PCAOB censured and barred Li from being an associated person of a registered accounting +firm for failure to cooperate with a PCAOB investigation. +6. Li and Company, PC (“Li & Co.”) is a public accounting firm headquartered in +Skillman, New Jersey founded in 2000. Li & Co. acted as Wellness’ auditor from 2011 through +April 29, 2016. Li & Co. was registered with the PCAOB from September 2006 until June 14, +2016 when its registration was revoked for failure to cooperate with a PCAOB investigation. +C. OTHER RELEVANT PARTIES +7. Wellness Center USA, Inc. (“Wellness”) is a Nevada corporation formed in June +2010 with its principal place of business in Hoffman Estates, Illinois. Since 2012, Wellness’ +common stock has been quoted on the Over-the-Counter Bulletin Board under the symbol WCUI. +8. Andrew J. Kandalepas (“Kandalepas”) was at all relevant times the President, +Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors of +Wellness. + +4 Wellness operates on a September 30 fiscal year. + + +4 +D. FACTS +Wellness Background +9. Wellness was originally an online vitamin and nutritional supplement distributor, +and subsequently through a series of acquisitions became the holding company for four +subsidiaries involved in the alternative medicine and healthcare sectors. Since its inception in +2010, Wellness has had less than $500,000 revenue every year, and has had annual net losses +between $100,000 and $7 million. Wellness has primarily funded its operations through sales of +stock, having raised approximately $18.6 million since 2011. +10. Since Wellness’ inception, Kandalepas has unilaterally controlled all its business +functions and operations. He appointed himself as Wellness’ CEO, CFO, and President. He also +appointed himself to serve as Chairman of Wellness’ Board of Directors. Kandalepas had sole +control over Wellness’ bank accounts and its bookkeeping. As Wellness’ only officer, Kandalepas +was also responsible for the preparation of its periodic reports. +11. Li & Co. served as Wellness’ independent accountant from 2011 through April 29, +2016 and performed quarterly reviews of interim financial information and annual audits during +this period. Li was the engagement partner on the Wellness audits and reviews during this period. +According to Li & Co., from at least 2012 to 2014, Wellness had material weaknesses in its +internal control over financial reporting, including the lack of financial expertise, the lack of an +independent board, and insufficient segregation of duties. +Kandalepas’ Compensation +12. From 2010 through fiscal 2012, Kandalepas did not take compensation from +Wellness outside of receiving 3.7 million Wellness shares and options for another 1.6 million +shares in 2010. According to Wellness’ bylaws, officer salary and compensation was to be fixed +by the Board of Directors (“Board”). Between 2010 and early 2012, Kandalepas loaned Wellness +more than $100,000 to fund its operations, although by the end of fiscal 2012 Kandalepas repaid +himself by taking withdrawals from Wellness’ bank account at will and without the Board’s +knowledge or involvement. From 2011 through mid-2013, Wellness reported in periodic filings +with the Commission that “Kandalepas has elected not to receive any compensation for his +services, until the Company is financially capable to compensate him.” +Kandalepas Made Unauthorized Withdrawals From Wellness +13. In early fiscal 2013, after repaying himself for his advances to the company, +Kandalepas continued to withdraw money from the company without Board knowledge or +authorization. Kandalepas took however much he wanted when he wanted, in varying amounts +and on no consistent schedule. By the end of fiscal 2013, Kandalepas had made unauthorized +withdrawals of $457,058, characterizing the withdrawals on Wellness’ financial statements as a +combination of salary, prepayments, or loans. During fiscal 2013, Kandalepas caused Wellness to + + +5 +issue Forms 10-K and 10-Q that misrepresented his compensation and failed to properly disclose +his unauthorized withdrawals. +14. In February 2013, as part of the closing of Wellness’ books for the first quarter of +fiscal year 2013, Wellness’ bookkeeper informed Kandalepas and Li that during the quarter +Kandalepas had withdrawn from the company $68,433 beyond what he had lent the company. In +response, Kandalepas unilaterally and retroactively declared, without consulting the Board, that he +would receive a $200,000 salary, or $50,000 per quarter, to account for his withdrawals. +15. Each quarter, Wellness recorded $50,000 in compensation for Kandalepas in its +accounting records. But Kandalepas took more money. Throughout 2013, Kandalepas withdrew +money from Wellness whenever he pleased, opting for frequent withdrawals of inconsistent +amounts rather than a regular salary, and he did not limit himself to his new salary. Wellness +booked any withdrawals exceeding Kandalepas’ $50,000 quarterly salary as “prepaid expenses.” +By the end of fiscal 2013, Kandalepas had taken $457,058 from the company. +Wellness’ Misleading 2013 Forms 10-Q +16. Wellness concealed the payments to Kandalepas in its 2013 Forms 10-Q. Its first +and second quarter Forms 10-Q falsely stated that “Kandalepas has elected not to receive any +compensation for his services, until the Company is financially capable to compensate him,” even +though Wellness had paid Kandalepas $100,000 in “compensation” over the first two quarters. In +those quarters, Wellness’ consolidated income statements reported “salaries-officers” at the parent +company of $50,000 and $100,000 respectively, although they did not attribute this compensation +to Kandalepas. Wellness’ third quarter Form 10-Q omitted the misstatement that Kandalepas was +not being compensated, but still did not affirmatively disclose that Kandalepas was receiving a +salary or withdrawing funds from the company. +17. In each of Wellness’ 2013 Forms 10-Q, Wellness classified Kandalepas’ excess +withdrawals in a non-descript balance sheet line item entitled “prepayments and other current +assets.” There was no way to tell from the quarterly reports that this amount represented payments +to Kandalepas. +Wellness’ Misleading 2013 Form 10-K +18. During the 2013 fiscal year audit, Li discussed the $257,058 of Kandalepas’ excess +withdrawals with Kandalepas. Kandalepas told Li that he was entitled to the excess withdrawals as +back pay for previous years’ services for which he was not compensated. Li responded that +Kandalepas could not take back pay since Wellness had not accrued salary for him in prior periods. +19. Days before the Form 10-K filing date, Li requested that Kandalepas pay back these +“advances” before the company filed its 10-K, but Kandalepas declined. Li presented him with +two other options for dealing with the overpayments: recognize the overpayments as compensation +(bringing Kandalepas’ compensation to $457,000 for 2013) or execute a promissory note with the +company for $250,000. Between midnight and 3:00 a.m. on January 14, 2014, the day Wellness + + +6 +filed its Form 10-K, Kandalepas, without Board consultation or authorization, finalized and +executed a promissory note to pay Wellness $250,000 plus interest. Kandalepas sent Li a draft +note before executing and asked if it was what Li had in mind. The promissory note was +backdated to September 30, 2013, Wellness’ fiscal year end. The overpayments were reclassified +on Wellness’ balance sheet from prepaid expenses to a note receivable. Li never communicated +with Wellness’ Board about Kandalepas’ withdrawals or this last minute promissory note and +never took steps to assess whether the Board had approved such withdrawals or the promissory +note. +20. Wellness’ 2013 Form 10-K made false representations concerning Kandalepas’ +excess withdrawals. In Item 13 of Form 10-K concerning related-party transactions, Wellness +falsely stated that “[o]n September 30, 2013, Mr. Kandalepas borrowed $250,000 from the +Company pursuant to a promissory note.” In fact, Kandalepas did not borrow any money from +Wellness on September 30, 2013; he took that sum throughout the previous twelve months. +Moreover, the note was executed on January 14, 2014, not “on September 30, 2013.” In Note 10 +of the financial statements, Related Party Transactions, the company falsely stated that “[o]n +September 30, 2013, Chairman, President, and CEO (“Maker”) hereby promises to pay [$250,000] +to the order of Wellness Center.” However, this promise, i.e., the execution of the note, occurred +on January 14, 2014, not on September 30, 2013. The Form 10-K attached a copy of the falsely +dated note as an exhibit. +21. In addition to being false, these disclosures were misleading because Kandalepas +did not have the financial ability to repay the note. As of January 2014, Kandalepas was past due +on his mortgage, had tens of thousands of dollars in credit card debt, and had minimal liquid assets +available to repay the loan. Kandalepas failed to make even the full first required payment in April +2014 and quickly fell far behind on the required payments. +22. In its Forms 10-K and 10-Q for fiscal 2014 and 2015, Wellness continued to +misrepresent that Kandalepas had issued a promissory note on September 30, 2013 and failed to +disclose the circumstances that gave rise to that note. In early 2016, after Wellness retained a new +independent accountant, Wellness wrote off the nearly $200,000 still owed under Kandalepas’ +promissory note as compensation. +Li & Co. and Li Caused Wellness’ Violations of Section 17(a)(2) +23. Li & Co. and Li played a central role in Kandalepas’ concealment of his +unauthorized withdrawals. Li suggested the creation of a promissory note immediately before +Wellness’ 2013 Form 10-K was issued. As described above, Li assisted Wellness in conceiving +this promissory note, which served as a method for concealing the true amount of money that +Kandalepas had withdrawn from the company throughout 2013. Li and Li & Co. knew or should +have known that the promissory note’s date misrepresented when the note was executed and that +the resulting disclosures in Wellness’ Form 10-K misrepresented the circumstances surrounding +Kandalepas’ withdrawals. Li and Li & Co. also knew or should have known that Wellness +intended to issue securities through private offerings following the filing of the 2013 Form 10-K. + + +7 +Li & Co., through Li, issued an audit report expressing an unqualified audit opinion that +accompanied Wellness’ 2013 Form 10-K. In light of this conduct, Li & Co. and Li caused +Wellness’ material misrepresentations and omissions in its Form 10-K. +Li and Co. and Li Failed to Satisfy Applicable Review and Audit Standards +24. Wellness’ 2013 Form 10-K included an audit report from Li & Co. that stated its +audit of Wellness’ financial statements was conducted “in accordance with the standards of the +Public Company Accounting Oversight Board” and that, in Li & Co.’s opinion, Wellness’ financial +statements presented fairly, in all material respects, the company’s financial position and results of +its operations in accordance with generally accepted accounting principles (“GAAP”). As +described below, Li & Co.’s 2013 audit of Wellness was not conducted in accordance with +PCAOB standards. Moreover, the financial statements included in Wellness’ Form 2013 10-K +were materially misstated because they incorrectly represented that Kandalepas had executed a +promissory note for $250,000 on September 30, 2013 when in fact that transaction occurred on +January 14, 2014. +25. Likewise, Li & Co. and Li failed to adhere to the standards for review of Wellness’ +interim financial information in Wellness’ Forms 10-Q for fiscal 2013. +Li & Co. and Li Failed to Satisfy the Standards for Reviews of +Interim Financial Information (AU 722) +26. A review of interim financial information consists principally of performing +analytical procedures and making inquiries of persons responsible for financial and accounting +matters.5 AU 722.07.6 The specific inquiries and analytical procedures to be performed should be +tailored by the accountant’s knowledge of the company’s business and its internal control. AU +722.15. The accountant should inquire, among other things, about matters dealt with at meetings +of stockholders, directors, and other appropriate committees for which minutes are not available, +significant transactions occurring or recognized in the last several days of the interim period, and +significant journal entries and other adjustments. AU 722.18. Although in a review an accountant +ordinarily is not required to corroborate management’s responses with other evidence, the +accountant should consider the reasonableness and consistency of management’s responses in light +of the results of other review procedures and the accountant’s knowledge of the company’s internal +control. AU 722.17. When the accountant becomes aware of information that leads him or her to +believe that the interim financial information may not be in conformity with GAAP in all material +respects, then 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 + +5 “The objective of a review of 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 +generally accepted accounting principles.” AU 722.07. +6 All cites are to the PCAOB standards in effect at the time of the relevant conduct. + + +8 +of any material modifications that should be made to the interim financial information. AU +722.22. Written representations from management should be obtained for all interim financial +information presented, including representations related to unrecorded transactions and amounts +receivable from or payable to related parties. AU 722.24. Accountants should read other +information contained in the Form 10-Q and consider whether such information or the manner of +its presentation is materially inconsistent with the interim financial information. AU 722.18(f). +27. Li & Co. and Li failed to satisfy these standards in each interim review for fiscal +year 2013 with respect to Kandalepas’ unauthorized withdrawals of corporate funds in those +quarters. Although they were aware that Wellness had material weaknesses with respect to its +internal control over financial reporting, Li & Co. and Li did not tailor their inquiries or perform +analytical procedures that addressed significant risk areas in accounting and disclosure matters +related to the interim financial information to be reported. +28. When Li & Co. and Li found out in February 2013 that Kandalepas had withdrawn +funds from the company that exceeded what he was owed for loan repayments, they accepted +Kandalepas’ decision to unilaterally and retroactively set a salary for himself as a post-hoc +justification for most of the amount withdrawn, despite the Wellness bylaws’ requirement that +officer compensation be set by the Board. Li & Co. did not conduct any additional inquiry as to +whether this salary was properly authorized, even in light of the suspicious circumstances in which +it was set (after Kandalepas had already taken the money). Li & Co. knew the withdrawals in +excess of Kandalepas’ self-proclaimed “salary” were classified as “prepayments” and did not take +any steps to consider whether the Wellness’ quarterly financial statements reflected that those +payments were advances to Kandalepas.7 +29. Li & Co. also failed to take action regarding materially inconsistent information +contained in the first and second quarter Forms 10-Q concerning Kandalepas’ compensation. In +those Forms 10-Q, Wellness falsely stated that Kandalepas had elected not to receive +compensation, which contradicted both Li’s personal knowledge that Kandalepas had declared a +salary and the financial statements, which accrued $50,000 of salary each quarter. +Li & Co. and Li Failed to Design and Perform Audit Procedures +Responsive to Assessed Risks (AS 13, AU 110, 316, and 317) +30. PCAOB Auditing Standard No. 13, The Auditor’s Responses to the Risks of +Material Misstatement, states “the auditor should design and perform audit procedures in a manner +that addresses the assessed risks of material misstatement for each relevant assertion of each +significant account and disclosure.” AS 13 at ¶ 8. Once an auditor identifies the possibility of a +material misstatement, AS 13 requires him to exercise professional skepticism in gathering and + +7 Rule 4-08(k) of Regulation S-X (“Related party transactions should be identified and the +amounts stated on the face of the balance sheet, income statement, or statement of cash flows.”); +ASC Topic 850-10-50-2 (requires that amounts receivable from related parties be stated +separately). + + +9 +evaluating audit evidence, including gathering evidence to corroborate management’s explanations +or representations.8 Id. at ¶ 7. Thus, PCAOB Auditing Standards required Li & Co. and Li to +perform substantive audit procedures specifically designed to be responsive to fraud risk. +31. Moreover, PCAOB AU Section 316, Consideration of Fraud in a Financial +Statement Audit, provides that an auditor has a responsibility to plan and perform the audit to +obtain reasonable assurance about whether the financial statements are free of material +misstatement, whether caused by error or fraud. AU 316.01; AU 110.02. Auditors consider two +types of fraud – misstatements arising from fraudulent financial reporting and misstatements +arising from misappropriation of assets. AU 316.06. Fraudulent financial reporting may be +accomplished by falsifying or altering “accounting records or supporting documents from which +financial statements are prepared” or by misrepresentation of transactions. AU 316.06. +Misstatements arising from misappropriation of assets involve the theft of an entity’s assets where +the effect of the theft causes the financial statements not to be presented, in all material respects, in +conformity with GAAP. Misappropriation of assets can be accomplished in various ways and may +be accompanied by false or misleading records or documents, possibly created by circumventing +controls. AU 316.06. PCAOB AU Section 317, Illegal Acts by Clients, provides that the auditor’s +responsibility to detect and report misstatements resulting from illegal acts having a direct and +material effect on the determination of financial statement amounts is the same as that for +misstatements caused by error or fraud as described in AU 110. AU 317.05. +32. During the planning of the Wellness Audit, Li & Co. concluded that Wellness’ lack +of internal control over financial reporting was a material weakness and deemed Wellness’ lack of +segregation of duties and its lack of sufficient internal controls as areas of the audit with significant +risks. Li & Co. concluded that Wellness’ internal controls could not be relied upon and therefore +more in-depth substantive procedures were required .9 Therefore, to comply with AS 13, Li & Co +and Li should have included procedures designed to address the risk of material misstatement due +to Kandalepas’ dominance over the company’s operations and financial reporting, especially in +light of Kandalepas’ frequent withdrawals of cash from the company. +33. The Wellness Audit lacked procedures designed to obtain sufficient audit evidence +that payments to Kandalepas were properly authorized and did not constitute fraud or illegal acts +that have a direct and material effect on the determination of the financial statement amounts, or + +8 “For significant risks, the auditor should perform substantive procedures, including tests +of details, that are specifically responsive to the assessed risks.” AS 13 at ¶ 11. PCAOB +Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement, states that a +fraud risk is a significant risk. Id. at ¶ 71. +9 Under PCAOB AU 325, Communications About Control Deficiencies in an Audit of +Financial Statements, a material weakness is a “deficiency, or a combination of deficiencies, in +internal control over financial reporting, such that there is a reasonable possibility that a material +misstatement of the company’s annual or interim financial statements will not be prevented or +detected on a timely basis.” AU 325.03. + + + +10 +that those payments were being recognized correctly in the company’s accounting records and +financial statements. In fact, Kandalepas explained to Li that the excess withdrawals were in fact +“back pay,” which Li knew was not authorized and had not been accrued. Thus, even when Li +faced circumstances requiring heightened scrutiny, and facts strongly suggestive of fraud, he failed +to perform any additional auditing steps that were warranted by the situation. Instead, Li helped +craft a solution that misrepresented the true nature of the excess withdrawals, classifying the +withdrawals as loans rather than compensation. +34. Li & Co. also failed to obtain reasonable assurance that there were no material +misstatements arising from the misappropriation of assets. The promissory note was not treated as +a subsequent event and was misrepresented in the annual report as if the company consciously lent +Kandalepas money pursuant to an agreement in September 2013. +Li & Co. and Li Improperly Relied on Management’s Representations +Concerning Kandalepas’ Withdrawals (AU 333, 334) +35. PCAOB AU Section 333, Management Representations, states that representations +from a company’s management “are part of the evidential matter the independent auditor obtains, +but 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. AU +333 further states that “[i]f a representation made by management is contradicted by other audit +evidence, the auditor should investigate the circumstances and consider the reliability of the +representation made. Based on the circumstances, the auditor should consider whether his or her +reliance on management’s representations relating to other aspects of the financial statements is +appropriate and justified.” AU 333.04. PCAOB AU Section 334, Related Parties, states that the +auditor should perform procedures to obtain and evaluate sufficient appropriate evidential matter +concerning related party transactions, and that such procedures should extend beyond inquiry of +management. AU 334.09. Auditors should consider, among other things, obtaining an +understanding of the business purpose of the transactions, examining agreements, contracts, and +other pertinent documents to the transactions, and determining whether the transactions were +approved by the board of directors or other appropriate officials. AU 334.09. +36. Li improperly relied on Kandalepas’ representations concerning his compensation +in at least two ways. First, Li took no steps to independently confirm that Kandalepas had been +authorized to receive a salary of $200,000, despite the bylaws’ requirement that the Board set +officer compensation. In the face of other audit evidence showing that Kandalepas had withdrawn +more than his annual salary throughout fiscal year 2013, Li should have investigated, in the context +of potential fraud, the circumstances and reliability of Kandalepas’ representation that he was to +receive a $200,000 salary, or that he was entitled to additional withdrawals beyond his salary. +Second, when Kandalepas presented Li with a back-dated promissory note for $250,000 in the +early morning hours of January 14, 2014, Li failed to investigate whether the financial arrangement +had been properly authorized by the Board of Directors and whether the date of the note was +appropriate given the discussions Li had just had with Kandalepas. + + +11 +37. Li failed to determine whether the disclosures in the financial statements +concerning Kandalepas’ excess withdrawals properly reflected the nature of the transactions.10 To +the contrary, Li assisted in redefining the true nature of the transactions – back pay according to +Kandalepas – by proposing that Kandalepas could execute a promissory note and recharacterize the +withdrawals as related party loans rather than compensation. +Li & Co. and Li Failed to Exercise Due Professional Care (AU 230) +38. PCAOB AU Section 230, Due Professional Care in Performance of Work, states +that auditors are to exercise due professional care in the planning and performance of the audit and +the preparation of the report. AU 230.01. Due professional care requires that the auditor exercise +professional skepticism throughout the audit process, including when considering the risks of +material misstatement due to fraud. AU 230.07-.08; see also AU 316.13. Under this standard, +“[p]rofessional skepticism is an attitude that includes a questioning mind and a critical assessment +of audit evidence” AU 230.07, and auditors “consider the competency and sufficiency of the +evidence” AU 230.08 and “neither assume[] that management is dishonest nor assume[] +unquestioned honesty.” AU 230.09. +39. When Li had to address the excess $250,000 in payments that Kandalepas had +received throughout 2013, Li failed to exercise the requisite professional skepticism to determine +whether these payments created a risk of material misstatement due to fraud. Rather than conduct +a critical assessment of whether these payments were evidence of misappropriation by the CEO, Li +assumed that the payments were authorized and suggested to Kandalepas a method for legitimizing +the payments in the company’s books (the promissory note) that he knew did not reflect the +circumstances under which those withdrawals were made (unauthorized back pay). Thus, Li failed +to exercise the requisite level of professional skepticism when considering the risk of material +misstatement due to fraud in the payments to Kandalepas. +Li & Co. and Li Failed to Perform Appropriate Audit Procedures for +Subsequent Events (AU 560) +40. PCAOB AU Section 560, Subsequent Events, requires auditors to evaluate events +or transactions that occur subsequent to the balance-sheet date but prior to the issuance of the +financial statements that have a material effect on the financial statements. AU 560.01, .12. +Transactions to be evaluated include those that did not exist at the date of the balance sheet being +reported on but arose subsequent to that date. AU 560.05. Accordingly, an auditor should perform +auditing procedures for the period after the balance-sheet date to ascertain the occurrence of +subsequent events that may require disclosure. AU 560.12. + +41. As described above, Li & Co. and Li were aware that a significant, new related +party transaction took place after the balance sheet date of September 30, 2013 (the Kandalepas + +10 See ASC Topic 850-10-50-1 (disclosure of related party transactions shall include the +nature of the relationship involved and a description of the transactions). + + +12 +promissory note). In fact, Li was involved in the creation of that note in mid-January 2014. Yet, +Li & Co. and Li failed to perform auditing procedures to determine whether this transaction should +be disclosed as a subsequent event. This note had a material effect on the financial statements, and +should have been reported as a subsequent event since the transaction took place after September +30, 2013. Thus, Li & Co. and Li failed to perform appropriate audit procedures in connection with +the promissory note that Kandalepas executed after the balance-sheet date but prior to the issuance +of the financial statements. + +Wellness’ Forms 10-Q and 10-K in Subsequent Years + +42. Li & Co. and Li also failed to adhere to applicable professional standards in +connection with their review of interim financial information included in Wellness’ 2014 and 2015 +Forms 10-Q and their audits for fiscal years 2014 and 2015. In each Form 10-Q and 10-K filed +during this period, Wellness disclosed in the footnotes to its financial statements that Kandalepas +had issued a promissory note to the company on September 30, 2013. Li & Co. and Li knew that +Kandalepas did not issue the promissory note on that date, yet they failed to take steps to consider +whether these disclosures were accurate and not misleading. AU 722.22; AS 13 at ¶ 8. + +E. FINDINGS +43. Based on the foregoing, the Commission finds that Li & Co. and Li caused +Wellness’ violations of Section 17(a)(2) of the Securities Act. + +44. Based on the foregoing, the Commission finds that Li & Co. and Li engaged in +improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +F. UNDERTAKING + +45. Cooperation with the Commission’s Investigation and Related Litigation. +Respondent Li & Co. (including its partners, principals, officers, agents, and employees) and +Respondent Li shall cooperate fully with the Commission in any and all investigations, litigations, +administrative and 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 +investigation, litigation, administrative or other proceedings, Respondents (i) will accept service by +mail, facsimile transmission, or email of notices or subpoenas issued by the Commission for +documents or testimony at depositions, hearing, or trials; (ii) appoint counsel Thomas F. +Falkenberg, Falkenberg Ives LLP, as their agent to receive service of such notices and subpoenas; +(iii) with respect to such notices and subpoenas, waive the territorial limits on service contained in +Rule 45 of the Federal Rules of Civil Procedures and any applicable local rules, provided that the +party requesting the testimony reimburses Respondents’ travel, lodging, and subsistence expenses +at the then-prevailing U.S. Government per diem rates; and (iv) consent to personal jurisdiction +over Respondents in any United States District Court for purposes of enforcing any such subpoena. + + + +13 +46. In determining whether to accept the Offer, the Commission has considered this +undertaking. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Li & Co. and Li shall cease and desist from committing or causing any violations +and any future violations of Section 17(a)(2) of the Securities Act. + + B. Li & Co. is denied the privilege of appearing or practicing before the Commission as +an accountant. + + C. Li is denied the privilege of appearing or practicing before the Commission as an +accountant. + + D. Respondent Li & Co. shall, within 14 days of the entry of this Order, pay +disgorgement of $22,500, prejudgment interest of $2,643 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. Respondent Li shall, within 14 days of the entry of this Order, pay, disgorgement of +$22,500, prejudgment interest of $2,643 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. + + F. Respondents shall, within 14 days of the entry of this Order, pay, jointly and +severally, a civil money penalty 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 timely payment is not made, additional interest shall accrue pursuant to 31 +U.S.C. § 3717. + +G. Payment pursuant to paragraphs D through F above 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; + + + +14 +(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 Li & +Co. or Li 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 Jeffrey A. Shank, Assistant Regional +Director, Division of Enforcement, Securities and Exchange Commission, 175 W. Jackson Blvd., +Suite 1450, Chicago, IL 60604. + + H. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor +Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondents’ payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against either or both 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. + + + +15 +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 Li, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent Li 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 Li 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/2018/AAER-3935.txt b/raw/aaer/2018/AAER-3935.txt new file mode 100644 index 0000000000000000000000000000000000000000..a69800b1809ee10a4cd53ede1bbc7327aecbfa9d --- /dev/null +++ b/raw/aaer/2018/AAER-3935.txt @@ -0,0 +1,216 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83067 / April 19, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3935 / April 19, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18442 + + +In the Matter of + +MEDIFIRST SOLUTIONS, +INC. +AND +BRUCE J. SCHOENGOOD + +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 Medifirst Solutions, Inc. (“Medifirst”) and Bruce +J. Schoengood (“Schoengood”)(collectively, “Respondents”). + +II. + In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, 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 and Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + + + 2 + + + +III. + + On the basis of this Order and Respondents’ Offer, the Commission finds1 that: + +A. RESPONDENTS + +1. Medifirst, a Nevada corporation headquartered in Freehold, New Jersey, develops +mobile handheld green and infrared laser devices used for anti-aging and skin care. At all relevant +times, its common stock was registered under Section 12(g) of the Exchange Act and is quoted on +OTC Link (previously “Pink Sheets”) operated by OTC Markets Group, Inc. under the ticker +symbol “MFST.” +2. Schoengood, age 59 and a resident of Manalapan, New Jersey, is Medifirst’s +founder and sole officer and director. Between 2011 and 2016, Schoengood signed and certified +each of Medifirst’s periodic filings in the capacities of principal executive and principal financial +officer. +B. OTHER RELEVANT ENTITY AND PERSON +3. David A. Aronson, CPA, P.A. (the “Aronson Firm”), an audit firm based in North +Miami Beach, Florida, was registered with the Public Company Accounting Oversight Board +(“PCAOB”) from March 15, 2005 until its registration was revoked on October 2, 2015. The +Aronson Firm was Medifirst’s auditor from June 1, 2011 until the Aronson Firm was dismissed as +the company’s independent auditor on June 22, 2015. +4. David A. Aronson, CPA (“Aronson”) was the Aronson Firm’s sole owner and +Medifirst’s audit engagement partner until Medifirst dismissed the Aronson Firm. After the +Aronson Firm’s dismissal, Medifirst retained Aronson as an internal accountant. +C. BACKGROUND +5. On October 2, 2015, the PCAOB filed a settled action against Aronson and the +Aronson Firm for multiple deficiencies in audit work performed between 2011 and 2015 on several +public company engagements, including Medifirst (the “PCAOB Order”).2 The PCAOB Order, +which was and is available on its website, revoked the registration of the Aronson Firm and barred +Aronson from being an associated person of a registered public accounting firm.3 + +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. +2 See PCAOB Release No. 105-2015-034, available at +https://pcaobus.org/Enforcement/Decisions/Documents/David_A_Aronson.pdf +3 On October 19, 2016, the Commission instituted litigated administrative and cease-and-desist proceedings +against Aronson to determine whether he violated Section 105(c)(7)(B) of the Sarbanes-Oxley Act of 2002 by + 3 +6. As stated in the PCAOB Order, Section 105(c)(7)(B) of the Sarbanes-Oxley Act of +2002 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 a financial management capacity [...] without the consent of the [PCAOB] or +the 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.” +7. On October 9, 2015, the Commission’s Division of Corporation Finance sent an +email to Medifirst and Schoengood regarding the PCAOB’s deregistration of the Aronson Firm. +Among other things, the email included a hyperlink to the PCAOB Order. Consequently, +Medifirst and Schoengood knew or, in the exercise of reasonable care, should have known that +Aronson had been barred from associating with a registered public accounting firm and that it was +unlawful to permit Aronson to remain associated with Medifirst in an accountancy or a financial +management capacity. +8. From the time the PCAOB Order was issued until approximately February 2016, +Aronson continued to perform in an accountancy or a financial management capacity at Medifirst. +In Aronson’s role as internal accountant his services included, but were not limited to, entering +financial data into Medifirst’s accounting system, acting as the conduit between Medifirst’s auditor +and Medifirst’s management, and preparing Medifirst’s draft financial statements and the notes to +the financial statements. Aronson drafted financial statements for the period ended September 30, +2015, Aronson provided those financial statements to Medifirst’s auditor and those financial +statements were included in Medifirst’s Form 10-Q filed with the Commission on November 23, +2015. Aronson also did work on Medifirst’s financial statements for the period ended December +31, 2015 in preparation for the company’s Form 10-K. +9. Neither the PCAOB nor the Commission consented to Aronson’s association with +Medifirst in an accountancy or a financial management capacity after the PCAOB Order. +10. As a result of the conduct described above, Medifirst violated, and Schoengood +caused Medifirst’s violation of, Section 105(c)(7)(B) of Sarbanes-Oxley. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondents Medifirst and +Schoengood cease and desist from committing or causing any violations and any future violations of +Section 105(c)(7)(B) of Sarbanes-Oxley. + + +remaining associated with two issuers, including Medifirst, in an accountancy or a financ ial management capacity, +in violation of his PCAOB Order. On January 31, 2017, the Commission accepted Aronson’s offer of settlement. In +the Matter of David A. Aronson, CPA, Exchange Act Rel. No. 79903 (January 31, 2017). + 4 +B. Respondent Schoengood shall pay a civil money penalty of $22,500.00 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) $11,250.00 within 14 days from the entry of this Order; +2) $2,250.00 within 42 days from the entry of this Order; +3) $2,250.00 within 70 days from the entry of this Order; +4) $2,250.00 within 98 days from the entry of this Order; +5) $2,250.00 within 126 days from the entry of this Order; and +6) $2,250.00 within 154 days from 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 $22,500.00, 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 Schoengood may transmit payment electronically to the +Commission, which will provide detailed ACH transfer/Fedwire +instructions upon request; + +(2) Respondent Schoengood 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 Schoengood 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 +Bruce J. Schoengood as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Glenn S. Gordon, +Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, 801 +Brickell Ave., Suite 1800, Miami, FL 33131. + + 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 Schoengood agrees that in any +Related Investor Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or + 5 +reduction of any award of compensatory damages by the amount of any part of Respondent +Schoengood’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 Schoengood 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 Schoengood 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 Schoengood, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent Schoengood 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 Schoengood 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/2018/AAER-3936.txt b/raw/aaer/2018/AAER-3936.txt new file mode 100644 index 0000000000000000000000000000000000000000..105ca0e2af782d823044a56beec59541d8d70825 --- /dev/null +++ b/raw/aaer/2018/AAER-3936.txt @@ -0,0 +1,416 @@ + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83088 / April 23, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3936 / April 23, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18446 + + +In the Matter of + +THE DUN & BRADSTREET +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 Dun & Bradstreet Corporation (“D&B” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 2 + +Summary + +1. These proceedings arise from violations of the Foreign Corrupt Practices Act of +1977 (the “FCPA”) [15 U.S.C. § 78dd] by D&B arising out of conduct at two of its indirect +subsidiaries in China, Shanghai Huaxia Dun & Bradstreet Business Information Consulting Co., +Limited (“HDBC”) and Shanghai Roadway D&B Marketing Services Co., Ltd. (“Roadway”). + +2. During the time period from approximately 2006 through 2012, D&B’s HDBC and +Roadway subsidiaries made unlawful payments in order to obtain or retain business. + +3. These unlawful payments were not accurately reflected in the books and records of +HDBC and Roadway, which were consolidated into D&B’s books and records. During the +relevant period, D&B also failed to devise and maintain sufficient internal accounting controls to +detect or prevent the improper payments. + +Respondent + +4. D&B is a corporation organized under the laws of the state of Delaware. D&B’s +corporate headquarters is in Short Hills, NJ. D&B has a class of securities registered pursuant to +Section 12(b) of the Securities and Exchange Act of 1934, which are traded on the New York +Stock Exchange. During the relevant time period, D&B managed its global operations through the +United States and international segments. International management included regional +management in Europe, Canada, Asia Pacific, and Latin America. D&B’s Asia Pacific interests +are managed from an office in Singapore (“D&B International (Singapore)”) and included, among +other countries, subsidiaries, joint ventures and strategic partnerships in China, Taiwan, and Hong +Kong. (This group of subsidiaries is referred to collectively herein as “D&B Greater China.”) +During the relevant period, D&B Greater China’s management operated from offices located in +Shanghai. + +Other Relevant Entities + +5. HDBC is a Chinese limited liability company that was formed in November 2006 +as a joint venture between D&B’s Chinese subsidiary, Dun & Bradstreet International Consultant +(Shanghai) Co. Ltd. (“D&B China”), and Huaxia International Credit Consulting Co. Limited +(“Huaxia”). D&B China is the fifty-one percent majority shareholder of HDBC and its books, +records, and financial accounts are consolidated into D&B’s books and records and reported by +D&B on its financial statements. + +6. Roadway was, during the relevant time period, a Chinese limited liability +company. In June 2009, D&B (through a wholly-owned subsidiary) acquired ninety percent of +Roadway’s shares. Roadway’s books, records, and financial accounts were, during the relevant +time period, consolidated into D&B’s books and records and reported by D&B on its financial +statements. In March 2012, D&B voluntarily suspended, and then in May 2012, voluntarily shut + 3 +down the operations of Roadway in part as a result of its discovery of the illegal conduct described +herein. + +Background + +7. D&B’s corporate history dates to 1841, when it was formed to provide reliable +credit information. D&B evolved into a global provider of business information. It currently +maintains a global commercial database of over 280 million companies and its products provide +commercial data to businesses and other entities through subscriptions and business reports on +credit history, business-to-business sales and marketing, counterparty risk exposure, and other +business data information products. + +8. Access to, and purchase of, business data are core components of D&B’s business +model, most importantly with respect to its well-known and established credit reporting business. +Businesses utilize D&B’s credit profiles to verify other businesses, make independent decisions on +the extension of credit, find new customers, and research new opportunities in specific countries. +D&B needs to acquire business data continually to populate and maintain its worldwide databases, +which are the heart of its commercial operations. D&B acquires commercial data through several +methods including contacting the commercial entities directly, contacting an entity’s vendors or +clients, and collecting information about entities from the government agencies where the business +operates or is organized. + +9. D&B first entered the China market in the early 1990’s through a joint venture and +by the mid-2000’s, began to consider strategic alternatives to grow its China-based business. +Ultimately, D&B chose a growth strategy that would be executed through acquisitions, mergers, or +joint venture partnerships. In 2006, D&B promoted a successful European executive to be +President of its Asia-Pacific region and tasked him with the mission of finding strategic partners to +grow the China business. + +HDBC Joint Venture + +10. In 2006, the new President of the Asia-Pacific region considered and courted +several potential partners for merger or acquisition but ultimately focused on Huaxia as a joint +venture partner. Among other things, Huaxia was considered attractive as a result of its +“government connections.” + +11. As part of its due diligence, a review of Huaxia’s data and operations was +conducted by an executive from D&B’s Greater China management. The data and operations +review focused on, among other things, data acquisition and sources of data at Huaxia. The report +explicitly noted that, unlike D&B’s China operations, Huaxia used its government connections to +source financial statement information directly from provincial offices of the Chinese State +Administration of Industry and Commerce (“AIC”), Chinese National Bureau of Statistics, +lawyers, and other individuals rather than publicly available sources. D&B’s due diligence +procedures failed to address the information in the report, rather, D&B provided a short FCPA + 4 +training session to Huaxia executives and then requested that they complete an anti-bribery +questionnaire and certification. + +12. Financial information on private companies in China was crucial to the success of +D&B’s products sold in its international market regarding China’s rapidly emerging economy. +Financial statement information filed with the AIC office contains the detailed information on a +business entity, is updated annually, and is of the type considered most useful for making credit +determinations and other business decisions. D&B promoted that their information products were +based upon AIC-sourced data. + +13. Access to the business information, including financial statement information, +archived in the AIC offices is highly regulated under Chinese law. Public access to the AIC +archived file on a business entity is limited to enterprise registration information (name, domicile, +business premises, legal representative, enterprise type, etc.), documents submitted for approval in +an application for enterprise registration, items concerning the change of the enterprise (name, +domicile, legal representative, subsidiaries), items concerning the deregistration of the enterprise +(including insolvency), and items concerning supervision and inspection (including penalties +against the entity). However, access to the complete AIC archived file for an entity, including its +financial statement information, is restricted to law enforcement agencies, the judiciary, +disciplinary/inspection organizations, and law firms in the limited circumstances related to +representation of clients in lawsuits. Supporting documents for case initiation and the lawyer’s +license are required to be produced to the AIC before such access is granted to a lawyer or law +firm. Chinese law further provides that AIC archived files cannot be made public and those who +obtain such AIC archived files shall not use such files to engage in commercial services. + +14. D&B Greater China’s management and staff who were responsible for data +acquisition knew of the commercial use restrictions and were also aware that it was possible to +bribe complicit AIC employees to obtain otherwise restricted financial statement data. Because of +the risk associated with such illicit arrangements, HDBC management used third-party agents to +unlawfully obtain the financial statement data under the mistaken belief that using third parties +would shield the company from any legal liability. + +15. D&B’s due diligence efforts indicated that Huaxia was directly acquiring certain +non-public AIC business data through unofficial arrangements. D&B’s Greater China +management understood that Huaxia routinely obtained information through agents and the agents +obtained information by making improper payments to government officials. The due diligence +package disclosing these arrangements was circulated to the D&B transaction team, including the +President of the Asia-Pacific region, who was also a member of D&B’s Global Leadership Team, +and a manager at D&B International. + +HDBC Continued to Make Improper Payments to Acquire Data + +16. The D&B China and Huaxia joint venture was completed in November 2006 and +resulted in the formation of HDBC. For at least two years after the closing of the deal, HDBC did +not fully integrate or consolidate the operations and data acquisition practices of the two + 5 +predecessor entities, allowing them to continue to operate much as they had prior to the joint +venture. Legacy D&B China continued its normal business operations in Shanghai and the legacy +Huaxia continued its normal business operations in Beijing. However, a D&B Greater China +manager stopped the practice of Huaxia employees directly making improper payments to AIC +officials and implemented the practice of using third-party agents to obtain the data. + +17. In the fall of 2008, D&B Greater China management sought to reduce HDBC’s +financial data acquisition costs. At the time, data acquisition costs in China were substantially +higher than similar data costs in other countries. D&B Greater China management considered +eliminating the use of agents and authorizing HDBC employees to purchase data directly from AIC +officials, as this would significantly reduce costs. Separately, employees in the data and operations +unit at HDBC noted in a report to the executive responsible for data acquisition in China that +purchasing data directly from AIC individuals would be at a high cost and require “lots of palm +grease (kind of bribe)” to the AIC officials. While the managers involved were not concerned with +making improper payments directly to these government officials, they were concerned that HDBC +would be unable to obtain proper fapiao (tax receipt) under this proposal. As a result, they +explored ways to generate fake fapiao for the payments that would be made to local officials. + +18. Ultimately, D&B’s President of Asia-Pacific, President of D&B Greater China, and +the executive responsible for data acquisition in China decided to maintain the status quo of using +third-party agents to acquire data for HDBC. This practice was in effect at HDBC from the +creation of the entity in 2006 until mid-2012, when HDBC eliminated improperly obtained +financial statement data from its information products as a remedial measure. + +Roadway Subsidiary + +19. In April 2009, D&B considered a business collaboration with Roadway, which was +a leading provider of direct marketing services in China. Businesses used Roadway’s services to +market directly to businesses or consumers through various media, including direct mail, +telemarketing, efax, and email. The transaction closed in June 2009, with D&B acquiring (through +a wholly-owned subsidiary) ninety percent of the shares of Roadway. + +20. A key risk identified by D&B in its pre-acquisition due diligence of Roadway +related to certain February 2009 amendments to Chinese criminal laws concerning citizens’ data +privacy. The amendments provided criminal sanctions for entities and individuals who illegally +obtain citizens’ personal information, through theft or other means, from Chinese government +entities or organizations in a field such as finance, telecommunications, transportation, education, +or health care. D&B knew that Roadway had obtained a significant amount of its data from +independent vendors, thus it needed to ensure that Roadway had legally obtained its pre-existing +data and that Roadway would employ legal means of acquiring data post-acquisition. While steps +were taken to try to limit the risk that its use of previously acquired data violated local law, +ultimately Roadway violated Chinese law with respect to data that had been acquired post- +acquisition. + + 6 +21. As part of the pre-acquisition due diligence process, Roadway informed D&B that +it could not warrant that no “rebates” were paid in connection with data sales because their sales +representatives were paid on commission and this might incentivize them to “share” the +commission with the “decision-maker” at the client in order to “drum up” business. D&B did not +conduct further due diligence to verify whether sales representatives were in fact making improper +kickbacks of a portion of commissions in order to secure business, or determine whether any +clients were state-owned or state-controlled entities (“SOEs”). Subsequent internal audit reviews +after the acquisition failed to detect the improper payments. + +Roadway Made Payments to Obtain Business + +22. After the transaction closed in mid-2009, Roadway continued to acquire consumer +data from agents and provide the data to businesses for use in marketing. While the agents did +provide certifications that the consumer data was legally obtained, D&B did not audit or otherwise +review the sources from where agents acquired data to verify their certifications. + +23. On March 15, 2012, National Consumer Protection Day in China, a television news +program featured a Roadway sales executive making statements that Roadway had created a +database with information on over 150 million Chinese citizens that included specific financial, +employment, and contact information that Roadway sold to companies for marketing purposes. +The broadcast stated that Roadway had purchased the personal information from banks, insurance +companies, and real estate agents or by cold calling companies. That same day, the Shanghai +police raided the Roadway offices in Shanghai and confiscated computer servers and detained +several employees, including senior management and employees responsible for data acquisition at +the company. + +24. In September 2012, Roadway was charged, along with five then-current or former +employees, by the Shanghai District Prosecutor with illegally obtaining private information of +Chinese citizens. Subsequently, in January 2013, Roadway and the five individuals were +convicted and Roadway was required to pay an approximately $160,000 criminal fine. + +25. In addition to failing to ensure the legality of the Roadway-acquired data, post- +acquisition, D&B also failed to take steps to determine whether Roadway employees were paying +customer “decision-makers” to get business. From July 2009 through March 2012, Roadway +employees continued to make improper payments to customer “decision-makers” to obtain or +retain business, including customers that were Chinese government agencies or entities that were +SOEs. These payments were called “Pin Tui,” or promotional expenses, and were inaccurately +recorded in Roadway’s books and records as legitimate promotion and advertisement expenses. +The Pin Tui payments were made directly by Roadway employees and through third-party agents +in connection with over thirty-four percent of the customer transactions at Roadway between July +2009 and March 2012. Of the 1,036 customers whose “decision makers” received payments in this +period, 156 were Chinese government agencies or SOEs. + + + + 7 +Legal Standards and Violations + +26. 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. + +FCPA Violations + +27. 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 +disposition of the assets of the issuer. [15 U.S.C. § 78m(b)(2)(A)]. + +28. As described above, D&B violated Section 13(b)(2)(A) of the Exchange Act. The +company’s subsidiary, HDBC, falsely recorded illicit payments to government officials to acquire +data incorporated into its business products as legitimate data acquisition expenses. D&B +subsidiary Roadway also acquired data through the use of improper payments and made improper +payments to government officials and private businesses to obtain or retain business. Roadway +falsely recorded the payments as legitimate business expenses. The false entries in HDBC’s and +Roadway’s books and records were then consolidated by D&B in its own books and records. + +29. Section 13(b)(2)(B) of the Exchange Act requires every issuer with a class of +securities registered pursuant to Section 12 of the Exchange Act to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that (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)]. + +30. D&B violated Section 13(b)(2)(B) of the Exchange Act for several years by failing +to devise and maintain a sufficient system of internal accounting controls in its China subsidiaries +to prevent and detect improper payments in connection with data acquisitions and sales. + +D&B’s Self-Disclosure, Cooperation, and Remedial Efforts + +31. In determining to accept the Offer, the Commission considered Respondent’s self- +disclosure, cooperation, and remedial efforts. D&B made an initial self-disclosure to the +Commission staff and the DOJ in March 2012, shortly after local police raided its Roadway +subsidiary. D&B’s cooperation included voluntarily producing documents from overseas, +summarizing the findings of its internal investigation, translating numerous key documents, + 8 +providing timely factual summaries of witness interviews done in the course of its internal +investigation, making employees available to the Commission staff, and providing for employees +or former employees to travel to the United States for interviews. D&B’s cooperation assisted the +Commission in collecting information that may not have been otherwise available to the staff. + +32. D&B’s remedial action included ceasing business operations of its Roadway +subsidiary; discontinuing illicit practices at HDBC; terminating certain D&B employees who were +involved in the misconduct; doubling the size of its audit services and corporate compliance teams; +hiring legal and compliance employees in China; re-evaluating and supplementing its anti- +corruption policies and procedures on a global basis, including its relationship with third-party +vendors and suppliers; enhancing its internal accounting controls and compliance functions; +developing and implementing FCPA compliance procedures, including the expansion and +implementation of new due diligence and contracting requirements for vendors and suppliers; +engaging a law firm to review every data vendor and source of data used in China; and conducting +regular anti-corruption training throughout the D&B organization. D&B also implemented a +process to re-evaluate and supplement its anticorruption compliance on a global basis. + +33. D&B also undertook disciplinary actions against certain employees, including +senior executives at D&B Greater China and D&B International. These individuals included +executives who had oversight responsibility for ensuring that adequate FCPA compliance training +and controls were in place at the company’s HDBC joint venture and Roadway subsidiary. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent D&B’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent D&B 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 pay, within 10 days of the entry of this Order, disgorgement of +$6,077,820, which represents profits gained as a result of the conduct described herein, +prejudgment interest of $1,143,664, and a civil money penalty in the amount of $2 million to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to SEC Rule of Practice 600 or pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + + 9 +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and +hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +D&B as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Charles E. Cain, Chief, FCPA Unit, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3937.txt b/raw/aaer/2018/AAER-3937.txt new file mode 100644 index 0000000000000000000000000000000000000000..d43b0d09c25cc295ac482518927a363af9734f6e --- /dev/null +++ b/raw/aaer/2018/AAER-3937.txt @@ -0,0 +1,478 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10485 / April 24, 2018 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83096 / April 24, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3937 / April 24, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18448 + +In the Matter of + +ALTABA INC., f/d/b/a +YAHOO! INC., + +Respondent. + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (the “Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against Altaba Inc., f/d/b/a Yahoo! Inc. (“Yahoo” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of +the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY + +1. This matter concerns material misstatements and omissions by Yahoo, one of the +world’s largest Internet media companies, regarding a 2014 data breach affecting more than 500 +million of its user accounts. In late 2014, Yahoo learned of a massive breach of its user database +that resulted in the theft, unauthorized access, and acquisition of hundreds of millions of its users’ +data, including usernames, birthdates, and telephone numbers. At that time, the breach was the +largest known theft of user data. + +2. Despite its knowledge of the 2014 data breach, Yahoo did not disclose the data +breach in its public filings for nearly two years. To the contrary, Yahoo’s risk factor disclosures in +its annual and quarterly reports from 2014 through 2016 were materially misleading in that they +claimed the company only faced the risk of potential future data breaches that might expose the +company to loss of its users’ personal information stored in its information systems, as well as +potential future litigation, remediation, increased costs for security measures, loss of revenue, +damage to its reputation, and liability, without disclosing that a massive data breach had in fact +already occurred. Yahoo management’s discussion and analysis of financial condition and results +of operations (“MD&A”) in those reports was also misleading to the extent it omitted known +trends or uncertainties with regard to liquidity or net revenue presented by the 2014 data breach. + +3. Yahoo’s disclosure violations continued in connection with a proposed sale of its +operating business to Verizon Communications, Inc. (“Verizon”) in July 2016. Although Yahoo +was aware of additional evidence in the first half of 2016 indicating that its user database had been +stolen, Yahoo made affirmative representations denying the existence of any significant data +breaches in a July 23, 2016 stock purchase agreement with Verizon, by which Verizon was to +acquire Yahoo’s operating business for $4.825 billion. The stock purchase agreement was attached +to a Form 8-K filed with the Commission on July 25, 2016. + +4. In September 2016, Yahoo disclosed the 2014 data breach in a press release filed as +an attachment to a Form 8-K and also disclosed the 2014 data breach to Verizon. The day after +Yahoo publicly disclosed the breach, Yahoo’s market capitalization fell nearly $1.3 billion by +virtue of a 3% decrease in its stock price. After Yahoo disclosed the 2014 data breach, Verizon +renegotiated the stock purchase agreement to reduce the price paid for Yahoo’s operating business +by $350 million, representing a 7.25% reduction in price. + +5. Based on the foregoing conduct, and the conduct described herein below, Yahoo +violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 13(a) of the Exchange Act +and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15 thereunder. + +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 + +RESPONDENT + +6. At all relevant times, Yahoo was a publicly traded Internet media company +incorporated in Delaware with its principal place of business in Sunnyvale, California. Prior to +June 16, 2017, Yahoo’s stock was registered with the Commission pursuant to Section 12(b) of the +Exchange Act, and, at all relevant times, Yahoo was required to file reports with the Commission +pursuant to Section 13 of the Exchange Act. Until June 19, 2017, Yahoo traded on the NASDAQ +Global Select Market under the ticker “YHOO.” In connection with the sale of its operating +business to Verizon, Yahoo changed its name to “Altaba Inc.” on June 16, 2017 and continued to +have its common stock registered under Section 12(b) of the Exchange Act, but as a publicly +traded non-diversified, closed-end management investment company incorporated in Delaware +with its principal place of business in New York, New York. As of June 19, 2017, Altaba Inc. has +traded on the NASDAQ Global Select Market under the ticker symbol “AABA.” + +OTHER RELEVANT ENTITY + +7. Verizon is a publicly traded telecommunications company incorporated in +Delaware with its principal place of business in New York, New York. Verizon’s stock is +registered with the Commission pursuant to Section 12(b) of the Exchange Act and is traded on the +New York Stock Exchange and the NASDAQ Global Select Market under the ticker “VZ.” +Verizon acquired Yahoo’s operating business on June 13, 2017 pursuant to a July 23, 2016 stock +purchase agreement and reorganization agreement, and February 20, 2017 amendments to those +agreements, executed by and between Verizon, Yahoo, and Yahoo Holdings, Inc. (“Yahoo +Holdings”), a wholly-owned subsidiary of Yahoo. +FACTS +Yahoo’s Disclosures Regarding Data Breaches +8. At all relevant times, Yahoo was one of the world’s largest Internet media +companies, providing over a billion users worldwide with an array of products and services, +including Internet searching capabilities, communications services, including Internet-based email, +and digital content products, such as Yahoo News and Yahoo Finance. Yahoo’s products and +services involved the storage and transmission of its users’ personal information in its facilities and +on its equipment, networks, and corporate systems. +9. As an Internet media company, Yahoo made certain risk factor disclosures +pertaining to potential data breaches in its annual reports on Form 10-K for the fiscal years ended +December 31, 2014 and December 31, 2015, and in its quarterly reports on Form 10-Q for the first +three quarters of 2015 and the first two quarters of 2016.2 These disclosures included the + +2 Item 1A of Part 1 of Form 10-K requires an issuer to set forth, under the caption “Risk +Factors,” the risk factors described in Item 503(c) of Regulation S-K [17 C.F.R. § 229.503(c)] +which are applicable to the issuer. Item 1A of Part 2 of Form 10-Q requires an issuer to set forth +any material changes from the risk factors as previously disclosed in response to Item 1A to Part 1 + 4 +following header concerning security breaches: “If our security measures are breached, our +products and services may be perceived as not being secure, users and customers may curtail or +stop using our products and services, and we may incur significant legal and financial exposure.” +The disclosures also stated that Yahoo’s “products and services involve the storage and +transmission of Yahoo’s users’ and customers’ personal and proprietary information in our +facilities and on our equipment, networks and corporate systems,” and that “[s]ecurity breaches +expose us to a risk of loss of this information, litigation, remediation costs, increased costs for +security measures, loss of revenue, damage to our reputation, and potential liability.” The +company’s risk factor disclosures were incorporated by reference into registration statements on +Form S-8 filed with the Commission on September 9, 2009 and September 11, 2014 that registered +Yahoo’s sales of its common stock under its employee stock purchase and option plans,3 pursuant +to which Yahoo received approximately $384 million in cash proceeds in 2014, 2015, and 2016. +10. In the summer of 2016, Yahoo engaged in negotiations to sell its operating business +to Verizon. In response to queries regarding past data breaches by Verizon during due diligence, +Yahoo created a spreadsheet that falsely represented to Verizon that it was only aware of four +minor breaches in which its users’ personally identifying information was exposed, but did not +disclose the 2014 theft of hundreds of millions of users’ personal data in its response. During a +June 27, 2016 telephone call requested by Verizon to discuss the four breaches disclosed by Yahoo +in its due diligence responses, Yahoo further did not disclose the 2014 theft of its users’ personal +data. +11. Ultimately, on July 23, 2016, Yahoo agreed to transfer the operating business to +Yahoo Holdings at close, and entered into a stock purchase agreement with Verizon, by which +Yahoo sold all of the outstanding shares of Yahoo Holdings to Verizon for $4,825,800,000 in cash. +In the stock purchase agreement, Yahoo again affirmatively represented and warranted the +following, in relevant part: +To the Knowledge of [Yahoo], there have not been any incidents of, +or third party claims alleging, (i) Security Breaches, 4 unauthorized + +of the issuer’s Form 10-K. Item 503(c) of Regulation S-K provides, in relevant part, that, where +appropriate, an issuer must provide a discussion of the most significant factors that make the +offering speculative or risky, must not present risks that could apply to any issuer or any offering, +and must explain how the risk affects the issuer or the securities being offered. Item 503(c) further +provides that each risk factor must be set forth under a subcaption that adequately describes the +risk. +3 Yahoo filed a Form S-8 registering sales under a “Yahoo Stock Plan” and “Yahoo +Amended and Restated 1996 Employee Stock Purchase Plan” on September 9, 2009 (333- +161806), and subsequently filed a new Form S-8 for the “Yahoo Stock Plan” on September 11, +2014 (333-198687). Both Form S-8s incorporated all future filed periodic reports and current +reports pursuant to Section 13(a) of the Exchange Act. +4 The stock purchase agreement defined “Security Breach[es]” as “any actual (i) loss or +misuse (by any means) of Personal Data; (ii) unauthorized or unlawful Processing, sale, or rental of + 5 +access or unauth orized use of any of [Yahoo’s] … information +technology systems or (ii) loss, theft, unauthorized access or +acquisition, modification, disclosure, corruption, or other misuse of +any Personal Data in [Yahoo]’s … possession, or other confidential +data owned by [Yahoo]…, in each case (i) and (ii) that could +reasonably be expected to have a Business Material Adverse Effect.5 + +These representations were made publicly available when Yahoo attached the stock +purchase agreement to a Form 8-K filed with the Commission on July 25, 2016. + +Yahoo’s Contemporaneous Knowledge of the 2014 Breach + +12. Despite the disclosures set forth above, in late 2014, Yahoo had learned of a +massive breach of its user database that resulted in the theft, unauthorized access, or acquisition of +hundreds of millions of its users’ personal data. At this time, Yahoo’s internal information security +team became aware that the company’s information technology networks and systems had suffered +a severe and widespread intrusion by hackers associated with the Russian Federation. + +13. By December 2014, Yahoo’s information security team, including its Chief +Information Security Officer, had determined that the hackers had stolen copies of Yahoo’s user +database files containing the personal data of at least 108 million users, and likely even Yahoo’s +entire user database of billions of users. The personal data in the stolen files included highly +sensitive information that Yahoo’s information security team referred to as Yahoo’s “crown +jewels”: Yahoo usernames, email addresses, telephone numbers, dates of birth, hashed passwords, +and security questions and answers. Yahoo’s information security team, including its Chief +Information Security Officer, also concluded that the hackers had successfully gained access to a +separate source of data: the email accounts of 26 Yahoo users specifically targeted by the hackers +because of their connections to Russia. + +14. Within days after Yahoo’s information security team reached these conclusions, +members of Yahoo’s senior management and legal teams received various internal reports from +Yahoo’s Chief Information Security Officer stating that the theft of hundreds of millions of Yahoo +users’ personal data had occurred. As Yahoo has stated, the company’s “relevant legal team had +sufficient information to warrant substantial further inquiry in 2014, and they did not sufficiently +pursue it.” Yahoo Form 10-K for FY2016 at 47 (filed with the Commission on March 1, 2017). + +Personal Data; or (iii) other act or omission that compromises the security or confidentiality of +Personal Data.” + +5 The stock purchase agreement defined a “Business Material Adverse Effect” as “any +circumstance, event, development, effect, change or occurrence that, individually or in the +aggregate, (a) would, or would reasonably be expected to, prevent, materially delay or materially +impede the ability of [Yahoo] to consummate the [reorganization agreement and sale of the +outstanding shares of Yahoo Holdings] or (b) has had, or would or would reasonably be expected +to have, a material adverse effect on the business, assets, properties, results of operation or +financial condition of the Business, taken as a whole”, with certain enumerated exceptions. + 6 +However, Yahoo senior management and relevant legal staff did not properly assess the scope, +business impact, or legal implications of the breach, including how and where the breach should +have been disclosed in Yahoo’s public filings or whether the fact of the breach rendered, or would +render, any statements made by Yahoo in its public filings misleading. + +15. Furthermore, Yahoo’s senior management and legal teams did not share +information regarding the breach with Yahoo’s auditors or outside counsel in order to assess the +company’s disclosure obligations in its public filings. Yahoo did not maintain disclosure controls +and procedures designed to ensure that reports from Yahoo’s information security team raising +actual incidents of the theft of user data, or the significant risk of theft of user data, were properly +and timely assessed to determine how and where data breaches should be disclosed in Yahoo’s +public filings, including, but not limited to, in its risk factor disclosures or MD&A.6 To the extent +that Yahoo shared information regarding the breach with affected users, they only notified the 26 +users whose email accounts were accessed during the breach. + +16. As a result of these failures, Yahoo did not disclose the theft of Yahoo users’ +personal data in its public filings. Instead, Yahoo’s risk factor disclosures in its annual reports for +the years ended December 31, 2014 and December 31, 2015, and in its quarterly reports for the +first three quarters of 2015 and the first two quarters of 2016, misleadingly suggested that a +significant data breach had not yet occurred, and that therefore the company only faced the risk of +data breaches and any negative effects that might flow from future breaches. In addition, Yahoo’s +filings did not address the breach’s potential impact on the company’s business in its risk factors; +nor did they address known trends or uncertainties with regard to liquidity or net revenue presented +by any current or future expenses and losses related to the 2014 data breach in its MD&A. + +17. After the 2014 breach, Yahoo’s information security team determined that the same +hackers were continuously targeting Yahoo’s user database throughout 2015 and early 2016, and +also received reports raising the possibility of a high volume of compromised Yahoo user +credentials for sale on the dark web. Based on this information, by June 2016, Yahoo’s new Chief + +6 Item 7 of Part 2 of Form 10-K (“Management’s Discussion and Analysis of Financial +Condition and Results of Operations”) requires an issuer to furnish the information required by +Item 303(a) of Regulation S-K [17 C.F.R. § 229.303]. Item 303(a) of Regulation S-K provides, +in relevant part, that, a registrant shall discuss its financial condition, changes in financial +condition and results of operations, including, among other things, identifying “any known +trends or any known demands, commitments, events or uncertainties that will result in or that are +reasonably likely to result in the registrant’s liquidity increasing or decreasing in any material +way” and “any known trends or uncertainties that have had or that the registrant reasonably +expects will have a material favorable or unfavorable impact on net sales or revenues or income +from continuing operations.” Item 2 of Part 1 of Form 10-Q (“Management’s Discussion and +Analysis of Financial Condition and Results of Operations”) requires an issuer to furnish the +information required by Item 303(b) of Regulation S-K, which provides, in relevant part, that a +registrant shall discuss any material changes from the end of the preceding fiscal year with +respect to its financial condition and results of operations, including a discussion of material +changes in those items listed in Item 303(a) (except for the impact of inflation and changing +prices on operations). + + 7 +Information Security Officer (hired in October 2015) concluded that Yahoo’s entire user database, +including the personal data of its users, had likely been stolen by nation-state actors through +several hacker intrusions (including the 2014 breach), and ultimately could be exposed on the +dark web in the immediate future. The Chief Information Security Officer communicated these +conclusions to at least one member of Yahoo’s senior management as Yahoo was negotiating the +sale of its operating business to Verizon. Despite this further evidence indicating the theft of +Yahoo’s user database, Yahoo affirmatively represented to Verizon that it was unaware of any +security breaches with a “Business Material Adverse Effect” in its stock purchase agreement, +which was subsequently filed as an exhibit to a Form 8-K on July 25, 2016. + +18. Based on the foregoing, Yahoo acted negligently in filing materially misleading +periodic reports with the Commission. In particular, Yahoo knew, or should have known, that its +risk factor disclosures and MD&A in its annual reports on Form 10-K for the fiscal years ended +December 31, 2014 and December 31, 2015, and in its quarterly reports on Form 10-Q for the first +three quarters of 2015 and the first two quarters of 2016, and its stock purchase agreement with +Verizon (which was filed as an exhibit to a current report on Form 8-K), as incorporated into its +Form S-8 registration statements, were materially misleading. + +Yahoo’s Disclosure of the 2014 Breach + +19. On or about September 22, 2016, Yahoo disclosed the 2014 breach and the +resulting theft of data involving 500 million of its user accounts in a press release attached to a +Form 8-K, and also disclosed the existence of the theft to Verizon. The day after Yahoo publicly +disclosed the breach—and despite its July announcement of the pending sale to Verizon—Yahoo’s +market capitalization fell nearly $1.3 billion by virtue of a 3% decrease in its stock price. After +disclosure of the 2014 breach, and after renegotiation of the terms of the sale of Yahoo’s operating +business pursuant to the stock purchase and reorganization agreements, Verizon and Yahoo agreed +to a reduction in the acquisition price for Yahoo’s operating business of $350 million, representing +a 7.25% discount. + +20. Yahoo also amended its risk factor disclosures and MD&A to address the 2014 +breach in its subsequent public filings. With respect to risk factors, Yahoo acknowledged in its +Form 10-Q for the third quarter of 2016 (filed October 9, 2016) that the data breach “risk” had +already materialized by virtue of the 2014 data breach (referred to as the “Security Incident”). +Specifically, Yahoo stated “Our security measures may be breached, as they were in the Security +Incident and user data accessed, which may cause users and customers to curtail or stop using our +products and services, and may cause us to incur significant legal and financial exposure” (italics +added). Yahoo also added a risk factor specific to the 2014 data breach indicating that “the full +extent of its impact and the impact of related government investigations and civil litigation on our +results of operation … could be material.” With respect to its MD&A, Yahoo disclosed in its Form +10-Q for the third quarter of 2016 that the company expected to incur expenses—including +investigation, remediation, and legal costs—related to the 2014 breach. + +21. Yahoo also corrected prior statements that its disclosure controls and procedures +were effective. In each of its 2014 and 2015 Form 10-Ks and Form 10-Qs for the first three + 8 +quarters of 2015 and the first two quarters of 2016, Yahoo stated that its principal executive officer +and principal financial officer evaluated the effectiveness of its disclosure controls and procedures +(as such term is defined in Rules 13a-15(e) under the Exchange Act) and, for each period covered +by the foregoing reports, had concluded that Yahoo’s disclosure controls and procedures were +effective. In its 2016 Form 10-K, filed with the Commission on March 1, 2017, Yahoo disclosed +that its principal executive officer and principal financial officer had concluded that, “due +exclusively to deficiencies in the Company’s existing security incident response protocols related +to the 2014 Security Incident, the Company’s disclosure controls and procedures for each of the +annual and quarterly periods ended December 31, 2014 through September 30, 2016 were not +effective at the end of each such period.” + + +VIOLATIONS + +22. As a result of the conduct described above, Yahoo violated Sections 17(a)(2) and +17(a)(3) of the Securities Act [15 U.S.C. §§ 77q(a)(2) and (3)], which make it unlawful for any +person in the offer or sale of any securities by the use of any means or instruments of transportation +or communication in interstate commerce or by use of the mails, directly or indirectly, 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; or 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, Yahoo violated Section 13(a) of the +Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15 +thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11, 240.13a-13, and 240.13a-15], which +require every issuer of a security registered pursuant to Section 12 of the Exchange Act to file with +the Commission, among other things, annual, quarterly, and current reports as the Commission +may require, to maintain disclosure controls and procedures designed to ensure that information +required to be disclosed by an issuer in reports it files or submits under the Exchange Act is +recorded, processed, summarized, and reported within the time periods specified in the +Commission’s rules and forms, and mandate that periodic and current reports contain such further +material information as may be necessary to make the required statements not misleading. + + + + + +UNDERTAKINGS + + Respondent Yahoo has undertaken to: + +24. 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, Yahoo agrees that cooperation includes the following: + 9 + +a. On an ongoing basis, producing, without service of a notice or subpoena, to the +Commission non-privileged documents and other materials, wherever located, in +Respondent’s possession, custody, or control, and/or appropriate privilege logs, as +requested by the Division’s staff and within 14 days of request. Respondent +agrees that it will preserve and produce documents within its possession, custody, +or control at any point, notwithstanding the sale of the operating business to +Verizon; + +b. Using its best efforts to secure the full, truthful, and continuing cooperation of +Respondent’s current and former directors, officers, employees and agents, +including making those persons available for interviews and the provision of +testimony in any and all investigations, litigations or other proceedings relating to +or arising from the matters described in the Order when requested to do so by the +Division’s staff, at Respondent’s expense; + +c. Using its best efforts to ensure its directors, officers and employees respond to all +inquiries related to any and all investigations, litigations or other proceedings +relating to or arising from the matters described in the Order and any related +proceedings when requested to do so by the Division’s staff; and + +d. Using its best efforts to ensure its directors, officers and employees testify at trial +and other judicial or administrative proceedings when requested to do so by the +Division’s staff. + +25. In determining whether to accept the Offer, the Commission has considered these +undertakings. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Yahoo’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent cease and desist from committing or causing any violations and any future violations of +Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 13(a) of the Exchange Act, and Rules +12b-20, 13a-1, 13a-11, 13a-13, and 13a-15 thereunder. + +B. Respondent shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $35,000,000.00 to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + + 10 +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 +Yahoo 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 Erin E. Schneider, 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 +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $35,000,000.00 based upon its undertaking 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. If at any time following the entry of the Order, the Division of +Enforcement (“Division”) obtains information indicating that Yahoo knowingly provided +materially false or misleading information or materials to the Commission, or in a related + 11 +proceeding, or the Division determines that Yahoo has not complied with its undertaking to +cooperate fully in any and all investigations, litigations, or other proceedings relating to or arising +from the matters described in the Order, the Division may, at its sole discretion and with prior +notice to Yahoo, petition the Commission to reopen this matter and seek an order directing that +Yahoo pay an additional civil penalty. Yahoo may contest by way of defense in any resulting +administrative proceeding whether it knowingly provided materially false or misleading +information or failed to comply with its undertaking to cooperate fully in any and all +investigations, litigations, or other proceedings relating to or arising from the matters described in +the Order, 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/2018/AAER-3938.txt b/raw/aaer/2018/AAER-3938.txt new file mode 100644 index 0000000000000000000000000000000000000000..b44358a96a0ed4fe0bb858263d1a67c77f33edf0 --- /dev/null +++ b/raw/aaer/2018/AAER-3938.txt @@ -0,0 +1,529 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83128 / April 30, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3938 / April 30, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18459 + +In the Matter of + +PANASONIC +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 Panasonic Corporation (“Panasonic” or +“Respondent”). +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, 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. +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, anti-fraud, books and records, +and internal accounting controls provisions of the federal securities laws by Panasonic, a global +electronics corporation headquartered in Osaka, Japan. +2. The anti-bribery violation is the result of a 2007 bribery scheme involving senior +management of one of Panasonic’s U.S. subsidiaries, Panasonic Avionics Corporation (“PAC”), +whereby a lucrative consulting position was provided to a government official (“Government +Official”) who assisted PAC in obtaining and retaining business from a state-owned airline +(“Government Airline”). While PAC was negotiating two agreements valued at over $700 million +with the Government Airline, PAC offered the Government Official a $200,000 a year post- +retirement consulting position in order to induce him to assist PAC. Ultimately, PAC retained the +Government Official and paid approximately $875,000 for his purported consulting position, +which required little to no work. The payments to the Government Official were made through a +third-party vendor that provided unrelated services to PAC. In addition, the engagement of the +Government Official violated Panasonic’s policies and procedures, and the payments were not +accurately reflected in its books and records. +3. The anti-fraud violation is a result of Panasonic materially overstating its pre-tax +income by at least $38.5 million or 9%, and net income by at least $22.4 million or 16%, for the +quarter ending June 30, 2012. PAC backdated an agreement with the Government Airline and +provided misleading information about the agreement to PAC’s auditor in order to include the +revenue in that quarter. Thereafter, Panasonic knowingly and intentionally prematurely recognized +this revenue in violation of generally accepted accounting principles. +4. In addition, Panasonic lacked appropriate internal accounting controls with respect +to the use of consultants and sales agents at PAC. PAC paid over $1.76 million to purported +consultants, including the Government Official, who provided few if any legitimate consulting +services. As with the payments to the Government Official, these payments were made through a +third-party vendor and Panasonic’s books and records did not accurately reflect the true nature of +the payments. Additionally, because certain sales agents could not meet PAC’s internal due +diligence requirements, PAC devised a scheme to retain those sales agents in the Asia, and China +regions by paying them through a separate sales agent. +Respondent +5. Panasonic Corporation is a multinational corporation, headquartered in Osaka, +Japan. During the relevant period, Panasonic’s global business was organized into eight business +segments, including the AVC Networks business segment that included PAC. Panasonic’s +securities were registered with the Commission pursuant to Section 12(b) of the Exchange Act until +April 22, 2013, and its American Depositary Shares traded on the New York Stock Exchange under +the ticker “PC.” From May 1, 2015 through June 20, 2016, Panasonic’s securities were registered +with the Commission pursuant to Section 12(g) of the Exchange Act. During the periods when +Panasonic securities were registered with the Commission, Panasonic was required to file or furnish +periodic reports with the Commission pursuant to Section 15 of the Exchange Act. + 3 +Other Relevant Entities and Individuals +6. Panasonic Avionics Corporation (f/k/a Matsushita Avionics Systems +Corporation), is a wholly-owned subsidiary of Panasonic’s North American subsidiary and is a +Delaware corporation headquartered in Lake Forest, California. PAC designs, engineers, +manufactures, sells and installs in-flight entertainment systems (“IFE”) and global communication +services (“GCS”) to airlines, aircraft leasing companies, and airplane manufacturers worldwide, +including to state-owned airlines. Panasonic managed PAC via its AVC Networks Company +business segment, and certain PAC officers also held concurrent titles at Panasonic. During the +relevant period, PAC’s books and records and financial accounts were consolidated into +Panasonic’s books and records and reported on Panasonic’s consolidated financial statements, +which were filed or furnished with the Commission and reported to investors. +FACTS +Bribery in the Middle East Region +7. In 1986, PAC retained a sales representative (“Sales Representative” or” Sales +Rep”) to assist PAC in contract negotiations for the sale of IFE products to several airlines in the +Middle East. Over the years, through agreements between PAC and the company owned by the +Sales Rep, his responsibilities grew, and he ultimately served as the exclusive representative for all +PAC sales to over fifty airlines in the Middle East, Africa, and Central and South Asia region, +many of which were state-owned. The Sales Rep was engaged with the knowledge of Panasonic +executives, although the Sales Rep lacked an education or background in avionics. Additionally, +the company knew that the Sales Rep employed his sons to assist him, even though they had no +relevant qualifications to sell IFE and GCS products. Between 2007 and 2016, PAC paid the Sales +Representative more than $184 million in sales commissions through his British Virgin Islands +entity. +8. Beginning in at least 2004, PAC maintained a separate, regional office in the +Middle East. The office, based in Dubai, was staffed by sales and marketing professionals and had +a repair shop, field engineers, and its own finance staff. Nevertheless, PAC continued to use the +Sales Rep despite concerns raised by PAC employees that the Sales Rep lacked the qualifications +to negotiate technical contracts related to IFE and GCS products and other red flags regarding his +conduct, such as his possession of confidential and proprietary materials of PAC’s competitors and +customers. Significantly, PAC also failed to adequately address allegations from its regional +employees that the Sales Rep was paying bribes to win business on PAC’s behalf. +9. While PAC engaged the Sales Rep as a sales agent through the entity that he +owned, he operated as a PAC employee. The Sales Representative had: PAC business cards +identifying him as PAC’s General Manager of Sales and Marketing in the Middle East, Africa and +South Asia; his own office space in PAC’s Dubai office; a PAC phone number and email address; +a PAC title; and numerous electronic devices. Throughout the relevant period, the Sales Rep +reported directly to senior PAC executives, including a senior executive (“PAC Executive One”) to +whom the Sales Rep gave cash and luxury items valued at more than $60,000. +10. The Government Airline was one of PAC’s most significant customers. In 2004, +PAC and the Government Airline signed a ten-year Master Product Supply Agreement (“MPSA”), +which ultimately grossed well over a billion dollars, for PAC to provide IFE products and services +for certain planes within the Government Airline’s fleet. The Sales Rep helped to negotiate the + 4 +MPSA on behalf of PAC, and the MPSA prohibited PAC from providing any consideration to +employees of the Government Airline. +11. The Government Airline appointed its own executive, the Government Official, to +serve as the primary point of contact for contract negotiations with PAC, including the MPSA. +During the relevant period, the Government Official reported directly to the Government Airline’s +President. The Government Official held substantial authority and had influence over the +Government Airline’s contracting decisions, including influence over the airline’s decisions to +award business to PAC as well as interpretations of specific terms in the MPSA and amendments +thereto. The Government Official negotiated significant terms with PAC, including credits, +concessions, and system/component price lists, and was involved in approving payments to PAC. +PAC identified the Government Official internally as a key executive at the Government Airline. +12. In 2006, the Sales Rep and the Government Official began negotiating an +amendment to the MPSA (“Amendment One”) for the purchase of additional IFE products by the +Government Airline. During the course of these negotiations the Government Official sought, and +the Sales Rep provided, assistance in obtaining clients for a private consulting firm recently +established by the Government Official. Negotiations for Amendment One, which was worth +nearly $360 million in additional business to PAC, continued through at least July 2007. +13. Over the course of 2007, PAC and the Government Airline also negotiated and +entered into a second amendment to the MPSA (“Amendment Two”) for the purchase of additional +IFE products. Due to the delay in the receipt of new aircraft by Government Airline, certain IFE +products that PAC and the Government Airline had contemplated being included in Amendment +One were instead included in Amendment Two. Amendment Two was signed in November 2007, +and was worth over $353 million in additional business to PAC. +14. During the course of negotiations over Amendments One and Two, the +Government Official solicited the Sales Rep for personal benefits. Beginning in at least April +2007, the Government Official sent numerous emails to the Sales Representative about obtaining a +position with PAC. For example, on June 17, 2007, the Government Official informed the Sales +Representative what he wanted in a position, including an annual salary of £150,000 and other +benefits. The Sales Rep immediately informed PAC Executive One of the specific request. The +following week, PAC emailed the Government Official asking about the status of the execution of +Amendment One. +15. Senior PAC executives were aware of the negotiations. In September 2007, a PAC +executive who concurrently served as a director in Panasonic’s Avionics Business Unit told PAC +Executive One and other PAC executives that “We should be very sensitive to [Government +Official’s] current position . . . . I will get in trouble if we act like a small company. What we are +doing for [the Government Official] is a large risk for a corporation like Panasonic. I think we still +should for good reasons, but we must get this done above the table with complete transparency.” +16. However, PAC and the Government Official concealed their negotiations for the +consulting position from the Government Airline. With the knowledge of PAC Executive One, in +or around September 2007, the Government Official was offered a position as a PAC consultant +for $200,000 per year plus travel expenses, which would be effective after his retirement from the +Government Airline. In addition, PAC Executive One arranged for the Government Official to be +retained and paid through an unrelated third-party vendor that prepared product manuals for PAC +(“Vendor”). + 5 +17. During the course of the negotiations of Amendments One and Two, and while +seeking these payments from PAC, the Government Official provided valuable information to help +PAC gain an improper advantage in obtaining and retaining business from the Government Airline. +This included confidential internal information, and advice on negotiating additional business and +maintaining the relationship with the Government Airline. For example, in April 2007, the +Government Official advised the Sales Rep how to break up the cost of a particular item into +several components, so the true cost would be hidden from the Government Airline and not raise +any red flags. +18. As a result of the Government Official’s actions, PAC was able to obtain a profit +margin on Amendments One and Two that was significantly higher than what it obtained from +other customers purchasing comparable products in the same time period. +19. Ultimately, between April 2008 and January 2014, the Government Official +provided little to no services and PAC paid over $875,000 to the Vendor for the Government +Official’s position. To effectuate the payments, PAC Executive One regularly authorized monthly +payments to the Vendor in the amount of $12,500 and the Vendor then transferred $10,000 from +each payment to the Government Official while retaining $2,500 as a fee. +20. PAC’s internal audit group ultimately identified the payments to the Government +Official as high risk, but nevertheless PAC continued to pay him. In or about December 2010, +senior PAC executives received a report from the Internal Audit group, which stated that no +services were requested from the Government Official and that no deliverables were provided to +PAC by the Government Official, but that invoices continued to be paid through the Vendor. The +report identified such payments as high risk, stating: “Based on the information provided, +[Vendor] consultant payment should be carefully reviewed in light of FCPA regulation due to lack +of clarity in deliverables.” Notwithstanding this report, PAC continued to make payments to the +Government Official through the Vendor. +21. Similarly, PAC continued to engage and pay the Sales Rep until 2016, despite +learning in 2015 that he had destroyed electronic data on devices provided to him by PAC, +including devices used for internal PAC communications and negotiations with the Government +Airline and the Government Official, after he learned of an investigative subpoena issued by SEC +staff. +Retention of Consultants Through the Office of the President Budget +22. From at least 2007 through at least January 2014, various purported consultants +were engaged and paid through an Office of the President budget controlled by PAC Executive +One, in circumstances in which little or no legitimate services were provided. For example, both +the Vendor and the Government Official were paid through this budget. +23. In October 2007, PAC Executive One used the Vendor as a conduit to pay a former +PAC employee (“Consultant One”), who was also working as a consultant for one of PAC’s largest +domestic airline customers. Between October 2007 and December 2013, PAC paid $825,000 for +Consultant One from the Office of the President budget via the Vendor. During that time, +Consultant One was not supervised by anyone at PAC or Panasonic, and provided few, if any, +legitimate services to PAC or Panasonic. Instead, Consultant One provided PAC Executive One +and others at PAC with non-public information regarding the customer, other airlines, and PAC +competitors. Consultant One frequently forwarded the information through emails that were + 6 +marked “CONFIDENTIAL” or “DO NOT FORWARD.” In one instance where Consultant One +provided PAC with such information, a PAC employee responded, “You always have info which +makes me shake my head.” Panasonic falsely recorded the payments to Consultant One on its +books as legitimate expenses for services provided by the Vendor. +24. Between January and December 2009, PAC Executive One used the Office of the +President budget and the Vendor to pay $60,000 to another former PAC employee (“Consultant +Two”). Consultant Two performed no work for PAC or Panasonic, and was paid solely to prevent +him from working for any of PAC’s competitors. Nevertheless, the payments to Consultant Two +were falsely recorded on Panasonic’s books as legitimate expenses of Vendor. +25. The Office of the President budget was set annually by a senior PAC finance +executive in consultation with PAC Executive One, based on the prior year’s costs and anticipated +changes in expenses. Apart from PAC Executive One, this budget was never meaningfully +reviewed or approved by any Panasonic or PAC personnel and there were no reasonable internal +accounting controls in place surrounding its use. +26. PAC Executive One authorized nearly all payments made out of this budget, +including payments totaling more than $1.76 million to the Government Official and the two other +consultants who provided few, if any, legitimate services to PAC. These payments were falsely +recorded in PAC’s general ledger as legitimate consulting payments to the Vendor. +27. Panasonic failed to maintain internal accounting controls reasonably designed to +ensure that the funds from the budget were used for their intended purposes and that Panasonic’s +books and records fairly reflected the transactions and dispositions of Panasonic’s assets. +28. As noted above, in 2010, PAC’s Internal Audit Department conducted an audit over +PAC’s use of certain third-party service providers, including consultants engaged through the +Vendor. The resulting “Selected Vendor Audit Report” (“Report”) described a number of “critical +risk” and “high risk” observations, defined as issues that “could have material financial, internal +control or operational consequences” and that required immediate attention from PAC’s senior +management. Specifically, the Report identified critical risks in connection with payments of +consultants through the Vendor, whose service agreement with PAC had expired in May 2009. +The Report further identified as “high risk” the retention of the Government Official and other +consultants, observing that between 2009 and 2010, the Government Official was not requested to +provide any services to PAC or Panasonic, and provided no deliverables, but “invoices [were] still +paid,” while deliverables from other consultants were not verified before invoices were paid. +Additionally, the report flagged as a “critical risk” the monthly payments of $10,000 to Consultant +One noting, “there was no information found in the [Vendor] agreement for this consultant.” +29. The Report was circulated to PAC senior executives. The initial version of the +Report noted that PAC’s procurement department was “not involved in hiring these consultants” +and concluded that the “consultant payment should be carefully reviewed in light of FCPA +regulation.” However, no one from PAC or Panasonic ever conducted any meaningful review or +follow-up to address the critical and high risk issues identified in the Report. Although PAC +subsequently requested that the Vendor seek activity reports from the consultants, these activity +reports were provided to PAC only sporadically and listed little detail as to the nature of the + 7 +purported work performed. The consultants continued to perform almost no work and PAC +continued to pay the consultants via the Vendor for several more years. +30. The payments to the consultants violated Panasonic’s Code of Conduct, which +specifically required all Panasonic employees to abide by “applicable laws and regulations” and +stated that Panasonic “[w]ill not engage in bribery of any kind.” During the period that PAC used +the Office of the President budget to pay the aforementioned consultants, PAC had specific +policies and procedures concerning the retention and payment of consultants. These policies set +out a number of requirements, including defining the scope of work and limiting a contract’s +duration to six months. After February 2011, PAC recommended, but did not require, third-party +due diligence reports concerning the consultants. +31. Panasonic lacked sufficient internal accounting controls with respect to these +policies and procedures, and it failed to follow its policies and procedures in the retention of the +consultants described above. +Retention of Sales Agents +32. PAC’s practice of using sales agents, who solicited business for PAC from state- +owned airlines and other customers, varied depending upon the sales region. For example, in +Europe, Oceania, and the United States, PAC did not use sales agents. By contrast, in its Middle +East, Asia, and China sales regions, PAC routinely engaged sales agents to obtain business from +state-owned airlines and other customers and typically paid them between six and ten percent of +the net contract amount. Between 2007 and 2017, PAC paid its sales agents in the Middle East, +Asia, and China sales regions, including the Sales Rep, over $275 million. +33. By 2004, PAC had established regional field offices in the Middle East, Asia, and +China. Moreover, by 2008 PAC’s primary regional office in Asia was staffed with numerous +marketing and sales personnel versed and trained in PAC’s products, as well as field engineers. +Nonetheless, PAC continued to use sales agents in connection with state-owned airlines and other +customers in this region. +34. Prospective sales agents would contact PAC sales and marketing employees in the +Asia and China regions and offer their services in connection with requests for proposals issued by +airlines for IFE products. Vetting of the sales agents typically consisted of PAC having the agent +arrange a phone call or meeting between PAC and high level executives or procurement staff of a +potential customer. In addition, PAC told at least one agent that he was expected to obtain +confidential, non-public bids of PAC’s competitors. This sales agent used sales commissions +received from PAC to provide gifts, entertainment, and hospitality to government officials and +their families as part of his efforts on behalf of PAC. +35. While PAC historically conducted no meaningful due diligence on its sales agents, +beginning in at least 1996, PAC started including audit rights in its contracts with sales agents. +However, PAC did not exercise its audit rights in order to avoid upsetting relationships with the +agents. In early 2007, PAC began to put in place due diligence procedures for screening sales +agents, including those agents with established relationships with PAC. For sales agents that could +not pass the new procedures, PAC made arrangements for the sales agents to enter into sub- +agreements with a Malaysia-based sales agent. That agent ultimately served as a stand-in for at + 8 +least thirteen sales agents, some of which refused or failed the vetting process. In this way, PAC +could continue to use sales agents who did not pass the screening requirements by concealing their +use and payment through the Malaysia-based sales agent. PAC paid a one or two percent fee to the +Malaysian representative who acted as the conduit for payments to the other agents, despite the fact +that PAC policies explicitly prohibited the use of unapproved sales agents. PAC falsely recorded +the payments to the sub-agents in its books and records as legitimate payments to the Malaysia- +based sales agent. +36. Beginning in February 2009, PAC instituted a formal process to hire sales agents. +The new procedure set out a number of different requirements, including determining the need for +the agent, internal due diligence documentation, preliminary background checks, interviews, and +analysis of any red flags, before requesting that the prospective sales agent undergo a third-party +due diligence vetting process. In addition, PAC regional sales and marketing staff would submit a +“Sales Representative Agreement Request” for review by PAC’s Legal Affairs Department. +Finally, all requests were to be routed to PAC’s Internal Review Committee (the “IRC”), staffed by +PAC executives, including PAC Executive One and another senior executive. +37. Notwithstanding the implementation of these procedures, the IRC never rejected a +request for use of a sales agent. Prior to voting to approve sales agent contracts, the IRC typically +received a single-page form providing cursory information regarding the agent and contract. The +due diligence information and red flags identified in the third-party reports were not communicated +to the IRC, and the IRC never questioned the need for the extensive use of sales agents or +requested to review due diligence reports. Similarly, the IRC did not question the decrease in the +number of agents after third-party due diligence requirements were instituted, or the fact that a +little-known Malaysian company had the capacity to perform work for approximately fifty +programs with nearly twenty airlines. Between 2008 and 2015, PAC paid over $10 million to the +Malaysian sales agent for the benefit of at least thirteen different unapproved sub-agents. The IRC +approved all of the contracts with the Malaysian agent after February 2009. +38. Moreover, PAC’s compliance personnel lacked appropriate qualifications and +training, and as a result failed to act on numerous red flags in connection with the retention of sales +agents. For example, they raised no questions or concerns about the retention of sales agents that +internal forms clearly disclosed were hired after “being recommended by airline.” Nearly all of the +airlines internally described as recommending these sales agents were state-owned airlines in the +Asia and China Regions. +39. PAC’s compliance personnel failed to act on other red flags, including those that +were specifically identified in PAC’s own policies and procedures such as: (a) payment of large +commissions to sales agents in relation to services rendered; (b) payments to bank accounts in +countries other than where services were being provided; (c) the retention of sales agents +recommended by state-owned airlines; and (d) lack of adequate educational, business, and +technical qualifications. Examples of ignored red flags include payments of approximately $4 +million to a sales agent whose primary work experience was as a Hong Kong department store +clerk, and nearly $10 million to an agent who had served as the head of an Asian equestrian league, +but had no relevant avionics experience. + 9 +40. Similarly, after a third-party vetting service discovered that one sales agent had +forged references, and another was flagged as potentially being a “foreign official” under the +FCPA, they were nevertheless engaged by PAC and simply paid as sub-agents through the +Malaysian agent. +41. As a result, Panasonic failed to devise and maintain a sufficient system of internal +accounting controls in connection with the retention of sales agents and failed to accurately record +the payments to the sales agents on its books and records. +Fraudulent Reporting of Revenue +42. During the time its securities were registered with the Commission, Panasonic filed +or furnished periodic reports with the Commission containing, among other things, Panasonic’s +consolidated financial statements. The consolidated financial statements incorporated financial +information (e.g., net sales, pre-tax income, net income) of its numerous subsidiaries, including +PAC. Panasonic reported to shareholders that the company’s consolidated financial statements +were prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). +43. Under GAAP, Accounting Standards Codification 605-10-25-1, Revenue +Recognition, provides that revenue should not be recognized until it is realized or realizable and +earned. PAC’s revenue recognition policy, consistent with GAAP, set forth four requirements that +must generally be met before revenue can be realized and earned: 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. Based on PAC’s +revenue recognition policy, and its customary business practice of requiring a written sales +agreement from customers such as Government Airline, it could not recognize revenue for a +quarter unless, among other requirements, a contract was signed by the customer during the quarter +in which the revenue was recognized. Furthermore, PAC was repeatedly advised by its external +auditor (“Auditor”) that a signed contract was necessary to recognize revenue from customers such +as the Government Airline. +44. As early as 2006, PAC backdated certain customer contracts in order to recognize +revenue in time periods prior to when those contracts were actually signed. +45. For example, in June 2012, PAC and the Government Airline were negotiating +Amendment Six to the MPSA, but were unable to reach agreement on all of the terms of the +contract. While the negotiations were ongoing and it appeared that Amendment Six would not be +signed by the end of June, PAC sought the advice of its Auditor about options to satisfy the +requirement that persuasive evidence of an agreement existed. Consistent with the Auditor’s prior +advice, and PAC’s past practice in accounting for agreements with the Government Airline, the +Auditor advised PAC that PAC could recognize revenue from Amendment Six in the quarter +ending June 30, 2012 (“First Quarter”) if the agreement was signed prior to the end of June 2012. +46. PAC’s senior executives understood that recognizing revenue from Amendment Six +in the First Quarter was critical to Panasonic. For example, on June 23, 2012, a Panasonic +executive who also served as a senior PAC executive told PAC Executive One and another senior +executive (“PAC Executive Two,” who was seconded from Panasonic) that failing to recognize + 10 +revenue from Amendment Six “is a big problem for all of us.” Similarly, on June 25, 2012 a +Panasonic accounting employee told PAC Executive Two that “it will be a big problem if this +contract fails to be signed.” +47. Accordingly, PAC advised the Government Airline that it needed a signed contract +before the end of June 2012. However, the Government Airline was seeking additional discounts +and did not execute Amendment Six before June 30, 2012. +48. On July 1, 2012, PAC’s contracts manager informed several PAC executives, +including PAC Executive Two, that Amendment Six still had not been signed. Less than an hour +later, PAC Executive Two advised accounting staff at Panasonic that the Government Airline had +not yet signed Amendment Six. In response, a Panasonic accounting executive voiced concern +regarding whether the Auditor would approve recognition of revenue for Amendment Six without +a signed contract. +49. On July 2, 2012, the Government Airline advised PAC that it had signed +Amendment Six, but refused to provide a copy of the executed contract because the Government +Airline wanted additional discounts. +50. On July 3, 2012, the Government Airline provided PAC with an executed, but +undated, signature page for Amendment Six. A PAC contracts manager then caused the date June +28, 2012 to be added to the Government Airline signature page even though he and other PAC +employees and executives knew that it was not signed on that date and that the Government Airline +was still seeking additional pricing discounts. +51. Thereafter, PAC sought to persuade the Auditor that Amendment Six revenue could +be recognized in the First Quarter, despite the fact that no PAC executive had signed the agreement +before the end of the quarter. Several PAC employees falsely represented to the Auditor that +Amendment Six had been signed on June 28, 2012. PAC Executive Two told a Panasonic +accounting employee in a Japanese language email that the Auditor had initially determined that +PAC should not include the revenue in the First Quarter, but that PAC had convinced the Auditor, +using a Japanese phrase subject to differing translations including “tweaks and tricks” and “tricks.” +52. In mid-July 2012, PAC provided the Auditor with a Consolidation Package with +PAC’s financial statements for the First Quarter. PAC included over $82 million of improperly +recognized revenue from Amendment Six in these financial statements. PAC Executive Two +signed a letter to the Auditor accompanying PAC’s financial statements, representing that the +financial information had been presented in conformity with GAAP. +53. At that time, PAC Executive Two knew or was reckless in not knowing that: (1) +PAC’s revenue recognition policy, which was consistent with GAAP, required persuasive evidence +of an arrangement in order for the company to recognize revenue; (2) PAC’s Auditor had +specifically advised that Amendment Six needed to be signed before the end of the quarter in order +to serve as persuasive evidence of an arrangement and satisfy its revenue recognition requirements; +(3) the Government Airline had not signed Amendment Six before the end of the quarter, and (4) +Panasonic’s financial statements nevertheless prematurely recognized approximately $82 million +of revenue for Amendment Six in the First Quarter. + 11 +54. Panasonic failed to accurately record the revenue from Amendment Six in its books +and records, and it failed to devise and maintain internal accounting controls sufficient to provide +reasonable assurances that transactions are recorded as necessary to permit preparation of financial +statements in conformity with GAAP. PAC’s financial results for the First Quarter – including +approximately $82 million of improperly recognized revenue and associated pre-tax income of +$38.5 million and net income of $22.4 million – were incorporated into Panasonic’s consolidated +financial statements for the First Quarter. Panasonic’s financial results and consolidated financial +statements for the First Quarter were furnished to the Commission on Forms 6-K filed with the +Commission on or about August 2, 2012, and on or about August 21, 2012. +55. As a result of its premature recognition of revenue in connection with Amendment +Six, Panasonic materially misstated pre-tax income by at least $38.5 million or 9%, and net income +by at least $22.4 million or 16% , in its Form 6-K for the First Quarter 2012. +LEGAL STANDARDS AND VIOLATIONS +56. As a result of the conduct described above, Panasonic violated Section 30A of the +Exchange Act, which prohibits any issuer with a class of securities registered pursuant to Section +12 of the Exchange Act, or 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. +57. As a result of the conduct described above, Panasonic violated Section +13(b)(2)(A) of the Exchange Act, which requires issuers that have a class of securities registered +pursuant to Section 12 of the Exchange Act and issuers with reporting obligations pursuant to +Section 15(d) of the Exchange Act to make and keep books, records, and accounts which, in +reasonable detail, accurately and fairly reflect their transactions and disposition of their assets. +58. As a result of the conduct described above Panasonic violated Section 13(b)(2)(B) +of the Exchange Act, which requires issuers that have a class of securities registered pursuant to +Section 12 of the Exchange Act and issuers with reporting obligations pursuant to Section 15(d) +of the Exchange Act to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that (i) transactions are executed in accordance with +management’s general or specific authorization; (ii) transactions are recorded as necessary (I) to +permit preparation of financial statements in conformity with generally accepted accounting +principles or any other criteria applicable to such statements, and (II) to maintain accountability +for assets; (iii) access to assets is permitted only in accordance with management’s general or +specific authorization; and (iv) the recorded accountability for assets is compared with the +existing assets at reasonable intervals and appropriate action is taken with respect to any +differences. +59. As a result of the conduct described above, Panasonic violated Section 10(b) of +the Exchange Act and Rule 10b-5 thereunder, which prohibit any person from making any untrue +statement of a material fact or omitting to state a material fact necessary in order to make the +statements made, in the light of the circumstances under which they were made, not misleading, +in connection with the purchase and sale of a security. + 12 +60. As a result of the conduct described above, Panasonic violated Section 13(a) of +the Exchange Act and Rules 13a-16 and 12b-20 thereunder. Section 13(a) requires issuers to file +periodic and other reports as the Commission may prescribe and in conformity with such rules as +the Commission may promulgate. Rule 13a-16 of the Exchange Act requires each foreign +private issuer to furnish information on Form 6-K as specified in the Rule. Rule 12b-20 of the +Exchange Act requires that the reports contain 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. +DEFERRED PROSECUTION AGREEMENT +61. Panasonic’s subsidiary PAC has entered into a deferred prosecution agreement +with the Department of Justice that specifically acknowledges responsibility for criminal conduct +relating to findings in the Order. +PANASONIC’S REMEDIAL EFFORTS +62. In determining to accept the Offer, the Commission considered remedial efforts +undertaken by Respondent and cooperation afforded the Commission staff in the later stages of +the staff’s investigation. Respondent has replaced the senior PAC executives involved in the +violations, established an Office of Compliance and Ethics led by a new Chief Compliance +Officer, implemented new compliance and accounting procedures, and enhanced internal +accounting controls 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 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 10(b), 13(a), 13(b)(2)(A) +13(b)(2)(B), and 30A of the Exchange Act, and Rules 10b-5, 12b-20, and 13a-16 thereunder. + B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of +$126,900,000 and prejudgment interest of $16,299,018.93, for a total payment of $143,199,018.93 +to the Securities and Exchange Commission for remission to 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 +(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 + 13 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Panasonic as Respondent in these proceedings, and the file number of these proceedings. A copy +of the cover letter and check or money order must be sent to Charles Cain, Chief, FCPA Unit, +Division of Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, +DC 20549. + By the Commission. + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3939.txt b/raw/aaer/2018/AAER-3939.txt new file mode 100644 index 0000000000000000000000000000000000000000..412a48125a472b16e857b1c082a66aa7bed456e2 --- /dev/null +++ b/raw/aaer/2018/AAER-3939.txt @@ -0,0 +1,1006 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83168 / May 4, 2018 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4906 / May 4, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3939 / May 4, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18466 + + + + +In the Matter of + +Winter, Kloman, Moter & + Repp, S.C., + Curtis W. Disrud, CPA, + and Paul R. Sehmer, CPA, + +Respondents. + + ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 203(k) OF THE INVESTMENT +ADVISERS ACT OF 1940, 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 +Winter, Kloman, Moter & Repp, S.C., Curtis W. Disrud, CPA, and Paul R. Sehmer, CPA +(collectively “Respondents”) pursuant to Section 203(k) of the Investment Advisers Act of +1940 (“Advisers Act”), Sections 4C1 and 21C of the Securities Exchange Act of 1934 + +1 Section 4C provides, in pertinent 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 + +(“Exchange Act”) and Rule 102(e)(1)(ii) and 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”) 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 Section +203(k) of the Investment Advisers Act of 1940, 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 misconduct by Respondents in completing audits pursuant +to Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder (the “Custody Rule”). For +2014 and 2015, Winter, Kloman, Moter & Repp, S.C. (“WKMR”) was engaged by Voit Fund +GP, LLC (“Voit Fund GP”), an affiliate of Voit & Company, LLC (“Voit”), an SEC-registered +investment adviser, to audit the financial statements in accordance with generally accepted +accounting principles (“GAAP”) of six pooled investment vehicles (the “Funds”) that Voit +advised. Voit Fund GP also engaged WKMR to audit the Funds. Voit and Voit Fund GP took +these steps to in an effort to enable Voit to comply with the Custody Rule because Voit had +custody of client assets invested in the Funds. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or pr acticing +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 Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. +3 + +2. Unbeknownst to Voit, WKMR, and two partners on the engagements, Curtis W. +Disrud (“Disrud”) and Paul R. Sehmer, CPA (“Sehmer”), failed to meet the requirements of the +Custody Rule in conduct their audits of the Funds. First, WKMR, Disrud, and Sehmer were +not independent accountants because: (1) they prepared the Funds’ 2014 and 2015 Financial +Statements which they audited; and (2) WKMR had a direct business relationship with Voit +because a WKMR affiliate, WKMR Financial Group, LLC (“WKMR Financial”) referred +advisory clients to Voit in return for a fee. Second, WKMR was not subject to regular +inspection by the Public Company Accounting Oversight Board (the “PCAOB”) at the time of +the audits. As a result, Respondents WKMR and Disrud caused and willfully aided and abetted +Voit’s 2014 and 2015 violations of the Custody Rule within the meaning of Section 4C of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, and Respondent +Sehmer caused Voit’s 2015 violations of the Custody Rule. + +3. In addition, the 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 by: WKMR and Disrud failing to design and implement an appropriate +response to the risk of material misstatement and failing to obtain sufficient appropriate audit +evidence; WKMR failing to ensure that the engagement team had adequate technical training +and proficiency and failing to establish sufficient quality control standards; WKMR and +Sehmer failing to conduct the necessary engagement quality reviews and receive concurring +approvals; and WKMR, Disrud and Sehmer failing to exercise due professional care. + +RESPONDENTS + +4. Winter, Kloman, Moter & Repp, S.C., is a Wisconsin service corporation +headquartered in Brookfield, Wisconsin. WKMR is a certified public accounting firm offering +audit, accounting, tax and business consulting services to closely held enterprises. During the +period in question, WKMR had eight shareholders, including Disrud and Sehmer. WKMR +registered with the PCAOB in May 2015 but was not subject to regular inspection until January +4, 2016. + +5. Curtis W. Disrud, age 54, of Oconomowoc, Wisconsin, has been employed at +WKMR since 1988, and has been a shareholder since 1999. Disrud has been WKMR +Financial Group, LLC’s Manager since January 2016. Disrud has been a licensed CPA in +North Dakota since 1986, in Wisconsin since 1988, and in Illinois since 2016. He holds a +Series 65 license. + +6. Paul Sehmer, age 56, of Waukesha, Wisconsin, has been employed at WKMR +since 1998, and has been a shareholder since 1998. Sehmer has been a licensed CPA in +Wisconsin since 1987 and in Washington D.C. since 2009. + + +4 + +OTHER RELEVANT PARTIES + +7. Voit & Company, LLC, (SEC File No. 801-60937) is a Wisconsin limited +liability company headquartered in Brookfield, Wisconsin. It has been registered as an +investment adviser with the Commission since 2002. Voit provides discretionary and non- +discretionary investment management services, consulting services, and non-managed account +services, and is the investment manager for Voit Fund GP, a Voit affiliate which offers limited +partnership interests in the Funds. Voit is the investment adviser to the Funds. Voit’s assets +under management (“AUM”) were $196.9 million as of September 28, 2017. Voit is owned by +Todd K. Voit (“T. Voit”). + +8. Voit Fund GP, LLC, a Delaware limited liability company formed in +December 2013 and headquartered in Brookfield, Wisconsin, is the general partner of the +Funds. Voit Fund GP is owned by T. Voit. + +9. WKMR Financial Group, LLC, is a Wisconsin limited liability company +headquartered in Brookfield, Wisconsin. It has been registered as an investment adviser with +the State of Wisconsin since 1999, and is wholly-owned by WKMR. WKMR Financial offers +personal financial planning, income tax planning, estate planning, and retirement planning. Its +main advisory service involves recommending other investment management firms, including +Voit, to clients as well as assisting clients in evaluating other managers. + +FACTS + +10. Between at least December 2013 and December 2015, Voit had custody of +client assets invested in the Funds and was required to comply with the Custody Rule. + +11. The Custody Rule requires, among other things, that registered investment +advisers with custody of client assets maintain those funds and securities with a qualified +custodian, who must provide account statements to the investors at least quarterly, and requires +client assets to be verified through an annual surprise examination by an independent public +accountant. + +12. An adviser does not have to comply with certain Custody Rule requirements if, +in connection with a limited partnership, it completes and distributes annual audited financial +statements prepared in accordance with GAAP to each limited partner within 120 days of the +end of the partnership’s fiscal year (the “Audit Exception”). See Rule 206(4)-2(b)(4) under the +Advisers Act. The financial statements must also be audited in accordance with generally +accepted auditing standards for the purpose of expressing an opinion therein. The financial +statements are required to be audited by an independent public accountant that is registered +with, and subject to regular inspection as of the commencement of the professional +engagement period, by the PCAOB (emphasis added). See Rule 206(4)-2(b)(4)(i and ii) under +the Advisers Act. To be considered independent, a public accountant must meet the standards +5 + +of independence described in Rule 2-01(b) and (c) of Regulation S-X. See Rule 206(4)-2(d)(3) +under the Advisers Act. + +Voit Fund GP Engaged WKMR to +Complete the Funds’ 2014 and 2015 Audits + +13. Voit Fund GP engaged WKMR to perform annual audits for the Funds for the +years ended December 31, 2014 and 2015, and distributed the audited financial statements to +each limited partner. The audit reports for each year stated that the audits were performed in +accordance with PCAOB standards. Voit Fund GP distributed the Funds’ financial statements +to each limited partner within 120 days of the end of each partnership’s fiscal year. WKMR +knew that the Funds’ audits were being performed so that Voit could comply with the Custody +Rule. + +14. Disrud was the WKMR engagement partner on both audits, and was thus +ultimately responsible for the Funds’ audit engagements and their performance, and for +WKMR’s audit reports. + +15. Sehmer was the WKMR independent partner reviewer4 on both audits, and also +the EQ Reviewer on the 2015 audit. As independent partner reviewer, Sehmer was responsible +for reviewing the audit file and financial report for completeness, and for reviewing the +financial report and statements before they were issued. As EQ Reviewer, Sehmer was +responsible for meeting the requirements of PCAOB Auditing Standard 7, Engagement Quality +Review (“AS 7”). + +WKMR was not Independent because it both Prepared +and Audited the Funds’ 2014 and 2015 Financial Statements + +16. WKMR was not independent because it prepared the Funds’ 2014 and 2015 +financial statements and notes to the financial statements, which it then audited. + +17. Each year, Voit provided WKMR with accounting records, including excel files +and brokerage account statements, partnership agreements, and other information. WKMR +performed audit procedures to test the financial data contained in these documents, and then +used the information to create the financial statements and the accompanying notes. The +engagement team used an example financial statements and notes provided in the American +Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide, Investment +Companies as a template to prepare the Funds’ financial statements and notes. + +18. After the engagement team drafted the financial statements and notes, it +provided T. Voit with drafts, so that he could review, suggest changes, and approve them. + + +4 An “independent partner reviewer” was a quality control policy established by WKMR for all audits, and is +not required under PCAOB standards. +6 + +19. Under Rule 2-01(c)(4)(i) of Regulation S-X, an accountant is not independent if +he provides certain bookkeeping or other services, related to the accounting records or financial +statements unless it is reasonable to conclude that the results of those services will not be +subject to audit procedures during an audit of the audit client’s financial statements. + +20. The financial statements and accompanying notes that WKMR prepared were +subject to the audit procedures that WKMR performed during its audits of the Funds. The +WKMR engagement team analyzed whether WKMR’s preparation of the financial statements +and notes impaired WKMR’s independence. The WKMR engagement team erroneously +concluded that independence was not impaired. Although this conclusion was documented in +WKMR’s workpapers, WKMR included no analysis to support the conclusion. + +WKMR was not Independent because it had a +Direct Business Relationship with its Audit Client + +21. WKMR was not independent because WKMR Financial had a direct business +relationship with Voit. + +22. During the relevant period, WKMR Financial and Voit had a referral fee +arrangement. The main advisory service of WKMR Financial involved recommending other +investment management firms, including Voit, to its clients. In exchange, WKMR Financial +received a percentage of the annual fee that the investment adviser receives from those referred +clients. WKMR Financial did not receive any referral fees from Voit if the client did not +become an investment management client, nor did it receive any referral fees for referring +clients who invested in the Voit Funds. + +23. Disrud and Sehmer, as WKMR partners, are indirect owners of WKMR +Financial, meaning that they receive a portion of the income that WKMR Financial generates. +Disrud has also been WKMR Financial’s Manager since January 2016, but Sehmer has no +other involvement with WKMR Financial. + +24. Under Rule 2-01(c)(3) of Regulation S-X, an accountant is not independent if it +has a direct business relationship with an audit client. Under Rules 2-01(f)(1) and 2-01(f)(2) of +Regulation S-X, the term “accountant” includes both the registered public accounting firm, +such as WKMR, and its subsidiaries, such as WKMR Financial. Under Rules 2-01(f)(6) and +Rule 2-06(f)(4) of Regulation S-X, the term “audit client” includes all entities under the +common control of the audit client. Voit Fund GP and Voit were both under the control of T. +Voit. As such, Voit was an affiliate of Voit Fund GP. + +25. WKMR had a direct business relationship with Voit because WKMR +Financial, an affiliate of WKMR, provided advisory services and recommended Voit to its +clients and, in exchange, received a fee from Voit. For 2014 and 2015, all of WKMR +Financial’s income came from Voit, and WKMR Financial’s net income for 2014 and 2015 +was approximately $217,000 and $233,000, respectively. The WKMR engagement team did +7 + +not analyze whether WKMR was considered to have a direct business relationship with its +audit client. + +WKMR was not Subject to Regular PCAOB Inspection +as of the Beginning of the Audit Engagement Periods + +26. WKMR was not subject to regular PCAOB inspection as of the beginning of +the 2014 and 2015 Funds’ engagement periods. WKMR has never issued audit reports for an +issuer. + +27. WKMR’s first broker-dealer audit (“Broker-Dealer Audit”) was concurrent +with the 2015 Funds’ audits. The engagement period for the 2015 Funds’ audits began the date +of the engagement letter, December 29, 2015. WKMR’s engagement period for the Broker- +Dealer Audit began afterwards, on January 4, 2016, the date of the engagement letter. +Therefore, WKMR became subject to regular PCAOB inspection as of January 4, 2016. + +28. In order to be subject to regular PCAOB inspection, a PCAOB registered public +accountant must have issued an audit report with respect to at least one issuer during any of the +three prior calendar years, or be engaged to audit the financial statements of a broker or dealer. +See PCAOB Rule 4003, Frequency of Inspections; PCAOB Rule 4020T, Interim Inspection +Program Related to Audits of Brokers and Dealers. + +29. Under Regulation S-X, the professional “engagement period” begins the earlier +of when the accountant signs an initial engagement letter (or other agreement to review of audit +a client’s financial statements) or begins audit, review, or attest procedures. See Rule 2- +01(f)(5) of Regulation S-X. 17 C.F.R. § 210.2-01(f)(5). + +30. Because WKMR had neither issued an audit report as to an issuer nor been +engaged to audit a broker or dealer as of the beginnings of the 2014 and 2015 audit +engagement periods for Voit, it was not subject to PCAOB inspection at those times. + +31. As a result of the conduct described in paragraphs 16 through 30 above, Voit +was not in compliance with the Custody Rule and did not qualify for the audit exception to the +Custody Rule. + +The 2014 and 2015 Funds’ Audits +Were Not Conducted in Accordance with +Certain Applicable Professional Standards + +32. WKMR’s audit reports for the 2014 and 2015 Funds’ audits state that the audits +were performed in accordance with PCAOB standards. However, in connection with the audits +of the Funds, WKMR and Disrud, for 2014 and 2015, and Sehmer, for 2015, failed to adhere to +certain professional auditing standards, and WKMR for 2014 and 2015 failed to adhere to +certain professional quality control standards as described in paragraphs 33 through 64 below. +8 + + +Failure to Design and Implement an Appropriate Response to the Risk of Material +Misstatement + +33. WKMR and Disrud failed to design and implement an appropriate audit +response that resulted in it obtaining reliable evidence that verified the existence and +completeness of Voit Funds’ investments. + +34. The WKMR engagement team performed a risk assessment during the planning +of the 2014 and 2015 audits, memorializing in the workpapers that the largest audit risk for +both years was that the “investor’s money is not invested properly or not invested at all.” + +35. WKMR’s audit reports for the Funds’ financial reports in 2014 and 2015 both +stated “Our procedures included confirmation of securities owned…by correspondence with +the custodian and broker.” + +36. The WKMR engagement team, however, did not obtain confirmations from a +third party, and there is no evidence of any correspondence with the custodian or broker-dealer +to confirm securities owned by the Funds. Instead, each year, a WKMR staff accountant +watched a Voit employee download and print the Funds’ year end account statements from the +purported website of Custodian A, the Funds’ custodian and broker. + +37. The downloaded account statements were not reliable evidence because +WKMR did not maintain control over the process and communicate with a third party – the +information was obtained by a Voit employee from a website that was under the control of +Voit. + +38. WKMR’s appropriate audit response required WKMR to send Custodian A a +confirmation request, in accordance with AU 330, to verify that the Funds’ assets were not +materially misstated. Because neither WKMR nor Disrud did so, they violated AS 13. + +39. In connection with the 2014 audits, Sehmer suggested that “in future audits, we +may want to consider having Schwab send us their certified investment statements directly.” +There is no evidence that Disrud instructed the engagement team to request confirmations +directly from Custodian A in connection with the 2015 audits. + +40. PCAOB Auditing Standard No. 13, The Auditor’s Response to the Risks of +Material Misstatement (“AS 13”) establishes requirements regarding designing and +implementing appropriate responses to the risks of material misstatement identified by the +auditor. See AS 13 ¶ 1. Auditors identify and assess risks in accordance with PCAOB +Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement (“AS +12”). For significant risks, the auditor should perform substantive procedures that are +specifically responsive to the assessed risks. See AS 12 ¶ 11. Substantive procedures +9 + +generally provide persuasive evidence when they are designed and performed to obtain +evidence that is relevant and reliable. See AS 12 ¶ 39. + +41. PCAOB AU Section 330, The Confirmation Process (“AU 330”) provides +guidance about the audit confirmation process, including the relationship of confirmation +procedures to the assessment of audit risk and performing alternative procedures when +responses to confirmation requests are not received. Confirmation is the process of obtaining +and evaluating a direct communication from a third party in response to a request for +information about a particular item affecting financial statement assertions, including those +relating to existence and completeness. See AU 330 at .04 and .11. An auditor should +maintain control over confirmation requests and responses, which means establishing direct +communication between intended recipient and the auditor to minimize the possibility that the +results will be biased because of interception and alteration. See AU 330 at .28. WKMR failed +to adhere to this guidance. + +Failure to Obtain Sufficient Appropriate Audit Evidence + +42. By failing to obtain third-party confirmation, WKMR and Disrud failed to +obtain sufficient appropriate audit evidence to support WKMR’s statement in the audit reports +that its procedures included confirmation of securities, in accordance with PCAOB Auditing +Standard No. 15, Audit Evidence (“AS 15”). + +43. AS 15 explains what constitutes audit evidence, and establishes the requirement +to plan and perform audit procedures to obtain sufficient appropriate audit evidence to support +the opinion in the auditor’s report. See AS 15 ¶ 1 and ¶ 3. 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. See AS 15 ¶ 6. The reliability of evidence depends on its nature +and source, and the circumstances under which it is obtained. Evidence obtained directly by +the auditor and from an independent third party is more reliable than evidence obtained directly +from the company. See AS 15 ¶ 8. A confirmation response represents a specific form of audit +evidence obtained by an auditor from a third party in accordance with AU 330 (emphasis +added). See AS 15 ¶ 18. WKMR failed to adhere to this guidance in its confirmation of +securities. + +Failure to Have Adequate Technical Training and Proficiency + +44. WKMR failed to ensure that the engagement team had adequate knowledge and +understanding of, and training and proficiency in, the Custody Rule, the PCAOB standards, +and the applicable SEC independence rules, in accordance with PCAOB AU Section 210, +Training and Proficiency of the Independent Auditor (“AU 210”). + +45. The WKMR engagement team conducted the Funds’ audits without any prior +experience with SEC-registered clients or clients affiliated with an SEC registrant. Voit Fund +GP was WKMR’s first client affiliated with an SEC-registered investment adviser. +10 + + +46. The WKMR engagement team also conducted the Funds’ audits without proper +training in PCAOB standards and SEC independence rules. WKMR conducted no relevant +firm-wide training prior to, or in conjunction with, the Funds’ audits. WKMR’s workpapers +for the Funds’ audits do not document that any member of the engagement team reviewed the +PCAOB standards, which they claimed to have applied, or the SEC independence rules. +During the relevant time, there was also no reference in the workpapers to the SEC’s +independence standards in the firm’s quality control policies and procedures. Disrud’s only +PCAOB training in conjunction with the Funds’ audits was in March 2015, when he viewed a +webinar regarding the results of PCAOB inspections. + +47. PCAOB Quality Control Standards require an auditing firm to establish policies +and procedures which provide the firm with reasonable assurance that work is assigned to +personnel having the degree of technical training and proficiency required in the circumstances. +See PCAOB Quality Control standard 20, System of Quality Control for a CPA Firm’s +Accounting and Auditing Practice, at .13 and PCAOB Quality Control standard 40, The +Personnel Management Element of a Firm's System of Quality Control-Competencies +Required by a Practitioner-in-Charge of an Attest Engagement, at .02. These standards also +require the firm to establish policies specifically designed to address the competencies of audit +partners, including a requirement that practitioners-in-charge of the applicable auditing +standards and standards directly related to the industry in which a client operates. See QC +40.08. + +48. AU 210 requires that the audit be performed by a person or persons having +adequate technical training and proficiency as an auditor. See AU 210 at .01. Likewise, +PCAOB Quality Control standards require that “[p]olicies and procedures should be +established to provide the firm with reasonable assurance that the work performed by +engagement personnel meets applicable professional standards, regulatory requirements, and +the firm’s standards of quality.” QC 20.17. Firm policies and procedures should also provide +reasonable assurance that the policies and procedures established for the elements of quality +controls described in the standard are “suitably designed and are being effectively applied.” +QC 20.20; see also AU 161. + +Failure to Obtain the Necessary Engagement Quality Reviews and Concurring Approvals + +49. WKMR, for 2014 and 2015, and Sehmer, for 2015, failed to conduct the +necessary engagement quality reviews (“EQRs”) and concurring approvals, in accordance with +PCAOB AS No. 7, Engagement Quality Review (“AS 7”). + +50. WKMR failed to designate an EQ Reviewer and obtain an EQR and concurring +approval in connection with the 2014 Funds audits. Sehmer acted only as the “independent +partner reviewer” for these audits, and only consulted on certain issues, and reviewed the +financial report and the audit file for completeness. He did none of the work described in AS +7. +11 + +51. Although Sehmer was EQ Reviewer and performed an EQR for the 2015 +Funds’ audits, he failed to perform his duties in accordance with AS 7. His only involvement +in the planning and risk assessment process was that he made himself available to answer +engagement team questions. He did not review any of the risk assessment audit programs or +the “Audit Strategy Memo,” which included the engagement team’s risk assessment and the +audit procedures planned to respond to the risks identified. The two major issues that Sehmer +consulted on - independence and sending confirmations - were not performed in accordance +with PCAOB standards. Sehmer also did not provide concurring approval for the 2015 Funds’ +audits. + +52. An EQR and concurring approval of issuance are required for audit +engagements conducted pursuant to the PCAOB standards. See AS 7 ¶ 1. + +53. AS 7 requires that the EQ Reviewer possess the level of knowledge and +competence related to accounting, auditing, and financial reporting required to serve as the +engagement partner on the engagement under review. See AS 7 ¶ 5. The EQ Reviewer +should: + +a) Evaluate significant judgments made by engagement team and the related +conclusions reached. To do so, the EQ Reviewer should hold discussions +with the partner and team, and review documentation. See AS 7 ¶ 9. + +b) Evaluate the engagement team’s assessment of, and audit responses to, +significant risks identified by the engagement team. See AS 7 ¶ 10b. + +c) Review the engagement team’s evaluation of the firm's independence in +relation to the engagement. See AS 7 ¶ 10d. + +d) Evaluate whether the engagement documentation indicates that the +engagement team responded appropriately to significant risks, and supports +the conclusions reached by engagement team. See AS 7 ¶ 11. + +54. The EQ Reviewer may also provide concurring approval if, after performing +with due professional care, he or she is not aware of a significant engagement deficiency. See +AS 7 ¶12. A significant engagement deficiency in an audit exists when the engagement team +failed to obtain sufficient appropriate evidence in accordance with PCAOB standards or the +firm is not independent of its client. See AS 7 ¶ 12. + +Failure to Exercise Due Professional Care + +55. WKMR and Disrud, for 2014 and 2015, and Sehmer, for 2015, failed to +exercise due professional care in planning and performing the Funds’ audits, in accordance +with PCAOB Standard AU Section 230, Due Professional Care in the Performance of Work +(“AU 230”). +12 + + +56. WKMR was not independent when it performed the 2014 and 2015 Funds’ +audits and failed to have adequate training and proficiency. WKMR and Disrud failed to +design and implement an appropriate audit response to provide reasonable assurance of +detecting material errors in the financial statements, and failed to obtain sufficient competent +evidence. Furthermore, WKMR and Disrud failed to exercise professional skepticism when +they obtained audit evidence, relating to the largest identified risk, from a website that was +under the control of management during the Funds’ audits. WKMR also violated AS 7. + +57. For the 2015 Funds’ audits, neither Disrud nor Sehmer signed off on the +workpaper that documented the engagement team’s independence conclusions. They only +signed off on the underlying “supporting” workpapers, which did not include any detailed +analysis. In reality, some of the workpapers simply contained copies of the supporting +documentation from the 2014 Funds’ audits. There is no documentation in the workpapers that +Sehmer reviewed the SEC independence standards. Sehmer also violated AS 7. + +58. AU 230 requires auditors to exercise due professional care in the planning and +performance of the audit and the preparation of the report. See AU 230 at .01. The +engagement partner should know, at a minimum, the relevant professional accounting and +auditing standards and should be knowledgeable about the client. See AU 230 at .06. + +59. Due professional care requires that the auditor exercise professional skepticism. +Professional skepticism is an attitude that includes a questioning mind and a critical assessment +of audit evidence. See AU 230 at .07. In exercising professional skepticism, the auditor +should not be satisfied with less than persuasive evidence because of a belief that management +is honest. See AU 230 at .09. + +Failure to Adhere to the Quality Control Standards + +60. Although the relevant audit reports stated that the 2014 and 2015 audits were +performed in accordance with PCAOB standards, WKMR failed to establish sufficient quality +control standards in accordance with PCAOB Quality Control standard 20 and PCAOB Quality +Control standard 40. + +61. WKMR failed to establish policies to ensure that it and its personnel were +independent and maintained their independence when it accepted Voit Fund GP as a client. +See QC 20 at .09 and .14. WKMR’s quality control manual stated that the engagement partner +decides whether to accept or reject the prospective client and documents that conclusion on the +“engagement acceptance form.” It was then in the engagement partner’s discretion whether he +routed the form to a second partner. There was no check on the engagement partner to ensure +that the partner appropriately evaluated independence conflicts. + +13 + +62. WKMR failed to satisfy the requirements of QC 20 and QC 40. The +engagement team did not have the adequate training or experience in PCAOB standards or +SEC independence rules. Disrud did not have the technical training and proficiency required. + +63. WKMR’s failure to establish adequate quality control policies was reflected in +WKMR’s failure to identify any of the independence, audit procedures or EQ Reviewer +deficiencies in the Funds’ audits described above, even after WKMR selected the Funds’ audits +for inspection as part of its internal inspection program. + +64. PCAOB Quality Control standard 20 requires that a system of quality control be +established and maintained. See QC 20 at .01. One of the elements of a system of quality +control is personnel management. See QC 40 at .01. The objective of the firm is to establish +and maintain a system of quality control to provide it with reasonable assurance that the firm +and its personnel comply with the professional standards. See QC 20 at .03. + +Respondents Misconduct Under Section 4C of the Exchange Act and Rule 102(e) + +65. Rule 102(e)(1) of the Commission’s Rules of Practice and Section 4C of the +Exchange Act allows the Commission to censure a person, or deny the person, either +permanently or temporarily, from appearing or practicing before the Commission if the +Commission finds the person to be lacking in character or integrity or to have engaged in +unethical or improper professional conduct or to have willfully aided and abetted the violation +of any provision of the federal securities laws or the rules and regulations thereunder. Section +4C(a)(2) and (3) of the Exchange Act and Rule 102(e)(1)(ii) and (iii) of the Commission’s +Rules of Practice. + +WKMR, Disrud and Sehmer’s Improper Professional Conduct + +66. WKMR and Disrud (for the 2014 and 2015 Funds’ audits) and Sehmer (for the +2015 Funds’ audits) engaged in improper professional conduct within the meaning of Rule +102(e)(1)(ii) of the Commission’s Rules of Practice by engaging in reckless conduct resulting +in a violation of the applicable professional standards, by negligently engaging in highly +unreasonable conduct that resulted in a violation of applicable professional standards in +circumstances for which heightened scrutiny is warranted, or by negligently engaging in +repeated instances of unreasonable conduct, each resulting in a violation of the applicable +professional standards. + +67. WKMR and Disrud failed to comply with the SEC and PCAOB independence +standards, for which heightened scrutiny was warranted. Although the WKMR engagement +team unreasonably concluded that it was independent from Voit Fund GP, WKMR failed to +consider whether WKMR was independent from Voit. + +68. WKMR and Disrud also failed to design and implement an appropriate audit +response to provide reasonable assurance of detecting material errors in the financial +14 + +statements, failed to obtain sufficient competent evidence, and failed to have adequate training +and proficiency prior to conducting the audits. + +69. In addition, WKMR and Disrud failed to exercise due professional care in +connection with the 2014 and 2015 Funds’ audits because: (1) they violated independence +standards; (2) they violated PCAOB audit standards; and (3) they failed to exercise +professional skepticism when they obtained confirmations from a website that was under the +control of management. WKMR failed to designate an EQ Reviewer and obtain the necessary +EQR for 2014, and concurring approvals for the 2014 and 2015 Funds’ audits. + +70. WKMR and Sehmer failed to exercise due professional care in connection with +the 2015 Voit Funds’ audits because Sehmer failed to comply with AS 7 in his role as the EQ +Reviewer. + +71. Furthermore, WKMR failed to adhere to the quality control standards because it +failed to establish policies to ensure that WKMR was competent to perform the 2014 Funds’ +audits or policies to ensure that WKMR and its personnel were independent and maintained its +independence when it accepted Voit Fund GP as a client. + +WKMR and Disrud Willfully Aided and Abetted +And Caused Voit’s 2014 and 2015 Custody Rule Violations +and Sehmer Caused Voit’s 2015 Custody Rule Violations + +72. WKMR and Disrud willfully5 aided and abetted and caused Voit’s 2014 and +2015 violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and +Sehmer also caused Voit’s 2015 violations of Section 206(4) of the Advisers Act and Rule +206(4)-2 thereunder. + +73. WKMR knew that Voit Fund GP needed the Funds’ audits to comply with the +Custody Rule. Disrud, as the engagement partner for both audit periods, was ultimately +responsible for ensuring that the Funds’ audits complied with applicable PCAOB standards and +the Custody Rule’s requirements, including that WKMR was an independent accountant and +subject to regular PCAOB inspection. + +74. Despite this, WKMR and Disrud failed to have adequate knowledge or +understanding of the Custody Rule and the applicable SEC independence requirements. The +WKMR engagement team conducted the Funds’ audits without any prior experience with SEC +or PCAOB registered clients, or clients affiliated with such clients. Disrud had no prior +experience or training regarding the Custody Rule, and he failed to determine or consider the +requirements for the Audit Exception. WKMR or Disrud did not understand that Voit, in + +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)). +15 + +addition to Voit Fund GP, was considered WKMR’s client. At the time of the Funds’ audits, +WKMR and Disrud did not know that the SEC independence standards applied to the audits. + +75. As a result, Disrud approved WKMR’s issuance of Voit Funds’ 2014 and 2015 +audit reports despite the fact that WKMR’s independence was impaired, and despite the fact +that WKMR was not subject to regular PCAOB inspection. + +76. Sehmer also caused Voit’s 2015 violations of Section 206(4) of the Advisers +Act and Rule 206(4)-2 promulgated thereunder because Sehmer was the EQ Reviewer on the +2015 Funds’ audits, reviewed the workpapers for the audits, and failed to reasonably ensure +that his work was performed in accordance with AS7. Sehmer also failed to act reasonably +when he did not know the requirements of the Custody Rule and the steps necessary to ensure +Voit compiled with the Custody Rule. He also failed to understand that WKMR was required +to be subject to regular PCAOB inspection but in fact was not, and that the WKMR Financial +and Voit referral fee arrangement impaired WKMR’s independence. + +Findings + +77. As a result of the conduct described above, WKMR and Disrud caused, and +willfully aided and abetted within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice, Voit’s 2014 and 2015 violations of +Section 206(4) of the Advisers Act and Rule 206(4)-2 promulgated thereunder. + +78. As a result of the conduct described above, Sehmer caused Voit’s 2015 +violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 promulgated thereunder. + +79. As a result of the conduct described above, in 2014 and 2015 WKMR, Disrud +and Sehmer 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. + +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 WKMR, Disrud and Sehmer 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 promulgated thereunder. + + +16 + +WKMR + + B. WKMR is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. After one year from the date of this order, WKMR 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 (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 WKMR’s work in its practice before the +Commission as an accountant 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 + +2. an independent accountant. Such an application must satisfy the +Commission that: + +(a) WKMR is registered with the PCAOB in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be +effective; + +(b) Respondent WKMR 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 PCAOB, that has conducted a review of +WKMR’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 WKMR’s employees +will not receive appropriate supervision. WKMR 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 WKMR, 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 +17 + +he/she is a member, and any person engaged to assist the consultant +in performance of his/her duties under this Order shall not, without +prior written consent of the staff, enter into any employment, +consultant, attorney-client, auditing or other professional +relationship with WKMR, 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) WKMR 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) WKMR 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 PCAOB, +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 WKMR 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 WKMR’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. + +Disrud + + E. Disrud is denied the privilege of appearing or practicing before the Commission +as an accountant. + + F. After 2 years from the date of this order, Disrud 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 Disrud’s work in his +18 + +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) Disrud, 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) Disrud, 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 Disrud’s or +the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + +(c) Disrud 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) Disrud 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. + + G. The Commission will consider an application by Disrud 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 +19 + +Disrud’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. + +Sehmer + + H. Sehmer is denied the privilege of appearing or practicing before the +Commission as an accountant. + + I. After 1 year from the date of this order, Sehmer 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 Sehmer’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) Sehmer, 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) Sehmer, 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 Sehmer’s or +20 + +the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + +(c) Sehmer 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) Sehmer 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. + + J. The Commission will consider an application by Sehmer 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 +Sehmer’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 WKMR shall, within 10 days of the entry of this Order, pay +disgorgement of $17,531 and prejudgment interest of $1,317, and pay a civil money penalty of +$15,000 to the Securities and Exchange Commission for transfer to the general fund of the +United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not +made, additional interest shall accrue pursuant to SEC Rule of Practice 600 and/or 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: +21 + +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 +WKMR 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 J. Burson, Senior +Associate Regional Director, 175 West Jackson Boulevard, Suite 1450, Chicago, Illinois +60604. + +L. Respondent Disrud shall, within 10 days of the entry of this Order, pay +disgorgement of $9,319 and prejudgment interest of $695, and pay a civil money penalty in the +amount of $10,000 to the Securities and Exchange Commission for transfer to the general fund +of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is +not made, additional interest shall accrue pursuant to SEC Rule of Practice 600 and/or 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 Disrud +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 J. Burson, Senior Associate +Regional Director, 175 West Jackson Boulevard, Suite 1450, Chicago, Illinois 60604. + +22 + + M. Amounts ordered to be paid as civil money penalties pursuant to this Order +shall be treated as penalties paid to the government for all purposes, including all tax purposes. +To preserve the deterrent effect of the civil penalty, Respondents agree that in any Related +Investor Action, it/he 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 Respondents’ +payment of a civil penalty in this action (“Penalty Offset”). If the court in any Related Investor +Action grants such a Penalty Offset, Respondents agree that it/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 Respondent, 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/2018/AAER-3940.txt b/raw/aaer/2018/AAER-3940.txt new file mode 100644 index 0000000000000000000000000000000000000000..88b9ad5e6bb53d82e6e17877a56d3c1090219dae --- /dev/null +++ b/raw/aaer/2018/AAER-3940.txt @@ -0,0 +1,112 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83169 / May 4, 2018 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3940 / May 4, 2018 +ADMINISTRATIVE PROCEEDING +File No. 3-16819 + +In the Matter of +KEVIN W. MCALEER, +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 17, 2015, Kevin W. McAleer, CPA (“McAleer”) 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)(iii) of the Commission’s Rules of Practice.1 This order is issued in response to +McAleer’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 McAleer willfully violated the federal securities laws with +respect to his conduct as the Chief Financial Officer of Penson Worldwide, Inc. (“PWI”). In +Forms 10-K, for annual periods ended December 31, 2009 and December 31, 2010, and in Forms +10-Q, for periods ended March 31, 2010 through June 30, 2011, filed with the Commission, +PWI’s financial statements failed to comply with Generally Accepted Accounting Principles +because they failed to recognize losses from certain loans made by a subsidiary of PWI. In +addition, PWI failed to adequately disclose the nature of the loans in those annual filings in +violation of applicable disclosure requirements. As a result, the Commission found that McAleer +willfully violated Exchange Act Section 13(b)(5), and Rules 13a-14 and 13b2-1, and caused +PWI’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. + +1 See Accounting and Auditing Enforcement Release No. 3697 dated September 17, 2015. McAleer was permitted, +pursuant to the order, to apply for reinstatement after one year 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, McAleer +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. McAleer 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, McAleer’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 McAleer, it appears that he has complied with the terms of the September 17, 2015 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 McAleer, 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 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 +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Kevin W. McAleer, 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/2018/AAER-3941.txt b/raw/aaer/2018/AAER-3941.txt new file mode 100644 index 0000000000000000000000000000000000000000..3bd173387d17323eac09902a6fa9ec43ba785cd9 --- /dev/null +++ b/raw/aaer/2018/AAER-3941.txt @@ -0,0 +1,114 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83170 / May 4, 2018 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3941 / May 4, 2018 +ADMINISTRATIVE PROCEEDING +File No. 3-12263 + +In the Matter of +David T. Leboe, 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 April 17, 2006, David T. Leboe, CPA (“Leboe”) 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 Leboe pursuant to Rule 102(e)(3)(i) of the +Commission's Rules of Practice.1 This order is issued in response to Leboe’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 Leboe had been permanently enjoined by a United States +District Court from future violations of Sections 10(b) and 13(b)(5) of the Securities Exchange +Act of 1934 (“Exchange Act”) and Rules 10b-5 and 13b2-1 thereunder, and aiding and abetting +violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, +13a-1, and 13a-13 thereunder. In a complaint filed on March 27, 2006 the Commission alleged, +among other things, that Leboe engaged in a fraudulent scheme which resulted in Enron Corp. filing +materially false and misleading financial statements in the company’s annual report on Form 10-K +for the fiscal year ended December 31, 2000, and in the company’s quarterly report on Form 10-Q +for the third quarter of fiscal year 2000. The Complaint alleged that Leboe engaged in a number of +improper accounting practices that materially increased Enron’s annual and quarterly revenue and net +income in a departure from Generally Accepted Accounting Principles. These practices included, +among other things, improperly accelerating the recognition of revenue from the sale of a + +1 See Accounting and Auditing Enforcement Release No. 2415 dated April 17, 2006. Leboe was permitted, pursuant +to the order, to apply for reinstatement after five years upon making certain showings. + + 2 +construction contract and concealing undocumented side agreements from Enron’s independent +auditors. In addition, the complaint alleged that Leboe actively sought to keep others from disclosing +information to Enron’s independent auditors about these side agreements. + +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, Leboe +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. Leboe 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, Leboe’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 Leboe, it appears that he has complied with the terms of the April 17, 2006 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 +Leboe, 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 +David T. Leboe, 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/2018/AAER-3942.txt b/raw/aaer/2018/AAER-3942.txt new file mode 100644 index 0000000000000000000000000000000000000000..b10281843500d9f2ff825a4b2c635416edfb99be --- /dev/null +++ b/raw/aaer/2018/AAER-3942.txt @@ -0,0 +1,122 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83391 / June 6, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3942 / June 6, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18533 + +In the Matter of +MICHAEL J. MONA, JR. +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Michael +J. Mona, Jr. (“Respondent” or “Mona”) 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.B.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. Mona, age 63, of Las Vegas, Nevada, is CannaVEST’s CEO and a member +of its board of directors. Mona became CannaVEST’s CEO in November 2012, and a board +member in January 2013. + + 2. On June 15, 2017, the Commission filed a complaint against Mona in SEC +v. CannaVEST Corp., et al. (Case No. CV-17-01681-APG-PAL) in the United States District +Court for the District of Nevada. On June 1, 2018, the court entered an order permanently +enjoining Mona, by consent, from future violations of 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 controlling any person who violates Sections 13(a), 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. Mona was also +ordered to pay a $40,000 civil money penalty and to reimburse CannaVEST $10,000 pursuant to +Section 304(a) of the Sarbanes-Oxley Act of 2002. + + 3. The Commission’s complaint alleged, among other things, that Mona +made material misrepresentations and/or misleading omissions on CannaVEST’s quarterly +reports filed with the SEC for CannaVEST’s first three quarters of 2013. The complaint +alleged that the overstatements related to CannaVEST’s acquisition of another company, +PhytoSphere Systems, LLC in the first quarter of 2013. The complaint further alleged that +CannaVEST agreed to the purported $35 million purchase price only because CannaVEST +could pay it primarily with CannaVEST shares that had little or no trading volume at the time, +and which Mona believed had little value, and a small amount of cash. The complaint further +alleged that Mona knew that CannaVEST was paying substantially less than $35 million to +acquire the PhytoSphere business, that PhytoSphere was not worth $35 million, and that +CannaVEST would have never agreed to the purported purchase price if CannaVEST were +required to pay cash for PhytoSphere. The complaint further alleged that Mona had +CannaVEST record $35 million worth of assets related to the PhytoSphere acquisition on +CannaVEST’s balance sheet in its Form 10-Q for the first quarter of 2013 and that, as a result, +CannaVEST materially overstated its assets on its balance sheet for the first quarter of 2013. +The complaint further alleged that, in its Form 10-Q for the second quarter of 2013, +CannaVEST continued to report falsely the value of its assets related to the PhytoSphere +acquisition. The complaint further alleged that, in its Form 10-Q for the third quarter of 2013, +CannaVEST and Mona wrote down the value of the assets related to the PhytoSphere +acquisition to $8 million after obtaining a valuation of PhytoSphere’s assets, but failed to +disclose that CannaVEST had never paid $35 million for those assets, that the assets were +3 + +never worth $35 million, and that the balance sheets for the first and second quarters of 2013 +were materially overstated. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Mona’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Mona is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five years from the date of this order, Mona may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as an accountant. + + By the Commission. + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3943.txt b/raw/aaer/2018/AAER-3943.txt new file mode 100644 index 0000000000000000000000000000000000000000..a9d45b1b44ac8322fbc14dc3387d99ab981e2fe3 --- /dev/null +++ b/raw/aaer/2018/AAER-3943.txt @@ -0,0 +1,488 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83428 / June 14, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3943 / June 14, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18542 + + +In the Matter of + +RSM US LLP, + +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 RSM US LLP (“RSM” or +“Respondent”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to +any person the privilege of appearing or practicing before the Commission in any +way, if that person is found . . . (1) not to possess the requisite qualifications to +represent others; (2) to be lacking in character or integrity, or to have engaged in +unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations 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. +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to which +the Commission is a party, and without admitting or denying the findings herein, except as to the +Commission’s jurisdiction over Respondent and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting 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: + +Summary +1. This matter involves improper professional conduct by RSM while performing the 2011 +audit of Madison Capital Energy Income Fund I LP (“Fund I”), a private fund formed for the general +purpose of acquiring oil and gas royalty interests to generate a return for its investors.4 During the +course of the Fund I engagement, RSM repeatedly violated professional standards, including by failing +to conduct the 2011 Fund I audit (hereinafter “Fund I audit”) in conformity with Generally Accepted +Auditing Standards (“GAAS”) and issuing to Fund I an audit report containing an unqualified opinion +that the fund’s statement of assets and partners’ capital was presented fairly, in all material respects, in +conformity with Generally Accepted Accounting Principles (“GAAP”).5 However, the schedule of +investments failed to separately report the fair value of the investments in each oil and gas royalty +interest held by Fund I, as required by GAAP. Lisa Hanmer (“Hanmer”), the Fund I engagement +manager, knew that the Fund I schedule of investments was not in conformity with GAAP. Hanmer +further knew that adequate procedures had not been performed in auditing the fair value of the +investment in the underlying Fund I royalty interests and took steps to conceal this fact from RSM +personnel, including engagement partner, Daniel Millmann (“Millmann”). Millmann did not complete +the workpaper documentation, evidencing that all review comments for the audit were satisfactorily +resolved before the audit report was released. Millmann neglected to review the investment audit +workpaper which, in the circumstances, was required. Millmann improperly delegated critical +engagement partner responsibilities to an engagement manager, Hanmer. RSM’s policies and +procedures failed to detect or prevent the audit failures that occurred on this matter as discussed below.6 + +3 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or entity in +this or any other proceeding. +4 This Order references the American Institute of Certified Public Accountants (“AICPA”) standards in effect at +the time of the 2011 Fund I audit. These standards are encompassed in Generally Accepted Auditing Standards. +5 As noted in its audit report issued for the Fund I audit, RSM’s audit of the statement of assets and par tners’ +capital included the schedule of investments. As of December 31, 2011, Fund I reported net assets of $2,574,744. +6 All descriptions of RSM’s systems, policies, and procedures refer to those in effect at the time of the Fund I +audit. +In the wake of the Commission staff’s investigation, RSM withdrew the Fund I audit report, citing +significant concerns that certain necessary audit procedures were omitted from the Fund I audit. + +Respondent +2. RSM US LLP (formerly known as McGladrey LLP) (“RSM”), a limited liability +partnership with its headquarters in Chicago, Illinois, is a national public accounting firm registered +with the Public Company Accounting Oversight Board (“PCAOB”). Fund I engaged RSM, through +RSM’s Madison, Wisconsin office, to “perform an audit of [Fund I’s] statement of net assets, including +the schedules of investments as of December 31, 2011 and a review of the related statements of +operations, changes in partners’ capital and cash flows for the year then ended . . . in accordance with +auditing standards generally accepted in the United States of America” in May 2012. + +Other Relevant Parties +3. Daniel Millmann (“Millmann”), age 54, currently resides in Madison, Wisconsin and +is a certified public accountant licensed to practice in Wisconsin. Millmann has worked at RSM since +1990 and became a partner in 2005. Millmann served as the RSM engagement partner for the Fund I +audit. Millmann was charged by the Commission on May 23, 2017 under Exchange Act Section 4C +and Rule 102(e) for his conduct on the Fund I audit. Millmann settled those charges on a no admit no +deny basis and consented to an order pursuant to Exchange Act Section 4C and Rule 102(e) that denies +him the privilege of appearing or practicing before the Commission as an accountant with the right to +apply for reinstatement after two years. See Millmann, Exchange Act Release No. 80749 (May 23, +2017) (settled order). + +4. Lisa Hanmer (“Hanmer”), age 44, currently resides in Oregon, Wisconsin and is a +certified public accountant licensed to practice in Wisconsin. Hanmer began working at RSM in 1996, +became a partner in 2013, and resigned from the firm, effective March 31, 2015. Hanmer served as the +RSM manager for the Fund I audit and held the title of director at the time. Hanmer was sued by the +Commission on May 23, 2017 under Exchange Act Section 4C and Rule 102(e) for her conduct on the +Fund I audit. See Hanmer, Exchange Act Release No. 80750 (May 23, 2017). On June 12, 2017, +Hanmer settled the lawsuit on a no admit no deny basis and consented to an order pursuant to Exchange +Act Section 4C and Rule 102(e) that denies her the privilege of appearing or practicing before the +Commission as an accountant. See Hanmer, Exchange Act Release No. 80904 (June 12, 2017). +Background +5. Madison Capital Investments LLC (“MCI”), a Wisconsin limited liability company +based in Madison, Wisconsin, organized a number of private placements of equity interests in oil and +gas limited partnerships since 2009, including Fund I. MCI offered its funds to broker-dealers and +investment advisers, and they in turn introduced these funds to prospective investors. These broker- +dealers and investment advisers generally required certain information before they agreed to place these +funds on their platforms (to be sold to, among others, accredited individual investors), including audited +financial statements. Thus, MCI signed a letter to engage RSM on May 16, 2012 to perform an audit of +Fund I’s statement of assets and partners’ capital as of December 31, 2011 and a review of the related +statements of operations, changes in partners’ capital and cash flows for the year then ended (the “audit +report”). Fund I’s only material assets were interests in oil and gas royalty properties. As such, +auditing the value of those assets was the primary purpose for MCI retaining RSM to conduct the audit +of Fund I’s statement of assets and partners’ capital. + +6. RSM issued its final audit report to Fund I on May 30, 2012. This report contained an +unqualified opinion on Fund I’s statement of assets and partners’ capital and a review conclusion, made +in accordance with AICPA standards, on the other financial statements issued by Fund I. Specifically, +RSM opined that the Fund I statement of assets and partners’ capital “presents fairly, in all material +respects, the financial position of [Fund I] as of December 31, 2011, in conformity with accounting +principles generally accepted in the United States of America.” + +7. The Fund I audit report was subsequently distributed by MCI to broker-dealers and +investment advisers, who reviewed the Fund I audit report in connection with their due diligence review +for MCI’s later funds. RSM generally understood how MCI intended to utilize the final Fund I audit +report. +RSM’s Quality Control Policies and Procedures +8. The operational responsibility for the RSM quality control system is assigned to RSM’s +National Professional Standards Group, National Office of Risk Management (“NORM”), and +Regional Professional Practices Offices. + +9. All RSM partners and other professionals are required to adhere to all applicable +provisions of the AICPA Code of Professional Conduct, as well as applicable ethics requirements of the +PCAOB and state boards of accountancy. + +10. During the relevant time period, RSM’s client acceptance and continuation policies and +procedures required the engagement partner to carefully evaluate the prospective client engagement +prior to acceptance by, among things, ensuring that qualified professional staff and other functional and +industry specialists were available. Acceptance of all clients required approval by the regional +assurance leader or his or her designee. +11. During the relevant time period, RSM used the McGladrey Risk Assessment Model +(“MRAM”), an RSM-developed electronic tool that assists engagement teams in performing consistent +and comprehensive evaluations of risk prior to client acceptance. In arriving at an engagement risk +assessment, the MRAM considers several risk-rating factors, such as industry, financial condition, +governance, management, control environment, size, complexity, and international reach. In addition +to providing for the approval of engagement acceptance or continuance, the MRAM process identifies +potential risks of material misstatement and the need for the involvement of subject matter experts, and +approves engagement staffing. RSM’s policies in this area were designed to provide reasonable +assurance that RSM undertakes or continues relationships and engagements only where RSM: (i) has +considered the integrity of the client and the risks associated with providing professional services under +the circumstances; (ii) is competent to perform the engagement and has the capabilities and resources to +do so; (iii) can comply with the applicable legal and ethical requirements; and (iv) can reach an +understanding with the client regarding the nature, scope, and limitations of the services to be +performed. +12. RSM designed its policies and procedures to provide reasonable assurance that RSM has +sufficient professional personnel with the capabilities, competence, and commitment to ethical +principles necessary to perform RSM’s engagements in accordance with professional standards and +regulatory and legal requirements and to enable RSM to issue reports that are appropriate under the +circumstances. NORM, in consultation with the Regional Professional Practice Offices, approves a list +of assurance partners, directors, and other professionals who have designations within RSM’s quality +control system. This list identifies individuals by industry and engagement risk rating who are +authorized to serve as engagement partners and managers, engagement quality reviewers, industry +specialists, independent report reviewers, SEC compliance reviewers, and subject matter experts. RSM +assigns an individual to a specific engagement after considering the professional competence and +industry experience of the individual, together with the degree of knowledge, skills, and abilities +required under the circumstances. RSM’s Regional Professional Practice Officers have the ability to +approve RSM staff, who are not on the preapproved list, for a given audit. +13. To provide reasonable assurance that engagements are consistently performed properly, +RSM develops, maintains, and provides personnel with electronic manuals, software tools, and subject +matter guidance materials, which address: (i) audit methodology, (ii) engagement supervision, (iii) +appropriate documentation of work performed, and (iv) identifying matters for consultation or +consideration by more experienced professionals. RSM’s audit methodology dictates that the +engagement team plan the audit work so that an effective audit is performed, designing procedures that +are responsive to the risks of material misstatement. +The Fund I Audit + +14. Hanmer functioned in the role of engagement manager for the Fund I audit and +performed the most work on the audit, including performing or overseeing the field work and testing +for the audit (including its documentation in the workpapers) and drafting the Fund I audit report. At +the time of the Fund I audit, Hanmer was a director at RSM whose primary experience was in auditing +privately-held manufacturing companies. Fund I was the first oil and gas fund she had audited in her +career. Hanmer had no prior training, competency or experience relating to the issuance of an audit +report involving fair value measurements and disclosures of these financial and non-financial assets. + +15. Millmann was the engagement partner for the Fund I audit. At the time of the Fund I +audit, Millmann’s primary experience was in auditing privately-held manufacturing companies and +professional service organizations. Millmann had never worked on an audit of an oil and gas fund prior +to the Fund I audit. Millmann had no prior training, competency or experience relating to the issuance +of an audit report involving fair value measurements and disclosures of these financial and non- +financial assets. + +16. The Fund I audit fell under the auspices of RSM’s financial services group, which +specializes in audits of broker-dealers, futures commodities merchants, non-registered proprietary +trading firms, business development companies, commodity pools, hedge funds, mutual funds, small +business investment company funds, registered investment advisers, and private equity funds +(hereinafter “RSM’s Financial Services Practice”). At the time of the Fund I audit, Millmann and +Hanmer were not on RSM’s preapproved list for RSM’s Financial Services Practice audits. This list +identifies competent individuals to perform audits for RSM’s Financial Services Practice, the purpose +of which is to provide reasonable assurance that such audits are performed according to firm and +professional standards. + +17. Because Millmann and Hanmer were not on the preapproved list for RSM’s Financial +Services Practice audits, the Regional Professional Practices Officer for the RSM Great Lakes Region +(“RPPO”) was required, according to RSM policy, to approve the staffing of Millmann and Hanmer on +the engagement. Despite their lack of experience with financial services or oil and gas fund audits, and +the fact that as described below, the MRAM for the audit determined that it was high risk, the RPPO +approved staffing Millmann and Hanmer on the Fund I audit, and did not do so until after they began +working on the audit. + +18. In addition, contrary to RSM’s client acceptance and continuation policies, substantive +audit procedures had begun before RSM had cleared the Fund I engagement through the MRAM, +which, as discussed above, assessed the risk of audit engagements and was designed to ensure that the +audit engagement staff had the required competency and experience. The MRAM for the Fund I audit, +which was approved on May 7, 2012, determined that the Fund I audit was high risk and therefore +required the assignment of a concurring review partner on the audit. The concurring review partner, a +member of RSM’s national professional standards group, was on the preapproved list for RSM’s +Financial Services Practice audits but did not have experience auditing oil and gas funds. As a +consequence, an oil and gas subject matter expert was assigned to the Fund I audit. + +19. Millmann did not sign off on the investments audit program, which included the +contemplated audit procedures for Fund I’s only material assets. In addition, the concurring review +partner did not sign off on the required Audit Engagement Concurring Review Questionnaire for the +Fund I audit, which is the workpaper that documents a concurring review partner’s review of the +significant areas of an audit engagement. + +20. RSM did not perform adequate audit procedures on Fund I’s schedule of investments to +obtain sufficient evidence for their fair value. Fund I valued the royalty interests it held using +engineering software that accounts for a number of inputs/factors when determining future production +and prices. The RSM valuation specialist assigned to the audit concluded that the valuation +methodology employed by Fund I “does not appear unreasonable” but deferred to others on the audit +team to confirm a number of items, including that the value of the individual royalty interests purchased +and owned by Fund I were actually reflected in Fund I’s valuation report. The audit team never +confirmed that the royalty interests purchased by Fund I were reflected in the Fund I valuation report. +Instead, Hanmer falsified the schedule of investments workpapers – by manually inserting the initials of +a staff member assigned to the Fund I audit next to certain audit procedures – to conceal that required +audit work was not completed. +21. RSM issued an audit report containing an unqualified opinion on the Fund I statement of +assets and partners’ capital; however, the Fund I financial statements, including the statement of assets +and partners’ capital, were not in conformity with GAAP. Specifically, ASC 946-210-50-6 requires +breaking out and reporting the value of each individual fund asset on the schedule of investments that is +more than 5 percent of total net assets.7 Notwithstanding this GAAP disclosure requirement, the final +Fund I Schedule of Investments sent to the client by Hanmer only reported the combined cost and fair +values of all of the royalty interests purchased by the fund. It did not report the values of Fund I’s +individual royalty interests. + +7 Fund I was required to comply with the GAAP Industry Guidance found at ASC 946, Investment Companies. +22. At the time the final audit report was released, Hanmer knew that the Fund I financial +statements were not in conformity with GAAP and took steps to conceal this fact from RSM personnel. +Specifically, before Hanmer sent the final audit report to Fund I, the concurring review partner assigned +to the Fund I audit clearly alerted Hanmer that Fund I’s royalty interests needed to be broken out +individually to be in conformity with GAAP. Nevertheless, submitting to client pressure to release the +Fund I audit report, Hanmer intentionally disregarded her concurring review partner’s comment and +sent the final audit report to the client with a schedule of investments that included only a single, +consolidated valuation of the royalty interests. To evade detection, Hanmer sent her concurring review +partner a different schedule of investments – which was not sent to Fund I – that purported to +incorporate the concurring review partner’s comment, but, in reality, included fictitious fair values for +individual royalty interests. +23. Millmann failed to complete the RSM required engagement report release workpaper, +which, in relevant part, mandated that Millmann satisfy himself that all review comments for the audit +were satisfactorily resolved before the audit report was released. Moreover, the final audit report was +not submitted to RSM’s report processing group before being released to the client. +24. Millmann neglected to review many investment workpapers (including Fund I’s +valuation summary report) and did not sign off on the investment audit program, which was necessary +in the circumstances of this engagement. As a result, Millmann was unable to determine if the +engagement team’s audit procedures for Fund I’s investments, which represented a significant portion +of Fund I’s assets, were adequate or even if they were all completed. In short, Millmann did not fulfill +his supervisory responsibility for the Fund I audit. +Withdrawal of Fund I Audit Report +25. RSM informed the Commission staff in early 2015 that the Commission staff’s +investigation caused it to conduct its own internal review of the Fund I audit. In connection with this +internal review, the RSM Quality Control Inquiry Committee convened on February 7, 2015 and +concluded that: Hanmer’s conduct on the Fund I audit departed from professional standards and firm +policies to a degree that warranted a recommendation to separate Hanmer from RSM. +26. Subsequently, Millmann, on behalf of RSM, in a February 23, 2015 letter to MCI, +withdrew its Fund I audit report based on “significant concerns that certain auditing procedures [RSM] +considered necessary in the circumstances existing at the time of the engagement were omitted from the +audit of the statement of assets, including Fund I’s schedule of investments, and [RSM’s] review of the +other financial statements.” The Fund I audit report was withdrawn after Fund I’s offering period +closed and after investors had already invested. RSM did not prevent or detect the audit failures +discussed above prior to the final report being released to the client. +Violations of Professional Standards +27. AU Section 230 requires that an auditor exercise due professional care in the +performance of an audit and the preparation of an audit report. AU § 230.01. This standard requires +the auditor to plan and perform his work with due professional care. Id. § 230.02. Due professional +care imposes a responsibility upon each professional within an independent auditor’s organization to +conduct field work and reporting with reasonable care and diligence and to possess the degree of skill +commonly possessed by other auditors. Id. §§ 230.02-.05. Auditors should be assigned to tasks and +supervised commensurate with their level of knowledge, skill, and ability so that they can evaluate the +audit evidence they are examining. Id. § 230.06. As a result of the conduct described above, +Respondent failed to meet this standard on the Fund I audit. +28. AICPA standards require that an auditor adequately plan field work for an audit. AU § +311.01. Audit planning involves developing an overall audit strategy for the expected conduct, +organization, and staffing of the audit. Id. § 311.02. Obtaining an understanding of the entity and its +environment, including its internal control, is an essential part of planning and performing an audit in +accordance with GAAS. Id. § 311.03. The auditor must plan the audit so that it is responsive to the +assessment of the risk of material misstatement based on the auditor’s understanding of the entity and +its environment, including its internal control. Id. The auditor must develop an audit plan in which the +auditor documents the audit procedures to be used that, when performed, are expected to reduce audit +risk to an acceptably low level. Id. § 311.19. As a result of the conduct described above, Respondent +failed to meet this standard on the Fund I audit. +29. AICPA standards require that audit “assistants,” or firm personnel other than the auditor +with final responsibility for the audit, be properly supervised. AU §§ 311.01, .04. Elements of +supervision include instructing assistants, keeping informed of significant issues encountered, +reviewing the work performed, and dealing with differences of opinion among firm personnel. Id. § +311.28. 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, including +knowledge of the client’s business and industry. Id. As a result of the conduct described above, +Respondent failed to meet this standard on the Fund I audit. +30. According to AICPA standards, the auditor must perform the audit to obtain reasonable +assurance that material misstatements, whether caused by errors or fraud, are detected. AU § 312.03. +As a result of the conduct described above, Respondent failed to meet this standard on the Fund I audit. +31. AICPA standards require that: “[t]he auditor must obtain sufficient appropriate audit +evidence by performing audit procedures to afford reasonable basis for an opinion regarding the +financial statements under audit.” AU § 326.01. Sufficiency is the measure of the quantity of audit +evidence, and appropriateness is the measure of the quality of audit evidence. Id. § 326.06. The +quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, the more +audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the +quality, the less the audit evidence that may be required). Id. As a result of the conduct described +above, Respondent failed to meet this standard on the Fund I audit. +32. The AICPA established Quality Control Standards for CPA firms’ accounting and +auditing practices. QC § 10. A system of quality control consists of policies designed to achieve the +following objective and the procedures necessary to implement and monitor compliance with those +policies. Id. § 10.04. The objective of a CPA firm is to establish and maintain a system of quality +control to provide it with reasonable assurance that a) the firm and its personnel comply with +professional standards and applicable legal and regulatory requirements and b) reports issued by the +firm are appropriate in the circumstances. Id. § 10.12. A firm’s system of quality control should +include policies and procedures addressing acceptance and continuance of client relationships and +specific engagements, engagement performance and monitoring. Id. § 10.17. It should also include +policies and procedures requiring that the engagement partner and personnel have the necessary +competence and capabilities to perform the audit engagement. Id. § 10.34. A firm’s supervision +policies and procedures should reasonably assure that suitably experienced engagement team members, +including the engagement partner, supervise the work performed. Id. § 10.36. As a result of the +conduct described above, Respondent failed to meet the standards that required competency and +proficiency in client acceptance and continuance, staffing, and supervision on the Fund I audit. + +Violations + +33. Rule 102(e)(1)(ii) of the Commission’s Rules of Practice provides that the Commission +may deny the privilege of appearing or practicing before the Commission to any person who is found to +have engaged in improper professional conduct. Respondent engaged in improper professional conduct +as defined in Rule 102(e)(1)(iv)(B)(2) (i.e., negligent conduct consisting of 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). + +Findings + +34. Based on the foregoing, the Commission finds that Respondent engaged in improper +professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +RSM’s Remedial Efforts + +35. In determining to accept RSM’s Offer, the Commission considered remedial acts +promptly undertaken by RSM and cooperation afforded the Commission staff. + +Undertakings + +36. RSM’s Review. Within 240 days after the entry of this Order, RSM shall perform and +complete a review and evaluation (“RSM’s Review”) of the sufficiency and adequacy of RSM’s quality +controls and policies and procedures for all audits of SEC registrants as well as audits of private funds +within RSM’s Financial Services Practice regarding the following (hereinafter referred to as “RSM’s +Policies”): +a. the exercise of due professional care as it relates to audits involving fair value +measurements and disclosures of financial and non-financial assets; +b. the performance of client acceptance and continuance procedures relative to the +commencement of any significant audit procedures, including relating to fair +value measurements and disclosures of financial and non-financial assets; +c. the incorporation of the results of risk assessment on audit planning prior to the +commencement of any significant audit procedures, including relating to fair +value measurements and disclosures of financial and non-financial assets; +d. effective supervision by engagement partners and managers, including review of +work related to the appropriate use of specialists employed or engaged by RSM +to assist an engagement team in performing risk assessments, planning or +performing audit procedures, or evaluating audit results, including, but not +limited to: +i. the coordination of relative responsibilities between auditors and +specialists; and +ii. the effective supervision by engagement partner and managers of the +employed specialists’ work; +e. adequate audit documentation related to workpaper sign-offs and audit report +release procedures; and +f. obtaining reasonable assurance that: +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 engagement circumstances, +and +ii. work is assigned to personnel having the degree of technical training and +proficiency required in the circumstances. +RSM’s Review shall assess the foregoing areas to determine whether RSM’s Policies are adequate and +sufficient to provide reasonable assurance of compliance with all relevant Commission regulations and +relevant audit standards and rules. In the event RSM’s Review results in any changes to RSM’s +Policies, RSM agrees to extend the same changes to policies and procedures related to audits in all +other practice areas where such changes are applicable and appropriate. + +37. RSM Report. Within 60 days of completing RSM’s Review, RSM shall deliver to the +Commission staff a detailed written report (“RSM Report”) summarizing its review and changes to +RSM’s Policies, if any, to provide reasonable assurance of compliance with all relevant Commission +regulations and relevant audit standards and rules. The RSM Report shall identify the undertaking as +described in paragraph 36, provide written evidence of compliance in the form of a narrative (including, +but not limited to, the resources devoted to compliance with the undertaking), and be supported by +exhibits sufficient to demonstrate compliance with that undertaking. The Commission staff may make +reasonable requests for further evidence of compliance with the undertakings described in paragraph +36, and RSM agrees to provide such evidence. +38. Certification by RSM’s CRO. Within 60 days of issuance of the RSM Report, but not +sooner than 30 days after a copy of the RSM Report is provided to the Commission staff, RSM’s chief +risk officer (“CRO”) must certify to the Commission staff in writing that RSM has adopted and has +implemented or will implement all recommendations contained in the RSM Report. To the extent that +RSM has not implemented all recommendations contained in the RSM Report within 60 days of +issuance of the RSM Report, RSM’s CRO must certify to the Commission staff in writing, 30 days +after their implementation, that RSM has adopted and has implemented all recommendations contained +in the RSM Report. The certifications by RSM’s CRO shall identify the undertakings, provide written +evidence of adoption and implementation in the form of a narrative, and be supported by exhibits +sufficient to demonstrate adoption and implementation. The Commission staff may make reasonable +requests for further evidence of adoption and implementation, and RSM agrees to provide such +evidence. +39. Training. Within two years of entry of this Order, +a. RSM shall require each audit professional who performs audits of SEC +registrants as well as audits of private funds within RSM’s Financial Services +Practice to successfully complete a minimum of 16 hours of audit-related +training. The audit-related training shall cover the topics specified above in +paragraph 36 with an emphasis on the need to follow policies, procedures and +professional standards at all times, even when faced with client pressure; and +b. RSM shall issue a firm-wide announcement describing this case and its +ramifications to those involved. +40. Within 60 days of the last certification required by paragraph 38 or the completion of +the training requirements contemplated by paragraph 39, whichever is later, RSM’s CRO shall certify, +in writing, adoption and implementation with the undertakings set forth above. The certification shall +identify the undertakings, provide written evidence of adoption and implementation in the form of a +narrative, and be supported by exhibits sufficient to demonstrate adoption and implementation. The +Commission staff may make reasonable requests for further evidence of adoption and implementation, +and RSM agrees to provide such evidence. +41. All reports and certifications mentioned in these undertakings shall be submitted to +Steven Klawans, Assistant 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. +42. 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. +43. In determining whether to accept RSM’s Offer, the Commission has considered these +undertakings. RSM agrees that if the Division of Enforcement believes that RSM has not satisfied +these undertakings, it may petition the Commission to reopen the matter to determine whether +additional sanctions are appropriate. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed +to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. RSM is censured; and + + B. RSM shall comply with the undertakings enumerated in paragraphs 36 through 43 above. + + + + By the Commission. + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3944.txt b/raw/aaer/2018/AAER-3944.txt new file mode 100644 index 0000000000000000000000000000000000000000..6c4f746ef1eab9ce54bfd0ca4303eecdeaf6222e --- /dev/null +++ b/raw/aaer/2018/AAER-3944.txt @@ -0,0 +1,415 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83575 / July 2, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3944 / July 2, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18568 + + +In the Matter of + +BEAM INC., n/k/a +BEAM SUNTORY 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 Beam Inc., n/k/a Beam Suntory Inc. (“Beam” or +“Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. +2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. These proceedings arise from violations of the books and records and internal +accounting controls provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”) [15 +U.S.C. § 78dd] by Beam in connection with conduct at Beam Global Spirits & Wine (India) +Private Limited (“Beam India”). Beam makes and sells branded alcoholic beverages worldwide, +and Beam India bottled and sold Beam products in India throughout the relevant period. + +2. From at least 2006 through 2012, Beam’s Indian subsidiary, Beam India, made +improper payments to various government officials in connection with obtaining or retaining +business in the Indian market. Senior executives at Beam India directed schemes using its third- +party sales promoters, distributors and other third parties in connection with sales, promotions, +distribution, and other commercial activities. The promoters, distributors, and other third parties +made illicit payments to employees at government controlled depots and retail stores and various +government offices to increase sales orders, get better positioning on store shelves, process and +secure license and label registrations, and facilitate the distribution of Beam India’s spirit products +from its bottling facility to warehouses in other states. The third parties received funds, or were +reimbursed, for the illicit payments by providing fabricated or inflated invoices to Beam India. +The expenses were falsely recorded at Beam India and thereafter consolidated into Beam’s books +and records. During this period, Beam also failed to maintain a sufficient system of internal +accounting controls. + +3. In 2011, Beam sought to introduce a new product in India. The label registration +for the product stalled when the Indian excise official with the discretion to issue the registration +told the third-party bottler of the product that an improper payment to him of one million Rupees +(approximately his yearly salary or $18,000) was required to approve the registration. The illicit +payment request ultimately made its way to three senior managers of Beam’s Asia Pacific/South +America region (“APSA”). The payment to be made by the third-party bottler and a method of +reimbursing the bottler for making the payment was approved. Within weeks after communicating +this down to the third-party bottler, the label registration was approved by the excise official and +Beam India’s bottler began canning and Beam India began distributing the new product. + +4. As a result of the conduct during the relevant period, Beam violated Sections +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act. + + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 + +Respondent + +5. Beam Inc., n/k/a Beam Suntory Inc. is a corporation organized under the laws of +the state of Delaware and headquartered in Chicago, Illinois. Through April 2014, Beam had a +class of publicly traded securities pursuant to Section 12(b) of the Exchange Act, which were +traded on the New York Stock Exchange. In April 2014, Suntory Holdings Limited (“Suntory”), a +Japanese corporation, acquired Beam. Beam subsequently delisted from the New York Stock +Exchange and continued its operations as a subsidiary of Suntory. During the period that Beam +was a public company, it operated and managed its global business on the basis of reportable +segments located in geographical regions, consisting of North America, Europe/Middle +East/Africa, and APSA (APSA was operated from Beam’s Australian subsidiary). + +Other Relevant Entities + +6. Beam Global Spirts & Wine (India) Private Limited was acquired in 2006, and +its books, records, and financial accounts were consolidated into Beam’s books and records and +reported by Beam on its financial statements. In 2011, Beam India’s management started reporting +to Beam’s APSA region management in Australia. + +Background + +7. In India the alcoholic beverage industry is highly regulated by government +authorities. Beam India, and third parties acting as agents on its behalf, had numerous interactions +with government officials related to importation of distilled mixes for its spirit products, shipments +to its bottling facility in Behror, Rajasthan, various inspections of the Behror plant, shipments from +the factory in Behror to distribution warehouses in multiple states in India, label registrations +required to distribute each brand of liquor in each state, licensing of warehouses in states prior to +retail distribution, and sales to retail stores that were operated by the Indian government. +Introduction of new spirit products and distribution warehouses required new applications for label +registrations and licensing of the warehouses in each state. Label registrations and warehouse +licenses also required yearly renewal in Rajasthan and in the twenty-six Indian states where Beam +sold its products or had warehouses. + +8. Prior to its acquisition by Beam, the Indian entity that subsequently became Beam +India regularly made direct and indirect payments to Indian government officials in connection +with inspections of the bottling facilities, distribution of its products, label registration and +warehouse license applications and renewals, and advantageous product placement and promotion +in both government and retail stores. It also made payments to government officials responsible +for ordering alcoholic products for distribution in government run retail channels in order to secure +and increase sales of spirit products. The Indian management maintained a second set of financial +records that tracked the payments and disguised the schemes in the entity’s books and records to +make it appear that the illicit payments were legitimate business expenses. + +4 + +9. When Beam acquired the assets of the Indian entity, it also retained existing +management of the entity who knew of and orchestrated the bribe schemes. Those retained +managers continued the schemes at Beam India without interruption from the 2006 acquisition +through the end of the third quarter 2012. Beam profited from the illicit payment schemes at Beam +India. + +Improper Payments Made in Government Sales Channels + +10. From 2006 through the end of the third quarter 2012, Beam, through Beam India, +sold liquor products in six markets where the Indian state government regulated both the +distribution and retail sale of alcoholic products. These included the Indian states of Delhi, Tamil +Nadu, Andaman & Nicobar, Orissa, and Karnataka and the Indian military’s Canteen Stores +Department (“CSD”). + +11. During this period, Beam India used third-party promoters to market its products in +the government channel. The third-party promoters, with Beam India’s knowledge and +authorization, also directed improper payments to government officials at retail stores and depots +in order to secure orders of Beam products as well as placement of Beam products in a prominent +shelf position in retail stores. + +12. The illicit payments, made with the knowledge, authorization, and complicity of +Beam India’s management, were funded through the submission of inflated invoices from the +promoters, often for inflated per-case commissions. Senior Beam India management directed the +distribution of funds to the various promoters in different markets to make payments to +government officials in those states. Certain Beam India finance executives maintained off-the- +books accounts that tracked amounts and uses of the funds provided to promoters. For example, +over the period, Beam India paid more than $1.5 million to its promoter in the CSD channel and +over $550 thousand to its promoter in the state of Delhi to make improper payments to government +officials at government-controlled retail stores and depots in those markets. + +13. The illicit payments were falsely characterized in Beam India’s books and records +as legitimate business expenses for “Customer Support,” “Off-Trade Promotions,” “Commission to +Distributor/Promoter,” and “Commercial Discount, Ongoing” which disguised the true nature of +these payments. Ultimately, the related expenses were consolidated in Beam’s general ledger +system coded as “Selling and Distribution Expenses.” + +Beam India’s Payments to Excise Officials + +14. From 2006 through the end of the third quarter 2012, Beam India also made +improper payments to insure timely inspections at Beam India’s Behror manufacturing facility, to +Indian government officials in fourteen states to secure and expedite the processing of annual label +registrations for distribution of Beam’s products from Rajasthan to other Indian states where the +liquor was to be sold, and for warehouse licenses in several states that served as depots for Beam +India’s products. The payments fell into two categories, payments to lower level government +5 + +employees to insure routine administrative processes and payments made to senior level ministry +officials who had discretion to issue or renew label registrations or warehouse licenses, necessary +for the distribution and sale of Beam’s products in the various states. + +15. In 2011, Beam India sought to introduce Beam’s profitable “Ready to Drink” +(“RTD”) products in India. At the time, Beam had embarked on a broad global initiative to +develop RTD beverages in emerging markets and had targeted India as one of the markets to +introduce RTD. In May 2011, Beam India contracted with a third-party bottling facility to produce +the RTD drinks. Applications were then filed with the Excise Ministry to obtain the label +registrations required to operate the facility and bottle RTD products in that state. + +16. The label registration process stalled for several months until the third-party bottler +met with a senior excise official, who demanded an improper payment of one million Indian +Rupees (approximately equal to the official’s yearly salary or $18,000 at the then exchange rate) to +approve the label registration. The third-party bottler requested that Beam India fund the improper +payment. Beam India management then sought approval to make the payment from Beam’s APSA +management located in Australia. The payment was approved and certain APSA senior +management discussed how to disguise the payment by having the third-party bottler pay it to the +Excise official, and then submit false invoices to be reimbursed for the illicit payment. After an +APSA senior manager communicated the authorization, a Beam India senior manager +implemented the scheme whereby the third-party bottler made the illicit payment. Within weeks +after discussing the payment demand, the needed approvals were received from the Excise +Ministry. Thereafter, the third-party bottler submitted two false invoices to Beam India, +purportedly for consulting services rendered at the bottling facility, in the approximate amount of +the payment demand, which Beam India paid. + +Beam Failed to Timely Remediate Deficiencies + +17. After Beam acquired Beam India in 2006, the company provided Beam India +management with its Code of Conduct manuals and additional compliance training. Beam also +instituted annual internal audits starting in 2008. + +18. In 2010, Beam engaged a global accounting firm to conduct a compliance review of +Beam India. The accounting firm interviewed executives at Beam India and conducted a limited +sample testing of transactions. In early January 2011, the firm reported that certain Beam India +executives believed that “promoters are likely making grease payments” to government officials in +India and, as a result, recommended that Beam follow-up and “conduct and document due +diligence to confirm activities undertaken” by third parties, “investigate red flags,” “discuss legal +considerations of third party actions taken on Beam’s behalf,” and “consider need to further +review” the CSD and other military outlet businesses. After receiving this report, Beam consulted +a U.S. law firm with FCPA expertise, which advised that these issues required follow up. Beam +then retained an Indian law firm to review and expand upon the work performed by the accounting +firm. The Indian law firm interviewed Beam India senior management to determine whether +improper payments were being made to Indian government officials in contravention of company +6 + +policy and the FCPA. The Indian law firm reported that Beam India managers believed that third +parties in India may make payments and/or provide gifts to customs officials and government +employees in the CSD channel. The Indian law firm confirmed many of the accounting firm’s +recommendations including additional FCPA training and revising contracts with third parties. +Beam then requested its U.S. law firm to review the report and work done by the Indian law firm. + +19. Before the U.S. law firm completed its review, the firm forwarded to Beam’s +general counsel’s office a July 2011 SEC enforcement action concerning FCPA violations by +Diageo plc in India. Diageo, a direct competitor of Beam’s in the Indian spirit markets, had settled +an SEC administrative action related to, among other conduct, payments made through its third- +party promoters to Indian government officials to obtain increased spirit orders in government +sales channels and to secure initial and annual label registrations and other administrative +approvals critical to Diageo’s business in India. Beam subsequently sent a lawyer from its General +Counsel’s office to India to interview senior Beam India management to ask whether similar +conduct was occurring at Beam India and to provide additional FCPA training. Thereafter, that +lawyer revised Beam India’s agreements with its customs house agent and third-party promoter in +the CSD channel, the largest revenue channel for Beam India, and used those agreements as +templates for agreements with other third parties in India. + +20. In August 2011, the U.S. law firm reviewed the Indian law firm’s report and noted +that the Indian law firm had not provided an analysis of Beam India’s books and records, internal +controls or other issues related to its finance and accounting practices, that it had not conducted any +substantial transactional testing, and that it raised issues concerning Beam’s oversight of third +parties and the potential conduct of those third parties. In addition to confirming the advice given +by the major accounting firm and the Indian law firm, the U.S. law firm proposed additional +recommendations, including that “Beam should strongly consider undertaking a financial review . . +. and that Beam should consider structuring the review so that in-house or outside counsel engages +an outside forensic investigator to conduct the review . . . .” Beam did not then conduct additional +transactional testing as advised by the U.S. law firm or conduct due diligence on third parties as +advised earlier in the year by the global accounting firm. + +21. In September 2011, the Indian law firm advised Beam to conduct interviews of +Beam India operational employees who interact and work with the promoters in the CSD channel +to identify specific risks associated with activities of the promoters. Beam declined, as a Beam +lawyer stated, “I believe we basically would like to see the same information for the same +purposes, but with different approaches. I am concerned about [the Indian law firm] digging and +finding information that we cannot impact, specifically, finding activities and practices by +[promoters] that we cannot remediate or change. The risk may be ultimately having to choose +whether to continue to conduct business with any [promoters] that create [FCPA] risks for +us/Beam India. . . . [The Indian law firm] may be familiar with the Diageo matter but will not +assess it as we would because it involves the [FCPA]. The lawyer added, “if we are doing +anything in the same manner as Diageo did that was violative, we should change it and look to how +we can do things in a more clearly compliant manner.” + +7 + +22. In November 2011, a former Beam India employee alleged a scheme through which +a Beam India manager was using false invoices from third parties to generate cash that was then +submitted to the manager. A review completed in March 2012 confirmed the conduct alleged by +the former employee, and concluded that the cash from the distributors had been used to make +payments totaling $25,000 over two years to government officials in connection with the label +registration process in one sales zone in India. However, Beam did not then expand the review to +other third parties or other markets that presented similar risks. Beam did move up a planned +FCPA compliance review by several months to August 2012. In July 2012, a former Beam India +zonal accountant raised similar issues which, along with the results of the August 2012 compliance +review, led to an internal investigation beginning in September 2012 that uncovered the schemes +conducted by Beam India management, which included managing the misconduct by Beam India’s +third parties and maintaining a second set of financial records. + +Legal Standards and Violations + +23. 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. + +FCPA Violations + +24. 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 +disposition of the assets of the issuer. [15 U.S.C. § 78m(b)(2)(A)]. + +25. As described above, Beam violated Section 13(b)(2)(A) of the Exchange Act. The +company’s subsidiary, Beam India, falsely characterized illicit payments to government officials as +legitimate business expenses in Beam’s books and records. + +26. Section 13(b)(2)(B) of the Exchange Act requires every issuer with a class of +securities registered pursuant to Section 12 of the Exchange Act to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that (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)]. + +8 + +27. As described above, Beam violated Section 13(b)(2)(B) by failing to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +company funds would only be used as authorized for legitimate corporate purposes, that +transactions would be recorded as necessary, and that access to company assets occurred only as +permitted. + +Beam’s Self-Disclosure, Cooperation, and Remedial Efforts + +28. In determining to accept the Offer, the Commission considered Respondent’s self- +disclosure, cooperation, and remedial efforts. Beam voluntarily disclosed this misconduct to the +Commission staff and timely shared the facts developed during the course of an internal +investigation by a special committee of its board. Beam also cooperated by voluntarily producing +documents, summarizing its factual findings, translating numerous key documents, providing +timely reports on witness interviews, and making current or former employees available to the +Commission staff, including those that needed to travel to the United States or elsewhere for +interviews. + +29. Beam’s remedial actions included: ceasing business operations at Beam India until +Beam was satisfied it could operate Beam India compliantly; terminating certain Beam India +employees who were involved in the misconduct; terminating third-party sales promoters in +government markets in India; updating and expanding its anti-corruption policies and procedures +on a global basis, including its relationship with third-party vendors and suppliers; enhancing its +internal controls and compliance functions; developing and implementing FCPA compliance +procedures, including expansion and implementation of policies and procedures such as the due +diligence and contracting procedures for vendors and suppliers; and conducting extensive anti- +corruption training throughout the Beam organization. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Beam’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Beam 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 10 days of the entry of this Order, pay disgorgement of +$5,264,340, prejudgment interest of $917,498, and a civil monetary penalty of $2,000,000 to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. §3717 or SEC Rule of Practice 600. Payment must be +made in one of the following ways: +9 + + +(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 +Beam as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Charles E. Cain, Chief, FCPA Unit, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3945.txt b/raw/aaer/2018/AAER-3945.txt new file mode 100644 index 0000000000000000000000000000000000000000..5de135a0495bea1649f757584c90fabab74dd955 --- /dev/null +++ b/raw/aaer/2018/AAER-3945.txt @@ -0,0 +1,1403 @@ + + + + + + + + + + + + + + + + SEC.gov | Axesstel, Inc., et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/521401","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Axesstel, Inc., et al. (S.D. Cal., filed June 28, 2018) + + + + + + + + + On June 28, 2018, the Securities and Exchange Commission charged a California-based telecommunications equipment manufacturer, its Chief Financial Officer, Former Chief Executive Officer, and Director of Contract Fulfillment and Sales Operations for inflating reported revenues in the company's Middle East, Africa, and Europe region in the fourth quarter of 2012 and first quarter of 2013. + + According to the SEC's complaint, Axesstel, Inc., Chief Financial Officer Patrick J. Gray, and former Chief Executive Officer Harold Clark Hickock III, aided and abetted by Director of Contract Fulfillment and Sales Operations Steven R. Sabin, inflated the company's revenues by prematurely recognizing revenue on sales and by improperly recognizing revenue despite entering into undisclosed side agreements that relieved customers of payment obligations. Additionally according to the complaint, the Defendants inflated unit prices of products to hit revenue targets with the agreement that Axesstel would subsequently repay the inflated amounts to the customer as marketing development fees. The SEC alleges that Axesstel's revenue was overstated by 66% in the fourth quarter of 2012 and 38% in the first quarter of 2013. + + The SEC's complaint alleges that Axesstel, Gray and Hickock violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and that Sabin aided and abetted these violations. The complaint also alleges that Gray and Sabin circumvented internal accounting controls and falsified Axesstel's books and records in violation of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder; that Axesstel violated the reporting provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and that Gray, Hickock and Sabin aided and abetted Axesstel's violations of 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 while Gray aided and abetted Axesstel's violations of Rule 13a-11; that Axesstel violated the books and records and internal accounting controls provisions of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and that Gray and Hickock aided and abetted these violations; and that by signing false Sarbanes-Oxley certifications and lying to Axesstel's auditor, Gray and Hickock violated Exchange Act Rules 13a-14 and 13b2-2. + + Axesstel, Gray, Hickock and Sabin agreed to settle the charges without admitting or denying the allegations of the Complaint and consented to entry of a final judgment that permanently enjoins them from future violations of the securities laws, and orders Gray, Hickock and Sabin to pay penalties of $40,000, $25,000 and $10,000, respectively. Gray and Hickock also consented to entry of a judgment which permanently bars Hickock from serving as an officer or director of a public company, and bars Gray from serving as an officer or director of a public company for five years. The settlements are subject to court approval. + + Gray also consented to the issuance of a Commission Order suspending him from appearing or practicing before the Commission as an accountant, with the right to apply for reinstatement after five years. + + The SEC's investigation was conducted by Adam B. Gottlieb and supervised by Amy L. Friedman, with the assistance of trial counsel Suzanne J. Romajas and Christian D. H. Schultz, supervised by Jan M. 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Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2018/AAER-3946.txt b/raw/aaer/2018/AAER-3946.txt new file mode 100644 index 0000000000000000000000000000000000000000..24d907c3bac1b1efd37fa2d3a5862890ffe05afa --- /dev/null +++ b/raw/aaer/2018/AAER-3946.txt @@ -0,0 +1,431 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10516 / July 2, 2018 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83578 / July 2, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3946 / July 2, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18569 + +In the Matter of + +KBR, Inc. + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange A ct of 1934 (“Exchange +Act”), against KBR, Inc. (“KBR” 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 f or 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 Co mmission’s jurisdiction over Respondent and the subject +matter of these proceedings, which are admitted, Respondent consents to the entry of this Order +Instituting Cease-And-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and +Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease - +And-Desist Order (“Order”), as set forth below. + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +Summary +1. KBR is a global engineering, construction, and services company based in Houston, +Texas. On May 30, 2014, KBR filed a Form 10-K/A that: (a) restated and amended earnings in its +consolidated financial statements for the fiscal year ended December, 31, 2013, and its unaudited +consolidated financial statements for the third quarter of 2013; (b) reduced its disclosed backlog as +of the fiscal year ended December 31, 2013; and (c) identified a material w eakness in its internal +control over financial reporting. + +2. The restated earnings, which resulted in charges of $156 millio n, primarily arose +from failures in KBR’s Canada business (“KBR Canada”) to make accurate and reliable estimates +of the costs to complete seven pipe fabrication and modular assem bly contracts in Canada. KBR +Canada experienced rapid growth in 2012 and 2013 , and it did not have sufficient resources or +sufficiently trained project managers, project controls personnel, and accounting and executive +management professionals to perform cost estimates and project oversight reviews. KBR’s +internal accounting controls were not properly designed to identify or prevent the errors in the +estimates of the costs to complete the company used to recognize revenue on these contracts. + +3. The reduction in backlog relates to one of the seven contracts, a multi -year, multi- +use agreement with a Canadian energy company (the “MUA contract”). In the second quarter of +2012, KBR included $459 million in its disclosed backlog for the MUA contract, despite the fact +that KBR had yet to receive, and the Canadian energy company was not obligated to provide, KBR +any orders under the contract. The backlog recording remained in place during the next six +quarters, including after it became clear that KBR was receiving far fewer work authorizations +under the contract t han anticipated. KBR’s dis closed backlog for the MUA contract was not +consistent with its disclosures, which attributed all of KBR’s backlog to “firm orders.” As a result, +KBR overstated the amount of its backlog in reports filed with the Commission. + +Respondent +4. KBR, Inc. is a Delaware company headquartered in Houston, Texas. KBR’s +common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act, +and its stock trades on the New York Stock Exchange under the symbol KBR. KBR 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 +Facts +A. KBR’s Restatement + +5. On May 30, 2014, KBR filed a Form 10 -K/A (the “Restatement”) restating +earnings in its consolidated financial statements for the fiscal year ended December 31, 2013, and +amending its unaudited consolidated financial statements for the third quarter of 2013. + +6. KBR determined that a restatement was necessary due to additional estimated costs +to complete seven Canadian pipe fabrication and modular assembly contracts in its Services +business. According to the Restatement, the additional projected costs to complete the Canadian +projects resulted in charges of $156 million in 2013, consisting of the reversal of $24 million in +previously recognized pre -tax profits, the recognition of approximately $97 million in pre -tax +losses at completion, and a $35 million reduction in previously recognized revenue. The $156 +million charge represented 91% of KBR’s 2013 net income (as restated). For the third quarter of +2013, the impact of the Re statement was 32% of KBR’s nine -month net income and 480% of +KBR’s three-month net income (as restated). + +7. As part of the Restatement, KB R also disclosed a reduction to a 2013 increase in +backlog, which included a backlog reduction of approximately $360 million for the MUA +contract. This reduction for the MUA contract represented the original $459 million backlog +value for the MUA contract less currency adjustments an d work off of orders received since the +original recording. + +8. Following an investigation led by the Audit Committee, KBR concluded that a +material weakness in internal control over financial reporting existed in the Canadian pipe +fabrication and mo dular assembly business within its Services segment resulting from +insufficiently trained personnel. It further determined that there was an ineffective control +environment, because the culture at the Canadian pipe fabrication and modular assembly +business facilitated delayed identification and communication of project concerns and the proper +preparation of complete and accurate estimates. +B. KBR Canada’s Cost to Complete Estimates + +9. KBR Canada is headquartered in Edmonton, Alberta. During the relevant time +period, KBR Canada primarily provided construction, turnaround and maintenance, and pipe +fabrication and modular assembly services to energy industry customers. + +10. KBR Canada enter ed into the seven contracts at issue during 2012 and 2013, a +period of rapid growth. The contracts called for KBR Canada to fabricate pipe and then assemble +standing modules used in connection with oil and gas projects. The contracts were “unit -rate” +contracts, which meant that payment to KBR was based on the actual quantity of work performed +measured against a book of agreed upon unit prices. KBR treated the unit-rate contracts as “fixed- +price” contracts for estimating purposes, because, unlike “reimbursable” contracts, KBR bore risk +to produce quantities at pre-agreed prices. The contracts were accounted for using the percentage- + 4 +of-completion method in accordance with Accounting Standards Codification Topic 605 -35-25, +“Revenue Recognition,” which was the accounting guidance in effect during the relevant period +for long-term construction contracts. + +11. KBR Canada prepared a n estimate for each contract that was updated monthly as +the contracts progressed towards completion. At year -end 2013, the estimates showed positive +margins in the 8% to 17.6% range for the seven contracts. But during the first quarter of 2014, +after KBR had filed its 2013 Form 10 -K, KBR management in Houston learned, in connection +with an internal review of unbilled revenues, that the costs incurred on the MUA contract exceeded +actual authorized revenue and that there were potentially other issues with the module contracts in +Canada. Thereafter, KBR investigated the status of the contracts, and determined that the contract +cost estimates were not accurate and would have to be reforecast. + +12. The revised estimated costs to complete , which were issued in April 2014 after +KBR filed its original 2013 Form 10-K, showed that all seven contracts were actually projecting a +loss position with margins as low as -58%. The common theme: costs were much higher than +previously estimated by personnel at KBR Canada, due to reduced productivity and growing +overhead, subcontract, and labor expenses in Canada. + +13. KBR also determined that much of the additional costs should have been included +in the contract estimates by the third quarter of 2013 or year -end 2013. Before the close of the +third quarter of 2013, new, higher labor rates were available that KBR Canada should have been +using in the estimates for all seven of the module projects. KBR Canada also had information in +the third and fourth quarters of 2013 that should have alerted KBR Canada to project delays and +cost overruns that were negatively impacting productivity on the projects. If this information had +been included in the cost estimates, all of the projects would have been in a loss position at year- +end 2013 or in the third quarter 2013, but no provisions for losses on contracts was accrued as +required under ASC 605-35-25-45. + +14. A combination of factors contributed to the inaccurate estimates of costs to +complete. KBR Canada’s estimating was not sufficiently rigorous, and it did not actually +reforecast the project costs as new information was obtained. In many instances, project controls +personnel at KBR Canada would update the initial estimates by applying the as sold margin to +KBR’s actual costs each month. In addition, the project managers, project controls, and accounting +personnel in Canada did not have sufficient experience, training, or resources to monitor the +projects and update the estimates. Finally, KBR’s oversight from Houston of contract estimating +in Canada was limited and did not identify the problems with the estimates before the Restatement. + +15. The Canadian legal entities that comprised KBR Canada were controlled +subsidiaries of KBR and were included in KBR's consolidated reporting as part of its Services +business segment during the relevant time period. KBR used the monthly updated estimated costs +to complete as the underlying support for recognizing revenue (or accruing contract losses) on the +seven contracts. At least as early the third quarter of 2013, the contract estimated costs to complete +contained inaccurate and unreliable cost estimates. As a result, KBR understated its costs, and +overstated its earnings, in its consolidated financial statements for the fiscal year ended December + 5 +31, 2013, which KBR filed with the Commission on Form 10-K on February 27, 2014, and in i ts +unaudited consolidated financial statements for the third quarter of 2013, which KBR filed with the +Commission on Form 10-Q on October 24, 2013. +C. KBR’s Backlog Disclosures + +16. The amount of work in backlog is an important metric of KBR’s business. KBR +discloses backlog in its press releases, and analysts cite to KBR’s backlog when evaluating the +company’s performance. + +17. Exchange Act Regulation S -K I tem 101(c)(1)(viii) requires, where material to +understanding the issuer’s business, disclosure by reporting segment of: + +The dollar amount of backlog orders believed to be firm, as of a recent date and as +of a comparable date in the preceding fiscal year , together with an indication of +the portion thereof not reasonably expected to be filled within the current fiscal +year, and seasonal or other material aspects of the backlog. + +18. During the relevant period, KBR disclosed backlog in its Description of Business at +a company level and separately in its Managements’ Discussion and Analysis disclosures for each +reporting segment, including Services. KBR disclosed that its backlog is attributable to firm +orders. For example, KBR’s Form 10-K for 2013 states: + +Backlog represents the dollar amount of revenue we expect to receive in the +future as a result of performing work on contracts awarded. . . . All backlog is +attributable to firm orders at December 31, 2013 and 2012. . . . + +Certain contracts provide maximum dollar limits, with actual authorization to +perform work under the contract agreed upon on a periodic basis with the customer. +In these arrangements, only the amounts authorized are included in backlog.1 + +KBR’s disclosures included risk factors describing the variability of backlog and amounts +recoverable under its customer contracts. + +19. KBR also has a documented backlog reporting policy. The policy states that “[i]n +determining the amount of Backlog to be recorded, the applicable Business Unit committee or +party responsible for Booking considers whether it is probable that the amounts recorded will +ultimately be realized in job revenue and income, and whether KBR will be compensated for the +work performed.” The policy also contains a section that addresses recording backlog for several +types of contracts where the amount of work is not defined at the outset of the contract (the “MSA +provision”). For contracts covered by the MSA provision, KBR only records the value of the +initial work order into backlog on those contracts. The only exception to this limitation is when a + +1 The Forms 10-K, Forms 10-Q, and Forms 8-K (attaching earnings releases) that KBR filed with the Commission +for periods during 2012 and 2013 all contain substantially similar language about KBR’s backlog. + 6 +clear pattern of work releases has been established with the customer that KBR is able to use to +assess probable contract revenue and job income over some future time period. + +20. KBR Canada entered into the MUA contract in May 2012. The contract had a five +year term, and it required KBR Canada to reserve enough capacity to produce 20 modules a month. +The counterparty Canadian energy company did not pay for the reservation of capacity. And +though it had reserved the KBR capacity, the counterparty Canadian energy company was not +obligated to provide any orders to KBR Canada, and did not provide any orders to KBR Canada at +the inception of the contract. Instead, the MUA contract provided a framework for future orders +for module work that could be awarded pursuant to written work authorizations. + +21. Despite having no commitment for any firm orders, KBR assigned a $459 million +backlog value to the MUA contract. KBR computed this figure using two primary components. +First, KBR estimated that it would generate $400,000 per module built. Second, KBR multiplied +20—its monthly module reservation capacity—times $400,000 times the number of months under +the term of the contract, excluding a sixth month “ramp-up” period. + +22. KBR recorded the entire $459 million figure into its reported backlog during the +second quarter of 2012. This was inconsistent with KBR’s disclosures, which attributed all +backlog to firm orders. The recording was also not consistent with a recording under the MSA +provision of KBR’s backlog reporting policy. Because there was no pattern of work releases with +the Canadian energy company that could have been used to establish an estimate , and the MSA +provision, if it had been applied, would have therefore required that only the amount of any actual +work authorizations be rec orded as backlog. KBR personnel determined not to apply the MSA +provision and instead considered the capacity reservation, the publicly disclosed capital +commitments made by the counterparty, the lack of alternative capacity in the Edmonton module +construction market, and the general high demand for module construction at that time. + +23. Further, KBR reviewed the MUA contract backlog amount quarterly. In +connection with these reviews, KBR received information inconsistent with the basis for the initial +$459 million recording. More specifically, the MUA contract was put in place and largely driven +by the expectation that the Canadian energy company would need a significant number of modules +for a large, publicly announced project. That project was cancelled in March 2013, but KBR +personnel in Canada did not recommend an adjustment, advoca ting that contract revenues would +be replaced with revenue from other projects. In August 2013, KBR Canada requested and was +granted a partial release of the reservation capacity for a period of six months, because there was +not enough work under the MUA contract to support it, and KBR Canada needed the capacity for +other projects. The Canadian energy company did not award work to KBR Canada at the +anticipated 20-module-per-month pace used in connection with the $459 million initial backlog +recording. By year-end 2013, which was approximately 20 months into the 60-month contract, the +Canadian energy company had awarded KBR less than approximately $55 million in work +authorizations and a total of 117 modules. At year-end, KBR Canada was aware that there would +be no new work under the MUA contract until March 2014 at the earliest. + + 7 +24. During this time, KBR did not adjust the backlog recording, and the $459 million +recording, less the actual work -off and currency adjustm ents, remained in KBR’s disclosed +backlog for all periods until the Restatement. The MUA contract represented approximately 22% +and 14% of Services disclosed backlog for 2012 and 2013, respectively, and 3.0% of the +company’s total disclosed backlog of approximately $15 billion as of June 30, 2012. At year-end +2013, the MUA contract was KBR’s fifth largest contract by funded backlog amount. + +25. KBR’s inclusion of the MUA contract in the company’s backlog, initially and in the +quarters that followed, occurred despite the review by numerous KBR perso nnel in Canada and +Houston. As a result of this negligent failure, KBR’s disclosures overstated disclosed backlog in +the Forms 10-K that KBR filed with the Commission on February 20, 2013 and February 27, 2014, +the Forms 10-Q that it filed with the Commis sion on July 25, 2012, October 24, 2012, April 25, +2013, July 25, 2013, and October 24, 2013, and the Forms 8-K that it filed with the Commission on +July 25, 2012, October 24, 2012, February 20, 2013, April 25, 2013, July 25, 2013, October 24, +2013, and February 28, 2014. + +D. KBR’s Internal Accounting Controls Were Not Sufficient + +26. At the end of the third quarter of 2013 and at year -end 2013, KBR’s internal +accounting controls relating to contract estimating were not sufficient to provide reasonable +assurances that transactions were recorded as necessary to permit preparation of financial +statements in accordance with generally accepted accounting principles. KBR Canada did not +have proper controls over the completeness and accuracy of labor costs and other c ritical +information used in the preparation of contract cost estimates. In addition, personnel in Canada +were able to prepare contract estimates without reviewing manual cost accrual entries, reconciling +subcontract costs with the subcontract register, an d following policies and procedures for +monitoring overhead costs. As a result of these insufficient controls, the cost estimates in Canada +were not accurate or reliable. In addition, KBR’s books and records did not accurately reflect its +contract costs. + +27. KBR reported a material weakness in its internal control over financial reporting in +the Restatement, stating that: + +We determined that a material weakness in internal control over financial +reporting existed in our Canadian pipe fabrication and modular assembly business +within our Services business segment resulting from the Company having +insufficiently trained project managers, project controls, accounting and executive +management professionals to perform project oversight reviews and monitor +compliance with the Company's standard processes and controls. Furthermore, the +control environment was ineffective in that the culture at the Canadian pipe +fabrication and modular assembly business facilitated delayed identification and +communication of project concerns and the proper preparation of complete and +accurate estimates of revenues, costs and profit at completion. As a result, our +controls over the completeness and accuracy of information used in our +preparation of estimates and our control procedures over our preparation of + 8 +estimates to complete and our controls over the reviews of such estimates to +complete for our Can adian pipe fabrication and modular assembly business also +were not effective. + +28. KBR’s internal accounting controls were also not sufficient because its corporate +oversight of estimating in Canada was limited and ineffective. Because five of the seven contracts +fell below a certain threshold dollar amount, KBR’s management in Houston did not have controls +in place to validate the estimates for those contracts. Management in Houston did engage in a +limited review of two of the larger contracts, but that revi ew failed to reveal the sig nificant +problems with the cost estimates + +KBR’s Remedial Efforts + +29. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by KBR and cooperation afforded the Commission staff. KBR undertook to +investigate contract estimating problems in Canada, identified the internal accounting controls +failures relating to the contract estimating problems, reported to the Commission regarding its +findings about its Canada operations, and implemented remedial measures to address the contract +estimating failures. KBR clawed back bonuses from its employees who received bonus +compensation as a result of overstated revenues at KBR Canada. +Violations + +30. As a result of the negligent conduct described above relating to the backlog +recording and disclosures, KBR violated Sections 17(a)(2) and (3) of the Securities Act, which +prohibit, in the offer or sale of any security (a) obtaining money or property by means of any +untrue statement of a material fact or any omission of a material fact necessary in order to make the +statements made, in light of the circumstances under which they were made, not misleading, a nd +(b) engaging in any transaction, practice, or course of business which operates or would operate as +a fraud or deceit upon the purchaser. Claims under Sections 17(a)(2) and (3) of the Securities Act +do not require a showing of scienter. Aaron v. SEC, 446 U.S. 680, 697 (1980). + +31. As a result of the conduct described above, KBR violated Section 13(a) of the +Exchange Act and Rules 13a-1, 13a-11, 13a-13 and 12b-20 thereunder, which require every issuer +of a security registered pursuant to Section 12 of the E xchange 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. + +32. As a result of the conduct described above, KBR 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. + + 9 +33. As a result of the conduct described above, KBR violated Section 13(b)(2)(B) of +the Exchange Act, which require all reporting companies to devise and maintain a system of +internal accounting controls su fficient to provide reasonable assurances that transactions are +recorded as necessary to permit preparation of financial statements in accordance with generally +accepted accounting principles. +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent KBR’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 KBR 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, and 13a-13 thereunder. +B. Respondent KBR shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $2,500,000 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. + +C. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detai led 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 +KBR as a Respondent in these proceedings, and the file number of these proceedings; a copy of + 10 +the cover letter and check or money order must be sent to Barbara L. Gunn, Assistant Regional +Director, Division of Enforcement, Securities and Exchange Commission, 801 Cherry Street, +Suite 1900, Fort Worth, TX 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, Respondent agrees that in any Related Investor +Action, it shall no t 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/2018/AAER-3947.pdf b/raw/aaer/2018/AAER-3947.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d199a8b4bed92a7ed8f6c9df4c54f0161bb3e01a Binary files /dev/null and b/raw/aaer/2018/AAER-3947.pdf differ diff --git a/raw/aaer/2018/AAER-3947.txt b/raw/aaer/2018/AAER-3947.txt new file mode 100644 index 0000000000000000000000000000000000000000..838c94f033ea3de333a0d11dbca9f8a310c371ee --- /dev/null +++ b/raw/aaer/2018/AAER-3947.txt @@ -0,0 +1,267 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83581 / July 2, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3947 / July 2, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18570 + + +In the Matter of + +The Dow Chemical Company, + +Respondent. + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against The Dow Chemical Company (“Dow” or +“Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + +Summary + +1. From 2011 through 2015, and in proxy statements reporting on those years, Dow +did not ensure that approximately $3 million in executive perquisites were adequately evaluated +and disclosed as “other compensation” in the Compensation Discussion & Analysis (“CD&A”) +section of the annual proxy statements. These authorized but undisclosed perquisites included +personal use of the Dow aircraft and other expenses. Although Dow applied procedures regarding +the evaluation and disclosure of its executives’ perquisites, Dow did not follow the Commission’s +standard regarding disclosure of perquisites, which provides that: +• An item is not a perquisite or personal benefit if it is integrally and directly related to the +performance of the executive’s duties. + +• Otherwise an item is a perquisite or personal benefit if it confers a direct or indirect benefit +that has a personal aspect without regard to whether it may be provided for some business +reason or for the convenience of the company, unless it is generally available on a non- +discriminatory basis to all employees. +Instead, Dow incorrectly applied a standard whereby a business purpose related to the executive’s +job was sufficient to determine that a benefit would not be a perquisite that required disclosure. +The Commission considered, but ultimately decided not to adopt, a business purpose standard to +determine whether a benefit provided to an executive should be disclosed as a perquisite. See +Commission’s Executive Compensation and Related Person Disclosure Final Rule adopting +release, Release Nos. 33-8732A; 34-54302A; IC-27444A; File No. S7-03-06 (August 29, 2006) +(the “Adopting Release”). +Respondent +2. Dow, a Delaware corporation based in Midland, Michigan, manufactures and +supplies chemical products for use as raw materials in the manufacture of customer products and +services worldwide. Dow’s stock was registered under Section 12(b) of the Exchange Act. Dow’s +common stock traded on the New York Stock Exchange until August 31, 2017. +Background +3. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +Act in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits issuers with securities registered pursuant to Section 12 of the Exchange Act from +soliciting proxies without furnishing proxy statements containing the information specified in +Schedule 14A, including executive compensation disclosures pursuant to Item 402 of Regulation +S-K. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and other +personal benefits provided to named executive officers who receive at least $10,000 worth of such +items in a given year. Item 402 of Regulation S-K also requires identification of all perquisites and +personal benefits by type, and quantification of any perquisite or personal benefit that exceeds the +greater of $25,000 or 10% of total perquisites. +4. According to the Adopting Release, “an item is not a perquisite or personal +benefit,” and does not need to be reported, “if it is integrally and directly related to the performance +of the executive’s duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct +or indirect benefit that has a personal aspect, without regard to whether it may be provided for +some business reason or for the convenience of the company, unless it is generally available on a +non-discriminatory basis to all employees.” The Adopting Release also states that “the concept of +a benefit that is ‘integrally and directly related’ to job performance is a narrow one,” which “draws +a critical distinction between an item that a company provides because the executive needs it to do +the job, making it integrally and directly related to the performance of duties, and an item provided +for some other reason, even where that other reason can involve both company benefit and +personal benefit.” +5. According to the Adopting Release, even where the company “has determined that +an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an +expense is for the benefit or convenience of the company,” that determination “is not responsive to +the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure +purposes.” Indeed, “business purpose or convenience does not affect the characterization of an +item as a perquisite or personal benefit where it is not integrally and directly related to the +performance by the executive of his or her job.” +6. Contrary to Item 402 of Regulation S-K and the Commission’s guidance in the +Adopting Release, Dow applied a standard whereby a business purpose would be sufficient to +determine that a benefit was not a perquisite that required disclosure. As a result, Dow did not +satisfy the Commission’s regulations and guidance. +7. Additionally, Dow did not adequately train employees in key roles, including those +tasked with drafting the CD&A section of the proxy statement and compiling the executive +compensation tables, to ensure that the proper standard was applied for perquisites disclosure. +8. Dow also had inadequate processes and procedures to ensure proper reporting of +perquisites. Dow personnel compiled the executive compensation table from a variety of sources +without ensuring that the amounts reported were consistent with the Commission’s perquisite +disclosure rules. Additionally, Dow did not fully comply with its own policies that called for +conducting an annual review of changes from the prior year to Commission rules and regulations, +market response, audit feedback, analysis of other companies’ disclosures, and changes in Dow’s +compensation benefit programs. +9. As a result of applying an improper standard for perquisite disclosure from 2011 +through 2015 for its named executive officers, Dow understated its disclosed perquisites in its 2013 +to 2016 proxy statements. Specifically, Dow understated its Chief Executive Officer’s disclosed +perquisites by approximately $3 million of additional Company authorized compensation, or 59%, +in the following years: (1) 2011 by approximately $414,000 or 61%; (2) 2012 by approximately +$849,000 or 70%; (3) 2013 by approximately $867,000 or 69%; (4) 2014 by approximately +$523,000 or 56%; and (5) 2015 by approximately $318,000 or 34%. +10. Thus, the amount of “other compensation” required to be disclosed pursuant to +Regulation S-K was misstated in Dow’s 2013 to 2016 proxy statements, which are incorporated by +reference into Dow’s annual reports on Form 10-K for that same time period. Such undisclosed +other compensation included, among other things: travel to outside board meetings, sporting +events, and personal activities; club memberships; limited use of personal assistant office time; and +membership fees to sit on the board of a charitable organization. +11. Rule 14a-9 prohibits the use of proxy statements containing materially false or +misleading statements or materially misleading omissions. As a result of the conduct described +above, Dow violated Section 14(a) of the Exchange Act and Rule 14a-9 thereunder. +12. Section 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder, require +every issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission information, documents, and annual 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. As a result of the conduct described above, Dow +violated Section 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder. +IV. + +Undertakings + + Respondent has undertaken to: + +Retain at its own expense an independent consultant (the “Independent Consultant”), not +unacceptable to the staff of the Commission, for a period of one year, to conduct a review of +Dow’s policies, procedures, controls, and training relating to the evaluation of whether payments +and other expense reimbursements should be disclosed as perquisites under the securities laws, +including the Commission’s rules and standards. Within 180 days of being retained, the +Independent Consultant shall recommend in a written report (“Report”) to be provided to +Respondent and the staff of the Commission, if and where appropriate, policies, procedures, +controls, and training reasonably designed to ensure: + +(a) Dow’s compliance with Item 402 of Regulation S-K relating to the disclosure of +perquisites as executive compensation; and + +(b) that Dow has processes and internal controls in place to reasonably ensure payments +and other expenses are properly evaluated for perquisite disclosure under the securities +laws, including the Commission’s rules and standards. + +Respondent shall adopt and implement all recommendations contained in the Report within +180 days of receiving the Report, provided, however, that within 30 days after the Independent +Consultant serves the Report, Respondent shall in writing advise the Independent Consultant and +the Commission of any recommendations that it considers to be unnecessary, unduly burdensome, +impractical, or costly. With respect to any recommendation that Respondent considers +unnecessary, unduly burdensome, impractical or costly, Respondent need not adopt that +recommendation at that time but shall propose in writing an alternative policy, procedure, or +system designed to achieve the same objective or purpose. As to any recommendation on which +Respondent and the Independent Consultant do not agree, such parties shall attempt in good faith +to reach an agreement within 30 days after Respondent advises the Independent Consultant of its +objection. In the event Respondent and the Independent Consultant are unable to agree on an +alternative proposal, Respondent will abide by the determinations of the Independent Consultant. + + The Independent Consultant will 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 Dow, or any of its present or former affiliates, directors, officers, +employees, or agents acting in their capacity. The agreement will also provide that the +Independent Consultant will require that any firm with which he/she is affiliated or of which he/she +is a member, and any person engaged to assist the Independent Consultant in performance of +his/her duties under this Order shall not, without prior written consent of the Denver Regional +Office of the Commission, enter into any employment, consultant, attorney-client, auditing or other +professional relationship with Dow, 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. + + After the final certification from the Independent Consultant, Respondent shall certify, in +writing, compliance with the undertaking(s) set forth above. The certification shall identify the +undertaking(s), provide written evidence of compliance in the form of a narrative, and be supported +by exhibits sufficient to demonstrate compliance. The Commission staff may make reasonable +requests for further evidence of compliance, and Respondent agrees to provide such evidence. The +certification and supporting material shall be submitted to Mary S. Brady, with a copy to the Office +of Chief Counsel of the Enforcement Division, no later than 60 days from the date of the +completion of the undertakings. + +V. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(a) and 14(a) of the +Exchange Act and Rules 13a-1, 12b-20, and 14a-9 thereunder. + + B. Respondent shall comply with the undertakings enumerated in Section IV above. + + C. Respondents shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $1,750,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +D. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifyi ng +Respondent’s name 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 Kurt L. +Gottschall, Division of Enforcement, Securities and Exchange Commission, Byron Rogers Federal +Office Building, 1961 Stout Street, Ste. 1700, Denver, CO 80294-1961. + + E. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, 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/2018/AAER-3948.txt b/raw/aaer/2018/AAER-3948.txt new file mode 100644 index 0000000000000000000000000000000000000000..4ffe22211c709cdefc724e1355489dd2ea4391c5 --- /dev/null +++ b/raw/aaer/2018/AAER-3948.txt @@ -0,0 +1,674 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83593 / July 5, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3948 / July 5, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18571 + + +In the Matter of + +CREDIT SUISSE +GROUP 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 Credit Suisse Group AG (“Credit Suisse” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Credit Suisse 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 Credit Suisse’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 Credit Suisse. Between at least 2007 +and 2013, Credit Suisse provided valuable employment to the relatives and friends of certain +foreign government officials in the Asia-Pacific region (“APAC”) as a personal benefit to the +requesting officials in order to obtain or retain investment banking business or other benefits for +the bank. Because many of Credit Suisse’s clients were state-owned entities (“SOEs”), and +because the individuals personally requesting employment or internships for their relatives and +friends were either executives of these SOEs or were foreign government ministers with influence +over the business decisions of SOEs, the requesting individuals were foreign government officials +under the FCPA. Credit Suisse provided these jobs to certain of the referred candidates (“Referral +Hires”) with the intent to corruptly influence the foreign government officials making the requests +to secure banking business from the SOEs. Credit Suisse’s referral hiring practice resulted in +multiple deals and substantial profits for Credit Suisse. + +2. While Credit Suisse had written policies beginning in at least 2007 that prohibited +the hiring of candidates referred by or related to officials from SOEs or government ministries in +order to obtain or retain business, those policies were not meaningfully enforced. At least one +senior Credit Suisse manager in APAC believed that restrictions on referral hiring -- including a +proposed requirement that all Referral Hires be vetted through the established, merit-based campus +recruiting program -- would “kill” their business. Steps were taken to make certain Referral Hires +from SOEs appear to be normal, merit-based hires at Credit Suisse. The candidates would undergo +interviews and submit their applications through Credit Suisse’s human resources department +(“Human Resources”). However, in some instances, certain senior bankers made decisions to +recommend hiring referrals in advance of this process and based on the prospect of business from +the referring SOE rather than the merit of the prospective employee. Since the company’s +prohibition on improper SOE Referral Hires was not implemented in practice, many client referrals +were hired by Credit Suisse without the requirement of any review by the bank’s Legal and +Compliance Department (“LCD” or “legal and compliance”) to ensure compliance with the bank’s +policies. + +3. During the six-year period referenced above, Credit Suisse offered employment to +more than 100 individuals referred by or who had some connection to APAC foreign government +officials. This included more than 60 employees and interns referred by foreign government +officials at more than 20 different Chinese SOEs. Credit Suisse HK and its affiliates obtained +deals from referring officials’ SOEs totaling tens of millions of dollars in revenue during this +period. Credit Suisse also hired referrals from numerous government agencies. In exchange these + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any o ther +person or entity in this or any other proceeding. + +3 +government officials assisted Credit Suisse in navigating complex regulatory landscapes in order to +obtain or retain business. Senior Credit Suisse managers in APAC tracked the success of some of +the bank’s Referral Hires in generating business through the use of spreadsheets that linked +particular referral hires to specific business deals for the firm. Certain senior personnel with Credit +Suisse HK and in the U.S. were aware that referral hiring was taking place in the APAC region. + +4. Credit Suisse’s internal accounting controls were insufficiently devised or +maintained to reasonably enforce or effectuate the policies against Referral Hires or bribery of +foreign officials and were therefore inadequate to address the corruption risks the company had +identified in connection with referral hiring. The written restrictions put in place by Credit Suisse +to minimize compliance and FCPA risks were not sufficient to curb Credit Suisse’s corrupt referral +hiring practices. + +Respondent + +5. Credit Suisse Group AG is a corporation incorporated and domiciled in +Switzerland. It is a multinational financial services holding company that provides a broad range +of services, including investment banking. Credit Suisse’s American Depository Shares are +registered pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock +Exchange. Credit Suisse files periodic reports, including Forms 20-F, with the Commission. + +Other Relevant Entity + +6. Credit Suisse (Hong Kong) Limited (“Credit Suisse HK”) is a Hong Kong +incorporated company and wholly owned subsidiary of Credit Suisse. Credit Suisse offers +securities products and financial advisory services in the APAC region. Credit Suisse’s global +investment banking business is headquartered in the United States and was conducted in the APAC +region primarily by and through Credit Suisse HK and its employees. Credit Suisse HK is an +“agent” of the issuer within the meaning of the Foreign Corrupt Practices Act. + +FACTS +Credit Suisse’s Written Policies Prohibited the Hiring of Government Referrals in Exchange +for Business +7. As early as 2007, Credit Suisse recognized the FCPA risks in hiring the relatives of +foreign government officials. Credit Suisse’s Global Anti-Bribery Policy (the “Global Policy”) +specified that “[o]ffers of employment, including internships, to Government Officials, their family +members, or associates,” could be considered to be “things of value” under the FCPA, and were +prohibited if offered “to obtain or retain business, or otherwise secure an improper advantage.” +The Global Policy was also reflected in regional policies applicable in APAC that recognized the +bribery risks inherent in referral hiring and specified additional restrictions on the practice. +8. In 2011, the Global Policy was updated to specify that ad hoc training activities and +internships for relatives of government officials that were clients both fell within the scope of +prohibited employment practices. The updated Global Policy stated that such referrals could only +4 +qualify for positions in existing campus or lateral hiring programs with open application processes +and that no special treatment could be provided for those referrals in the recruiting process. +Senior Credit Suisse Managers in APAC Knew About Prohibitions Regarding Government +Hires +9. Credit Suisse HK senior managers were aware that hiring referrals from SOEs and +government ministries to obtain or retain business was restricted under Credit Suisse’s written +compliance policies and could violate the FCPA. For example, in an April 2009 e-mail, a Credit +Suisse Banker wrote that “[g]iven the importance of these two referrals, I’m thinking whether we +should add them to the regular intern program. Can we make two more spaces?” A Credit Suisse +employee responded that “[g]iven the LCD resistance on the hiring of gov’t related interns, we +should clarify how the individuals are related to these entities. We can then decide the best course +of action.” +10. Additionally, in a May 2009 e-mail LCD informed APAC senior managers that +Credit Suisse was unable to provide summer internships to two SOE client referrals because: +“[a]fter consultation with the Bank’s Anti Corruption Team in New York, LCD in [sic] have +deemed both requests to be potential violations of the Foreign Corrupt Practices Act and as such +are too risky a venture for the Bank to pursue.” The LCD representative went on to describe why +the two proposed hires could violate the FCPA, and concluded: “I am sorry for this news, however +given the increased attention the regulators are now dedicating to this area and the fact that all of +our key competitors have either disbanded their similar programmes, or are in the final stages of +doing so, [LCD] in deeming the provision of these types of work experience or internships to +FCPA subject parties to be too great a risk to enter into are simply adhering to what is now the +industry practice.” +11. Also, in April 2010 LCD officials informed a Human Resources officer of a +problem with hiring a client referral from an Indonesian SOE, noting “[a]s such, there is a blanket +ban on offering these internships to anyone with direct government or SOE relations.” +Credit Suisse HK Personnel Developed a Referral Hiring Practice to Hire SOE Referrals +Without Proper Scrutiny +12. From at least 2007 through 2013, multiple senior Credit Suisse managers in APAC +engaged in a practice of hiring, promoting and retaining government-connected Referral Hires as +part of a quid pro quo by which Credit Suisse managers sought to improperly influence foreign +officials to assist Credit Suisse in winning lucrative investment banking mandates. +13. Rather than enforce Credit Suisse’s anti-corruption policies, senior Credit Suisse +managers repeatedly took steps to onboard Referral Hires from SOEs and government ministries +independently from the scrutiny of the company’s established, merit-based campus recruiting +program. A 2009 e-mail from a Credit Suisse HK Human Resources executive to two Credit +Suisse HK senior managers on “Client interns” stated: “One of LCD’s recommendations will be to +hire the client interns through the formal Summer Programme for Analyst & Associates (managed +by campus recruiting). We think this is not a great idea... we think it would be better if we could +5 +hire these interns independently (as in the past) for this summer. We can agree with LCD a new +way to approach this for next year.” This practice persisted for the ensuing years. +14. APAC Credit Suisse senior managers at times agreed in principle to hire a referred +candidate before conducting interviews or vetting of any kind, based on business advantages the +government official who referred the candidate could provide. Senior Credit Suisse managers in +APAC engaged in sham practices intended to give the appearance of a regular hiring process being +followed. Senior Credit Suisse managers in APAC instructed subordinates to conduct interviews +of referral candidates and automatically score the candidate highly, regardless of his/her actual +performance. +15. In seeking approval to hire or promote a referred candidate, rather than highlighting +the skills or experience of the candidate, Senior Credit Suisse managers in APAC referenced +particular business or mandates that had been or could be gained as a result of the Referral Hire. +For example: + One SOE executive emailed a senior Credit Suisse banker to refer a candidate who +had a “very good and close relationship” with senior management at the SOE, and +wrote that hiring the Referral Hire would “bring [Credit Suisse] the big surprise in +the near future if you could coordinate with CS Asian team to arrange a position in +CS team in Beijing.” + The senior Credit Suisse banker later told a colleague about an impending deal that +the SOE was pursuing and explained that the referring SOE official “was focused +on having us make a relationship hire and said it was very important for us to win +future business with [the SOE].” + Another banker wrote of another government-connected Referral Hire: “Need a +favor from you. [The Referral Hire] will get us a US$1bn bond deal from [a +prospective client]. His family requested to change his status to permanent with +CS. Given of [sic] the level of importance of this deal, we will decide to renew his +contact [sic] for another 24 months instead of permanent.” +16. Many candidates were offered full-time salaried positions and paid internships that +were eligible for bonuses, housing allotments, and other benefits, and some were hired without any +approval or vetting from the LCD or any other compliance body. +Credit Suisse HK Control Failures +17. Credit Suisse’s compliance policies governing the bank’s referral hiring practices +highlighted the corruption risks associated with referral hiring, and dictated that Credit Suisse HK +could employ government-connected Referral Hires under only very limited circumstances. From +at least 2007, the Global Policy prohibited offering a job or internship to any foreign official or +relative of a foreign official to obtain or retain business or otherwise for improper purposes. +18. In light of the corruption risks identified in its own compliance policies, Credit +Suisse placed written requirements around the onboarding of Referral Hires. Despite these written +6 +requirements, senior Credit Suisse managers in APAC repeatedly made Referral Hires in order to +obtain banking business and other advantages from senior officials at SOEs and government +agencies. +19. Certain Credit Suisse managers in the U.S. were aware of Credit Suisse HK’s hiring +of client referrals, some of whom treated the job as a mere “boondoggle.” For certain Referral +Hires, Credit Suisse senior managers in the U.S. approved the hire and took him or her on in the +United States. This led to complaints from Credit Suisse U.S. bankers due to the frequency of the +requests and the poor quality of the Referral Hires. For example, one senior U.S. Credit Suisse +banker wrote: “. . . to be honest, we have had really bad experiences with many of the individuals +from Asia . . . [a particular Credit Suisse HK senior manager] generates most of them and there is +enough frustration in the system over this at this point that I wanted to check in with you for a +sanity check on whether we should always break the mold for his requests or not . . . .” +20. In making Referral Hires, Credit Suisse repeatedly deviated from its established, +merit-based hiring requirements which assessed job candidates based purely on qualifications and +expected job performance. Credit Suisse failed to take adequate steps to mitigate known risks of +bribery and corruption in its APAC operations. Credit Suisse HK failed to meaningfully +implement or enforce Credit Suisse’s policies until 2013. +Credit Suisse Hired SOE Referral Hires To Assist in Winning or Retaining Business +21. Between 2007 and 2013, Credit Suisse hired multiple relatives and friends of +officials with foreign government entities and senior officials at foreign SOEs to obtain or retain +business for Credit Suisse. +22. Credit Suisse maintained spreadsheets that listed “referral hires” or “relationship +hires.” These spreadsheets included information identifying the referring client or relationship +when the relationship was with a government regulator. Some of these spreadsheets identified the +“[c]ontribution” of the referral hire, including in at least three instances, deals specifically +attributable to the relevant relationship. In an email to colleagues, a Credit Suisse employee +explained: “Relationship hires have to translate to $” or “the relationship is worthless to our +organization.” This email was forwarded to a senior Credit Suisse banking official in the U.S. In a +different email, a senior Credit Suisse banker stated that a referral hire “will get us a US$1bn bond +deal. . . . His family requested to change his status to permanent with CS. Given [] the level of +importance of this deal, we will decide to renew his contract for another 24 months instead of +permanent.” +23. Credit Suisse’s Referral Hires often lacked technical skills, were less qualified, and +had significantly less banking and other relevant experience than candidates hired through Credit +Suisse’s other employment channels. Credit Suisse Referral Hires included the following: + In 2008, Credit Suisse HK hired the nephew of a senior Chinese government +official, despite the fact that the nephew lacked investment banking qualifications +and a Credit Suisse HK manager acknowledged that “most likely he will not be +good.” The hire was made at the request of a government official with a Chinese +SOE from which Credit Suisse was seeking to win business. The same Credit +7 +Suisse HK manager reasoned that “[t]here is a relationship hire in every industry” +and stated that this particular individual should be hired in order to “open doors on +SOE fronts which we are in lack of and our marketing effort has been handicapped, +including [the referrer’s SOE].” After repeated efforts to “leverage” the Referral +Hire to obtain business from various Chinese SOEs, Credit Suisse HK successfully +won a mandate generating approximately $475,170 in revenue for the bank. + + From 2010 to 2011, Credit Suisse HK employed the relative of a government +official with a Chinese state-owned oil company. A Credit Suisse HK employee +explained: “the girl is [the] relative of someone staying at core decision making +circle of [the SOE] . . . . this girl is particularly important for . . . us to be blessed by +the [SOE].” After the hire the SOE awarded Credit Suisse HK multiple mandates +that yielded over $12 million in net profits for the bank. + + Beginning in 2010, Credit Suisse HK employed an individual closely connected to +a key government minister. The Referral Hire worked at Credit Suisse HK in +various roles from June 2010 until December 2012. Credit Suisse HK was awarded +lucrative roles in a securities offering for two Chinese SOEs as a consequence of +this hire, and received net profits for its work of more than $4 million. + + In 2011, the company hired the son of a senior commerce minister in China. A +Credit Suisse HK senior manager strongly advocated hiring the son, stating that the +company’s relationship with the government ministry was “very important” +because all “red chip” deals [involving companies based in mainland China but +incorporated elsewhere and listed on the Hong Kong Stock Exchange] “need to get +approved there.” The bank proceeded to employ the son for over a year, and during +his employment one of the senior managers used her “chit” with the minister to +assist the bank in securing the necessary approval from the ministry for a deal on +which Credit Suisse eventually received net profits of approximately $6 million. + +24. The following are specific instances of Credit Suisse Referral Hires resulting in +lucrative investment banking mandates for the firm. +Referral Hire from Energy-Related SOE to Obtain Investment Banking Mandates +25. In or around March 2010, Credit Suisse pitched for a mandate involving a Chinese +energy-related company (“Company A”). Referral Hire A was the daughter of a high-ranking +official (“Official A”) at a Chinese energy-related SOE (“SOE A”) that was the controlling +shareholder of Company A. +26. On or around March 9, 2010, a Credit Suisse Vice President sent an email to a +Credit Suisse HK senior investment banking manager in Hong Kong (“Employee A”), attaching +Referral Hire A’s resume and asking whether Employee A could “check with [Foreign Official A] +as to whether we can move things to the next step at the same time?” After stating “not too many +interviews,” and explaining that Referral Hire A was “a princess [who was] not used to too many +rounds of interview,” Employee A proposed “giv[ing] her the offer letter asap,” at which point +8 +Employee A would “push her mum [Official A].” In order to make Referral Hire A’s application +appear more presentable, Credit Suisse HK bankers drafted a resume for her requiring them to be a +bit “creative” in filling in the details. +27. Four days after receiving the request to hire Referral Hire A, on or about March 13, +2010, Employee A emailed the Credit Suisse Vice President, using a shorthand term that referred to +Company A in the subject line, writing, “I am seeing [Official A] to push. [Official A] will get us in +the deal.” Two days later, Employee A sent another email, again using a shorthand reference to +Company A in the subject line, writing, “I am meeting [Official A] . . . tomorrow. Where is +[Referral Hire A’s] contract?” A Credit Suisse employee responded that the offer letter was being +prepared, and a Credit Suisse HK Human Resources manager (“Employee B”) subsequently +confirmed Referral Hire A would receive a first year analyst salary and a housing allowance, +respectively approximately $70,000 and $30,000 annually. In or around April 2010, Credit Suisse +booked the mandate for Company A, realizing a $950,000 fee. +28. On or about July 1, 2010, Referral Hire A began working at Credit Suisse, without +being vetted or approved by LCD. During her probationary period, Referral Hire A exhibited +unprofessional behavior. In connection with a July 2010 training, Credit Suisse employees +complained that she failed to attend a mandatory boot camp, brought her mother to training events, +and left early. One Credit Suisse employee wrote that she received the worst grade in the class on +an assessment, commenting that “from the looks of her assessment she didn’t even try (she filled in +a pattern of 5As in a row, 5 Bs in a row, etc. on the answer key).” Less than a month later, in or +around early August 2010, Referral Hire A and another intern made “the same exact error which +nobody makes” on a homework assignment, and it was “apparent that they shared an Excel file and +cheated on the homework.” On or about August 5, 2010, after a Credit Suisse employee reported +that Referral Hire A “has been leaving at 4 pm right after every lecture every day this week while +the rest of the class is working until at least 9pm, 10 pm” and that she “has yet to show up to +training today,” Employee B commented, “[Referral Hire A] is the most famous intern ever.” +Notwithstanding these performance issues during the probationary period, in or around early +October 2010, Referral Hire A’s employment was fully approved, and both Employee A and +another employee vouched for her performance. +29. In April 2011, Credit Suisse obtained a mandate from SOE A for a convertible +bond offering, generating approximately $1,248,111 in revenue for Credit Suisse upon the closing +of the deal. On or about April 12, 2011, a Credit Suisse HK senior investment banking manager +(“Employee C”) forwarded to Employee A an email stating: “We’ve just closed books on the [SOE +A] $150m CB. Order book is above $900m.” Employee A responded, “[Referral Hire A] is a +star” who “also will help us to get [a] USD2bn [initial public offering (“IPO”)],” adding that they +should “say we will promote her to associate 1 if she delivers.” On or about April 18, 2011, +shortly before Credit Suisse hosted a dinner in Paris for “[Foreign Official A] and her delegation” +(including Referral Hire A), Employee A emailed a colleague that Referral Hire A was Foreign +Official A’s daughter and that they “will promote her to associate soon as she will bring some +sizeable IPO mandates to CS.” +30. On or about June 17, 2011, a Credit Suisse managing director emailed Employee B +that the managing director was “at a complete loss as to what to write for” Referral Hire A’s +9 +evaluation, asking, “[h]as anything been written on her file previously that we could copy and +paste?” The two then proposed feedback for Referral Hire A: “Pls come to the office more often +— we would like to see more of your smiling face,” and, “Come to the office, answer your phone, +don’t be rude...” On or about June 22, 2011, a Credit Suisse employee emailed Employee B, +attaching “manager summaries for everyone but [Referral Hire A],” along with the message, “I’m +wondering if we can explain that she’s a special situation and there’s no need to give feedback.” +Despite this, on or about June 30, 2011, Credit Suisse awarded Referral Hire A a bonus of +approximately $58,000. +31. During Referral Hire A’s employment with Credit Suisse, Referral Hire A’s mother +accompanied her to Credit Suisse trainings in New York, traveled with her on Credit Suisse +business trips, approved a list of client deals for her to work on, and requested that she be promoted +by Credit Suisse. For example, in or around May 2012, Employee A and a another Credit Suisse +HK senior investment banking manager (“Employee D”) had a meeting with Foreign Official A, +during which Foreign Official A approved a list of Credit Suisse clients with whom Referral Hire +A could work, including SOE A. +32. On July 5, 2012, Referral Hire A was promoted to the rank of Associate. +Approximately one week later, Employee A reported to another banker that Foreign Official A +stated that Foreign Official A would execute a “block [trade]” with Credit Suisse. Employee A +added a request to “[p]ls keep this confidential for now.” +33. In addition, Credit Suisse employees took steps to attribute credit for certain deals +to Referral Hire A, even where she did not contribute any work to those projects. For instance, on +or about July 25, 2012, Employee A drafted an email that Employee A directed Referral Hire A to +send back to Employee A and other Credit Suisse managers to make it appear as though Referral +Hire A had worked to win a mandate from SOE A for the privatization of another Chinese energy- +related SOE. After the email was sent, Employee A forwarded it to various Credit Suisse +employees, giving them the false impression that Referral Hire A had herself worked to secure the +deal and drafted the email. Later, Employee A emailed other Credit Suisse employees to alert +them to another email from Referral Hire A regarding an SOE A block trade. Employee A advised +them to respond to Referral Hire A that, “[W]e know you made this deal possible for us.” Shortly +thereafter, on or about August 6, 2012, Credit Suisse received the mandate to act as joint +bookrunner with the other international investment bank on the SOE A equity block trade and +convertible bond offering promised by Foreign Official A in July. This transaction generated +approximately $2,680,733 in revenue for Credit Suisse. +34. On or about August 16, 2012, Employee A emailed Employee C and Employee D +with the message, “Btw — [Foreign Official A] mentioned about [Referral Hire A]’s promotion to +VP again.” On or about August 17, 2012, Employee A emailed Employee C and Employee D, +directing them to “send an email to [Referral Hire A] on [SOE A] . . . [t]hank[ing] her and her +mum for the deal.” On or about August 27, 2012, Employee A inquired about when Referral Hire +A could be promoted to “Associate 2,” and Employee B agreed, on or about September 1, 2012, to +“move [her] class year.” +10 +35. The circumstances of Referral Hire A’s employment eventually gave rise to +questions from legal and compliance. A Credit Suisse HK senior manager responded that it was +her “oversight not to bring to the attention of the in-house legal counsel at the time of the +transaction in 2012.” In April, 2013, a member of Credit Suisse’s LCD e-mailed a series of +questions relating to Referral Hire A’s employment, including “her background, level of +experience and qualifications,” “[a]ny record of any external third party/ personal referee referring, +recommending or endorsing her for the position,” “[w]ho in Credit Suisse interviewed her,” “[w]ho +in Credit Suisse approved her hire,” and “[w]hat ... her annual performance ratings” were. +Nevertheless, Referral Hire A remained at Credit Suisse until May 31, 2015. During her tenure at +Credit Suisse, Referral Hire A received multiple promotions, and Credit Suisse “fast tracked” her +promotions by changing her class year. In total, Credit Suisse paid Referral Hire A over $1 million +in total compensation. +Referral Hire from Government Ministry to Obtain Favorable Treatment +36. In 2009, Credit Suisse offered employment to Referral Hire B, the daughter of an +influential official with a powerful Chinese government ministry (“Official B”). Credit Suisse +employees decided to recommend hiring Referral Hire B after Employee D forwarded the +individual’s resume to colleagues and recommended that Credit Suisse HK “take an exceptional +decision to enroll [Referral Hire B] into our first year analyst program this year.” In his +recommendation Employee D emphasized that Official B was “very powerful” and “extremely +influential in all the banking restructurings/IPOs.” Employee D specified a mandate sought by +Credit Suisse HK and stated that Official B would be “very influential” in awarding it. Employee +D made these recommendations prior to any interview or other vetting of Referral Hiring B. +37. In November 2009, after receiving a short summary of the interview feedback for +Referral Hire B, Employee A authorized a Credit Suisse recruiting specialist to offer Referral Hire +B an 18-month contract for a full-time paid position eligible for bonuses and a relocation +allowance. Shortly thereafter, a Credit Suisse HK senior manager informed Official B about her +daughter’s offer. Referral Hire B began working at Credit Suisse in March 2010, without having +received any screening or approval from LCD or any other compliance body. +38. During Referral Hire B’s tenure at Credit Suisse, Credit Suisse staffed Referral Hire +B on deals where it was believed her mother could be useful. Credit Suisse HK senior managers +and other Credit Suisse employees sought to use Referral Hire B’s connections to her mother to +secure business for Credit Suisse, and provided Referral Hire B with promotions and high +performance ratings in connection with these efforts. +39. In April 2011, shortly before Credit Suisse secured a lucrative IPO mandate from a +Chinese financial SOE (“SOE B”), a Credit Suisse HK senior manager e-mailed Referral Hire B to +“[g]et your mum a full set of the docs which we gave to [the chairperson of the financial SOE] +when she is back!” In May 2011, a Credit Suisse HK senior manager sent an e-mail to Credit +Suisse employees encouraging them to “make sure [Referral Hire B] gets involved in all the +meetings” related to the potential deal with SOE B due to her relationships which “will be very +important to position us on the overall progress.” Subsequently, in May 2011, Credit Suisse +11 +secured the mandate from SOE B, generating approximately $8,961,177 in revenue for Credit +Suisse. +40. Later in May 2011, a Credit Suisse HK senior manager sent an e-mail to various +Credit Suisse employees, noting that “[Referral Hire B] was instrumental in helping us to secure +[the mandate from SOE B]” and directing them to “invite [Referral Hire B] (e-mails) on all +communications” as she was feeling “left out” and a Credit Suisse HK senior manager “[w]ant[ed] +to keep [Referral Hire B] happy :).” Less than a month later, Referral Hire B’s performance rating +was upgraded from A to AA. +41. In August 2011, a Credit Suisse HK senior manager e-mailed colleagues with a +subject heading including the words, “Don’t forward-Confidential” writing that the SOE promised +to “give CS the JGC [joint global coordinator] and JBR [joint bookrunner] role in the IPO, based +on Referral Hire B’s family’s contribution” to the SOE B. +42. Referral Hire B routinely requested and was granted special accommodations. +When she requested to take a training course in New York, she was permitted to do so, even +though Credit Suisse managers believed a comparable Hong Kong course would be more +appropriate. Referral Hire B performed poorly at the New York training, completing only 4 out of +16 training modules, scoring a 64% on her exam, and receiving an “Average” grade, placing her in +the bottom 14% of her class. Despite this, Referral Hire B was given repeated job promotions by +Credit Suisse. +43. Notwithstanding Referral Hire B’s relationship to a foreign official, Credit Suisse +employees did not disclose her background to LCD. In May 2011, over a year after Referral Hire +B began her employment, a senior Credit Suisse banker inquired with whom Referral Hire B was +affiliated, as the banker “[d]idn’t see that in our RH [Referral Hire] file/list.” Employee B replied +that Referral Hire B’s mother was the “current #1 or 2” of the Chinese government ministry. In +response, the Credit Suisse banker asked if they could “share this with LCD,” to which Employee +B responded, “I would prefer not to unless there is a clear conflict” and added that he doubted +Referral Hire B was qualified for the position, noting that he had “doubts about her abilities +beyond getting a meeting and completing a ppt slide for a pitchbook” and that “if you have met her +you might not even believe that!” He also acknowledged that it would be improper to ask Referral +Hire B’s mother to take actions on the company’s behalf, noting, “[I]f we must [disclose Referral +Hire B’s relationship to LCD], think it is fair to share this as long as we don’t ask her Mom to do +or sign anything?” Nevertheless, Referral Hire B remained employed at Credit Suisse until 2016. +Referral Hire to Obtain Investment Banking Mandates for Credit Suisse +44. In October 2007, after receiving a resume for Referral Hire C, Employee D emailed +three colleagues: “This is the candidate referred by [Official C, a high-ranking official at SOE C].” +On or about November 27, 2007, Employee D emailed a senior Credit Suisse manager about +Referral Hire C and another referral hire candidate, writing: “We’re seriously approached by two +important clients or business partners for jobs,” noting that one of the candidates was “referred by +[Official C, a high-ranking official at SOE C].” After proposing that they offer each candidate “a 3 +month intern opportunity,” Employee D added, “Btw, we’re expecting two mandates (one equity +12 +and one m&a) from SOE C later this year and it’s an important account for us longer term.” On or +around December 17, 2007, Credit Suisse gave Referral Hire C a three-month employment +contract. +45. On or about March 4, 2008, multiple Credit Suisse senior managers had dinner with +Official C, during which an upcoming IPO by SOE C was discussed. After dinner, Official C +spoke to at least one of the Credit Suisse senior managers about permanent employment at Credit +Suisse for Referral Hire C. The following day, that Credit Suisse senior manager notified a +colleague that Official C would send an email about Referral Hire C to a Credit Suisse employee, +and added: “We’re pitching for the [SOE C] IPO, a multi billion dollar IPO. . . .” In another +email, Employee D requested support for Referral Hire C’s hire, noting “we’re pushed by [Official +C],” and reiterating that Credit Suisse was pitching for the SOE C IPO. Less than two weeks later, +or about March 17, 2008, Credit Suisse provided Referral Hire C a full-time position in Hong +Kong with a salary of approximately $90,000. In May 2008, Credit Suisse received the mandate +from a subsidiary of SOE C to act as bookrunner on its IPO, generating approximately +$21,090,349 in revenue for Credit Suisse upon the closing of the deal in 2009. Credit Suisse was +also awarded a mandate to act as financial advisor on a SOE C-related merger and acquisition in +May 2008, earning approximately $225,000. +46. During Referral Hire C’s four-year employment at Credit Suisse, senior managers +repeatedly emphasized to their colleagues the importance of including Referral Hire C in all +matters related to SOE C, referring to ways Referral Hire C could be “leveraged” or included on +transactions for which Referral Hire C lacked relevant banking experience and expertise. +47. In or around November 2008, several senior managers decided to eliminate the +positions of several highly-rated, regular analysts in order to keep client referral hires linked to +banking mandates expected in the next year. Employee D wrote that with respect to Referral Hire +C and two other candidates, “we’ll see real relationship revenue coming in the next 12 months if +we show good will to them at this critical moment.” In or around March 2009, Credit Suisse was +awarded a mandate by SOE C that brought in $1,179,906. +48. On or about May 17, 2010, Employee D emailed three senior colleagues that +“[Official C was] ready for [a SOE C affiliate] to do the block [trade] next month, aiming to raise +[funds] via an asset injection. . . . He will ask [the SOE C affiliate] to arrange a bidding process, +similar to the [SOE C property development company] block we did before. However, given the +parent will be in the deal, he won’t be too sensitive on the bid price. Let’s get ourselves prepared +and keep [i]t very confidential at this stage. . . . Please make sure that [Referral Hire C] is invited +to the working team.” +49. Credit Suisse HK senior managers exaggerated Referral Hire C’s contributions to +the firm. On or about May 18, 2009, Employee D emailed Referral Hire C: “We just did the block +[trade] for [a subsidiary of SOE C]. You’ll be nominated in the deal team pls give [Official C] a +call to congratulate him and thank him for the mandate.” Referral Hire C later replied, “[A]s I +know, almost all banks want to have this deal, including [three competitor banks of Credit +Suisse]...But [a subsidiary of SOE C] decided to give CS si[n]ce [Official C] made lots of efforts +on this.” +13 +50. The next day, on or about May 19, 2009, Credit Suisse acted as a bookrunner on a +secondary offering for the subsidiary company associated with SOE C valued at over 500 million +dollars, earning fees of approximately $6,787,128. On or about June 30, 2009, Referral Hire C +received a bonus of approximately $40,000. +51. On or about June 15, 2010, a Credit Suisse banker emailed various senior banking +employees to provide an update on the pending and future deals. The banker wrote that a senior +official of [SOE C] “recently obtained greenlight from [Official C] regarding asset injection.” +Employee D then directed an employee to “leverage [Referral Hire C] on all [SOE C] deal flows.” +52. On or about July 27, 2010, Credit Suisse learned that a SOE C affiliate had awarded +mandates related to a bond deal worth several hundred million dollars to two Credit Suisse +competitors. On or about July 28, 2010, Employee D referenced the deal and wrote: “It was +[Referral Hire C] who made the last minute breakthrough and got us a role around 6pm last night.” +This deal earned Credit Suisse $222,899. Referral Hire C’s bonus for 2010 was over $320,000. +53. Or about May 16, 2011, Employee A emailed others that two managing directors +wanted to cover SOE C more proactively. Employee A noted steps a select group of Credit Suisse +managers had acted to increase Referral Hire C’s compensation (without informing their +colleagues), writing “we matched [Referral Hire C]’s bump-up and guarantee. [Referral Hire C’s] +major contribution to the firm will be on this account. How can we push [Referral Hire C] harder +to pursue this account?” Employee C then replied privately to Employee A that the other senior +managers “don’t know about what we did with [Referral Hire C]. Only [Employee D], you and me +plus H.R.” During Referral Hire C’s employment with Credit Suisse, Referral Hire C was paid +approximately $1.5 million in total compensation. During that same period, Credit Suisse was +mandated on five SOE C deals, earning over $29 million dollars. +Hiring and Advancement of Referral Hire to Secure Client Relationship with SOE +54. During or around June 2010, Credit Suisse hired Referral Hire D as a referral hire +from a large energy-related SOE (“SOE D”) in order to obtain business from SOE D. Referral +Hire D’s employment was arranged by Credit Suisse during the summer of 2010, with Employee +C, and Referral Hire D was to start as an Associate with a promotion to Vice President that same +year. +55. Referral Hire D started work at Credit Suisse on or about November 8, 2010. Three +days later, Credit Suisse was awarded a mandate to act “as a joint bookrunner in [a SOE D +affiliate]’s IPO” on or about November 11, 2010. Several weeks later, Credit Suisse booked +approximately $986,439 in revenue as the deal closed. +56. In a November 16, 2010 email related to the SOE D deal, Employee A relayed +that when Employee A had asked a high-ranking executive of SOE D to “push for our +incentive,” the high-ranking executive “reminded [Employee A] that we need to pay [SOE +D’s] relationship hire — [Referral Hire D], the Associate well at the year end bonus.” One +day earlier, Employee A had told Employee B that Referral Hire D was not up for a +promotion to Vice President. After the discussion with the high-ranking executive at SOE D, +Employee A advocated for Referral Hire D’s promotion, which became official less than two + + + +14 + + +months after Referral Hire D began working at Credit Suisse. Referral Hire D was promoted +and consequently became eligible for a bonus. In an earlier email exchange between +Employee B and Credit Suisse employees in London and New York concerning the +promotion for Referral Hire D, a London employee noted that the promotion request was +“abnormal.” +57. In a Credit Suisse internal spreadsheet that listed specific deals attributable to +relationship hires, “[SOE D]” was listed as Referral Hire D’s “[c]ontribution” to the +company. Referral Hire D was terminated approximately one year after starting at Credit +Suisse. +LEGAL STANDARDS AND VIOLATIONS + +58. As a result of the conduct described above, Credit Suisse violated Section 30A +of the Exchange Act which prohibits any issuer with a class of securities registered pursuant +to Section 12 of the Exchange Act, or 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. +59. As a result of the conduct described above Credit Suisse violated Section +13(b)(2)(B) of the Exchange Act, which requires issuers that have a class of securities +registered pursuant to Section 12 of the Exchange Act and issuers with reporting +obligations pursuant to Section 15(d) of the Exchange Act to devise and maintain a system +of internal accounting controls sufficient to provide reasonable assurances that (i) +transactions are executed in accordance with management’s general or specific +authorization; (ii) transactions are recorded as necessary (I) to permit preparation of +financial statements in conformity with generally accepted accounting principles or any +other criteria applicable to such statements, and (II) to maintain accountability for assets; +(iii) access to assets is permitted only in accordance with management’s general or specific +authorization; and (iv) the recorded accountability for assets is compared with the existing +assets at reasonable intervals and appropriate action is taken with respect to any differences. +Commission Consideration of Credit Suisse’s Remedial Efforts + +60. The Commission has considered the remedial efforts undertaken by Credit +Suisse to enhance its internal accounting controls as well as its global implementation in 2015 +of procedures intended to ensure that all job candidates are assessed based purely on merit, +qualifications and expected job performance. + + + + + + + +15 + + +Non-Prosecution Agreement + +61. Credit Suisse HK has entered into a non-prosecution agreement with the +Department of Justice that acknowledges responsibility for criminal conduct relating to +certain findings in the Order. +Non-Imposition of a Civil Penalty + +62. Respondent acknowledges that the Commission is not imposing a civil +penalty based upon the imposition of a $47 million criminal fine as part of Credit Suisse’s +settlement 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, Respondent cease and desist +from committing or causing any violations and any future violations of Sections +13(b)(2)(B) and 30A of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(2)(B), and +78dd-1]. + +B. Respondent shall, within 10 days of the entry of this Order, pay +disgorgement of $24,989,843 and prejudgment interest of $4,833,961, for a total +payment of $29,823,804 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 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 +Credit Suisse 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 Regional Director, FCPA Unit, Enforcement Division, Boston Regional Office, U.S. +Securities and Exchange Commission, 33 Arch Street, Suite 2300, Boston, Massachusetts 02110. + +By the Commission. + + + + + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3949.txt b/raw/aaer/2018/AAER-3949.txt new file mode 100644 index 0000000000000000000000000000000000000000..cfaa2209fe8e77bb82c72d711e5b209e0b2a86dc --- /dev/null +++ b/raw/aaer/2018/AAER-3949.txt @@ -0,0 +1,418 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10517 / July 10, 2018 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83612 / July 10, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3949 / July 10, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18582 + + +In the Matter of + +ADVANCED DRAINAGE SYSTEMS, +INC. and MARK B. STURGEON, +CPA, + +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, +MAKING FINDINGS AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the +Securities Act of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of +1934 (“Exchange Act”) against Advanced Drainage Systems, Inc. and Mark B. Sturgeon +(collectively, “Respondents”); and that public administrative proceedings be, and hereby are, +instituted against Sturgeon pursuant to Exchange Act Section 4C1 and Rule 102(e)(1)(iii)2 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 . . . (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the s ecurities laws or the +rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: +2 + +Commission’s Rules of Practice. +II. +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondents +consent to the entry of this Order, as set forth below. +III. +On the basis of this Order and Respondents’ Offers, the Commission finds3 that: +SUMMARY +1. Advanced Drainage Systems, Inc. (“ADS” or the “Company”) is an Ohio-based +manufacturer of corrugated plastic pipe and drainage systems. In July 2014, following an initial +public offering (“IPO”) of its shares pursuant to a registration statement filed with the +Commission, ADS became a public reporting company. In its registration statement and in +quarterly and other reports filed with the Commission, ADS materially misstated its financial +results for fiscal years 2013, 2014, and 2015, and its quarterly financial results for fiscal years +2014 and 2015. For example, ADS overstated its income before taxes in fiscal years 2013, 2014, +and 2015 by $7.8 million (20%), $1.8 million (5%), and $22 million (90%), respectively. +2. As described below, these misstatements resulted from improper accounting, +including unsupported journal entries directed or approved by the Company’s Chief Financial +Officer (“CFO”), Mark Sturgeon, and insufficient internal accounting controls. The CFO +directed or approved unsupported journal entries to inventory, cost of goods sold, and other +accounts that resulted in overstated Company earnings. ADS did not have sufficient internal +accounting controls in place to provide reasonable assurance that, among other things, +transactions were recorded as necessary to permit preparation of financial statements in +conformity with generally accepting accounting principles (“GAAP”). +3. On March 29, 2016, ADS restated and revised its financial results for fiscal years +2013, 2014 and 2015, and its quarterly financial results for fiscal years 2014 and 2015, in a series + +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 + +of filings that included its first annual report on Form 10-K (the “Restatement”).4 +4. As a result of the conduct described herein, ADS violated the antifraud provisions +of Securities Act Sections 17(a)(2) and 17(a)(3), the reporting provisions of Exchange Act +Section 13(a) and Rules 12b-20, 13a-11, and 13a-13 thereunder, the books and records +provisions of Exchange Act Section 13(b)(2)(A), and the internal accounting control provisions +of Exchange Act Section 13(b)(2)(B); and Sturgeon violated Securities Act Sections 17(a)(2) and +17(a)(3), Exchange Act Section 13(b)(5) and Rule 13b2-1, and caused ADS to violate Exchange +Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-11 and 13a-13 +thereunder. Sturgeon also violated Section 304(a) of the Sarbanes-Oxley Act of 2002 by failing +to reimburse the Company for $173,970 in profits realized from his sale of ADS securities +following the Company’s filing of its 2015 quarterly reports on Form 10-Q, which required +restatement. +RESPONDENTS +5. Advanced Drainage Systems, Inc. is a Delaware corporation with its principal +place of business in Hilliard, Ohio. ADS is a manufacturer of corrugated plastic pipe and +drainage systems. ADS’s common stock is registered with the Commission under Section 12(b) +of the Exchange Act and trades on the New York Stock Exchange under the ticker symbol +“WMS.” +6. Mark B. Sturgeon, 63, is a resident of Columbus, Ohio. Sturgeon worked at ADS +from 1981 until 2016 and was the Chief Financial Officer and Executive Vice President of ADS +from 1994 until November 9, 2015. Sturgeon retired from ADS in March 2016. Sturgeon is a +Certified Public Accountant and maintained an active license in Ohio from 1980 to 2011. +FACTS +7. ADS is an Ohio-based manufacturer of corrugated plastic pipe and drainage +systems that operates primarily in North and South America and Europe. In July 2014, the +Company had an IPO of its shares pursuant to a registration statement on Form S-1 filed on April +2, 2014, and subsequently amended, which became effective on July 24, 2014. ADS’s final +registration statement included audited financial statements for fiscal years 2013 and 2014 that +were materially misstated. +8. Following the IPO, ADS became a public reporting company. ADS filed with the +Commission quarterly reports on Form 10-Q for the first, second, and third fiscal quarters of +2015 on September 5, 2014, November 10, 2014 and February 9, 2015, respectively.5 ADS +announced year-end and fourth quarter fiscal year 2015 financial results in an earnings release +the Company filed on Form 8-K on May 12, 2015. The Company’s quarterly financial + +4 In addition to the annual report, that same day ADS filed amended quarterly reports for the first three quarters of +fiscal year 2015. The next day, March 30, 2016, ADS filed a Form 8-K that contained additional information about +the Restatement. + +5 ADS’s fiscal year-end is March 31. +4 + +statements, and its announced year-end and fourth quarter financial results for fiscal year 2015, +were materially misstated. +9. ADS was required to file its first annual report on Form 10-K in June 2015. In +early June, three ADS finance employees reported to the Company’s auditor that during fiscal +year 2015 they had been asked by their superiors to make improper journal entries. These entries +had the effect of capitalizing certain costs into inventory, thereby reducing current period +expenses. On June 30, 2015, the Company filed a Form 12b-25 seeking a 15-day extension to +file its annual report. The Company attributed the delay to “(i) the finalization of the inventory +costing analysis and, (ii) the review of journal entry control processes.” On July 15, 2015, the +Company issued a Form 8-K announcing an additional delay, and that it was now evaluating its +accounting treatment of transportation and equipment leases. On August 17, 2015, the Company +issued a Form 8-K announcing that its previously issued financial statements and financial data, +including its May 12, 2015 earnings release, should not be relied upon. The Company +announced additional delays in filing its annual report on December 11, 2015, February 2, 2016, +and February 23, 2016. +10. On March 29, 2016, ADS filed its annual report on Form 10-K for fiscal year +2015, and amended quarterly reports on Form 10-Q for the first, second, and third fiscal quarters +of 2015. These filings restated the Company’s previously reported or announced financial +results for fiscal years 2013, 2014 and 2015, and previously reported or announced quarterly +financial results for fiscal years 2014 and 2015. +11. The material misstatement of ADS’s financial results for fiscal years 2013, 2014 +and 2015 resulted from improper accounting for leases, inventory, and other costs, including +unsupported journal entries directed or approved by the CFO, and insufficient internal +accounting controls. ADS, and Sturgeon as CFO, failed to devise and maintain a sufficient +system of internal accounting controls at the Company, including controls related to journal +entries and lease accounting. Sturgeon also circumvented existing internal accounting controls +by directing or approving unsupported accounting entries. +Improper Accounting for Inventory and Related Costs +12. In aggregate, ADS’s improper accounting for inventory and related cost accounts +overstated the Company’s income before taxes in 2013, 2014 and 2015 by $3.1 million, $1.5 +million and $16.8 million, respectively. Some of these errors resulted from entries directed or +approved by CFO Sturgeon without proper support. In general, these improper accounting +entries had the effect of overstating earnings by improperly capitalizing costs in inventory and +decreasing cost of goods sold (“COGS”) or other expenses. ADS failed to follow the Company’s +accounting policies and properly support accounting adjustments, which did not comply with +GAAP. [ASC Topic 330]. The following are examples of the improper accounting entries to +inventory and related cost accounts: +Pension Costs +13. ADS accrued monthly for estimated non-cash pension costs associated with the +annual allocation of Company shares to participants in ADS’s employee stock ownership plan. +5 + +The Company’s accounting policy was to capitalize in inventory pension costs associated with +manufacturing, which became part of COGS, and to expense as part of selling, general and +administrative (“SG&A”) pension costs associated with non-manufacturing operations. +14. In around February 2015, Sturgeon received information that the pension cost +accrual should be increased by approximately $2.9 million. Pursuant to the Company’s +accounting policy, the $2.9 million adjustment should have been apportioned between +manufacturing and non-manufacturing operations – with a portion capitalized into inventory +costs and a portion immediately expensed as SG&A. Sturgeon, however, improperly directed +that the entire $2.9 million adjustment be capitalized into inventory. This improper accounting +overstated the Company’s fiscal fourth quarter 2015 income before taxes by approximately $1.1 +million. +Medical Costs +15. ADS also accrued monthly for estimated medical costs for its employees, and +made adjustments to the accrual throughout the year as actual cost information became available. +As with pension costs, the Company’s accounting policy was to capitalize in inventory medical +costs associated with manufacturing, which became part of COGS, and to expense as part of +SG&A medical costs associated with non-manufacturing operations. +16. In March 2015, ADS personnel determined that actual medical costs for February +exceeded the Company’s accrual by $552,000. Pursuant to the Company’s accounting policy, +this $552,000 variance should have been apportioned between manufacturing and non- +manufacturing. Sturgeon, however, improperly directed that the entire amount be allocated to +manufacturing costs, which were capitalized into inventory. This improper accounting +overstated the Company’s earnings by failing to account for a portion of the adjustment as an +SG&A expense. +17. The following month, ADS personnel determined that actual medical costs for +March were approximately $592,000 less than the Company’s accrual. With this variance, +Sturgeon improperly directed that the entire amount be credited to SG&A accounts. This +improper accounting also overstated the Company’s earnings by understating SG&A expenses. +Together, these two improper accounting entries overstated the Company’s fiscal fourth quarter +2015 income before taxes by approximately $401,000. +Capitalized Freight Costs +18. ADS ships inventory between plants as part of managing inventory levels. ADS’s +policy was to capitalize in inventory freight costs associated with intra-company transfers of +inventory. In fiscal year 2015, ADS booked two unsupported adjustments to capitalized freight +that resulted in overstating the Company’s earnings. In September 2014, Sturgeon directed a +journal entry that increased the capitalized freight account, and correspondingly decreased +COGS, by $500,000. This accounting entry lacked adequate support. In addition, at year-end, +accounting personnel booked a journal entry that increased the capital freight account, and +correspondingly decreased COGS, by approximately $296,000. This adjustment also lacked +6 + +adequate support. These two accounting adjustments overstated the Company’s 2015 income +before taxes by approximately $796,000. +Inventory Cost Standards +19. ADS used estimated standard costs to account for raw materials and production +costs in inventory and COGS. At year end, ADS updated its standard costs based on updated +raw material and production costs. ADS’s accounting practice was to make an accounting +adjustment to inventory, and corresponding adjustment to COGS, to reflect any changes to the +inventory balance resulting from the updated standard costs. ADS also maintained an inventory +reserve account to reflect changes between standard and actual costs. From at least 2013, +Sturgeon directed or approved frequent adjustments to the reserve account without adequate +corroboration or documentation, which resulted in inaccuracies in certain financial statements. +20. At the end of fiscal year 2015, as part of the Company’s annual update of standard +costs, Sturgeon updated many of the Company’s standard costs, resulting in a material increase +in inventory and corresponding reduction in COGS. Many of Sturgeon’s cost adjustments lacked +support and in some instances were inconsistent with available cost information. In aggregate, +these improper cost adjustments, and other deficiencies in the Company’s raw material costing +methodology, overstated the Company’s fiscal year 2015 income before taxes by $5.9 million. +Other Improper Accounting +Lease Accounting +21. As part of its operations, ADS leases significant amounts of equipment. Since at +least 2010, the Company had improperly accounted for many of its equipment leases as +operating leases, and not capital leases, based largely on the minimum payment terms for the +initial twelve-month non-cancellable period of the leases. However, ADS did not consider other +relevant lease terms and conditions in its operating or capital classification determination. ADS +subsequently determined that the Company’s lease accounting did not comply with GAAP [ASC +840]. Under GAAP, most of the Company’s equipment leases should have been accounted for +as capital leases. This accounting error had the effect of understating the Company’s net +property, plant and equipment in 2013, 2014, and 2015 by $58 million, $64 million, and $73 +million, respectively, understating its financing obligations by $38 million, $46 million, and $61 +million, respectively, and overstating its income before taxes by $3.1 million, $2.4 million, and +$5.1 million, respectively. +Volume Rebate Liability +22. ADS offered rebates to many of its high-volume customers. The Company +accrued monthly for its estimated rebate liabilities. Following the end of fiscal year 2015, a +member of the ADS accounting group, using a newly developed methodology, estimated that +ADS’s rebate liability was under accrued by approximately $1.4 million. A subsequently +prepared reconciliation schedule indicated it should be adjusted upwards by approximately +$845,000. The Company did not use either of these calculations to adjust the rebate liability +account at year-end, and instead, without support, recorded only a partial adjustment of +7 + +$400,000. The Company later determined, in connection with the Restatement, that the volume +rebate account was under accrued by $3.5 million at the end of fiscal year 2015. +Tone at the Top and Other Accounting Control Deficiencies +23. The material misstatements and improper accounting described above were due in +part to insufficient internal accounting controls. As ADS acknowledged in its Restatement, the +poor “tone at the top” set by senior management contributed to the Company’s ineffective +internal accounting controls. Senior management also created a high pressure environment for +accounting personnel, and there was an inappropriate emphasis on aggressive and arbitrary +timelines. Sturgeon and others in the finance department managed ADS’s accounting in a top- +down manner, overriding accounting policies and calculations by accounting personnel and +directing or approving entries without adequate documentation. All of these factors led to an +environment where many employees felt there was no meaningful way to challenge accounting +instructions and entries with which they disagreed. +24. ADS also lacked accounting personnel with appropriate experience and training. +The Company also had insufficient internal accounting controls over: inventory and lease +accounting; segregation of accounting entry and approval duties; and documentation +requirements for journal entries. These deficiencies, and others, contributed to the improper +accounting and material misstatements of the Company’s financial results described above. +The Offer and Sale of Securities +25. ADS offered and sold securities pursuant to an Amended Form S-1 the Company +filed on July 14, 2014, that went effective on July 24, 2014. This registration statement +contained inaccurate financial statements for fiscal years 2013 and 2014, which the Company +later corrected. ADS also offered and sold securities pursuant to a Form S-8 the Company filed +on July 30, 2014, as a result of employee exercises of stock options during fiscal year 2015. The +Form S-8 incorporated by reference ADS’s subsequent periodic filings under the Exchange Act, +including the quarterly filings during fiscal year 2015, which the Company later restated. In +May 2015, Sturgeon sold a total of 50,000 shares of ADS common stock on the open market. +ADS’S REMEDIAL EFFORTS +26. In determining to accept ADS’s offer, the Commission considered remedial acts +promptly undertaken by ADS and cooperation afforded the Commission staff. +VIOLATIONS +27. 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. +28. 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. +8 + +29. Exchange Act Section 13(a) and Rules 13a-11, 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, quarterly, and current reports as the Commission may require. +30. 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. +31. Exchange Act Section 13(b)(2)(A) requires issuers with a security registered +pursuant to Section 12 to make and keep books, records and accounts which, in reasonable detail, +accurately and fairly reflect transactions and dispositions of their assets. +32. Exchange Act Section 13(b)(2)(B) requires issuers with a security registered +pursuant to Section 12 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. +33. 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). +34. 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). +35. Section 304 of the Sarbanes-Oxley Act of 2002 requires the chief executive +officer or chief financial officer of any issuer required to prepare an accounting restatement due +to material noncompliance with the securities laws as a result of misconduct to reimburse the +issuer for: (i) any bonus or incentive-based or equity-based compensation received by that person +from the issuer during the 12-month period following the false filings; and (ii) any profits +realized from the sale of securities of the issuer during that 12-month period. +36. Based on the foregoing, the Commission finds that ADS 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-11 and 13a-13 thereunder. +37. Based on the foregoing, the Commission finds that Sturgeon (a) willfully6 +violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 13(b)(5) of the Exchange +Act and Rule 13b2-1, and Section 304(a) of the Sarbanes-Oxley Act; and (b) caused ADS’s +violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a- +11 and 13a-13 thereunder. + +6 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)). +9 + +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Respondent ADS cease and desist from committing or causing any violations and +any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, +Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b- +20, 13a-11, and 13a-13 thereunder. +B. Respondent Sturgeon 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), 13(b)(2)(B) and 13(b)(5) of the Exchange Act, and +Rules 12b-20, 13a-11, 13a-13, and 13b2-1 thereunder; and +C. Sturgeon is denied the privilege of appearing or practicing before the Commission +as an accountant. +D. Sturgeon shall, within 14 days of the entry of this Order, reimburse ADS for a +total of $173,970, representing profits from the sale of ADS stock pursuant to +Section 304(a) of the Sarbanes-Oxley Act. If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. +E. Within 14 days of the entry of this Order, ADS shall pay a civil money penalty of +$1,000,000 and Sturgeon shall pay a civil money penalty 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. +F. Penalty 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 +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +10 + +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +G. 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 +Brian O. Quinn, Assistant Director, Division of Enforcement, Securities and +Exchange Commission, 100 F St., NE, Washington, DC 20549. +H. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondents agree +that in any Related Investor Action, they shall not argue that they are entitled to, +nor shall they benefit by, offset or reduction of any award of compensatory +damages by the amount of any part of Respondents’ payment of a civil penalty in +this action (“Penalty Offset”). If the court in any Related Investor Action grants +such a Penalty Offset, Respondents agree that they shall, within 30 days after +entry of a final order granting the Penalty Offset, notify the Commission’s +counsel in this action and pay the amount of the Penalty Offset to the Securities +and Exchange Commission. Such a payment shall not be deemed an additional +civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor +Action” means a private damages action brought against either of both +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 Sturgeon, and further, any debt for disgorgement, prejudgment interest, +civil penalty or other amounts due by these 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 these 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/2018/AAER-3950.txt b/raw/aaer/2018/AAER-3950.txt new file mode 100644 index 0000000000000000000000000000000000000000..d2ac73b6b7c4e6f3c03130d0ad5499d07fe16dca --- /dev/null +++ b/raw/aaer/2018/AAER-3950.txt @@ -0,0 +1,126 @@ + + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83620 / July 12, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3950 / July 12, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18592 + + +In the Matter of + + +PATRICK J. GRAY, + +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 Patrick +J. Gray (“Respondent” or “Gray”) 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. Gray, age 57, resides in San Diego, California. Gray has served as Chief +Financial Officer of Axesstel, Inc. (“Axesstel”) since February 2007. + + 2. Axesstel was a publicly traded company based in San Diego, California, that +develops, manufactures through third-party contractors, and sells wireless broadband, +telecommunications and security alert systems to the global markets. Axesstel’s common stock +traded over-the-counter under ticker AXST and was registered with the Commission under Section +12(g) of the Securities Exchange Act of 1934 (“Exchange Act”) until October 6, 2017, when its +registration was revoked for failure to comply with reporting requirements. + + 3. On June 28, 2018, the Commission filed a complaint against Gray in the +civil action entitled SEC v. Axesstel, Inc., et al., Civil Action No. 3:18-cv-01486-L-AGS, in the +United States District Court for the Southern District of California. On July 11, 2018, the court +entered an order permanently enjoining Gray, by consent, from future violations of Sections 10(b), +13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, +12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1, and 13b2-2. Gray was also barred from serving an +officer and director of a public company for a period of five years and ordered to pay a $40,000 +civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that from at +least the fourth quarter of 2012 through the first quarter of 2013, Gray as the Chief Financial +Officer of Axesstel, engaged in fraudulent accounting practices and improperly recognized and +reported materially false revenue of $10.5 million (67% of revenue) in the fourth quarter and +$3.8 million (38% of revenue) in the first quarter. The Complaint alleged that in many instances, +material terms of purported sales to Axesstel customers – including price, delivery, and payment +terms – were not finalized before the end of the period in which Axesstel recognized the revenue +and unit prices were inflated to enable Axesstel to hit revenue targets. In addition, the Complaint +alleged that Axesstel also entered into undisclosed “consignment” agreements with at least two +customers, which relieved the customers of any obligation to pay for the products they + 3 +purportedly purchased unless and until the customers were able to resell the items to their own +end users. The Complaint alleged that Gray signed quarterly management representation letters +to Axesstel’s auditors that failed to disclose the true facts and circumstances of these purported +sales, and Gray participated in or otherwise authorized the improper revenue recognition. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Gray’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Gray is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five years from the date of this order, Gray may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as an accountant. + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3951.txt b/raw/aaer/2018/AAER-3951.txt new file mode 100644 index 0000000000000000000000000000000000000000..52a18ba0fe002b10684093b01004b50184b4cf4e --- /dev/null +++ b/raw/aaer/2018/AAER-3951.txt @@ -0,0 +1,480 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83622 / July 12, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3951 / July 12, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18292 + +In the Matter of + +Anton & Chia, LLP, +Gregory A. Wahl, CPA, +Michael Deutchman, CPA, +Georgia Chung, CPA, +and Tommy Shek, CPA, + +Respondents. + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE +AS TO RESPONDENT TOMMY SHEK, +CPA + +I. + + On December 4, 2017, the Securities and Exchange Commission (“Commission”) +instituted public administrative and cease-and-desist proceedings against Anton & Chia, LLP +(“A&C”), Gregory A. Wahl, CPA (“Wahl”), and Michael Deutchman, CPA (“Deutchman”), +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 and against Georgia Chung, +CPA (“Chung”) and Tommy Shek, CPA (“Shek” or “Respondent”) pursuant to Section 4C of the +Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +1 Section 4C provides, in pertinent 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; or 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) and (iii) provide, 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 who is found . . . to have engaged in unethical or improper professional +conduct; or 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. +2 + +II. + + Shek 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, Shek consents to the entry of +this Order Making Findings and Imposing Remedial Sanctions Pursuant to Section 4C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice as to +Respondent Tommy Shek, CPA, as set forth below. + +III. + + On the basis of this Order and Respondent Shek’s Offer, the Commission finds3 that: + +SUMMARY + +1. These proceedings arise out of improper professional conduct by Shek, an audit +manager at A&C, related to the interim reviews of the financial statements of CannaVEST Corp. +(“CannaVEST”) for the first through third quarters of 2013. In performing the interim reviews of +CannaVEST’s financial statements, Shek engaged in improper professional conduct by failing to +adhere to standards of the Public Company Accounting Oversight Board (“PCAOB”) and ignoring +a number of red flags that indicated that CannaVEST’s financial information contained material +misstatements. As a result, Shek engaged in improper professional conduct within the meaning of +Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice. + +RESPONDENT + +2. Tommy Shek, CPA, age 34, of Rowland Heights, California, was an A&C audit +manager. Shek is a licensed CPA in California. Shek worked at A&C from July 2011 through at +least October 2015. Shek was an A&C audit manager from January 2013 to July 2014. In July +2014, Shek was promoted by A&C to senior audit manager. Shek served as the audit manager +for CannaVEST’s 2013 interim reviews. + +OTHER RELEVANT PERSONS AND ENTITIES + +3. Anton & Chia, LLP, a PCAOB registered audit firm since 2009, is a California +limited liability partnership headquartered in Newport Beach, California, with additional offices +in San Diego and Westlake Village, California. A&C was founded in 2009 by Chung, and is + +3 The findings herein are made pursuant to Respondent Shek’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 + +currently co-owned by Chung and her husband, Wahl. A&C performed CannaVEST’s 2013 +interim reviews. + +4. Gregory A. Wahl, CPA, age 43, of Irvine, California, is A&C’s managing +partner, and co-owner with Chung. Wahl is a licensed CPA in California and New York, and a +chartered accountant in British Columbia, Canada. Wahl served as the engagement partner for +CannaVEST’s 2013 interim reviews. + +5. Georgia Chung, CPA, age 49, of Irvine, California, is A&C’s co-owner with +Wahl. Chung is a licensed CPA in California and Colorado. Chung served as the engagement +quality reviewer (“EQR”) for CannaVEST’s first quarter of 2013 interim review. + +6. CannaVEST Corp., is a Delaware corporation headquartered in Las Vegas, +Nevada. CannaVEST, originally a shell company named Foreclosure Solutions, Inc., changed its +name to CannaVEST Corp. (OTCBB, ticker: CANV) on January 29, 2013. CannaVEST entered +into the business of acquiring raw hemp product from suppliers in Europe and reselling it to third +parties and also developing, producing, and selling consumer products that contain Cannabidiol +(“CBD”) oil (a type of hemp oil). In early January 2016, CannaVEST changed its name to +CV Sciences, Inc. (OTCQB, ticker: CVSI), and claimed to develop pharmaceutical drugs that +contain CBD oil. CannaVEST’s common stock is registered with the Commission pursuant to +Exchange Act Section 12(g). + +7. Michael J. Mona, Jr., age 63, of Las Vegas, Nevada, is CannaVEST’s CEO and +a board member. Mona became CannaVEST’s CEO in November 2012, and a board member in +January 2013. + +2013 CANNAVEST INTERIM REVIEWS + +Background + +8. CannaVEST was originally a shell company with no operations, no revenues, and +only $431 in assets at December 31, 2012. In December 2012, the company entered into an +agreement to buy PhytoSphere Systems, LLC (“PhytoSphere”) from Medical Marijuana, Inc. +(“MJNA”) for a stated purchase price of $35 million. On January 29, 2013, the PhytoSphere +acquisition closed, and the company was transformed from a shell company into a business +allegedly with over $35 million in assets and operations in the hemp business. + +9. In connection with this acquisition, on June 15, 2017, the Commission filed an +injunctive action against CannaVEST and its CEO Mona (Case No. 2:17-CV-01681-APG-PAL). +The Commission’s complaint alleges that CannaVEST and Mona made material +misrepresentations and/or misleading omissions on CannaVEST’s quarterly reports filed with the +SEC for its first three quarters of 2013. + +10. The Commission’s complaint alleges that in CannaVEST’s Forms 10-Q for the +first two quarters of 2013, CannaVEST and Mona overstated CannaVEST’s total assets. The +overstatements related to CannaVEST’s acquisition of PhytoSphere in the first quarter of 2013. +4 + +CannaVEST agreed to the purported $35 million purchase price only because CannaVEST could +pay it primarily with CannaVEST shares that had little or no trading volume at the time, and +which Mona believed had little value, and a small amount of cash. The Commission alleges that +Mona knew that CannaVEST was paying substantially less than $35 million to acquire the +PhytoSphere business, that PhytoSphere was not worth $35 million, and that CannaVEST would +have never agreed to the purported purchase price if CannaVEST were required to pay cash for +PhytoSphere. + +11. The Commission’s complaint alleges that Mona, nevertheless, had CannaVEST +record $35 million worth of assets related to the PhytoSphere acquisition on CannaVEST’s +balance sheet in its Form 10-Q for the first quarter of 2013. As a result, CannaVEST materially +overstated its assets on its balance sheet for the first quarter of 2013. The Commission alleges +that in CannaVEST’s Form 10-Q for the second quarter of 2013, CannaVEST continued to +report falsely the value of its assets related to the PhytoSphere acquisition. + +12. The Commission’s complaint alleges that in CannaVEST’s Form 10-Q for the +third quarter of 2013, CannaVEST and Mona wrote down the value of the assets related to the +PhytoSphere acquisition to $8 million after obtaining a third-party valuation report that valued +PhytoSphere at $8 million as of January 29, 2013. CannaVEST, however, failed to disclose that +it had never paid $35 million for those assets, that the assets were never worth $35 million, and +that the balance sheets for the first and second quarters of 2013 were materially overstated. + +13. In April 2014, CannaVEST restated all three quarters to reflect $8 million in +assets related to the PhytoSphere acquisition on CannaVEST’s balance sheet. + +14. A&C conducted the interim reviews for CannaVEST’s Q1 through Q3 2013 +financial information. + +15. Wahl served as the engagement partner for CannaVEST’s Q1 through Q3 2013 +interim reviews. + +16. Chung served as the EQR for CannaVEST’s Q1 interim review. + +17. Shek served as the audit manager for CannaVEST’s Q1 through Q3 interim +reviews. + +Shek Failed to Make Adequate Inquiries and Perform Appropriate Analytical Procedures +in CannaVEST’s Q1 and Q2 2013 Interim Reviews + +18. PCAOB Standard AU § 722, Interim Financial Information, provides that the +objective of an interim review is to provide the accountant with a basis for communicating +whether he is aware of any material modifications that should be made to the interim financial +information for it to conform with GAAP. (AU § 722.07). A review consists principally of +making inquiries of management and performing analytical procedures. (AU §§ 722.07, 722.15). + +5 + +19. In the Q1 2013 interim review, Shek failed to make adequate inquiries of +management. As a result, he failed to become aware that material modifications should be made +to the total asset value on CannaVEST’s balance sheet for those quarters. + +20. In the Q1 2013 interim review, Shek failed to make inquiries of Mona for the fair +value of the consideration, i.e., the fair value of CannaVEST’s shares as of January 29, 2013, that +CannaVEST would pay to MJNA. CannaVEST and Mona treated the PhytoSphere acquisition +as a business combination. See ASC 805, Business Combinations, and ASC 820, Fair Value +Measurement. Under ASC 805 and 820, CannaVEST and Mona should have determined the fair +value of CannaVEST’s stock (i.e., the fair value of the consideration) as of the acquisition date, +January 29, 2013, and used this fair value to determine how much CannaVEST was paying to +acquire PhytoSphere. CannaVEST and Mona, however, never determined the fair value of +CannaVEST’s shares as of January 29, 2013, and Shek failed to make inquiries of Mona for the +fair value. + +21. Instead, Shek reviewed and relied on the PhytoSphere purchase agreement as the +sole support for the $35 million total asset value recorded on CannaVEST’s balance sheet. The +purchase agreement stated that CannaVEST would pay for PhytoSphere with CannaVEST shares +and/or cash, and that CannaVEST would make these payments in five installments over the +course of fiscal year 2013. Mona intended to pay the five installments primarily with +CannaVEST shares and only a small amount of cash. In addition, the purchase agreement stated +that CannaVEST’s shares would be valued at a minimum of $4.50 and a maximum of $6.00 per +share (the “collar”). Mona, however, had no basis for assigning a value of $4.50 to $6.00 per +share and Mona only came up with the collar in order to cap the number of shares provided to +MJNA. Mona did not know how much CannaVEST shares were worth because the shares were +either not trading or had very little trading on the OTC market. Mona believed that +CannaVEST’s shares had little value. + +22. In the Q1 2013 interim review, Shek also failed to make inquiries of Mona +regarding how he determined the collar. If he had inquired, he would have found that Mona set +the collar with no basis for the fair value of CannaVEST’s shares, that Mona never took any +steps to determine the fair value of CannaVEST’s shares (unrestricted or restricted) as of January +29, 2013, and that Mona did not know the fair value of the shares. Shek should have made +inquiries of Mona regarding what steps he planned to take to determine the fair value of the +shares, and based on the shares’ fair value, Shek would have become aware that material +modifications to the total asset value on CannaVEST’s balance sheet should have been made.4 + + +4 CannaVEST ultimately provided a total of 5,825,000 restricted shares and paid $950,000 in +cash (borrowed from another entity) to MJNA during fiscal year 2013. CannaVEST and Mona +never determined the fair value of CannaVEST’s shares as of January 29, 2013. But in +September 2013 CannaVEST had an independent valuation done on its shares (related to another +transaction) that found CannaVEST’s unrestricted shares were worth $1.13 per share and its +restricted shares were worth $0.68, as of August 21, 2013. +6 + +23. In the Q2 2013 interim review, Shek failed to perform appropriate analytical +procedures and failed to make adequate inquiries of management. As a result, Shek again did +not become aware that material modifications to the total asset value on CannaVEST’s balance +sheet should have been made. + +24. Shek failed to perform appropriate analytical procedures for the Q2 2013 interim +review because he failed to prepare balance sheet analytics that compared the Q1 2013 balance +sheet to the Q2 2013 balance sheet. Under PCAOB Standard AU § 722.16, Analytical +Procedures and Related Inquiries, analytical procedures should include comparing the quarterly +interim financial information with comparable information from the immediately preceding +interim period. A&C’s Q2 2013 balance sheet analytics only compared the FYE 2012 balance +sheet to the Q2 2013 balance sheet. From Q1 to Q2 2013, CannaVEST made significant changes +to the allocation of the $35 million value among the individual assets related to the PhytoSphere +acquisition. For example, from Q1 to Q2, CannaVEST decreased the value of its rights to +purchase CBD oil from $11.5 million to $947,388, and increased the value of its goodwill from +$17,535,000 to $26,998,125. An appropriate balance sheet analytics would have shown these +substantial changes in allocation between Q1 and Q2. Instead, the balance sheet analytics only +listed the new asset values for Q2, e.g. $947,388 for rights to purchase CBD oil and $26,998,125 +for goodwill, and did not show how these asset values had changed significantly since Q1. + +25. Shek reviewed the balance sheet analytics, but failed to identify that the analytics +did not compare Q1 to Q2. If these significant changes between Q1 and Q2 had been +documented in the analytics, the changes should have raised a red flag with Shek regarding the +accuracy of the $35 million total asset value for PhytoSphere. This should have then prompted +Shek to make inquiries of management related to the fair value of the consideration paid by +CannaVEST for PhytoSphere. If Shek had made such inquiries related to the fair value of the +consideration, he would have become aware that material modifications to the total asset value +on CannaVEST’s balance sheet should have been made. + +Shek Failed to Consider Whether a Restatement of CannaVEST’s Q1 and Q2 2013 +Financial Information Was Necessary During the Q3 2013 Interim Review + +26. Under PCAOB Standard AU § 722, Interim Financial Information, misstatements +identified by the accountant, or brought to the accountant’s attention, should be evaluated to +determine whether material modification should be made to the interim financial information for +it to conform to GAAP, and the accountant should consider the nature, cause (if known), and +amount of the misstatements, and whether the misstatements originated in the preceding year or +interim periods of the current year. (AU § 722.26). + +27. During the Q3 2013 interim review, Shek failed to consider whether a restatement +of CannaVEST’s Q1 and Q2 2013 financial information was necessary. + +28. In October 2013, CannaVEST obtained a valuation report from a third-party +valuation firm that reported PhytoSphere was worth $8 million as of January 29, 2013. Shek +reviewed this valuation report. As a result of the report, the engagement team prepared a memo +that discussed impairing CannaVEST’s goodwill in Q3 by $26,998,125. Shek reviewed this +7 + +memo. The memo did not consider whether a restatement of CannaVEST’s Q1 and Q2 financial +information was necessary. + +29. The valuation report should have been a red flag for Shek that the original $35 +million total asset value reported on CannaVEST’s Q1 and Q2 2013 balance sheet may have +been incorrect. This should have prompted Shek to make inquiries into the fair value of the +consideration as of January 29, 2013 and consider whether a restatement of CannaVEST’s +financial statements included in its Q1 and Q2 2013 Forms 10-Q was necessary. + +Shek Failed to Consider and Update His Knowledge of CannaVEST’s Internal Controls +and Lack of Personnel with Appropriate Accounting Qualifications When Planning the Q1 +through Q3 2013 Interim Reviews + +30. Under PCAOB Standard AU § 722, Interim Financial Information, in planning a +review of interim financial information, the accountant should perform procedures to update his +knowledge of the entity’s business and its internal controls to: (a) aid in the determination of +inquiries to be made and the analytical procedures to be performed, and (b) identify particular +events, transactions, or assertions to which the inquiries may be directed or analytical procedures +applied. (AU §§ 722.10-722.13). + +31. Shek failed to consider and update his knowledge of CannaVEST’s internal +controls and lack of personnel with appropriate accounting qualifications when planning the Q1 +through Q3 2013 interim reviews. + +32. With regards to CannaVEST’s internal controls, CannaVEST and Mona failed to +devise a sufficient system of internal accounting controls, such that transactions (like the +PhytoSphere acquisition) were properly recorded to permit preparation of financial statements in +accordance with GAAP and to maintain accountability of assets. In addition, CannaVEST +lacked personnel with appropriate accounting qualifications. CannaVEST did not have a CFO +from Q1 through Q3 2013, and its Forms 10-Q for those quarters stated that management had +identified a material weakness in the effectiveness of internal control over financial reporting +related to CannaVEST’s lack of personnel with appropriate accounting qualifications. + +33. When planning the Q1 through Q3 2013 interim reviews, Shek failed to consider +and update his knowledge of CannaVEST’s internal controls and lack of accounting personnel, +did not assess whether these matters increased the risk of material misstatement, and did not plan +his interim review procedures accordingly to address that risk. + +34. Moreover, when planning the Q2 and Q3 interim reviews, Shek did not have a +sufficient understanding of CannaVEST’s internal controls. A&C’s inquiries checklist for the +Q2 and Q3 interim reviews, which Shek reviewed, indicated that CannaVEST did not have any +significant deficiencies or material weaknesses in internal control over financial reporting. This +directly contradicted CannaVEST’s disclosure in its Forms 10-Q, which stated that management +had identified a material weakness in internal control over financial reporting related to +CannaVEST’s lack of personnel with appropriate accounting qualifications. + +8 + +Shek Failed to Identify that the Engagement Team Did Not Prepare Adequate +Documentation for CannaVEST’s Q1 through Q3 2013 Interim Reviews + +35. Under PCAOB Standard AS No. 3, Audit Documentation, an accountant’s interim +review documentation is the written record of the basis for the accountant’s conclusions that +provides the support for the accountant’s representations. The 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 accountant’s significant conclusions. Among other things, the documentation +includes records of the planning and performance of the work, the procedures performed, +evidence obtained, and conclusions reached by the accountant. (AS No. 3.2). + +36. Under PCAOB Standard AU § 722, Interim Financial Information, an +accountant’s interim review documentation should include any findings or issues that in the +accountant’s judgment are significant, for example, the results of review procedures that indicate +that the interim financial information could be materially misstated, including actions taken to +address such findings, and the basis for the final conclusions reached. In addition, 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. +(AU §§ 722.51-722.52). + +37. Shek failed to identify that the engagement team did not prepare adequate +documentation for CannaVEST’s Q1 through Q3 2013 interim reviews. For example, for the Q1 +interim review, Shek should have made inquiries of Mona for the fair value of the consideration +related to the PhytoSphere acquisition, and had this amount documented in the work papers. For +the Q2 interim review, Shek should have included a balance sheet analytics that compared Q1 to +Q2 in the work papers. For the Q3 interim review, Shek should have considered whether a +restatement was necessary and had this restatement analysis documented in the work papers. In +addition, for the Q1 through Q3 interim reviews, Shek should have documented in the planning +memo A&C’s knowledge of CannaVEST’s internal controls, including how the material +weakness that related to the lack of accounting personnel increased the risk of material +misstatement, and how the engagement team planned to address that risk through interim review +procedures. + +Shek Failed to Exercise Due Professional Care in CannaVEST’s Q1 through Q3 2013 +Interim Reviews + +38. PCAOB Standard AU § 722, Interim Financial Information, requires that an +accountant exercise due professional care, as provided in AU § 150.02, Generally Accepted +Auditing Standards, in the performance of an interim review. (AU § 722.01). Under PCAOB +Standard AU § 230, Due Professional Care in the Performance of Work, due professional care +requires that an accountant exercise professional skepticism, which is an attitude that includes a +questioning mind and a critical assessment of the evidence. (AU § 230.07). +9 + +39. Shek failed to exercise due professional care and failed to exercise a sufficient +level of professional skepticism when performing CannaVEST’s Q1 through Q3 2013 interim +reviews. He failed to properly plan the interim reviews, properly assess the risk of material +misstatement, consider how to address that risk through interim review procedures, make +appropriate inquiries of management, perform appropriate analytics, and adequately document +the interim reviews. + +FINDINGS + +40. As a result of the conduct described above, Shek 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 conduct described in Rules +102(e)(1)(iv)(A) or 102(e)(1)(iv)(B). + +IV. + +In view of the foregoing, the Commission deems it appropriate, in the public interest to +impose the sanctions agreed to in Respondent Shek’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. Shek is denied the privilege of appearing or practicing before the Commission as an +accountant. + + B. After one year from the date of this Order, Shek 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 Shek’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 +10 + +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) Shek, 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) Shek, 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 the +respondent’s or the firm’s quality control system that would +indicate that Shek will not receive appropriate supervision; + + (c) Shek 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) Shek 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. + +C. The Commission will consider an application by Shek 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 Shek’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. + + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3952.txt b/raw/aaer/2018/AAER-3952.txt new file mode 100644 index 0000000000000000000000000000000000000000..500ba467260c5685e13c5cbf161d9926a8bfcb7c --- /dev/null +++ b/raw/aaer/2018/AAER-3952.txt @@ -0,0 +1,578 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10519 / July 17, 2018 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83655 / July 17, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3952 / July 17, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18602 + + + + +In the Matter of + +JAY C. LAKE, 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 Jay C. Lake, +CPA (“Respondent” or “Lake”) 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 Rules +102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Section 8A of the Securities Act of 1933, Sections 4C and 21C of the Securities +Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, +and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + + These proceedings arise out of the role of Lake in a shell factory scheme orchestrated by an +undisclosed team of “Control Persons.” The shell companies were undisclosed “blank check” +companies (the “Blank Check Companies”) and were created and designed to avoid the +corresponding registration and reporting requirements applicable to blank check companies. The +Control Persons’ scheme was to create and sell the Blank Check Companies as public companies +with operations, and register offerings of their securities, without disclosing to the public or the +Commission the true purpose or control of the companies. Lake participated in the audits of the +financial statements of five of the Blank Check Companies. Thus, Lake and his now defunct audit + +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 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not bi nding on any +other person or entity in this or any other proceeding. +3 + +firm, Lake & Associates, CPA’s [sic], LLC (“Lake & Associates”) issued the audit reports included +in the Form S-1 registration statements and certain periodic reports of the five Blank Check +Companies. + + Each Blank Check Company followed the same path to sale. One or more of the Control +Persons recruited a sole officer, director, employee, and majority shareholder to act in name only. +The Control Persons exclusively retained and maintained all communications with a small group of +outside professionals including Lake and Lake & Associates. The Blank Check Companies had no +operations and no value other than (i) their registration status with the Commission, and (ii) a +particular capital structure – for example, a control block of shares and float of purportedly free- +trading shares solely for purposes of merger or acquisition. The Forms S-1 and subsequent +Commission filings falsely depicted the Blank Check Companies as actively pursuing business +plans, when the only plan from the onset was to be sold as public vehicles. In participating in the +audits of the five Blank Check Companies’ financial statements, Lake failed to obtain an +understanding of the business of the issuer and the role of the Control Persons. + + During the course of two of the audits in question, Lake engaged in improper professional +conduct pursuant to Section 4C of the Exchange Act and Rules 102(e)(1) of the Commission’s +Rules of Practice. Specifically, during the course of the two engagements for the audits of the +financial statements of BlueFlash Communications, Inc. (“BlueFlash”) and ShopEye, Inc. +(“ShopEye”), Lake ignored red flags. Among other things, Lake failed to inquire regarding facts +that contradicted each company’s presentation as an operating company owned and controlled by its +sole officer. + +Lake authorized the issuance of audit reports containing unqualified opinions for use in +filings by BlueFlash and ShopEye, but the underlying audits failed to comply with Public Company +Accounting Oversight Board (“PCAOB”) standards. Specifically, Lake failed to comply with +PCAOB requirements relating to: (1) client acceptance and continuance; (2) obtaining a sufficient +understanding of the issuer; (3) performing sufficient procedures to identify the existence of +related party transactions that should have been disclosed in the financial statements; and (4) +maintaining sufficient audit documentation. Furthermore, Lake & Associates, at the direction of +Lake, issued audit reports for ShopEye without obtaining an engagement quality review and +concurring approval of issuance. These audit reports allowed BlueFlash and ShopEye to file +numerous registration statements and periodic reports with the Commission that were materially +false and misleading. + +B. RESPONDENT + +1. Lake, age 54, of Itasca, Illinois, holds active CPA licenses in Florida and Illinois. +From at least February 21, 2003 to August 19, 2013, Lake was the owner of Lake & Associates. +Lake served as the engagement partner of four of the Blank Check Companies’ audits and as the +engagement quality reviewer of one of the Blank Check Companies’ audit. On August 13, 2013, +the PCAOB issued a settled order finding, among other things, that Lake & Associates and Lake +violated PCAOB rules and auditing standards in auditing the 2009 financial statements of four +4 + +unrelated issuer clients (“PCAOB Order”). Lake consented to the PCAOB Order barring him +from being an associated person of a registered public accounting firm with the ability to petition +the PCAOB after three years to associate with a registered public accounting firm. In re Lake & +Associates, CPA’s LLC, and Jay Charles Lake, CPA, PCAOB Rel. No. 105-2013-006, at 13 +(Aug. 13, 2013). + +Relevant Entities and Individuals + +2. Lake & Associates, was a Florida limited liability company and was a PCAOB +registered public accounting firm with offices in Schaumburg, Illinois and Boca Raton, Florida. +Lake & Associates had only one equity partner, Lake, who had ultimate authority to issue the +audit reports on behalf of Lake & Associates. Lake & Associates consented to the PCAOB +Order revoking its registration with the ability to reapply after three years. In re Lake & +Associates, CPA’s, LLC, and Jay Charles Lake, CPA, PCAOB Rel. No. 105-2013-006, at 12-13 +(Aug. 13, 2013). + +3. BlueFlash, now known as Neurotrope, Inc., was at the relevant time a Florida +corporation with its principal place of business in St. Joseph, Michigan. On March 7, 2011, +BlueFlash filed a Form S-1 registration statement with the Commission, seeking to register the +offer and sale of 3,000,000 common shares in a $30,000 public offering. The registration +statement became effective on May 13, 2011. Lake & Associates served as BlueFlash’s auditor +for the years ended January 31, 2011, January 31, 2012, and January 31, 2013. Lake was the +engagement partner for the BlueFlash audits. + +4. ShopEye, was at the relevant time a Florida corporation with its principal place of +business in Foster City, California. On August 5, 2011, ShopEye filed a Form S-1 registration +statement, seeking to register the offer and sale of 3,000,000 common shares in a $30,000 public +offering, which became effective on November 1, 2011. ShopEye subsequently deregistered +those shares. On June 20, 2013, ShopEye filed a new Form S-1 registration statement, seeking to +register the offer and sale of 3,000,000 common shares in a $30,000 public offering. This +registration statement became effective on September 26, 2013. Lake & Associates served as +ShopEye’s auditor and audited the financial statements for the years ended on May 31, 2011, +May 31, 2012, and May 31, 2013. Lake was the engagement partner for the ShopEye audits. On +July 28, 2014, the Commission, by delegated authority, issued a stop order suspending the +effectiveness of ShopEye’s Form S-1 registration statement pursuant to Section 8(d) of the +Securities Act. In re the Registration Statement of ShopEye, Inc., Initial Decision Rel. No. 615 +(June 16, 2014), final as of July 28, 2014, Securities Act Rel. No. 9624 (July 28, 2014). + +C. FACTS + +(1) Background + +5. From February 2010 to August 2013, Lake & Associates audited the financial +statements the Control Persons used in the Forms S-1 and periodic reports filed with the +5 + +Commission for five Blank Check Companies, two of which were BlueFlash and ShopEye. Lake +& Associates’ sole owner, Lake, was the engagement partner for the firm’s audits of four Blank +Check Companies, including BlueFlash and ShopEye, and the engagement quality reviewer for +another. + +6. The Control Persons were the exclusive contacts between Lake & Associates and +the Blank Check Companies. Lake knew that one or more of the Control Persons prepared the +Blank Check Companies’ financial statements, provided Lake & Associates with the supporting +evidence for the audits, and responded to Lake & Associates’ questions about the Blank Check +Companies. + +7. Lake failed to meaningfully understand the business of the issuer and role of the +Control Persons and the sole officer. In obtaining an understanding of the issuers, Lake did not +question the substantial similarities in the five Blank Check Companies’ Forms S-1 or periodic +reports, all of which were closely patterned on a template formula driven by the Control Persons, +even though the companies were portrayed as operating companies pursuing different business +plans. These similarities included: (1) the same number of issued shares; (2) the same offering +size; (3) nearly identical total assets (cash and cash equivalents), liabilities (accounts payable and +accrued liabilities), and stockholder’s equity; (4) the exact annual budget ($150,000) for the +effectuation of vastly different business plans; and (5) the sole officers of the Blank Check +Companies all devoted 20-30 hours per week to the respective company. Furthermore, the +Forms S-1 for the five Blank Check Companies all similarly stated that the Blank Check +Companies’ sole officer capitalized the corresponding issuer via a purchase of 9,000,000 shares +of common stock for $9,000 in cash. In failing to sufficiently understand the issuer’s business, +Lake failed to: (1) identify factors that contradicted each company’s presentation as an operating +company owned and controlled by its sole officer; (2) identify possible risks of material +misstatement related to the integrity of the individuals involved and the company being an +undisclosed blank check company; and (3) sufficiently identify related parties and relevant +disclosures. + +8. Lake & Associates performed the Blank Check Companies’ audits described +above and Lake authorized the issuance of and consented to the incorporation of these audit +reports in each of the Blank Check Companies’ Forms S-1 and Forms 10-K filed with the +Commission. The ShopEye and BlueFlash audit reports stated that the audits had been +conducted “in accordance with the standards of the Public Company Accounting Oversight +Board” and that the financial statements were fairly presented, in all material respects, “in +conformity with accounting principles generally accepted in the United States.” As described +below, however, the ShopEye and BlueFlash audits were not conducted in accordance with +PCAOB standards and were so deficient that they amounted to no audits at all. + + + +6 + +(2) Lake & Associates Performed Deficient Audits of ShopEye and BlueFlash for +the Years Ended May 31, 2012 and 2013, and January 31, 2012 and 2013, +Respectively + +(a) Lake Failed to Evaluate Information Obtained During the Client +Acceptance and Retention Process that was Relevant to Identifying Risks +of Material Misstatement (AS No. 12, AS No. 13, and AU 230) + +9. PCAOB Standard Quality Control Section 20, System of Quality Control for a CPA +Firm’s Accounting and Auditing Practice, (“QC 20”) requires that policies and procedures be +established for deciding whether to accept or continue a client relationship and whether to perform +a specific engagement for that client. Such policies and procedures should provide the firm with +reasonable assurance that the likelihood of association with a client whose management lacks +integrity is minimized. All of the firm’s personnel are responsible for complying with the firm's +quality control policies and procedures. (QC 20 at ¶ .14, .22). + +10. PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of Material +Misstatement, (“AS No. 12”) requires that the auditor evaluate whether information obtained +from the client acceptance and retention evaluation process or audit planning activities is +relevant to identifying risks of material misstatement.4 Risks of material misstatement identified +during those activities should be assessed in accordance with AS No. 12. (AS No. 12 at ¶ 41). + +11. PCAOB Auditing Standard No. 13, The Auditor’s Responses to the Risks of +Material Misstatement, (“AS No. 13”) requires the auditor when responding to the assessed risks +of material misstatement, particularly fraud risks, to apply professional skepticism in gathering and +evaluating audit evidence. Examples include: (a) modifying the planned audit procedures to +obtain more reliable evidence regarding relevant assertions, and (b) obtaining sufficient appropriate +evidence to corroborate management’s explanations or representations concerning important +matters. (AS No. 13 at ¶ 7). + +12. PCAOB Standard AU Section 230, Due Professional Care in the Performance of +Work, (“AU 230”) states that due professional care requires the auditor to exercise professional +skepticism. Professional skepticism is an attitude that includes a questioning mind and a critical +assessment of audit evidence. AU 230 requires that the auditor neither assumes that management +is dishonest nor assumes unquestioned honesty. In exercising professional skepticism, the auditor +should not be satisfied with less than persuasive evidence because of a belief that management is +honest. (AU 230 at ¶¶ .07, .09). + +13. Lake & Associates’ client acceptance and continuance policies at the time of the +ShopEye and BlueFlash audits required: (1) completing an annual engagement acceptance or +continuance form; (2) initial background checks on key members of management, board of +directors, and the audit committee chairperson; and (3) annual reviews by the managing partner to + +4 References to PCAOB auditing standards refer to the standards in effect at the relevant time. +7 + +reevaluate the acceptability of each client and engagement. Lake failed to comply with the firm’s +policies and procedures, including not conducting any background checks for ShopEye. + +14. As part of Lake’s annual reviews to reevaluate the acceptability of ShopEye and +BlueFlash, Lake also disregarded various circumstances concerning management’s integrity that +Lake should have considered and followed-up on as part of the ShopEye and BlueFlash audits. For +example, each sole officer and founder of ShopEye and BlueFlash resigned about one year after +the incorporation of the company and in each instance, they were replaced within a very short +time period and without any compensation for the sale of their shares. Although presented with +this circumstance for ShopEye and BlueFlash, Lake did not consider whether there were risks of +material misstatement related to management’s integrity and subsequently did not determine an +appropriate audit response. + +15. For the above reasons, Lake failed to comply with Lake & Associates’ client +acceptance policies and procedures and exercise due care and professional skepticism when +evaluating information obtained during the client acceptance and retention process that was +relevant to identifying risks of material misstatement and thus, failed to comply with AS No. 12, +AS No. 13, and AU 230. + +(b) Lake Failed to Obtain a Sufficient Understanding of the Company (AS +No. 12 and AU 230) + +16. AS No. 12 requires that the auditor obtain an understanding of the company and +its environment. This should include, among other things, obtaining an understanding of the +company’s organizational structure, management personnel, the sources of funding of the +company’s operations, and the company’s operating characteristics. The auditor is also required +to evaluate the design and implementation of internal control and to obtain an understanding of +the period-end financial reporting process. In addition, the auditor is required to make certain +inquiries regarding fraud risks to personnel within the company and when necessary, corroborate +responses or address inconsistencies. (AS No. 12 at ¶¶ 7, 10, 20, 28, 32, 56). + +17. AU 230 states that due professional care requires the auditor to exercise +professional skepticism. Professional skepticism is an attitude that includes a questioning mind +and a critical assessment of audit evidence. AU 230 requires that the auditor neither assumes that +management is dishonest nor assumes unquestioned honesty. In exercising professional +skepticism, the auditor should not be satisfied with less than persuasive evidence because of a +belief that management is honest. The engagement partner should be knowledgeable about the +client. (AU 230 at ¶¶ .06, .07, .09). + +18. Lake failed to comply with AS No. 12 and AU 230 as he failed to obtain a +sufficient understanding of ShopEye and its environment and exercise professional skepticism. In +obtaining an understanding of ShopEye and its internal control, Lake failed to identify and/or +address various red flags that arose during the course of the audits. For example: + +8 + +a. Lake failed to obtain an understanding of the compensation arrangement with the +Control Persons, which could have revealed that the company was not an operating +company owned and controlled by the sole officer as presented and instead was an +undisclosed blank check company owned and controlled by the Control Persons; + +b. Lake never communicated directly with the sole officers or confirmed with them that +the Control Persons were authorized to represent the issuer on their behalf. Lake’s +communications throughout the audits were with one or more of the Control Persons; +and, + +c. Lake failed to question why there were numerous similarities between ShopEye, +BlueFlash, and the other three different Blank Check Companies, including that all +were startup companies with minimal resources, where the Control Persons were the +only contacts for day-to-day audit interaction and were not receiving any observable +compensation. Further, some of the five Blank Check Companies also had notes +payable with one of the Control Persons. + +19. Lake also failed to perform sufficient inquiries as part of risk assessment by not +speaking with either sole officer of ShopEye or obtaining an understanding as to the lack of any +expenses to advance the stated business plan. + +(c) Lake Failed to Perform Sufficient Procedures over Related Parties (AU +334 and AU 230) + +20. PCAOB Standard AU Section 334, Related Parties, (“AU 334”) provides auditor +requirements for identifying and testing related party transactions. AU 334 states that certain +transactions may be indicative of the existence of related parties, including: (a) borrowing or +lending on an interest-free basis or at a rate of interest significantly above or below market rates +prevailing at the time of the transaction, (b) making loans with no scheduled terms for when or +how the funds will be repaid, and (c) transactions that are occurring, but are not being given +accounting recognition, such as receiving or providing accounting, management or other services +at no charge. Sufficient appropriate procedures over related parties should extend beyond inquiry +of management. For each material related party transaction, the auditor should consider whether +he has obtained sufficient appropriate evidential matter to understand the relationship of the parties +and the effects of the transaction on the financial statements. The auditor should then evaluate all +the information available to evaluate whether it is adequately disclosed in the financial statements. +(AU 334 at ¶¶ .03, .08, .09, .11). + +21. AU 230 states that due professional care requires the auditor to exercise +professional skepticism. Professional skepticism is an attitude that includes a questioning mind +and a critical assessment of audit evidence. AU 230 requires that the auditor neither assumes that +management is dishonest nor assumes unquestioned honesty. In exercising professional +skepticism, the auditor should not be satisfied with less than persuasive evidence because of a +belief that management is honest. (AU 230 at ¶¶ .07, .09). +9 + +22. Lake failed to comply with AU 334 as he failed to identify or evaluate whether +material related party transactions were adequately presented and disclosed in ShopEye’s financial +statements as related party transactions. Lake failed to comply with AU 230 by not exercising due +care and professional skepticism when identifying or evaluating related party transactions. + +23. First, ShopEye’s work papers included discussion of a note for $3,000 with an issue +date of November 1, 2012, payable to a Florida limited liability company (“LLC”) controlled by +one of the Control Persons. Such Control Person signed the note on behalf of the LLC. The note +did not indicate a specific due date, was due on demand, and listed 5% as the annual interest rate. +The note, however was not listed or disclosed in the financial statements included in Commission +filings as a related party transaction. Lake knew that this note should have been disclosed in the +financial statements as a related party transaction as it was entered into with an entity controlled by +one of the Control Persons who also performed services for ShopEye. + +24. Second, documents evidence that the Control Persons provided accounting and +management services for ShopEye. However, there is no supporting documentation to establish +whether these services were paid or unpaid and whether they should have been disclosed as related +party transactions. In addition, these services, whether paid or unpaid, were not given accounting +recognition or disclosure in any of the filings with the Commission. + +(d) Lake Failed to Maintain Sufficient Audit Documentation (AS No. 3) + +25. PCAOB Auditing Standard No. 3, Audit Documentation, (“AS No. 3”) requires +that the auditor prepare audit documentation in connection with each engagement conducted +pursuant to the standards of the PCAOB. 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. The auditor must retain audit documentation for at least seven years +from the date the auditor grants permission to use the auditor’s report in connection with the +issuance of the company’s financial statements. (AS No. 3 at ¶¶ 4, 6, 14). + +26. Lake failed to comply with AS No. 3 as (a) the audit work papers for ShopEye do +not evidence who performed and reviewed the work and the dates such work was completed and +reviewed, and (b) he failed to retain for at least seven years the audit work papers for BlueFlash. + +(e) Lake & Associates Failed to Execute Engagement Quality Reviews (AS +No. 7) + +27. PCAOB Auditing Standard No. 7, Engagement Quality Review, (“AS No. 7”) +requires an engagement quality review and concurring approval of issuance for certain +engagements conducted pursuant to the standards of the PCAOB. In an audit, the engagement +quality reviewer may provide concurring approval of issuance only if, after performing with due +10 + +professional care the review required by this standard, he or she is not aware of a significant +engagement deficiency. Furthermore, 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 No. 7 at ¶¶ 1, 12, 13). + +28. Lake & Associates did not obtain engagement quality reviews for the ShopEye +audits at issue (including obtaining concurring approval of issuance). Specifically, Lake & +Associates falsified its engagement quality reviewer’s electronic sign-offs for the ShopEye audits +for the years ended May 31, 2012 and May 31, 2013. Lake was the engagement partner for these +ShopEye audits and knew that the engagement quality reviewer’s sign-offs were falsified. +Furthermore, Lake authorized the filing of and consented to the incorporation of these audit +reports in ShopEye’s Commission filings. + +D. VIOLATIONS + +29. Section 17(a) of the Securities Act prohibits, in the offer or sale of securities, (1) +employing any device, scheme or artifice to defraud, (2) obtaining money or property by means +of any material misrepresentation or omission, or (3) engaging in any transaction, practice or +course of business that operates or would operate as a fraud or deceit upon the purchaser. +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit, in connection with the +purchase or sale of securities, (a) employing any device, scheme, or artifice to defraud, (b) +making any material misrepresentation or omission, or (c) engaging in any act, practice, or +course of business that operates as a fraud or deceit upon any person. As a result of the actions +described above, Lake willfully violated Section 17(a) of the Securities Act and Section 10(b) of +the Exchange Act and Rule 10b-5 thereunder by participating and authorizing audit reports filed +with the Commission that were so deficient that they amounted to no audits at all and that falsely +stated that such audits were conducted in accordance with PCAOB standards. + +30. Rule 2-02(b)(1) of Regulation S-X requires an accountant to state “whether the +audit was made in accordance with generally accepted auditing standards.” As used with respect +to Regulation S-X in relation to audits of issuers, the phrase “generally accepted auditing +standards” means the “the standards of the PCAOB plus any applicable rules of the Commission.” +SEC Release No. 34-49708 (May 14, 2004). As a result of the conduct described above for the +ShopEye and BlueFlash audits, Lake willfully aided and abetted and caused Lake & Associates’ +violations of Rule 2-02(b)(1) of Regulation S-X. + +31. Rule 2-06 of Regulation S-X requires accountants to retain for seven years +“records relevant to the audit or review, including work papers and other documents that form the +basis of the audit or review.” As a result of the conduct described above for the BlueFlash audits, +Lake willfully aided and abetted and caused Lake & Associates’ violations of Rule 2-06 of +Regulation S-X. + + + +11 + +E. FINDINGS + +32. Based on the foregoing, the Commission finds that Lake willfully violated Section +17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and +willfully aided and abetted and caused Lake & Associates’ violation of Rules 2-02 and 2-06 of +Regulation S-X. + +33. Based on the foregoing, the Commission finds that by willfully violating Section +17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and +willfully aiding and abetting Lake & Associates’ violation of Rules 2-02 and 2-06 of Regulation S- +X, Lake engaged in conduct subject to Section 4C(a)(3) of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. + +34. Based on the foregoing, the Commission finds that Lake 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 Respondent Lake’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Lake shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and +Rule 10b-5 thereunder, and Rules 2-02 and 2-06 of Regulation S-X. + + B. Lake is denied the privilege of appearing or practicing before the Commission as an +accountant. + + C. Lake shall, within 10 days of the entry of this Order, pay disgorgement of +$10,500 and prejudgment interest of $1,620.71 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. + + D. Lake shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $25,000 to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +E. Payment must be made in one of the following ways: + +12 + +(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 Jay +C. Lake as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Glenn S. Gordon, Associate Regional +Director, Division of Enforcement, Securities and Exchange Commission, 801 Brickell Avenue, +Suite 1800, Miami, FL 33131. + + 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 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 +13 + +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/2018/AAER-3953.txt b/raw/aaer/2018/AAER-3953.txt new file mode 100644 index 0000000000000000000000000000000000000000..a0f3e9c27ea5f61b48feccbb7db5c7ce1bed8620 --- /dev/null +++ b/raw/aaer/2018/AAER-3953.txt @@ -0,0 +1,112 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83772 / August 3, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3953 / August 3, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18621 + +In the Matter of + +KURT J. BORDIAN, CPA, +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Kurt J. +Bordian (“Respondent” or “Bordian”) 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 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. Kurt J. Bordian (“Bordian”), age 49, resides in Vancouver, British Columbia. +Bordian is a Canadian Chartered Professional Accountant and Certified General Accountant +licensed in British Columbia, Vancouver. + + 2. On June 12, 2018, the Commission filed a complaint against Bordian in SEC v. +Bordian (Civil Action No. 2:18-cv-10437). On July 27, 2018, the court entered an order +permanently enjoining Bordian, by consent, from future violations of Section 10(b) of the +Exchange Act and Rule 10b-5 thereunder. The court’s order also imposed an officer and director +bar, and ordered Bordian to pay $220,500 in disgorgement of ill-gotten gains from insider trading, +and $14,358 in prejudgment interest; and a $220,500 civil money penalty. + + 3. The Commission’s complaint alleged, among other things, that in May 2016, +Bordian engaged in unlawful insider trading in the securities of InterOil Corporation (“InterOil”), a +Canadian oil and gas company that had securities registered with the Commission and listed on the +New York Stock Exchange. The complaint alleged that Bordian, who worked as an accountant +and personal assistant for a member of InterOil’s board of directors, traded on material nonpublic +information that InterOil was entering into an agreement to be acquired. The complaint alleged +that Bordian made $220,500 in illicit profits from this insider trading. + + + + + + + + + + + + 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 Bordian’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + Bordian 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/2018/AAER-3954.txt b/raw/aaer/2018/AAER-3954.txt new file mode 100644 index 0000000000000000000000000000000000000000..09e6d52d68069c8c69d35f7fa794673eebb6de43 --- /dev/null +++ b/raw/aaer/2018/AAER-3954.txt @@ -0,0 +1,160 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83805 / August 8, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3954 / August 8, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18630 + +In the Matter of + +Kevin M. Modany, CPA +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Kevin +M. Modany (“Respondent” or “Modany”) 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.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. Modany was a certified public accountant licensed to practice in the State of +Pennsylvania. He served as Chief Executive Officer of ITT Educational Services, Inc. (“ITT”) from +2007 to September 2016. + +2. ITT was a Delaware corporation with headquarters in Carmel, Indiana. ITT +was a for-profit higher education company. ITT's common shares were 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 May 12, 2015, the Commission filed a complaint against Modany and +others in SEC v. ITT Educational Services, Inc., et al. (Civil Action No. 1:15-cv-00758), and +filed an amended complaint on June 8, 2018 and a second amended complaint on June 22, 2018. +On July 6, 2018, the court entered an order permanently enjoining Modany, by consent, from +controlling any person who violates Sections 10(b) and 13(a) of the Exchange Act, and Rules +10b-5, 12b-20,13a-l, 13a-ll, and 13a-13 thereunder. Modany was also ordered to pay a $200,000 +civil money penalty, and not to serve as an officer and director of a public company for a period +of five years. + +4. The Commission’s complaint alleged, among other things, and Modany +neither admits nor denies, that ITT engaged in conduct that violated certain provisions of the +federal securities laws with respect to two student loan programs guaranteed by ITT and in +connection with ITT’s books and records and certain public filings for the year end 2012 and the +first three quarters of fiscal year 2013. In addition, the complaint alleged, and Modany neither +admits nor denies, that Modany was a control person of ITT during this period, that Modany was +liable as a control person for certain of ITT’s alleged violations, and that, as a result, Modany +engaged in conduct, as a control person, that violated a provision of the federal securities laws. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Modany’s Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + + 3 +A. Respondent Modany is suspended from appearing or practicing before the +Commission as an accountant. + +B. After 5 years from the date of this order, Modany 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 +Modany’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) Modany 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) Modany 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 Modany’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; +(c) Modany 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) Modany 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. + + 4 +C. The Commission will consider an application by Modany 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 Modany’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. + + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3955.txt b/raw/aaer/2018/AAER-3955.txt new file mode 100644 index 0000000000000000000000000000000000000000..d516ba929315edfc8923f154bafb1c603f704cb1 --- /dev/null +++ b/raw/aaer/2018/AAER-3955.txt @@ -0,0 +1,165 @@ + + +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83806 / August 8, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3955 / August 8, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18631 + +In the Matter of + +Daniel M. Fitzpatrick, 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 Daniel +M. Fitzpatrick (“Respondent” or “Fitzpatrick”) 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. Fitzpatrick was a certified public accountant. He served as Chief Financial +Officer of ITT Educational Services, Inc. (“ITT”) during 2012 and 2013. + +2. ITT was a Delaware corporation with headquarters in Carmel, Indiana. ITT +was a for-profit higher education company. ITT's common shares were 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 May 12, 2015, the Commission filed a complaint against Fitzpatrick +and others in SEC v. ITT Educational Services, Inc., et al. (Civil Action No. 1:15-cv-00758), and +filed an amended complaint on June 8, 2018 and a second amended complaint on June 22, 2018. +On July 6, 2018, the court entered an order permanently enjoining Fitzpatrick, by consent, from +controlling any person who violates Sections 10(b) and 13(a) of the Exchange Act, and Rules +10b-5, 12b-20,13a-l, 13a-ll, and 13a-13 thereunder. Fitzpatrick was also ordered to pay a +$100,000 civil money penalty, and not to serve as an officer and director of a public company for +a period of five years. + +4. The Commission’s complaint alleged, among other things, and Fitzpatrick +neither admits nor denies, that ITT engaged in conduct that violated certain provisions of the +federal securities laws with respect to two student loan programs guaranteed by ITT and in +connection with ITT’s books and records and certain public filings for the year end 2012 and the +first three quarters of fiscal year 2013. In addition, the complaint alleged, and Fitzpatrick neither +admits nor denies, that Fitzpatrick was a control person of ITT during this period, that Fitzpatrick +was liable as a control person for certain of ITT’s alleged violations, and that, as a result, +Fitzpatrick engaged in conduct, as a control person, that violated a provision of the federal +securities laws. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Fitzpatrick’s Offer. + + + 3 +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondent Fitzpatrick is suspended from appearing or practicing before the +Commission as an accountant. + +B. After 5 years from the date of this order, Fitzpatrick 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 +Fitzpatrick’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) Fitzpatrick 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) Fitzpatrick 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 Fitzpatrick’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; +(c) Fitzpatrick 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) Fitzpatrick acknowledges his responsibility, as long as he appears +or practices before the Commission as an independent accountant, to comply with all + + 4 +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 Fitzpatrick 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 Fitzpatrick’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. + + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3956.txt b/raw/aaer/2018/AAER-3956.txt new file mode 100644 index 0000000000000000000000000000000000000000..7859c289976aa44a17d5026369c3ac4f6b5e47d7 --- /dev/null +++ b/raw/aaer/2018/AAER-3956.txt @@ -0,0 +1,98 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83807 / August 8, 2018 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3956 / August 8, 2018 +ADMINISTRATIVE PROCEEDING +File No. 3-17553 + +In the Matter of +ROBERT J. BREHL, 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 19, 2016, Robert J. Brehl, CPA (“Brehl”) 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)(iii) of the Commission’s Rules of Practice.1 This order is issued in response to Brehl’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 Brehl willfully aided and abetted and caused the violation of +the federal securities laws while serving as the Chief Accounting Officer of an issuer with +securities registered with the Commission under Section 12(b) of the Securities Exchange Act of +1934. Between March 2012 and June 2014, the Commission alleged that Brehl maintained a +close personal and romantic relationship with a member of the Ernst & Young LLP (“EY”) +engagement team that performed audit and review services for the issuer. As a result of this +relationship EY was found to lack independence from the issuer. Brehl caused and willfully +aided and abetted the issuer’s violations of Section 13(a) of the Exchange Act, and Rule 13a-1 +thereunder, which require public issuers to file annual reports with the Commission that have +been audited by an independent accountant. + + +1 See Accounting and Auditing Enforcement Release No. 3803 dated September 19, 2016. Brehl was permitted, +pursuant to the order, to apply for reinstatement after one year 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, Brehl +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. Brehl 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, Brehl’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 Brehl, it appears that he has complied with the terms of the September 19, 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 Brehl, 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 +Robert J. Brehl, 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 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/2018/AAER-3957.txt b/raw/aaer/2018/AAER-3957.txt new file mode 100644 index 0000000000000000000000000000000000000000..5d3320a16f4a8ded054cb00e1980c14b07fb9b35 --- /dev/null +++ b/raw/aaer/2018/AAER-3957.txt @@ -0,0 +1,158 @@ + + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83854 / August 15, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3957 / August 15, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18644 + +In the Matter of + +LAUREN ZARSKY, 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 Lauren +Zarsky (“Respondent” or “Zarsky”) 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 her 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. Respondent, age 25, is and has been a certified public accountant licensed to +practice in the State of New Jersey since 2016. She was employed as an accountant until May 2018. + + 2. On August, 14, 2018, a final judgment was entered against Respondent, +permanently enjoining her from future violations of Section 10(b) of the Exchange Act of 1934 and +Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 thereunder, in the civil +action entitled Securities and Exchange Commission v. Lauren Zarsky, Civil Action Number 18- +cv-7129 in the United States District Court for the Southern District of New York. Respondent +was also ordered to pay $19,440 in disgorgement of avoided losses, and $839.27 in prejudgment +interest, and a $19,440 civil money penalty. + + 3. The Commission’s complaint alleged that Respondent engaged in insider +trading ahead of a June 26, 2017 negative drug trial announcement by Innate +Immunotherapeutics, Inc. (“Innate”). The complaint alleged that Respondent learned highly +confidential and material information regarding the negative drug trial results on the evening +of June 22, 2017, from her boyfriend, whose father was a member of Innate’s board of +directors. According to the complaint, Respondent sold all of her shares of Innate on June 23, +2017, on the basis of this material, nonpublic information. The complaint alleged that by +selling her shares of Innate before the announcement of the negative drug trial results, +Respondent avoided total losses of $19,440. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Zarsky’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + 3 + A. Lauren Zarsky is suspended from appearing or practicing before the Commission as +an accountant. + + B. After five years from the date 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 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 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 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 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 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 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. + + 4 +C. The Commission will consider an application by Respondent 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 Respondent’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. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3958.txt b/raw/aaer/2018/AAER-3958.txt new file mode 100644 index 0000000000000000000000000000000000000000..dd39c056248fd5a24da9982109b41c9c6de8b23e --- /dev/null +++ b/raw/aaer/2018/AAER-3958.txt @@ -0,0 +1,525 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83858 / August 16, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3958 / August 16, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18646 + + +In the Matter of + +CITIGROUP 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 Citigroup 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 a Cease-and-Desist Order (“Order”), as set forth below. + + + + + + + + +2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + These proceedings involve Citigroup Inc.’s (“Citigroup”) failure to devise and maintain a +sufficient system of internal accounting controls concerning a wholly-owned subsidiary, the +Mexican bank Grupo Financiero Banamex, S.A. de C.V. (“Banamex”), sufficient to provide +reasonable assurances that Banamex’s transactions were recorded as necessary to permit the +preparation of Citigroup’s financial statements in accordance with generally accepted accounting +principles (“GAAP”) and to maintain accountability for assets. Over the period between 2008 and +February of 2014, Banamex loaned billions of dollars on the basis of invoices and work estimates – +also known as “accounts receivable factoring” in the banking industry – reflecting work performed +for Petroleos Mexicanos, S.A. de C.V. (“Pemex”) by Oceanografia, S.A. (“OSA”), a Mexican +marine services provider for the oil industry in the Gulf of Mexico. However, some of the factored +documents received from OSA, amounting to about $400 million, were fraudulent and included +forged signatures. Banamex had deficient internal accounting controls over its accounts receivable +factoring program used by OSA, including lacking internal accounting controls necessary to test the +authenticity of the factored documents prior to advancing funds to OSA and recording them as +accounts receivable. Banamex also lacked internal accounting controls sufficient to identify and +respond to red flags that arose during the relationship between Banamex and OSA potentially +warning Banamex of the ongoing fraud. Instead, it was not until the Government of Mexico itself +accused OSA of failing to post a satisfactory insurance bond and decided to temporarily cease doing +new business with OSA in February of 2014, at a time when Banamex had approved funding of +over $600 million dollars to OSA and was still advancing monies to OSA, that Citigroup discovered +many of the work estimates were falsified. Banamex’s internal accounting controls surrounding the +factoring program were not sufficient to allow the earlier detection of OSA’s fraud. As a result, +Citigroup recorded nearly $475 million in expenses in its financial statements. In particular, +Citigroup adjusted its fourth quarter and full year 2013 financial results downward by the then- +estimated $360 million loss and recognized an additional loss of $113 million in 2014, when +Citigroup had determined the full magnitude of the fraud. + +Respondent + +1. Citigroup, a Delaware corporation headquartered in New York, New York, is a +diversified global financial services holding company whose businesses provide a broad range of +financial services to consumer and corporate customers. At all times pertinent to this Order, +Citigroup’s securities were registered with the Commission pursuant to Section 12(b) of the +Exchange Act, and its securities traded on the New York Stock Exchange under the symbol “C.” + + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + +3 + +Other Relevant Entity + +2. Banamex is a Mexican corporation and is a wholly-owned subsidiary of Citigroup. +It was created in August of 2001, when Citigroup acquired Banamex’s predecessor entity Grupo +Financiero Banamex-Accival. Banamex is a diversified financial services provider to a broad range +of consumer and corporate customers, primarily in Mexico, and is the second largest bank in +Mexico. + +Facts + +Banamex’s Accounts Receivable Factoring Program + +3. From at least 2008 through February 2014 (the “Relevant Period”), Banamex +offered accounts receivable factoring to certain customers. An accounts receivable factoring +product normally involved a supplier of goods or services receiving advances from Banamex in +exchange for the supplier assigning to Banamex all rights, including the right to receive payment, +under the supplier’s invoices to buyers of its goods and services. Depending on the arrangement, +either the supplier or the buyer of the goods and services was liable to remit payment to Banamex. + +4. Under an accounts receivable factoring program, Banamex typically “discounted” or +“factored” the invoice by advancing to its customer an amount less than the face value of the +factored invoice. + +5. Throughout the Relevant Period, the Banamex accounts receivable factoring +facilities were provided in two of Citigroup’s banking divisions: (1) the Consumer and +Commercial Bank (“CCB”) and (2) the Institutional Clients Group (“ICG”). Regardless of +whether the facility was in CCB or ICG, Banamex had its own employees in Mexico that were +responsible for implementing and monitoring Banamex’s accounts receivable factoring facility. +All of ICG’s global accounts receivable factoring facilities, including those originating within +Banamex, were part of the Treasury and Trade Services (“TTS”) business at Citigroup. + +6. Throughout the Relevant Period, OSA, a customer of Banamex, was a major oil +field services provider in Mexico. Among other things, OSA, in operation since the 1960s, +provided Pemex with construction, maintenance, and vessel-chartering services for oil exploration, +extraction, and production in the Gulf of Mexico. OSA’s largest customer was the Mexican +Government-owned and -operated oil company, Pemex. + +7. Throughout the Relevant Period, Pemex was a financially stable, large oil company +with a high credit rating assigned by Banamex and the financial backing of the Mexican +Government. Banamex, by contrast, had assigned OSA a lower credit rating. + +8. OSA began using Banamex’s accounts receivable factoring program in +approximately 2008, and over the Relevant Period received over $3.3 billion in financing from +Banamex (the “Program”). Over the life of the Program, as some amounts were repaid and +additional advances were made, the outstanding amount of accounts receivable on Banamex’s + + +4 + +financial statements grew to over $580 million and was authorized to grow to approximately $700 +million. + +9. OSA was at first a CCB customer but was transferred to ICG in 2012, as OSA and +the factored amount grew in size. + +10. As a result of OSA’s fraud, which was not detected earlier in part because of the +internal accounting controls deficiencies identified herein, Banamex eventually failed to collect on +over $400 million in repayments owed to it under the Program. + +Banamex Lacked Sufficient Internal Accounting Controls Governing the Transfer of Clients +Between Divisions + +11. As part of the transfer of the Program from the CCB business to the ICG business in +2012, the Program was selected as one of the products under which Banamex sought to increase its +market share and profitability. + +12. The CCB group normally manages relationships with customers that are under a +certain relatively small market capitalization threshold, whereas the ICG group manages +relationships with customers that have a much larger market capitalization, in the hundreds of +millions of dollars. + +13. Around the same time that the OSA relationship was transferred from the CCB +group to the ICG group within Banamex in 2012, OSA was identified by Banamex as a “target +client.” + +14. After the transfer, OSA was subject to a credit approval by Banamex ICG’s +Independent Risk function, customer acquisition due diligence, and an ICG business process +designed to ensure that ICG assets were deployed effectively (the Global Deal Review or “GDR,” +described below). However, Banamex’s internal accounting controls required insufficient +additional safeguards, procedures, or diligence with respect to a client upon the transfer of a +relationship from CCB to ICG. In particular, Banamex’s Independent Risk function did not +undertake an additional risk assessment with respect to OSA’s use of the Program. Banamex’s +internal accounting controls did not require it to, for example, revisit the designation of the Program +as a credit of Pemex as opposed to of OSA (as further discussed below, and which would have +indicated that the advances should in reality have been considered a credit of OSA), review the +payment history of the credit facility (which would have revealed that some of the payments were +not being received from Pemex directly), or review the controls surrounding the processing of +factored documents under the Program (which, as discussed further below, were deficient), or to +otherwise do any additional diligence on OSA or its principals with respect to the Program (which +would have revealed publicly available allegations of serious fraud, money-laundering, and tax +avoidance with respect to such individuals). + +15. In addition, Banamex did not require that CCB and ICG share information at the +time of the transfer, leading to inconsistencies in how risk was evaluated and the size of the facilities +each unit would agree to extend to any particular client, and to OSA in particular. Specifically, + + +5 + +CCB’s internal assessment of OSA’s use of the Program was not positive for reasons that included +its understanding of the reputational risks that made doing business with OSA and its principals +undesirable, and CCB was looking to reduce its exposure. But that information was not shared with +ICG in 2012, and was not required under Banamex’s procedures to be shared. Rather than reduce +Banamex’s OSA exposure, Banamex’s ICG continued to increase OSA’s use of the Program by +hundreds of millions of dollars. + +16. The response to publicly available information regarding OSA and its principals was +insufficient. Media reports alleged that OSA had defrauded another Mexican bank of more than +$30 million dollars in 2006 under a credit product almost identical to the Program, by submitting +fraudulent invoices to obtain financing from that bank, i.e. in the exact manner in which OSA +defrauded Banamex. This information was publicized in the media and available to Banamex. + +17. Although Citigroup and Banamex had procedures for information sharing, such as +periodic country reviews, Banamex’s internal accounting controls did not specifically require it to +share such reports regarding OSA’s negative reputation with TTS management or TTS risk officers +(nor did Citigroup’s internal accounting controls require that this information be shared outside of a +subsidiary into the broader TTS management or risk officers). + +18. In 2012, another Citigroup subsidiary refused to permit one of OSA’s two principals +(“Executive A”) to open private bank accounts at that Citigroup subsidiary. In doing so, the +subsidiary noted that Executive A presented a serious negative reputational risk, given the publicly +available information about him, his dealings, his corrupt connections to the Mexican government, +and his alleged violations of law. Accordingly, while one Citigroup subsidiary refused to even open +a bank account for Executive A, another Citigroup entity, Banamex, was advancing hundreds of +millions of dollars to Executive A’s business. Although Banamex reviewed this negative +information as part of its anti-money laundering review, its internal accounting controls did not +require that this information be shared with, or considered by, the TTS managers and risk officers +responsible for the Program. + +Banamex Improperly Classified the Advances Made to OSA as Credit Risk to Pemex + +19. Having failed to properly identify and consider the risks relating to OSA, Banamex’s +other deficient internal accounting controls compounded the error by failing to ensure that the +advances made to OSA under the Program were properly considered by Banamex to be credit risk +to OSA, rather than Pemex. + +20. At Banamex, and consistent with Citigroup global policy, an accounts receivable +factoring program where the ultimate repayment obligation rests primarily on the supplier is called a +“seller centric” program, and an accounts receivable factoring program where the ultimate +repayment obligation rests primarily on the buyer of the goods (and not the supplier) is called a +“buyer centric” program. + +21. From the outset of the Program, Banamex misclassified the loans it advanced to +OSA as credit risk to Pemex (i.e., as “buyer centric”), instead of what it really was, credit risk to the + + +6 + +much-less financially secure OSA (i.e., as “seller centric”), and lacked the internal accounting +controls over the accounts receivable factoring products necessary to identify and correct this error. + +22. This was particularly important in the context of OSA because if the Program were +properly understood – as credit to OSA and not to Pemex – Banamex would not have made +advances at even a fraction of the size that it actually made to OSA. Given the lower credit rating +that Banamex itself assigned OSA, OSA could not meet Banamex’s credit guidelines for the +magnitude of the advances made under the Program. + +23. The group at Banamex that was tasked with classifying the Program, the +Independent Risk function, relied heavily on the assertions made to it by the business and product +functions within Banamex who were in charge of the relationship between Banamex and the +borrower. In other words, the classification of advances as buyer or seller centric was essentially +committed to the discretion of the very individuals who stood to gain – in stature and compensation +at Banamex – from increasing the advances. + +24. The foregoing is in fact what occurred with respect to Program advances to OSA: +the “independent” risk group relied largely on the assessment made by the business and product +people in charge of the OSA relationship, the people who advocated repeatedly for increasing the +loan amounts, that the Program was properly considered buyer centric such that Banamex need only +consider the creditworthiness of Pemex, and not of OSA. + +25. The OSA accounts receivable factoring facility was thus opened and operated as a +buyer centric program (i.e., the credit risk was considered that of Pemex). + +26. But this categorization was erroneous. For one, the advances to OSA did not meet +Banamex’s internal criteria for which advances were properly considered buyer centric, and +Banamex lacked the internal accounting controls sufficient to identify situations, such as this, when +an accounts receivable factoring program was misclassified. + +27. For example, under Citigroup’s guidelines for accounts receivable factoring +programs, a facility was properly considered “buyer centric” if the buyer provides the bank an +unconditional acceptance of the commercial transaction, if the credit facility originates with the +buyer, and if the buyer’s payments flow directly to Banamex. The Banamex advances to OSA did +not meet all of these criteria, but none of Banamex’s internal accounting controls prevented the +financing to OSA from being improperly classified as buyer centric. + +28. In addition, throughout the life of the Banamex-OSA accounts receivable factoring +facility, Banamex ’s internal accounting controls were insufficient to appropriately evaluate +numerous red flags, specifically signs that indicated the loans should have been characterized as +seller centric, including: + +a. Pemex’s refusal in 2010 to pay Banamex on certain invoices OSA had factored +with Banamex; +b. Banamex’s limited contact with Pemex with respect to the advances; + + +7 + +c. The use of Banamex’s advances to OSA in certain instances to extinguish prior +(and sometimes aging) debt for unrelated earlier advances; +d. OSA – not Pemex – telling Banamex in certain instances to which advances any +particular payment should be applied; and +e. Several individuals within Banamex raising questions about the propriety of +classifying the program as buyer centric. + +29. Despite these warnings, Banamex continued to misclassify the Program as buyer +centric, which rendered irrelevant Banamex’s assessment of the creditworthiness of the “borrower.” +Banamex therefore wrongfully analyzed the creditworthiness of Pemex, rather than OSA, the true +borrower, in extending hundreds of millions of dollars in loans. + +Banamex Lacked Sufficient Internal Accounting Controls For Invoice Processing + +30. The processes by which Banamex disbursed funds to OSA under the Program were +critically flawed in another respect. Specifically, the internal accounting controls surrounding the +advancing of funds allowed a single Banamex employee to verify invoices that led to disbursement +of funds with insufficient oversight. This flawed process allowed OSA to defraud the bank under +the accounts receivable factoring program. + +31. In December of 2009, Banamex had already lost $1 million under the accounts +receivable factoring program when it factored invoices for another company that was a supplier for +Pemex without properly validating the documents with Pemex. Claiming that the supplier’s work +was not timely, Pemex ultimately refused to pay the invoices. + +32. When, eventually, Banamex did make changes to the validation procedures, it failed +to adopt sufficient oversight or verification of the actions of the employee charged with validating +the factored documents under the accounts receivable factoring program generally and under the +OSA Program specifically. + +33. Banamex’s revised procedures, for example, allowed Pemex invoices to be factored +without a stamp or validation from Pemex, and eventually began to discount work estimates rather +than finalized invoices. The procedures also allowed Banamex to reconcile payments on submitted +invoices not with Pemex, but with the submitting company, including OSA. + +34. The discounting processes, including those relating to the validation of invoices or +work estimates for payment, were developed beginning in 2010 largely by a Banamex employee +(“Employee A”) and implemented primarily by other employees. Employee A was terminated by +Banamex in 2012 after it was discovered that he had engaged in undisclosed personal business with, +and received undisclosed payments from, OSA. Even after Employee A was fired, Banamex did +nothing to investigate the controls created by Employee A, especially with respect to OSA. + +35. After the fraud by OSA on Banamex was discovered, another Pemex supplier was +also discovered to have defrauded Banamex under the same deficient discounting processes that +OSA was able to use to defraud Banamex. + + + +8 + +36. In all, Banamex’s deficient discounting processes under the Program resulted in at +least three different loss events, two of which involved companies being able to defraud the bank. + +37. Banamex’s internal accounting control deficiencies over the Program were such +that it could not match payments it received from Pemex to the OSA work estimates in connection +with which it had made advance payments to OSA and recorded a receivable. Periodically, +Banamex did a “reconciliation” with OSA, at which time OSA would tell Banamex which Pemex +payments to apply to which work estimates. Essentially, Banamex lacked an adequate ability to +independently monitor and keep track of which accounts receivable factoring advances had been +paid and which remained outstanding. + +38. In addition, OSA itself at times directed Banamex to use new funds received under +the Program to cover previously outstanding amounts owed to Banamex, which was made possible +by a lack of controls over invoice tracking and permitted OSA to convert past due obligations into +current ones. This preemptively limited an additional review of the Program by giving the +impression that the Program was working as intended, was profitable, and the accounts receivable +balance was current. + +39. There was an internal audit of the TTS Mexico business, the report of which was +issued in November 2013. The scope of this audit included, among other TTS products and +services, accounts receivable factoring facilities originating within Banamex. The audit report +raised several control issues associated with those facilities, and reported that accounts receivable +factoring transactions, “which are manually input into the back-end processing system, can be +manipulated by a single person and as a result, funds can be directed to incorrect beneficiaries” and +that the “situation could expose the bank to fraud risk and operational losses.” The audit report also +noted other, generally applicable control issues relating to accounts receivable factoring +transactions. + +40. The OSA fraud came to light three months after the audit report was issued, during +which period the corrective action plans required by the audit proceeded on a normal timeline, +despite the audit’s findings. + +Banamex Failed to Follow Through on Whatever Internal Accounting Controls Were in Place + +41. To the extent Citigroup’s policies required internal accounting controls that applied +to advances under the Program, Banamex in some instances failed to adhere to them. + +42. For example, Citigroup had the GDR process, which was in addition to the credit +review and approval process and was intended to ensure that Citigroup was appropriately +deploying its assets on a global basis. But the Program was submitted to GDR only three times – +when the credit facility was transferred to ICG in June 2012, as part of a Mexico portfolio review +in September 2013, and again in December 2013. + +43. In the period between the first two GDR reviews, the Program grew substantially— +from approximately $400 million to almost $700 million. Citigroup did not have a triggered + + +9 + +process in place requiring additional review of the financing facility in light of these significant +changes in the size of the risk exposure. + +44. In September 2013, the Banamex employees responsible for the Program advocated +strongly that the Program be increased, claiming, incorrectly, that the credit risk was an exposure +to Pemex. However, a high level ICG manager specifically stated that he was uncomfortable with +the amount of credit already extended under the Program. At that late date, individuals within +Banamex and Independent Risk for the Latin American Region also openly questioned whether +there was sufficient support for the credit facility being classified as a buyer centric program and +whether the process for validation and payment of factored documents was sufficiently robust. All +of these concerns were apparently assuaged with additional assurances from the business, product +and risk teams at Banamex – the very individuals who had mischaracterized the facility as buyer +centric. + +45. In September 2013, ICG management also specifically questioned Banamex +employees as to why they were not more familiar with the Program, given its size, and they also +questioned whether the facility had gone through GDR, but little was done as a result of these +concerns. + +46. After Independent Risk had reviewed and approved credit increases to the Program, +Banamex eventually brought the increased Program to GDR for review and approval from a +business perspective in December 2013, where it was tabled – meaning that approval was put on +hold until the Banamex business team provided additional information. The Banamex team +proceeded as if GDR approval had been granted, even though the GDR procedures required +reconsideration by the GDR committee. + +Violations + +47. By virtue of the conduct described above, Citigroup failed to devise and maintain +internal accounting controls sufficient to provide reasonable assurances that Banamex’s accounts +were accurately stated in accordance with generally accepted accounting principles. + +48. As a result of the conduct described above, Citigroup 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, among other things, +transactions are executed in accordance with management’s general or specific authorization; +transactions are recorded as necessary to permit preparation of financial statements in conformity +with generally accepted accounting principles 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. + +Citigroup’s Remedial Efforts + + +10 + +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 Citigroup’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Citigroup cease and +desist from committing or causing any violations and any future violations of Section 13(b)(2)(B) of +the Exchange Act. + +B. Citigroup shall, within 30 days of the entry of this Order, pay a civil money penalty +in the amount of $4.75 million to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +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 +Citigroup 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 Sanjay Wadhwa, Senior Associate +Director, Division of Enforcement, New York Regional Office, Securities and Exchange +Commission, 200 Vesey Street, New York, NY 10281. + + 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 + + +11 + +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/2018/AAER-3959.txt b/raw/aaer/2018/AAER-3959.txt new file mode 100644 index 0000000000000000000000000000000000000000..2da59e69bd3b2e14dd7d82e67bbb5d5c79739aae --- /dev/null +++ b/raw/aaer/2018/AAER-3959.txt @@ -0,0 +1,78 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83883 / August 17, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3959 / August 17, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18650 +______________________________ +: +In the Matter of : + : ORDER OF FORTHWITH SUSPENSION + : PURSUANT TO RULE 102(e)(2) OF THE +DANIEL H. GLICK, CPA, : COMMISSION’S RULES OF PRACTICE + : +: +Respondent. : +______________________________: + I. +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Daniel H. Glick 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. Daniel H. Glick was licensed as a certified public accountant in Illinois from 1991 +to 2014. +2. On January 9, 2018, Glick pled guilty to one count of wire fraud in violation of + +1 Rule 102(e)(2) provides in pertinent part: “Any . . . person whose license to practice as an accountant, +engineer, or other professional or expert has been revoked or suspended in any State; or any person who has been +convicted of a felony or a misdemeanor involving moral turpitude shall be forthwith suspended from appearing or +practicing before the Commission.” + + + + +2 + +Title 18 United States Code, Section 1343 before the United States District Court for the +Northern District of Illinois, in United States v. Daniel Glick, Case No. 17-cr-739. On April 17, +2018, a judgment in the criminal case was entered against Glick. He was sentenced to a prison +term of 151 months and ordered to pay restitution in the amount of $5,206,432.09. +3. In connection with that plea, Glick admitted, among other things that: (a) he +engaged in a fraudulent scheme designed to benefit himself and his companies to the financial +detriment of clients and two financial institutions; (b) as part of his scheme, Glick +misappropriated at least several million dollars of funds from clients and financial institutions, +and lied to clients about the use, status and safety of their invested funds; and (c) he created and +provided false and misleading account statements to clients and made Ponzi-type payments to +clients. +5. On October 6, 2014, the Illinois Department of Financial and Professional +Regulation (“Illinois DFPR”) revoked Glick’s Certified Public Accountant license. +6. The Illinois DFPR imposed this disciplinary action based on unprofessional +conduct related to the misappropriation of personal funds of a tax client for Glick’s personal use. +III. +In view of the foregoing, the Commission finds that Glick has been convicted of a felony +and is an accountant whose license to practice has been revoked within the meaning of Rule +102(e)(2) of the Commission’s Rules of Practice. +Accordingly, it is ORDERED, that Daniel H. Glick 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/2018/AAER-3960.txt b/raw/aaer/2018/AAER-3960.txt new file mode 100644 index 0000000000000000000000000000000000000000..f7d35797e8e1a469ac4d3c4784bf8d868909544f --- /dev/null +++ b/raw/aaer/2018/AAER-3960.txt @@ -0,0 +1,329 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83889 / August 20, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3960 / August 20, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18652 + + + + +In the Matter of + +Joseph Jennings, CPA, + +Respondent. + + + + +CORRECTED ORDER INSTITUTING +PUBLICADMINISTRATIVE 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 Joseph +Jennings, CPA (“Respondent” or “Jennings”) pursuant to Sections 4C1 and 21C of the Securities + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 + +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + + 1. These proceedings involve insider trading by Jennings, a certified public accountant +(“CPA”), who was employed as a director in the New York office of a major accounting and +auditing firm (the “Firm”). In March 2015, through his work at the Firm, Jennings learned that the +Firm’s clients H.J. Heinz Company (“Heinz”) and Kraft Foods Group, Inc. (“Kraft”) planned to +enter into a merger agreement. On March 23, 2015, while in possession of this material nonpublic +information, and in breach of his duty of trust and confidence to the Firm, Jennings purchased 100 +Kraft call options (with a strike price of $67.50 and an expiration date of June 19, 2015) in a close +relative’s online brokerage account for approximately $5,500. On March 25, 2015, before the +market opened, Heinz and Kraft issued a joint press release announcing their agreement to form +The Kraft Heinz Company (“Kraft Heinz”), one of the world’s largest food and beverage +companies (the “Announcement”). After the Announcement, Kraft’s stock price increased by +approximately 35%, from the previous trading day’s closing price of $61.33 per share to the + +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 + +Announcement day’s closing price of $83.17 per share. Following the Announcement, the value +of the Kraft options that Jennings had purchased in his close relative’s account increased by +approximately $150,500. Jennings did not sell or exercise the Kraft options following the +Announcement. Later, in June 2015, Jennings and his relative who owned the account contacted +the brokerage firm where the account was held to instruct the brokerage firm to allow the Kraft +options to expire without being exercised. As a result, the options Jennings had purchased expired +without being exercised or sold. + +B. RESPONDENT + + 2. Jennings, age 35, resides in New York, New York, and is a CPA licensed since +2007 in the state of Illinois and since 2013 in the state of New York. Until March 2018, Jennings +was a director at the Firm, where he provided the Firm’s clients with a variety of services, +including annual audits of public companies’ financial statements and accounting advisory +services. + +C. RELEVANT ENTITIES + + 3. Kraft was an Illinois-based international food and beverage company. Kraft’s +common stock traded on NASDAQ under the symbol “KRFT” until July 6, 2015, when Kraft +completed its merger with Heinz. During the relevant period, Kraft was an audit client of the Firm. + + 4. Heinz was a Pennsylvania-based international food company. Heinz was a private +company until July 6, 2015, when it merged with Kraft to form Kraft Heinz. During the relevant +period, Heinz was an audit client of the Firm. + +D. FACTS + + 5. Jennings owed a duty of trust and confidence to his employer, the Firm, and his +misuse of information he learned in the course of his employment was a violation of that duty. +Jennings’s employment agreement prohibited him from using or sharing nonpublic information +that he obtained during the course of his work for the Firm, for his personal gain or for the personal +gain or advantage of anyone with whom he improperly shared the information. Jennings was also +subject to the Firm’s Insider Trading Policy, which prohibited him from using inside information +that he obtained at work to buy or sell securities. Jennings signed annual acknowledgments +indicating that he read, understood, and agreed to comply with these policies. + + 6. In mid-March 2015, through his work at the Firm, Jennings learned that the Firm’s +clients Heinz and Kraft planned to enter into a merger agreement. This information was material +and nonpublic. + + 7. After the market closed on March 23, 2015, while in possession of the material +nonpublic information, Jennings logged into a close relative’s online brokerage account, which +Jennings controlled, and entered an order to purchase 100 Kraft call options, with a strike price of +4 + +$67.50 and an expiration date of June 19, 2015. The order executed the next day, March 24, 2015, +at a cost of approximately $5,500. + + 8. Jennings knew, or was reckless in not knowing, that his purchase of Kraft options +was in breach of his duty to his employer and in violation of the Firm’s policies prohibiting insider +trading. + + 9. On March 25, 2015, before the market opened, Heinz and Kraft issued a joint press +release announcing their agreement to merge and form Kraft Heinz. + + 10. On March 25, 2015, Kraft’s stock closed at $83.17 per share, an increase of +approximately 35% over the prior day’s closing price of $61.33 per share. As a result, the value of +the Kraft options that Jennings had purchased in his relative’s account increased by approximately +$150,500. + + 11. In early June 2015, both Jennings and his relative who owned the account contacted +the brokerage firm where the account was held to instruct the brokerage firm to allow the Kraft +options to expire without being exercised. As a result, the options Jennings had purchased expired +without being exercised or sold. + + 12. In July 2015, the Firm received an inquiry from the Financial Industry Regulatory +Authority (“FINRA”) requesting that any employee with prior knowledge of the Kraft Heinz +merger review an enclosed list of individuals and entities and that such employees identify +individuals or entities on the list who were known to them. Jennings’s relative’s name was on that +list. Although Jennings acknowledged his relationship with his relative in connection with the +FINRA inquiry, he did not inform the Firm that he controlled the relative’s brokerage account, or +that he had traded in Kraft securities in that account in advance of the Announcement. + +Findings + + 13. Based on the foregoing, the Commission finds that Jennings willfully violated +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Jennings’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Jennings shall cease and desist from committing or causing any violations and any +future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + +5 + + B. Jennings is denied the privilege of appearing or practicing before the Commission +as an accountant. + + C. After two years from the date of this order, Jennings 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 Jennings’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) Jennings, 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) Jennings, 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 Jennings will not receive appropriate supervision; + (c) Jennings 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 +6 + + + (d) Jennings 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 Jennings to resume appearing or +practicing before the Commission provided that his state CPA license(s) 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 Jennings’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 shall pay a civil money penalty in the amount of $150,500 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: (1) $50,000 within 10 days of the entry of the Order; (2) $40,500 within one year of +the entry of the Order; (3) $30,000 within two years of the entry of the Order; and (4) the balance +of $30,000 within three years 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 the penalty, 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 +7 + +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Joseph Jennings 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 Joseph G. Sansone, Division of +Enforcement, Securities and Exchange Commission, 200 Vesey Street, Suite 400, New York, New +York 10281-1022. + + 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. + +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/2018/AAER-3961.txt b/raw/aaer/2018/AAER-3961.txt new file mode 100644 index 0000000000000000000000000000000000000000..0834df129619c542c365048fee153856e407cca5 --- /dev/null +++ b/raw/aaer/2018/AAER-3961.txt @@ -0,0 +1,426 @@ + + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83948 / August 27, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3961 / August 27, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18684 + + +In the Matter of + +LEGG MASON, 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 Legg Mason, 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, 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. + +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 internal controls provision of the +Foreign Corrupt Practices Act (“FCPA”) by Legg Mason, Inc. (“Legg Mason” or the +“Company”). Between 2004 and 2010, Legg Mason, through Permal Group Ltd., one of its +former asset management subsidiaries (“Permal”), partnered with Société Générale S.A., a +global financial services company based in Paris, France (“Société Générale”) to solicit +business from state-owned financial institutions in Libya (“Libyan Financial Institutions”). +In connection with this effort, bribes were paid through a Libyan middle-man (the “Libyan +Intermediary”) to obtain investments from Libyan Financial Institutions. + +2. From approximately 2005 to 2008, Société Générale paid the Libyan +Intermediary approximately $26.25 million for supposed “introductory” services. +Nevertheless, by at least 2006, two Permal employees were aware that the intermediary was +paying bribes to Libyan government officials in order to secure investments. These two now- +former Permal employees agreed to continue to use the Libyan Intermediary notwithstanding +that knowledge. + +3. Société Générale sold the Libyan Financial Institutions seven structured notes, +or debt securities, linked to funds managed in whole, or in part, by Permal. The total value of +these notes was approximately $950 million. For each of the seven transactions, Société +Générale, on behalf of itself and Permal, paid to an entity incorporated under the laws of +Panama and controlled by the Libyan Intermediary (the “Panamanian Company”) a +commission of between one and a half and three percent of the nominal amount of the +investments made by the Libyan Financial Institutions. Permal earned net revenues of +approximately $31.6 million from these transactions. + +4. Legg Mason lacked appropriate internal accounting controls with respect to +the use of introducing brokers and other intermediaries in emerging markets, including Libya. +Accordingly, Legg Mason violated the internal controls provision of the federal securities +laws set forth in Section 13(b)(2)(B) of the Exchange Act. + +Respondent + +5. Legg Mason, Inc. (“Legg Mason” or the “Company”) is a U.S. based +investment management firm headquartered in Baltimore, Maryland. Its shares were publicly +traded on the New York Stock Exchange and it was an “issuer” within the meaning of the +Foreign Corrupt Practices Act (“FCPA”). + +Other Relevant Entities + +6. Permal Group Ltd. (“Permal”) was a U.S. headquartered investment firm +and former subsidiary of Legg Mason through which Legg Mason conducted business as an +asset manager. Permal’s financial statements were consolidated into Legg Mason’s financial +statements and the entities participated in a net revenue sharing arrangement. All Permal +employees were subject to Legg Mason’s code of conduct. In approximately 2016, Permal's + + +3 + +interests in the asset management business were contributed to create a new asset +management business named EnTrustPermal, and Legg Mason retained responsibility for the +legacy Permal's liabilities with regard to the conduct set forth herein. + +7. Société Générale S.A. (“Société Générale”) is a financial institution and +global financial services company headquartered in Paris, France. + +FACTS +Background +8. In and around 2004, as Libya emerged from international economic sanctions, +Libyan Financial Institutions sought opportunities to invest the substantial assets under their +control. Financial institutions from around the globe aggressively sought access to these +assets. Against this backdrop, Permal explored partnerships with both introducing brokers +and with other financial institutions, including Société Générale, in an effort to improve its +efforts to market products and services to Libyan Financial Institutions. + +9. In or about May 2004, the Libyan Intermediary met with employees of +Permal to discuss how the Libyan Intermediary could provide Permal access to investments +in Libya. The Libyan Intermediary was accompanied at the meeting by multiple Libyan +government officials, including a close associate of one of the most senior and powerful +government officials in Libya. The attendees discussed the possibility that various Libyan +Financial Institutions would purchase products from Société Générale, and the products +would be linked to funds managed by Permal. Following that meeting Permal understood +that the Libyan Intermediary had connections in Libya that would make him an effective +introducing broker for Permal in that country. + +Bribes Paid to Libyan Officials Through the Libyan Intermediary to Benefit Legg +Mason +10. Permal worked closely with Société Générale to sell the structured investment +products to Libyan government entities. Société Générale acted as the “structuring bank,” +receiving money invested by the Libyan Institutional investors in exchange for the issuance +of structured notes. By agreement with Société Générale, some of the assets invested by the +Libyan Financial Institutions were placed in funds managed by Permal. Permal then +recognized these investments as part of its assets under management and earned fees on the +amount of assets received. + +11. On each transaction, Société Générale paid the Panamanian Company +controlled by the Libyan Intermediary a commission of between one and a half and three +percent of the nominal, or face value, amount of the investments made by Libyan institutional +investors. The Libyan Intermediary used those funds to pay high-level Libyan government +officials in order to secure the investments from various Libyan state institutions for Société +Générale. Permal never paid the Libyan Intermediary directly under this agreement because +Permal and Société Générale jointly decided that Société Générale should make commission +payments to the Libyan Intermediary. + + + +4 + + +12. Two Permal employees (each, a “Permal Employee,” and, together, the +“Permal Employees”), both of whom are no longer employed by Legg Mason or any of its +subsidiaries or affiliates, nor were ever employed by EnTrustPermal, were aware at the time +that the Libyan Intermediary was paying bribes and other improper financial benefits to +Libyan government officials in order to secure investments for Société Générale. The Permal +Employees and employees of Société Générale discussed their belief and understanding that, +in order to secure deals for Permal and Société Générale, the Libyan Intermediary was using +some portion of the commissions from Société Générale to pay Libyan government officials, +and was providing smaller payments and improper benefits, such as free travel and +entertainment, to other Libyan officials. + +13. The Permal Employees, along with employees of Société Générale, also used +coded language in furtherance of the scheme, including discussing when the Libyan +Intermediary had “cooked” various Libyan government officials, which was used to connote +that the Libyan Intermediary had established control over the official, whether through +bribery or other means. For example, on or about September 5, 2006, the Libyan +Intermediary transferred approximately $75,000 to a relative of a Libyan government official. +The Libyan Intermediary used the term “cooking” to describe his ability to cause Libyan +government officials to invest with Société Générale and Permal by any means necessary, +including bribes, threats, and intimidation. That same day, the Libyan Intermediary placed a +telephone call, which was recorded, to a Société Générale employee, during which he stated +about the Libyan government official: “I cooked him. . . . Only we have to go there, start the +fire, have a barbecue.” During another telephone call the same day with a Permal Employee, +a Société Générale employee stated: “[the Libyan government official] is coming, for your +information, at my place this weekend . . . . I’m going to cook the guy, cook him very hot to +make sure everything is clean . . . let’s make sure by working on [the Libyan government +official], by working on him that we get back on these transactions, done at least 100 on each +fund . . . [Libyan Intermediary] is saying the proposals you’re going to do for [this Libyan +Financial Institution], he’ll do the same one for [another Libyan Financial Institution].” + +14. Approximately one week later, in September 2006, a Permal Employee sent +the Libyan government official a proposal for a structured note issued by Société Générale +and linked to a fund managed by Permal. On or about September 19, 2006, a Société +Générale employee told a senior Permal employee by email that the Société Générale +employee had “cooked” the Libyan government official and that the Société Générale +employee was confident that Permal would be included in the upcoming deals. + +15. On or about March 27, 2007, two Libyan Financial Institutions jointly +invested in three structured notes totaling $500 million issued by a Société Générale +subsidiary, two of which were linked to the performance of certain funds, including funds +managed by Permal. On or about April 11, 2007, Société Générale paid, in connection with +the March 2007 transactions, a total of $15 million to the Libyan Intermediary via the +Panamanian Company’s account at Société Générale. + + + +5 + +16. Additionally, at least one of the Permal Employees was aware that Société +Générale employees were taking steps to conceal the Libyan Intermediary’s payments from +the Libyan Financial Institutions. + +17. Permal through certain of its employees had further involvement in +subsequent transactions with Libyan Financial Institutions that were obtained through bribes +paid by Société Générale, as set forth below. + +Legg Mason Obtains $150 Million Investment From Libyan Financial Institution +18. On or about June 21, 2007, Société Générale sold to a Libyan Financial +Institution a $150 million, three-year structured note issued by a Société Générale subsidiary, +linked to funds managed by both Permal and Société Générale. Certain Société Générale +employees prepared and transmitted a term sheet setting out the terms and conditions of the +investment and deal documents to the Libyan Financial Institution, incorporating Permal’s +logo and information in the materials. + +19. On or about July 25, 2007, Société Générale closed a second deal with the +same Libyan Financial Institution. In this transaction, the investor purchased a $100 million, +five-year structured note issued by a Société Générale subsidiary, linked to funds managed by +Permal. + +20. On or about and between August 10, 2007 and March 19, 2009, Société +Générale paid a total of approximately $5.25 million to the Libyan Intermediary via the +Panamanian Company’s account at Société Générale in connection with these two +transactions. + +Legg Mason Obtains $300 Million Investment From Libyan Financial Institution +21. By in or about September 2007, Permal had begun pursuing a direct +investment by another Libyan Financial Institution into a fund managed by Permal, instead of +through a Société Générale structured note. Ultimately, however, the LIA purchased a +structured note issued by a Société Générale subsidiary, linked to funds managed by Permal. + +22. On or about October 17, 2007, one of the Permal Employees sent an email to +a Libyan government official informing him that the contemplated investment with Permal +would be managed out of its New York office. On or about October 26, 2007, the Permal +Employee sent an email to set up a meeting between the Libyan Intermediary and Permal’s +then-Chief Executive Officer and Chairman. + +23. On or about November 28, 2007, the Libyan Financial Institution purchased +from Société Générale $300 million worth of structured notes issued by a Société Générale +subsidiary, linked to funds managed by Permal. According to the term sheet, which was +prepared by Société Générale employees but had Permal’s logo on the cover, Permal would +be the investment adviser of the fund to which the performance of the structured note was +linked. Although Permal employees had originally pitched the deal without the assistance of +the Libyan Intermediary, and the Libyan Intermediary had played no role in negotiating or + + +6 + +structuring the deal, the term sheet stated that the Panamanian Company had collaborated +with Société Générale and was remunerated for its services. + +24. On or about January 21, 2008, Société Générale prepared a $9 million invoice +for the Libyan Intermediary to send to Société Générale. On or about February 2, 2008, +Société Générale paid $9 million to the Panamanian Company’s account at Société Générale +in Zurich in connection with the November 2007 transaction. + +25. On or about April 27, 2008, Société Générale learned from the Libyan +Intermediary that the Libyan Financial Institution would be requiring financial firms doing +business with it to disclose whether the firms were using intermediaries or third parties in +connection with soliciting investments. + +26. On or about April 28, 2008, employees of Société Générale and one of the +Permal Employees spoke by telephone. During that recorded phone call, a Société Générale +employee described the requirement to disclose the use of agents as a “Libyan bomb.” The +Permal Employee responded, “I know, man. I know the can of worms opened.” + +27. On or about and between May 4, 2008 and May 9, 2008, a Permal Employee +and a Libyan government official connected to these transactions traveled together to Boston, +Massachusetts, where Permal provided the official with a course in negotiations at a +university, as well as luxury hotel accommodations and entertainment. The Libyan +government official and the Permal Employee then traveled from Boston to New York. + +28. On or about and between May 9, 2008 and May 12, 2008, a Société Générale +employee and the Libyan Intermediary traveled to New York to meet the Libyan government +official, to pitch him on a prospective deal, and to provide him with entertainment in New +York. While in New York, a Société Générale employee discussed with the Libyan +government official the prospect of Société Générale securing approximately $4 billion worth +of additional investments from a Libyan Financial Institution. A Société Générale employee +also provided the Libyan government official and the Libyan Intermediary with multiple days +of entertainment in New York, including overnight stays at an upscale hotel, extravagant +meals and nightlife entertainment, and gifts of luxury goods. + +29. As a result of the corrupt scheme, Permal obtained seven investments and +earned net revenues of approximately $31.6 million. Permal continued to earn management +fees in connection with some of the transactions described herein until 2012. All seven +transactions involving Permal were terminated no later than 2012. + +Legg Mason Lacked Adequate Internal Accounting Controls +30. Legg Mason failed in a timely manner to devise and maintain an adequate +system of internal accounting controls with respect to the Company’s widespread use of +introducing brokers and other intermediaries in emerging markets, including Libya. The +controls in place during the relevant period were minimal and deficient. + + + +7 + +31. The internal accounting controls were not reasonably sufficient with respect to +the Company’s use of, and payments to, intermediaries. Legg Mason did not timely institute +appropriate risk-based due diligence and compliance requirements pertaining to the retention +and oversight of such agents and business partners. + +32. Legg Mason did not take adequate steps to identify or mitigate the risks of +bribery and corruption in making use of middlemen such as the Libyan Intermediary. + +Legal Standards and Violations + +33. As a result of the conduct described above Legg Mason violated Section +13(b)(2)(B) of the Exchange Act, which requires issuers that have a class of securities +registered pursuant to Section 12 of the Exchange Act and issuers with reporting obligations +pursuant to Section 15(d) of the Exchange Act to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that (i) transactions are +executed in accordance with management’s general or specific authorization; (ii) transactions +are recorded as necessary (I) to permit preparation of financial statements in conformity with +generally accepted accounting principles or any other criteria applicable to such statements, +and (II) to maintain accountability for assets; (iii) access to assets is permitted only in +accordance with management’s general or specific authorization; and (iv) the recorded +accountability for assets is compared with the existing assets at reasonable intervals and +appropriate action is taken with respect to any differences. + +Cooperation and Remedial Action + +34. In determining to accept the Offer, the Commission considered the significant +cooperation Legg Mason provided to the Commission staff throughout the investigation. +Legg Mason’s cooperation included summarizing the findings of its internal investigation, +making foreign-based employees available to the Commission staff including providing for +their travel to the United States for interviews, and providing timely factual summaries of +witness interviews and other information developed in the course of its internal investigation. +Legg Mason’s cooperation assisted the Commission in collecting information that might not +have been otherwise available to the staff. + +35. The Commission also considered the remedial efforts undertaken by +Respondent. Legg Mason’s remedial action included replacing the employees involved in the +violation, increasing the number of professionals focused on the company’s compliance +efforts including establishing a new anti-corruption officer position, and enhancing its +internal accounting controls to prevent and detect the type of misconduct described herein. + +Non-Prosecution Agreement + +36. Legg Mason has entered into a non-prosecution agreement with the +Department of Justice that acknowledges responsibility for criminal conduct relating to +certain findings in the Order. + + + +8 + +Non-Imposition of a Civil Penalty + +37. Respondent acknowledges that the Commission is not imposing a civil +penalty based upon the imposition of a $32,625,000 criminal fine as part of Legg Mason’s +resolution with the United States Department of Justice on June 4, 2018. + +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(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)]. + +B. Respondent shall, within 10 days of the entry of this Order, pay +disgorgement of $27,594,729 and prejudgment interest of $6,907,765, for a total +payment of $34,502,494 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 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 + + + + + + + +9 +Payments by check or money order must be accompanied by a cover letter identifying +Legg Mason 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 +Regional Director, FCPA Unit, Enforcement Division, Boston Regional Office, U.S. Securities +and Exchange Commission, 33 Arch Street, Suite 2300, Boston, Massachusetts 02110. + + +By the Commission. + + + + + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3962.txt b/raw/aaer/2018/AAER-3962.txt new file mode 100644 index 0000000000000000000000000000000000000000..ffbf03c26a9fabb9283b9b9b73fe3fd037b96f35 --- /dev/null +++ b/raw/aaer/2018/AAER-3962.txt @@ -0,0 +1,116 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 83993 / August 29, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3962 / August 29, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18698 + +In the Matter of +DAVID MICHAEL NAYLOR, +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 +Respondent David Michael Naylor (“Naylor”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Naylor 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 + +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 him and the subject matter of these proceedings, and the +findings contained in Section III.3 below, which are admitted, Naylor 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 Naylor’s Offer, the Commission finds that: + + 1. Naylor, age 54, is and has been a Canadian chartered professional accountant +(“CPA”). He has served as Chief Financial Officer of Intertech Solutions, Inc. (“ITEC”) since April +2014 and continues to hold that position. + + 2. ITEC was, at all relevant times, a Nevada corporation with its principal place +of business in Scottsdale, Arizona. ITEC was purportedly engaged in the business of project finance +and management for mining operations. At all relevant times, ITEC’s common stock traded on OTC +Link, operated by OTC Markets Group. ITEC’s common stock was not registered with the +Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”) +during the relevant period. + + 3. On August 22, 2018, a final judgment was entered against Naylor in the +civil action entitled Securities and Exchange Commission v. Intertech Solutions, Inc. et al., Civil +Action Number 2:18-CV-01566, in the United States District Court for the District of Nevada, +permanently enjoining him from (1) future violations of Sections 5(a), 5(c), and 17(a) of the +Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Exchange Act and Rule 10b-5 +thereunder; and (2) directly or indirectly, including, but not limited to, through any entity owned or +controlled by him, participating in the issuance, purchase, offer, or sale of any security in an +unregistered transaction. The District Court also imposed a permanent officer and director bar and +a permanent penny stock bar on Naylor and ordered Naylor to pay $454,630.36, jointly and +severally with ITEC, in disgorgement of ill-gotten gains from the proceeds of ITEC’s illegal +offerings plus $18,459.82 in prejudgment interest and a $92,383.00 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Naylor, at +the direction of ITEC’s undisclosed control person, engaged in an unregistered general solicitation +of ITEC securities, obtained money or property by means of material misrepresentations in the +offer or sale of ITEC securities, aided and abetted the making of numerous material +misrepresentations in offering documents ITEC provided to prospective investors, and engaged in +a fraudulent scheme which resulted in ITEC’s investor funds being misappropriated to pay for +personal expenses of ITEC’s control persons and business expenses of entities that provided no +services or other benefit to ITEC. The Complaint alleged that Naylor was responsible for ITEC’s +financial accounts and authorized the misuse of ITEC’s investor funds. + + + 3 + + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Naylor’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Naylor 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/2018/AAER-3963.txt b/raw/aaer/2018/AAER-3963.txt new file mode 100644 index 0000000000000000000000000000000000000000..d1927be2f7945ae193a50aedeea869d26f0474e9 --- /dev/null +++ b/raw/aaer/2018/AAER-3963.txt @@ -0,0 +1,76 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84010 / August 30, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3963 / August 30, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18703 +______________________________ +: +In the Matter of : + : CORRECTED ORDER OF SUSPENSION +PHILIP R. JACOBY, JR., CPA, : 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 Philip R. Jacoby, Jr. 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. Jacoby maintained a certified public accountant license from the state of +Maryland from March 1982 until December 1984. + +2. On February 2, 2018, a judgment of conviction was entered against Jacoby in +United States v. Jacoby, 17 Cr. 676 (DLC), in the United States District Court for the Southern +District of New York, finding him guilty of one count of false statements to auditors. Jacoby’s +criminal conduct occurred while he served as the principal accounting officer of Osiris +Therapeutics, Inc. + + +1 Rule 102(e)(2) provides in pertinent part: “[a]ny person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + + + +2 + +3. As a result of this conviction, Jacoby was sentenced to two years of supervised +release and ordered to pay a criminal monetary penalty of $10,000. + +III. + +In view of the foregoing, the Commission finds that Jacoby 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 Philip R. Jacoby, Jr. 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/2018/AAER-3964.txt b/raw/aaer/2018/AAER-3964.txt new file mode 100644 index 0000000000000000000000000000000000000000..77340c3aa2b732186305a4beeedd7f6680ffc4e1 --- /dev/null +++ b/raw/aaer/2018/AAER-3964.txt @@ -0,0 +1,465 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84017 / September 4, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3964 / September 4, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18708 + +In the Matter of + +Sanofi, + +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 Sanofi (“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 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + + + + +2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that + +Summary + +A. These proceedings arise out of Sanofi’s violations of the internal accounting controls +and recordkeeping provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”) [15 +U.S.C. § 78m]. + +B. As described below, from at least 2011 to 2015, employees and agents of Sanofi’s +subsidiaries in Kazakhstan, Levant (which includes the countries Jordan, Lebanon, Syria, and the +region of Palestine), and the Gulf (which includes the countries Bahrain, Kuwait, Qatar, Yemen, +Oman, and the United Arab Emirates) acted to provide things of value to foreign officials, including +healthcare professionals (“HCPs”), in order to improperly influence them and increase sales of +Sanofi products. + +C. The funds used for the illicit payments were generated through fake expenses for +purportedly legitimate travel and entertainment expense, clinical trial and consulting fees, product +samples, round table meeting expenses, distributor discounts, and credit notes to distributors which +were improperly recorded as legitimate expenses in Sanofi’s books and records. Throughout this +period, Sanofi failed to devise and maintain a sufficient system of internal accounting controls and +lacked an effective anti-corruption compliance program with regard to Kazakhstan, Levant, and the +Gulf. + +D. Deficiencies in the internal accounting controls and compliance program of Sanofi +also led to similar improper conduct in connection with sales in other countries in which Sanofi +operates. + +Respondent + +E. Sanofi is a corporation organized in France. Its headquarters are located in Paris, +France. Sanofi issued and maintains a class of publicly traded securities registered pursuant to +Section 12(b) of the Securities Exchange Act of 1934, which have traded on the New York Stock +Exchange since 2002. + +F. Sanofi is a global pharmaceutical company and operates in over 100 countries. +Sanofi employs approximately 107,000 people worldwide, at least 28 percent of whom are +designated as sales force personnel. + + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + +3 +Other Relevant Entities + +G. Sanofi-Aventis Kazakhstan LLP (“Sanofi KZ”) is a company organized in +Kazakhstan. Sanofi KZ engages distributors in Kazakhstan to facilitate the sale and distribution of +pharmaceutical products and maintains its own sales and marketing staff to promote Sanofi +pharmaceutical products. + +H. Sanofi-Aventis Liban S.A.L. (“Sanofi Levant”) is a company organized in +Lebanon. Sanofi Levant engages distributors in Levant to facilitate the sale and distribution of +pharmaceutical products and maintains its own sales and marketing staff to promote Sanofi +pharmaceutical products. + +I. Sanofi Aventis Gulf FZE (“Sanofi Gulf”) is a company organized in the United +Arab Emirates. Sanofi Gulf is responsible for pharmaceutical operations in Bahrain, Kuwait, +Qatar, Yemen, Oman, and the United Arab Emirates. Sanofi Gulf engages 31 distributors across +the relevant countries to facilitate the sale of Sanofi pharmaceutical products and maintains its own +sales and marketing staff to promote Sanofi pharmaceutical products. + +Facts + +Kazakhstan + +J. Between 2007 and 2011, senior managers of Sanofi KZ engaged in a scheme to +bribe foreign officials to corruptly influence the award of tenders at public institutions. The funds +paid to foreign officials were derived from discounts and credit notes2 extended to several +distributors who colluded with senior managers to kick back funds to Sanofi employees in +Kazakhstan which were then used to pay Kazakh officials. + +K. The scheme took several stages to execute. First, senior managers of Sanofi KZ +identified to a distributor a public tender for pharmaceuticals that could be filled by Sanofi +products. Second, the distributor submitted a bid for the public tender and, when awarded, notified +Sanofi of its need to purchase products to fulfill the tender. Third, the sale price between Sanofi +and the distributor included a pre-determined discount or credit note from the sale price between +the distributor and the public institution. Fourth, from the amount of the discount or credit note, +Sanofi and the distributor were able to designate a portion as the funds which were used to bribe +Kazakh officials. Fifth, once the funds which were used to bribe Kazakh officials were earmarked, +the distributor kicked back those funds to Sanofi employees who then delivered the illicit proceeds +to Kazakh officials. The scheme typically involved providing a 20-30 percent discount to the +distributors, a portion of which was then used as the funds from which bribes were paid to Kazakh +officials. The funds kicked back to Sanofi employees were tracked in internal spreadsheets and +referred to as “marzipans.” + + +2 Credit notes are monies owed to a vendor by Sanofi. The vendor may apply the credit note(s) +against monies the vendor owes to Sanofi and, in some cases, the vendor was able to exchange +the credit note(s) for cash from Sanofi. + + +4 +L. At the time, Sanofi had no standardized commercial policy for distributor discounts +and did not review the discounts provided by local management. During the relevant period, tender +sales increased by over 200 percent and included top selling products of Sanofi. The distributors +involved in the conduct were some of the largest distributors by sales in Kazakhstan. As a result of +the improper conduct in Kazakhstan, Sanofi derived profits equivalent to approximately USD +11,580,099. + +Levant + +M. From 2011 to 2013, employees and agents of Sanofi Levant participated in a series +of schemes to pay foreign officials to boost sales of Sanofi products through increased +prescriptions. The schemes included sponsorships, gifts, donations, product samples, consulting +agreements, peer-to-peer meetings, clinical studies, and grants. The schemes were executed across +the various business lines in Levant and included the top selling products of Sanofi in the region. +Some of the schemes involved the participation by senior managers of Sanofi Levant. The +instances of improper conduct were not isolated and spanned across government agencies as well +as private institutions. + +N. An example of the corrupt conduct is a 2012 request by an HCP of a large public +hospital in Jordan for 24 vials of Taxotere as product samples. At the time, corporate policy for +product samples required a medical justification. Taxotere is a product used to treat cancer and is +one of the most expensive products sold in Levant. The oncology manager requested a +justification from the sales representative and was told + +[HCP] is a KOL [key opinion leader] Doctor, our Consumption in [hospital] +is 124 vials, But we Don’t Give Dr.s in Institution Pt.Support [in public +hospital product samples for patients]. But He Asked as a Favor. + +The oncology manager then approved the request. Medical Affairs was not involved in reviewing +or approving the request and no justification was provided regarding the medical use or +appropriateness. The quantity provided as samples was nearly 20 percent of the hospital’s +purchases. The HCP requesting the samples was a tender committee member at the hospital. + +O. The same HCP requesting samples of Taxotere in 2012 was also provided with +consulting, speaking, and clinical trial fees over a period of years despite the lack of documentation +of other support to demonstrate the services had been provided. Sanofi paid to the HCP the +equivalent in local currency of USD 28,900 in consulting fees and, USD 5500 in speaking fees. +Sanofi also paid to the HCP USD 125,997 in clinical trial fees. The consulting fees were +purportedly related to hosting events and training for HCPs in Iraq. No supporting documentation +was found for any of the purported consultancy services. While the clinical trial fees were +approved by Medical Affairs, the HCP has never provided reports of findings or observations. The +HCP, who provided the ostensible speaking, consulting, and clinical trial services to Sanofi, +requested that the consulting and clinical trial fees be paid by check to an unrelated individual. +Sanofi accommodated the request to pay the unrelated individual without explanation or +justification. + + + +5 +P. The practice of engaging as consultants influential HCPs who provided vague +services was also performed with HCPs in the private sector. As an example, Sanofi Levant +retained as a consultant the services of a prominent pharmacist in Lebanon for several years +through 2013. The pharmacist received annual payments denominated in United States dollars of +no less than USD 42,000 and in a five-year period received a total of USD 237,300. The +consulting services required included preparing training programs and conducting speaking events +however, evidence of the receipt of those services is sparse or nonexistent. Sanofi failed to require +sufficient documentation of the performance of services before making payments to its consultants. + +Q. As a result of the improper conduct in Levant, Sanofi derived profits equivalent to +approximately USD 4,200,000. + +The Gulf + +R. In the countries comprising Sanofi Gulf, sales managers and medical +representatives in the Primary Care business unit engaged in a long-standing scheme to submit +false travel and entertainment reimbursement claims, pool the illicit proceeds of the false schemes, +and distribute the illicit proceeds to HCPs in the private sector in order to increase prescriptions of +Sanofi products. + +S. The false travel and entertainment claims were made in connection with fake round +table meetings with HCPs and facilitated by fake receipts issued by collusive vendors known to +facilitate such activity. The scheme was quite simple and involved local sales managers. Medical +representatives were instructed by their sales managers to submit a doctored receipt for a round +table meeting that never occurred. Medical representatives then submitted a doctored receipt for +reimbursement as a legitimate travel and entertainment expense. The sales managers approved the +travel and entertainment expense submission and the medical representatives were reimbursed. +Medical representatives gave the sales managers the illicit proceeds from the fraudulent +reimbursement and then pooled the illicit proceeds together into a slush fund to pay HCPs. +Managers tracked the incoming pool of illicit proceeds from medical representatives and the +disposition of illicit proceeds to HCPs who were paid to increase prescriptions of Sanofi products. + +T. The Primary Care business unit was responsible for several high sales volume +products in the Gulf. The scheme employed by sales managers and medical representatives was +executed from at least 2012 to 2015. One medical representative estimated that 70 percent of the +travel and entertainment expense submissions of the Primary Care business unit were related to the +scheme. From 2012 to 2015, Sanofi Gulf spent the equivalent of approximately USD 4 million for +round table meetings with HCPs, although only a portion was used in the scheme. + +U. In a 2015 internal audit of commercial operations in the Gulf, one of the findings +concerned the lack of monitoring of outsourced distributor promotional activities. An example of a +specific risk identified in the report included: “Interactions with HCPs organized by the +outsourced sales force are not compliant with Sanofi guidelines. Selection of HCPs, attendance list +and detailed hospitality costs were neither documented nor reviewed by Sanofi.” Similar control +weaknesses and failures in documentation of round table meetings conducted by distributors on +behalf of Sanofi were found. Another finding identified the many internal control lapses, including + + +6 +the use of cash to make payment to HCPs, surrounding round table meetings conducted by Sanofi +itself and lack of documentation and approvals related to attendance of round table meetings. A +full audit of the commercial operations in the Gulf had not been conducted since 2007, eight years +earlier. + +V. As a result of the improper conduct in the Gulf, Sanofi derived profits equivalent to +approximately USD 1,751,567. + +W. As a result of the conduct described above, Sanofi violated Sections 13(b)(2)(A) +and 13(b)(2)(B) of the Exchange Act. Sanofi violated Section 13(b)(2)(A) of the Exchange Act by +falsely recording improper payments made by employees and agents as legitimate selling and +marketing expenses, whose results were then consolidated and reported by Sanofi on its +consolidated financial statements. Sanofi also violated Section 13(b)(2)(B) by failing to devise and +maintain sufficient accounting controls to detect and prevent the making of improper payments to +foreign officials. + +Sanofi’s Remedial Efforts +X. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. + 1. During the course of the investigation, Respondent provided regular briefings +regarding the facts developed in its internal investigation in Kazakhstan, Levant, and the Gulf, +and with respect to other countries. Respondent timely conveyed the facts it learned in the +course of its investigation, including facts that the Commission would not have been able to +readily and independently discover, produced and highlighted particularly relevant documents, +promptly responded to additional requests by the Commission staff, and provided translations of +documents as needed. + 2. Respondent also provided information regarding its remedial efforts, +enhancements to its compliance program and implementation of initiatives. Prior to the +Commission’s investigation, Respondent had begun independently enhancing its compliance +program by, among other things, developing a centralized compliance program, revamping its +internal controls and procedures over HCP expenditures, increasing the number of its compliance +officers globally, enhancing the operation of local compliance committees, and placing +compliance personnel in high-risk local markets. Additionally, it enhanced its (1) policies +governing interactions with HCPs and government officials, gifts, travel, meetings, congresses, +contributions, and ISTs; (2) anti-corruption training, audits, and due diligence procedures for +third-party agents; and (3) monitoring for certain Sanofi-sponsored events for HCPs. Respondent +also reports that it has terminated 121 employees, including senior local business managers, +accepted resignations from another 14 employees, and disciplined 49 employees. + + + +7 +Undertakings +Y. Respondent undertakes to cooperate fully with the Commission in any and all +investigations, litigation, or other proceedings relating to or arising from the matters described in +this Order. In connection with such cooperation, Respondent shall: + 1. produce, without service of a notice or subpoena, any and all nonprivileged +documents and other information requested by the Commission staff subject to any restrictions +under the law of any foreign jurisdiction; + + 2. use its best efforts to cause its current or former officers, +employees, agents, and directors to be interviewed by Commission staff at such times and +places as the staff reasonably may direct; and + + 3. use its best efforts to cause its current or former officers, +employees, agents, and directors to appear and testify without service of a notice or +subpoena in such investigations, depositions, hearings, or trials as may be +requested by the Commission staff. + +Z. Respondent undertakes to report on the status of its remediation and +implementation of compliance for a period of at least two years. During this two-year period, +Respondent shall conduct and prepare self reviews, as well as related follow-up, and submit written +reports of the results, as set forth in the Compliance Program Review Plan (“Plan”) submitted with +its Offer of Settlement and report to the Commission staff as outlined below: + +1. Respondent shall submit to the Commission staff a written report within six (6) +months of the entry of this Order setting forth a complete description of its +Foreign Corrupt Practices Act (“FCPA”) and anti-corruption related +remediation efforts to date, its proposals reasonably designed to improve the +policies and procedures of Respondent for ensuring compliance with the FCPA +and other applicable anticorruption laws, and the parameters of the subsequent +reviews (the “Initial Self Report”). The Initial Self Report shall be transmitted +to Charles Cain, FCPA Unit Chief, Division of Enforcement, United States +Securities and Exchange Commission, 100 F St NE, Washington, DC 20549. +Respondent may extend the time period for issuance of the Initial Self Report +with prior written approval of the Commission staff. + +2. Respondent shall undertake two (2) follow up reviews (the “Follow up Self +Reports”), incorporating any comments provided by the Commission staff on +the previous report(s), and following up on matters identified in earlier reports, +to further monitor and assess whether the policies and procedures of +Respondent are reasonably designed to detect and prevent violations of the +FCPA and other applicable anti-corruption laws. + +3. The first Follow up Self Report shall be completed by no later than seven +months after the Initial Self Report. The second Follow up Self Report shall be + + +8 +completed by no later than seven months after the first Follow up Self Report. +Respondent may extend the time period for issuance of the Follow up Self +Reports with prior written approval of the Commission staff. + +AA. Should Respondent during the period of the undertakings discover credible +evidence, not already reported to the Commission staff, that questionable or corrupt payments or +questionable or corrupt transfers of property or interests may have been offered, promised, paid, or +authorized by Respondent entity or person, or any entity or person while working directly for +Respondent, or that related false books and records have been maintained, Respondent shall +undertake to promptly report such conduct to the Commission staff. + +BB. The periodic reviews and reports submitted by Respondent will likely include +proprietary, financial, confidential, and competitive business information. Public disclosure of the +reports could discourage cooperation, impede pending or potential government investigations and +thus undermine the objectives of the reporting requirement. For these reasons, among others, the +reports and the contents thereof are intended to remain and shall remain non-public, except (1) +pursuant to court order, (2) as agreed by the parties in writing, (3) to the extent that the +Commission staff 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. + +CC. During this two-year period of review, Respondent shall provide its external +auditors with its annual internal audit plan and reports of the results of internal audit procedures +and its assessment of its FCPA compliance policies and procedures. + +DD. During this two-year period of review, Respondent shall provide the Commission +staff with any written reports or recommendations provided by Respondent’s external auditors +response to Respondent’s annual internal audit plan, reports of the results of internal audit +procedures, and its assessment of its FCPA compliance policies and procedures. + +EE. Respondent shall certify, in writing, compliance with the undertaking(s) set forth +above. The certification shall identify the undertaking(s), provide written evidence of compliance +in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The +Commission staff may make reasonable requests for further evidence of compliance, and +Respondent agrees to provide such evidence. The certification and supporting material shall be +submitted to Charles Cain, Unit Chief, FCPA Unit, Division of Enforcement, 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. + +FF. In determining whether to accept the Offer, the Commission has considered these +undertakings. + + + + +9 +IV. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. Respondent cease and desist from committing or causing any violations and any +future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 +[15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)]. + +B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of +USD 17,531,666 and prejudgment interest of USD 2,674,479 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. Respondents shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of USD 5,000,000 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§ 3717. + +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 Sanofi as a +Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Charles Cain, Division of Enforcement, Securities +and Exchange Commission, 100 F St., NE, Mailstop 5631, 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 + + +10 +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $5,000,000 based upon its cooperation in a Commission investigation or related +enforcement action. If at any time following the entry of the Order, the Division of Enforcement +(“Division”) obtains information indicating that Respondent knowingly provided materially false +or misleading information or materials to the Commission, or in a related proceeding, the Division +may, at its sole discretion and with prior notice to the Respondent, petition the Commission to +reopen this matter and seek an order directing that the Respondent pay 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. + +E. Respondent shall comply with the undertakings enumerated in Section III, +paragraphs Z through FF above. + + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3965.txt b/raw/aaer/2018/AAER-3965.txt new file mode 100644 index 0000000000000000000000000000000000000000..0e8950a1c2c84a143dde028480cc632c7e4e7e01 --- /dev/null +++ b/raw/aaer/2018/AAER-3965.txt @@ -0,0 +1,81 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84022 / September 4, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3965 / September 4, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18711 +___________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +MICHAEL J. KIPP, : 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 Michael J. Kipp 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. Kipp served as the Senior Vice President and Chief Financial Officer of Swisher +Hygiene, Inc. from May 2011 until May 2012. + +2. On June 20, 2017, Kipp was convicted of conspiracy to commit securities fraud, +in violation of Title 15, United States Code, Sections 78j(b), 78ff, 78m(b)(2)(A), and 78m(b)(5) +and Title 17, Code of Federal Regulations, Sections 240.10b-5, 240.13b2-1 and 240.13b2-2, wire +fraud in violation of Title 18 United States Code, Section 1343, securities fraud in violation of + +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 + +Title 15, United States Code, Sections 78j(b) and 78ff, and bank fraud in violation of Title 18 +United States Code, Section 1344 in United States v. Kipp, No. 3:15-cr-00244-MOC, in the +United States District Court for the Western District of North Carolina. + +3. As a result of this conviction, Kipp was sentenced to fifty-four months +imprisonment in a federal penitentiary. + +III. + +In view of the foregoing, the Commission finds that Kipp 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 Michael J. Kipp 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/2018/AAER-3966.txt b/raw/aaer/2018/AAER-3966.txt new file mode 100644 index 0000000000000000000000000000000000000000..3a601791fec2848ef1025969f3872234fff2fc8b --- /dev/null +++ b/raw/aaer/2018/AAER-3966.txt @@ -0,0 +1,77 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84023 / September 4, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3966 / September 4, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18712 +___________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +JOANNE K. VIARD, CPA, : TO RULE 102(e)(2) OF THE + : COMMISSION’S RULES OF + : PRACTICE +Respondent. : +_________________________ : + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Joanne K. Viard 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. Viard is a certified public accountant in Florida. + +2. On June 20, 2017, Viard was convicted of one count of conspiracy to commit +securities fraud, in violation of Title 15, United States Code, Sections 78j(b), 78ff, 78m(b)(2)(A), +and 78m(b)(5) and Title 17, Code of Federal Regulations, Sections 240.10b-5, 240.13b2-1 and +240.13b2-2 in United States v. Viard, No. 3:15-cr-00244-MOC, in the United States District +Court for the Western District of North Carolina. + +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 + + +3. As a result of this conviction, Viard was sentenced to twenty-four months +imprisonment in a federal penitentiary. + +III. + +In view of the foregoing, the Commission finds that Viard 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 Joanne K. Viard 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/2018/AAER-3967.txt b/raw/aaer/2018/AAER-3967.txt new file mode 100644 index 0000000000000000000000000000000000000000..ad60ceec8ffbf4ad1a520a224e812e464569ddbb --- /dev/null +++ b/raw/aaer/2018/AAER-3967.txt @@ -0,0 +1,77 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84024 / September 4, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3967 / September 4, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18713 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +JOHN PIERRARD, : 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 John Pierrard 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. Pierrad served as the Director of Financial Planning and Analysis at Swisher +Hygiene, Inc. from early 2011 through May 2012. + +2. On October 20, 2015, Pierrard pleaded guilty to one count of conspiracy to +commit securities fraud, in violation of Title 15, United States Code, Sections 78j(b), 78ff, +78m(b)(2)(A), and 78m(b)(5) and Title 17, Code of Federal Regulations, Sections 240.10b-5, +240.13b2-1 and 240.13b2-2 in United States v. Pierrard, No. 3:15-cr-00238-MOC, in the United +States District Court for the Western District of North Carolina. + +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 + + +3. As a result of this conviction, Pierrard was sentenced to eight months probation +with house arrest. + +III. + +In view of the foregoing, the Commission finds that Pierrard 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 John Pierrard 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/2018/AAER-3968.txt b/raw/aaer/2018/AAER-3968.txt new file mode 100644 index 0000000000000000000000000000000000000000..03b5ab5af673142a4d3d97894efd1fc3a351a5c1 --- /dev/null +++ b/raw/aaer/2018/AAER-3968.txt @@ -0,0 +1,313 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84054 / September 6, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3968 / September 6, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18728 + + + +In the Matter of + +JOOHYUN BAHN, a/k/a +DENNIS BAHN, + +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 JooHyun Bahn, a/k/a Dennis Bahn (“Bahn” 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 (“Order”), as set +forth below. + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. From March 2013 through May 2015, Bahn, while acting as a broker for Colliers +International Group Inc. (“Colliers”), a foreign private issuer, violated the Foreign Corrupt +Practices Act (the “FCPA”) of the Exchange Act, when he attempted to bribe a foreign official of a +country in the Middle East in connection with his efforts to broker the sale of an $800 million high- +rise commercial building in Vietnam, known as Landmark 72. The foreign official was unaware of +the offered bribe. In an effort to obtain money for himself, an accomplice had misrepresented the +official’s involvement in the scheme to Bahn. As part of his illicit conduct, Bahn circumvented +Colliers’ internal accounting controls, fabricated documents, created fictitious email messages, and +lied to Colliers executives. Among other actions, Bahn falsely represented that the foreign +country’s sovereign wealth fund had committed to acquire the building, thus causing Colliers to +record commission revenue on a transaction that never had a committed buyer and never ultimately +closed. + +2. Bahn’s conduct violated the anti-bribery provisions of the FCPA, Section 30A of +the Exchange Act. + +3. Bahn also caused Colliers’ violations of Section 13(b)(2)(A) of the Exchange Act, +in which Colliers failed to make and keep books, records, and accounts which, in reasonable detail, +accurately and fairly reflected its transactions and disposition of its assets. + +4. Bahn also took steps to circumvent Colliers’ then existing internal accounting +controls by making false statements, fabricating documents, and creating multiple email accounts +in order that: (a) the Landmark 72 transaction appeared to be a legitimate real estate transaction; +and (b) Colliers improperly recognized the commission revenue derived therefrom in its books and +records, thereby violating Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1. + +Respondent + +5. Joohyun Bahn, a/k/a Dennis Bahn, age 40, is a citizen of South Korea and a +permanent resident of the United States with a home in New Jersey. Bahn worked as a commercial +real estate broker at the New York offices of Colliers from March 2014 to May 2015. + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + + 3 + +Related Entities and Individuals + +6. Colliers International Group Inc., is a Canadian corporation with headquarters in +Toronto, Ontario. Colliers is a foreign private issuer that has a class of securities registered +pursuant to Exchange Act Section 12(b) and listed on the NASDAQ stock market and the Toronto +Securities Exchange. In June 2015, Colliers became a successor of the issuer, FirstService +Corporation, following a spin-off from FirstService. + +7. Firm-1 is a brokerage firm specializing in commercial real estate investment sales, +financing, research and advisory services. Based in California, Firm-1 has a class of shares +registered pursuant to Section 12(b) of the Exchange Act. + +8. The Fund is the sovereign wealth fund of a country (“Country-1”) located in the +Middle East. The Fund has global investments in banking, mining, automobile and commercial +real estate sectors. As part of its objective, The Fund considered a wide range of investments for +Country-1, including potential real estate investments. + +9. Foreign Official-1 was an officer and employee of the government of Country-1 +located in the Middle East. Foreign Official-1 was then associated with the Fund until August +2014. + +Bahn’s Scheme to Bribe Foreign Official-1 + +10. Landmark 72 is a commercial office building in Vietnam. The owner of Landmark +72 retained Bahn and Firm-1 in February 2013 first to find investors to refinance the property’s +debt and later to sell the property. During the same period Bahn became acquainted with his +accomplice, who led Bahn to believing that he had connections to Country-1’s officials who could +arrange to purchase the property in return for bribes. + +11. In February 2014, Bahn’s accomplice told him that Foreign Official-1 could +influence The Fund to acquire Landmark 72 but that Foreign Official-1 required a payment to do +so. On February 25, they exchanged text messages about Foreign Official-1’s payment demand +and determined they would use “roses” as a code word for the bribe payment. Bahn’s accomplice +wrote that he was negotiating for one half of the payment to be made upfront and the remainder +when the deal was “inked.” Bahn replied, “whatever it takes to get it done . . . .” + +12. In March 2014 Bahn left Firm-1 for Colliers. As part of his onboarding process at +Colliers, Bahn received and agreed to be bound by Colliers’ code of conduct and its anti-bribery +policies. + +13. On March 7 Bahn received an email from his accomplice stating that Foreign +Official-1 required an upfront payment of “250 Roses” [$250,000] and a payment of “750 Roses” +[$750,000] after “approval/completion of contract.” Bahn responded on April 1 with the proposal +that if The Fund would increase the purchase price from $700 million to $800 million, he could + 4 +increase the upfront payment to Foreign Official-1 from $250,000 to $500,000, and pay an +additional $2 million after the deal closed. Later that night an email purporting to be from Foreign +Official-1 but presumably forged by Bahn’s accomplice, instructed that “this final offer of $800 +[million] CANNOT BE AMENDED” and that the payment of “500 Roses” [$500,000] had to be +made by April 3, 2014. + +14. During this period, Bahn caused Colliers and the building’s owner to enter into two +different versions of Colliers’ brokerage services agreement. One version, which Bahn provided to +the owner, set the purchase price for Landmark 72 at $800 million, while the second version, given +to Colliers, set the price at $700 million. + +15. In April 2014, Bahn discussed the need to fund the bribe to Foreign Official-1 with +a coworker, who then introduced Bahn to a non-Colliers related business associate from whom +Bahn borrowed $500,000. In order to induce the business associate into making the loan, Bahn +caused the building owner to send two wire transfers totaling $500,000 to Colliers and represented +to Colliers that the funds were a non-refundable down payment on its commission. Bahn knew +that he had misrepresented the true purpose of the wire transfer to Colliers and that the company +would book the $500,000 as revenue. He also knew that approximately $225,000 of that amount +would come to him as his share of the commission. + +16. On April 16, 2014, Bahn caused a check to be issued to an entity controlled by his +accomplice with the intent that it would be forwarded to Foreign Official-1 as a bribe. Instead, +Bahn’s accomplice kept the money for himself. + +17. From May through September 2014, as the transaction languished, Bahn took steps +to create the appearance of progress. On June 30 Bahn emailed to Colliers and the building owner +a letter he forged in Foreign Official-1’s name purporting to reaffirm The Fund’s commitment to +the transaction. Bahn also sent proposed Letters of Intent to his accomplice for him to forward to +Foreign Official-1. Receiving no response, Bahn reminded his accomplice on August 27, 2014 +that if Foreign Official-1 closed the transaction there would be “2 million Roses waiting for him.” +On September 1, 2014, Bahn’s accomplice sent Bahn a Letter of Intent, purportedly from The +Fund. + +18. In order to conceal the anticipated $2 million payment to Foreign Official-1 and to +repay the $500,000 he had previously borrowed, Bahn in September 2014 devised a scheme to +divert a portion of Colliers’ commission. Bahn accomplished this through the preparation of a +sham amendment to the services agreement between Colliers and the building owner. + +Bahn Misrepresents that the Landmark 72 Sale has Closed +Causing Colliers to Falsely Record Commission Revenue + +19. In the first week of 2015 Bahn falsely represented to Colliers’ executives that the +transaction had closed. Bahn provided a fabricated email confirmation purporting to be from the +building owner stating that Colliers had earned its fee. Bahn then provided a revised confirmation + 5 +to clarify that the transaction had closed prior to the 2014 year end, thus causing Colliers to book +its commission within the year. + +20. Unbeknownst to Colliers, Bahn had forged each iteration of the confirmation and +falsely claimed that each had come from the owner. Colliers’ financial executives, its internal +counsel, and an internal audit executive all relied on the fabricated confirmation and Bahn’s +misrepresentations in concluding that the payment could be booked by December 31, 2014. As a +result, Colliers recorded the full commission fee as earned and recognized in 2014. + +21. Bahn knew that The Fund had not committed to purchasing Landmark 72 because +there was no contract between the owner and The Fund. Bahn also knew the closing had not +occurred and that Colliers had not earned its fee. Bahn understood that his misstatements and +fabricated confirmations caused Colliers to improperly recognize revenue on the purported +transactions. + +The Fund Rejects the Landmark 72 Transaction +and Bahn’s Scheme Unravels + +22. Apart from his attempts to bribe Foreign Official-1, in 2015 Bahn separately +initiated preliminary discussions with The Fund’s real estate division. Early in its review process +the real estate division determined that Landmark 72 was not a suitable investment and emailed +Bahn its rejection of the transaction on April 10, 2015. The Fund subsequently sent a formal +rejection to Bahn on April 20, 2015. + +23. In mid-May, Bahn’s coworker informed Bahn’s supervisor of a Korean television +news report that The Fund had never intended to buy Landmark 72 and that the The Fund letter of +intent was a fraud. Bahn’s supervisor directed Bahn to provide a timeline of his work on +Landmark 72. Before he did so, Bahn on May 14, 2015 sent a LinkedIn message to Foreign +Official-1: + +This is very urgent. In regards to Landmark 72 deal in Hanoi, Vietnam, we +were told that you promised to close the deal at USD 800MM after you receive +$500,000 from us. We gave [Bahn’s accomplice] $500,000 and he subsequently +wired it to you. + +Can you confirm this? + +24. Foreign Official-1 forwarded the message to The Fund’s Chief Compliance Officer +and did not respond. On May 18, 2015, Bahn submitted the status report to his supervisor, making +additional misrepresentations. + +25. On May 27, 2015, The Fund delivered a cease-and-desist letter to Bahn and +Colliers making clear that “[The Fund] is not interested in and has never attempted to buy +Landmark 72.” Colliers terminated Bahn’s relationship with the company on May 28, 2015. + + 6 + +Legal Standards and Violations + +26. 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. + +Bahn Violated Exchange Act Section 30A + +27. The anti-bribery provisions of the FCPA, Exchange Act Section 30A, make it +unlawful for any United States issuer, or any employee or agent acting on its behalf, to make use of +the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an +offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift or +promise to give anything of value to any foreign official for purposes of influencing any act or +decision of such foreign official in his official capacity in order to assist such issuer in obtaining or +retaining business for or with any person. 15 U.S.C. § 78dd-1. +28. As described above, while acting as Colliers’ agent in his capacity as a broker, +Bahn made use of interstate commerce by sending emails from the United States in furtherance of +(i) his corrupt offers and promises to bribe Foreign Official-1 and (ii) his transfer of $500,000 that +he intended as a payment to Foreign Official-1, through which Bahn intended that the official +would use his official position to secure the purchase of Landmark 72. By this conduct Bahn +violated Exchange Act Section 30A. + +Bahn Violated Exchange Act Section 13(b)(5) and Rule 13b2-1 + +29. Exchange Act Section 13(b)(5) provides that no person shall “knowingly +circumvent . . . a system of internal accounting controls or knowingly falsify any book, record, or +account.” Exchange Act Rule 13b2-1 further provides that “no person shall, directly or indirectly, +falsify or cause to be falsified, any book, record, or account.” 15 U.S.C. § 13(b)(5). +30. As described above, Bahn knowingly circumvented Colliers’ internal accounting +controls and caused Colliers’ books, records and accounts to be falsified through the falsified +documents he provided and misrepresentations that he made to Colliers’ executives, all of which +caused Colliers improperly to recognize revenue on a non-existent transaction. By this conduct +Bahn violated Exchange Act Section 13(b)(5) and Rule 13b2-1. + +Bahn Caused Violations of Exchange Act Section 13(b)(2)(A) + +31. The books and records provision of the FCPA, Exchange Act Section +13(b)(2)(A), requires every issuer with a class of securities registered pursuant to Exchange Act +Section 12 to make and keep books, records, and accounts, which, in reasonable detail, +accurately and fairly reflect the transactions and dispositions of the assets of the issuer. 15 U.S.C. +§ 78m(b)(2)(A). + 7 +32. As described above, Bahn fabricated documents and made misstatements to +Colliers’ financial and legal executives that led to Colliers improperly recording revenue on a +fictitious transaction. Colliers books and records were consolidated into FirstService’s books +and records. By this conduct Bahn caused violations of Section 13(B)(2)(A). + +Criminal Disposition + +33. Respondent has pleaded guilty to criminal conduct relating to the findings in the +Order. Specifically, in United States v. Bahn, Crim. No. 16 CR 00831-ER-1 (S.D.N.Y. 2016), +Respondent pleaded guilty to one count of conspiracy to violate the FCPA and one count of +violating the FCPA [18 U.S.C. 371, 15 U.S.C. § 78dd-2]. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Bahn’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Bahn cease and desist +from committing or causing any violations and any future violations of Sections 30A, 13(b)(2)(A), +and 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. + + B. Pursuant to Section 21B of the Exchange Act, Respondent Bahn shall pay $225,000 +in disgorgement. Payment of this obligation shall be deemed satisfied by the restitution or forfeiture +ordered in the criminal proceeding, United States v. Bahn, Crim. No. 16 CR 00831-ER-1 (S.D.N.Y. +2016). + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3970.txt b/raw/aaer/2018/AAER-3970.txt new file mode 100644 index 0000000000000000000000000000000000000000..23aa8db4a60e2196fe2bfba25bf3cea08eaa4aa0 --- /dev/null +++ b/raw/aaer/2018/AAER-3970.txt @@ -0,0 +1,534 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84118 / September 13, 2018 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5008 / September 13, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3970 / September 13, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18762 + + + +In the Matter of + +HOLTHOUSE CARLIN & +VAN TRIGT LLP + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 203(k) OF +THE INVESTMENT ADVISERS ACT OF +1940, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted against Holthouse Carlin & Van Trigt LLP (“HCVT” or “Respondent”) pursuant to +Section 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), 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(a)(2) provides, in relevant part, that: + The Commission may censure any person . . . if that person is found . . . to have engaged in unethical or +improper professional conduct. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + The Commission may censure a person . . . who is found . . . to have engaged in unethical or improper +professional conduct. + + +2 + + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Section 203(k) of the Investment +Advisers Act of 1940, Section 4C and 21C of the Securities Exchange Act of 1934, and Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + + This proceeding arises out of HCVT’s failure to comply with the Commission’s auditor +independence rules. From 2012 through 2016, HCVT conducted 57 audits for the private funds of +four registered investment adviser clients pursuant to Section 206(4) of the Advisers Act and Rule +206(4)-2 thereunder (the “Custody Rule”). In 2012 and 2013, HCVT also conducted six audits for +four broker-dealer clients. The Commission’s independence standards under Rules 2-01(b) and (c) +of Regulation S-X apply to Custody Rule audits under Rule 206(4)-2(d)(3) of the Advisers Act, and +to broker-dealer audits under Rule 17a-5(f)(3) of the Exchange Act.4 HCVT, however, violated +those independence standards because it prepared and audited its clients’ financial statements, +accompanying notes, and accounting entries. As a result of its conduct, HCVT caused its +investment advisers clients’ violations of Section 206(4) of the Advisers Act and Rule 206(4)-2, +caused its broker-dealer clients’ violations of Section 17(a) of the Exchange Act and Rule 17a-5, +violated Rule 17a-5(i) of the Exchange Act, and engaged in improper professional conduct under +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + +4 The provisions of Exchange Act Rule 17a-5 relevant here have since changed. On July 30, 2013, the Commission +adopted amendments to Rule 17a-5. See Broker-Dealer Reports, SEC Exch. Act Rel. No. 34-70073 (July 30, 2013), +78 Fed. Reg. 51910 (Aug. 21, 2013). Among other things, the amendments require audits of brokers and dealers for +fiscal years ending on or after June 1, 2014 to be performed in accordance with the Public Company Accounting +Oversight Board (“PCAOB”) standards, not “generally accepted auditing standards,” or “GAAS,” as the rule +previously required. Although the amended language reflects the change to PCAOB auditing standards, this change +does not otherwise affect an auditor’s liability for inaccurately stating in an auditor’s report that its audit was +performed in accordance with applicable standards under Rule 17a-5(i). Additionally, the auditor independence +requirement of Rule 2-01 of Regulation S-X applied to broker-dealer audits both before and after the July 30, 2013 +amendments. At the time of the relevant conduct, prior to the amendments, that requirement was set forth in Rule +17a-5(f)(3). It is now found in Rule 17a-5(f)(1). + +3 + +Respondent + + Holthouse, Carlin & Van Trigt LLP is a California limited liability partnership. It is a +regional CPA firm with its principal place of business in Los Angeles. HCVT has more than 100 +partners and principals and over 585 employees with 12 offices located in California, Texas, and +Utah. HCVT is registered with the Public Company Accounting Oversight Board (“PCAOB”). +Currently, it’s PCAOB registration is pending withdrawal. HCVT also has no disciplinary history. + +Facts + +A. Background + +1. HCVT primarily provides tax, accounting, business management, and mergers and +acquisitions services to private companies, public companies, and high net worth individuals and +family offices. It also provides auditing services to privately held businesses, funds, and employee +benefit plans. HCVT does not audit any public issuers. + +2. In 2009, HCVT expanded its practice to include audits for four broker-dealers +registered with the Commission. Its practice expanded further in 2012, when, pursuant to the +Custody Rule, HCVT began auditing private investment funds managed by registered investment +advisers. From 2012 to 2016, HCVT’s Custody Rule and broker-dealer audits generated just +0.32% of its total revenues. + +B. HCVT’s Custody Rule Audits + +3. HCVT failed to comply with Regulation S-X’s independence standards when it +conducted 57 audits for four investment adviser clients for audit years 2012 through 2016. + +4. Those four adviser clients had custody of the assets of several private investment +funds they advised. Thus, each client was required to comply with the Custody Rule’s +independent asset verification requirement, either through a surprise asset verification of client +funds and securities in the adviser’s custody or a scheduled annual audit of each fund’s financial +statements. In each instance here, the advisers engaged HCVT to perform annual audits for their +respective private investment funds. + +5. The Custody Rule requires auditors to comply with the independence standards of +Regulation S-X, Rules 2-01(b) and (c). Under these rules, an accountant is not independent if +the accountant provides certain bookkeeping or other services related to the accounting records +or financial statements unless it is reasonable to conclude that the results of those services will +not be subject to audit procedures during the audit of the audit client’s financial statements. + +6. HCVT’s policies, procedures, controls, and training incorrectly referenced the +independence standards issued by the American Institute of Certified Public Accountants +(“AICPA”), which allow auditors to prepare their clients’ financial statements and still maintain +their independence so long as the client assumes responsibility for the financial statements. They + +4 + +did not refer to Regulation S-X’s independence standards or make clear that those standards +governed Custody Rule audits. + +7. HCVT also incorrectly concluded that the AICPA’s independence standards +governed the 57 Custody Rule audits. In fact, no one at HCVT took any steps to determine +which independence standards applied to Custody Rule audits, and no one involved with these +audits raised auditor independence as an issue. + +8. Five of the 57 Custody Rule audits at issue took place in audit years 2012 through +2016, and were for a private investment fund managed by an investment adviser registered with +the Commission. + +9. In each of those five audits, HCVT prepared the fund’s financial statements and +notes. As part of its preparation of the client financial statements, HCVT converted them from +cash to GAAP basis and created journal entries that ultimately formed the basis of the final +financial statements that HCVT subsequently audited. As a result, HCVT’s revisions to the +fund’s financial statements substantially changed the fund’s net income as previously accounted +for under a cash basis, for instance, increasing it by more than 100% in 2012 and decreasing it by +50% in 2013. HCVT’s workpapers for these audits nonetheless certified that HCVT was +independent. + +10. The other 52 Custody Rule audits at issue were for three other investment adviser +clients’ private investment funds – 50 were audits for one adviser’s funds in audit years 2012 +through 2016, and two were audits for two other advisers’ funds in audit year 2016. + +11. HCVT also prepared all of the funds’ financial statements and notes for these 52 +audits. To do so, HCVT drafted the financial statements after it received trial balance sheets and +income statements. HCVT also proposed accounting adjustments and provided proposed +financial disclosures, and the firm also helped update the notes to the financial statements. + +C. HCVT’s Broker-Dealer Audits + +12. HCVT also failed to follow Regulation S-X’s independence standards when it +conducted six audits for four broker-dealer clients in audit years 2012 and 2013. + +13. Similar to the Custody Rule, Section 17(a) and Rule 17a-5 of the Exchange Act +require auditors to comply with the independence standards of Rules 2-01(b) and (c) of +Regulation S-X when auditing broker-dealer financial statements. + +14. HCVT made significant adjustments and edits to the clients’ financial statements +and notes in five of the six audits, supplemented one note and added a new note to the financial +statements to one audit, and used its own software to prepare the financial statements and notes +for all six audits. + +15. The HCVT audit reports for each audit were filed by the clients with the +Commission in a Form X-17A-5-Part III. Each report stated that the audit was conducted “in + +5 + +accordance with auditing standards generally accepted in the United States of America” and +contained HCVT’s unqualified opinion on the broker-dealer’s financial statements. + +16. HCVT, however, audited the financial statements and notes it helped prepare. In +doing so, no one at the firm considered that the Commission’s independence standards in +Regulation S-X do not allow auditors to audit their own work. Indeed, none of HCVT’s policies, +procedures, controls, and training referenced Regulation S-X’s independence standards, and no one +raised independence standards as being an issue for these audits. + +17. For five of the six audits at issue, three broker-dealer clients generated and gave +HCVT draft financial statements and notes. HCVT made significant adjustments to the financial +statements and notes in four of the five audits. HCVT also used its word processing software to +prepare the financial statements and notes it was auditing. After doing so, HCVT provided the +financial statements and notes it had prepared to its clients for approval. In one instance, HCVT +made direct adjustments to the client’s fiscal year 2012 financial statements and notes to the +financial statements. + +18. The sixth audit was for one broker-dealer client in audit year 2012. For this audit, +the client prepared a version of the financial statements and notes and provided it to HCVT. +HCVT supplemented one of the notes to the financial statements by adding information concerning +broker-dealer customer concentrations and added a new note to the financial statements concerning +subsequent events. HCVT also prepared the final version of the financial statements and notes +using its own word processing software before sending the final version to the client for approval. + +Violations + +A. Custody Rule Violations + +19. Section 206(4) of the Advisers Act and Rule 206(4)-2 requires investment advisers +to maintain client assets with a qualified custodian. Rule 206(4)-2(a)(4) requires client assets to be +verified through an annual surprise examination by an independent public accountant. Rule +206(4)-2(b)(4) states that an investment adviser with custody of a private fund client’s assets does +not have to be subjected to surprise exams if its fund’s financial statements are audited and +provided to the limited partners, often referred to as the “audit exception.” Rule 206(4)-2(d)(3) +requires auditors to comply with the independence standards of Regulation S-X, Rules 2-01(b) and +(c). + +20. Rule 2-01(b) of Regulation S-X provides that an auditor lacks independence if it is +not “capable of exercising objective and impartial judgment on all issues encompassed within the +accountant’s engagement.” Rule 2-01(c)(4) of Regulation S-X provides that an auditor also lacks +independence if, at any point during the audit and professional engagement period, the auditor +provides prohibited non-audit services to an audit client. + +21. As a result of the conduct described above, HCVT caused four of its investment +adviser clients to violate the Custody Rule (Section 206(4) of the Advisers Act and Rule 206(4)-2) +when HCVT failed to maintain its independence under Rule 2-01(b) and (c) of Regulation S-X, as + +6 + +required by Rule 206(4)-2(d)(3), while conducting 57 audits of the financial statements of those +clients’ funds from 2012 to 2016. + +B. Broker-Dealer Violations + +22. Section 17(a) of the Exchange Act and Rule 17a-5 require registered broker- +dealers to file annual reports with the Commission containing financial statements audited by +independent public accountants. As in effect at the relevant time, Rule 17a-5(e)(1)(i) stated: +“An audit shall be conducted by a public accountant who shall be in fact independent as defined +in paragraph (f)(3) of this section ….” Rule 17a-5(f)(3) provided that “[a]n accountant shall be +independent in accordance with the provisions of Rule 2-01(b) and (c) of Regulation S-X.” + +23. Rule 2-01(b) of Regulation S-X provides that an auditor lacks independence if it is +not “capable of exercising objective and impartial judgment on all issues encompassed within the +accountant’s engagement.” Rule 2-01(c)(4) of Regulation S-X provides that an auditor also lacks +independence if, at any point during the audit and professional engagement period, the auditor +provides prohibited non-audit services to an audit client. + +24. As in effect that the time, Rule 17a-5(g) of the Exchange Act required that “[t]he +audit shall be made in accordance with generally accepted auditing standards,” or +“GAAS.” GAAS states “…it is the responsibility of the auditor to ensure compliance with all +relevant legal, regulatory, or professional obligations.” AU-C Section 200.02.5 The ethical +requirements, including objectivity and independence, consist of the “AICPA Code of +Professional Conduct together with rules of state boards of accountancy and applicable +regulatory agencies that are more restrictive.” AU-C 200.A15-.A16. + +25. Rule 17a-5(i) of the Exchange Act required broker-dealer auditors to state in their +audit reports “whether the audit was made in accordance with [GAAS].” Accordingly, if an +auditor’s report states that its audit was performed in accordance with GAAS when the auditor was +not independent, then it has directly violated Exchange Act Rule 17a-5(i). See In the Matter of +Rosenberg Rich Baker Berman & Company and Brian Zucker, CPA, Exch. Act Rel. No. 69765 at +p. 5 (June 14, 2013) (settled order). + +26. As a result of the conduct described above, HCVT caused four of its broker-dealer +clients to violate Section 17(a) and Rule 17a-5 of the Exchange Act when HCVT failed to maintain +its independence under Rule 2-01(b) and (c) of Regulation S-X, as required by Rule 17a-5(f)(3) of +the Exchange Act, while conducting six audits of those clients’ financial statements in 2012 and +2013. + +27. As a result of the conduct described above, HCVT violated Exchange Act Rule +17a-5(i) by representing in its audit reports filed with the Commission that it had performed the +audits of its broker-dealer clients’ financial statements in accordance with GAAS when in fact, + +5 The AICPA clarified its standards for audits of financial statements for periods ending on or after December 15, +2012. For periods prior, see AU Section 220.05, “The Securities and Exchange Commission (SEC) has also adopted +requirements for independence of auditors who report on financial statements filed with it that differ from the +AICPA requirements in certain respects.” + +7 + +because of the independence impairment described above, the audits had not been performed in +accordance with GAAS. + +C. Rule 102(e) + +28. Rule 102(e)(1) of the Commission’s Rules of Practice and Section 4C of the +Exchange Act allows the Commission to censure a person if the Commission finds the person +engaged in improper professional conduct. See Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +29. Rule 102(e)(1)(iv) and Section 4C(b) define “improper professional conduct” to +include one of two types of negligent conduct: a single instance of highly unreasonable conduct +that results in a violation of applicable professional standards in circumstances for which +heightened scrutiny is warranted; or 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. Questions regarding an auditor’s independence always warrant +heightened scrutiny. See Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 +Fed. Reg. 57164, 57168 (Oct. 26, 1998). + +30. As a result of the conduct described above, HCVT engaged in improper +professional conduct within the meaning of Rule 102(e)(1)(ii) when it repeatedly failed to exercise +due professional care by not complying with Commission independence standards. + +Findings + +31. Based on the foregoing, the Commission finds that HCVT caused four of its +investment adviser clients’ violations of Section 206(4) of the Advisers Act and Rule 206(4)-2. + +32. Based on the foregoing, the Commission finds that HCVT caused four of its broker- +dealer clients’ violations of Section 17(a) and Rule 17a-5 of the Exchange Act. + +33. Based on the foregoing, the Commission finds that HCVT violated Rule 17a-5(i) of +the Exchange Act. + +34. Based on the foregoing, the Commission finds that HCVT 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. + +Undertakings + +35. HCVT has undertaken to forego and end any engagements concerning Custody +Rule audits, broker-dealer audits, public company audits, or any other assurance service arising +from a Commission rule for a period of one year from the date of entry of this Order. A Custody +Rule audit is defined as an engagement to audit the financial statements of a private fund managed +by a registered investment adviser pursuant to Section 206(4) of the Investment Advisers Act of +1940 and Rule 206(4)-2. A broker-dealer audit is defined as an engagement to audit the financial + +8 + +statements of a broker-dealer pursuant to Section 17(a) and Rule 17a-5 of the Securities Exchange +Act of 1934. 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 Securities Exchange Act of 1934. + +36. If HCVT chooses to engage in Custody Rule audits, broker-dealer audits, public +company audits, or any other assurance service arising from a Commission rule after the one year +period referenced in paragraph 35 above, HCVT undertakes that, before it enters into such +engagements, it must (1) retain, at HCVT’s expense, an independent consultant not unacceptable to +the Commission’s staff (the “Independent Consultant”) for a period of three years and (2) certify, +in the manner described in paragraph 44 below, that is in compliance with the Independent +Consultant’s recommendations. HCVT shall require the Independent Consultant to: + +a. conduct a comprehensive review of HCVT’s policies, procedures, controls, +and training on auditor independence standards for Custody Rule audits, +broker-dealer audits, public company audits, or any other assurance service +arising from a Commission rule (collectively the “Policies & Practices”); +b. make recommendations for changes or improvements to the Policies & +Practices and a procedure for implementing the recommended changes or +improvements; and +c. conduct an annual review, for each of the following three years from the +date of the issuance of the Independent Consultant’s initial report, to assess +whether HCVT is complying with its revised Policies & Practices and +whether the revised Policies & Practices are effective in achieving their +stated purposes, and make additional recommendations for changes or +improvements to the Policies & Practices, if needed. +37. HCVT undertakes that no later than ten days following the date of the Independent +Consultant’s engagement, provide to the Commission staff a copy of an engagement letter +detailing the Independent Consultant’s responsibilities pursuant to paragraph 36 above. HCVT +shall not have the authority to terminate the Independent Consultant without prior written approval +of the Commission’s staff. + +38. HCVT undertakes that it will arrange for the Independent Consultant to issue its +first report within 90 days after the date of the Independent Consultant’s engagement. For the +annual reviews conducted for each of the following three years, HCVT undertakes that it will +arrange for the Independent Consultant to issue each of these reports 365 days following the +preceding report. Within ten days after the issuance of each of the reports, HCVT shall require the +Independent Consultant to submit to Robert Conrrad, Assistant Regional Director, Division of +Enforcement, Securities and Exchange Commission, 444 South Flower Street, Suite 900, Los +Angeles, CA 90071 a copy of the Independent Consultant’s reports. The Independent Consultant’s +reports shall describe the review performed and the conclusions reached and shall include any +recommendations deemed necessary to make the Policies & Practices adequate and address the +deficiencies set forth in Section III of the Order. + + +9 + +39. Within 30 days of receipt of each of the Independent Consultant’s reports, HCVT +undertakes that it will adopt all recommendations contained in the reports and remedy any +deficiencies in its written policies, procedures, and systems; provided, however, that as to any +recommendation that HCVT believes is unnecessary or inappropriate, HCVT may, within 15 days +of receipt of the reports, advise the Independent Consultant in writing of any recommendations that +it considers to be unnecessary or inappropriate and propose in writing an alternative policy or +procedure designed to achieve the same objective or purpose. + +40. With respect to any recommendation with which HCVT and the Independent +Consultant do not agree, HCVT undertakes that it will attempt in good faith to reach an agreement +with the Independent Consultant within 30 days of receipt of the reports. In the event that HCVT +and the Independent Consultant are unable to agree on an alternative proposal acceptable to the +Commission’s staff, HCVT will abide by the original recommendation of the Independent +Consultant. + +41. Within 30 days after the date of each of the Independent Consultant’s reports, +HCVT undertakes that it will submit an affidavit to the Robert Conrrad, Assistant Regional +Director, Division of Enforcement, Securities and Exchange Commission, 444 South Flower +Street, Suite 900, Los Angeles, CA 90071 stating that it has implemented any and all +recommendations of the Independent Consultant, or explaining the circumstances under which it +has not implemented such recommendations. + +42. HCVT undertakes that it will cooperate fully with the Independent Consultant and +provide the Independent Consultant with access to its files, books, records and personnel as +reasonably requested for the Independent Consultant’s review. + +43. HCVT undertakes that it 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 HCVT, or any of its +present or former affiliates, directors, officers, employees, or agents acting in their capacity. The +agreement will also provide that the Independent Consultant will require that any firm with which +he/she is affiliated or of which he/she is a member, and any person engaged to assist the +Independent Consultant in performance of his/her duties under this Order shall not, without prior +written consent of the Los Angeles Regional Office, enter into any employment, consultant, +attorney-client, auditing or other professional relationship with Sagent, 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. + +44. HCVT undertakes that it will certify, in writing, compliance with the undertaking(s) +set forth above. The certification shall identify the undertaking(s), provide written evidence of +compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate +compliance. The Commission staff may make reasonable requests for further evidence of +compliance, and Respondents agree to provide such evidence. The certification and supporting +material shall be submitted to Robert Conrrad, Assistant Regional Director, Division of +Enforcement, Securities and Exchange Commission, 444 South Flower Street, Suite 900, Los + +10 + +Angeles, CA 90071, with a copy to the Office of Chief Counsel of the Enforcement Division, no +later than sixty (60) days from the date of the completion of the undertakings. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent HCVT’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 206(4) of the Advisers Act and Rule 206(4)-2, and Section 17(a) of +the Exchange Act and Rule 17a-5. + + B. Respondent is censured. + + E. Respondent shall comply with the und ertakings enumerated in Section III., +Paragraphs 35 through 44. + +G. Respondent shall, within 30 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 +HCVT 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 W. Berry, Associate Regional + +11 + +Director, Division of Enforcement, Securities and Exchange Commission, 444 S. Flower St., Suite +900, Los Angeles, CA 90071. + + M. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, 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/2018/AAER-3971.txt b/raw/aaer/2018/AAER-3971.txt new file mode 100644 index 0000000000000000000000000000000000000000..73e8549aeb92663ef1c04fd5355dd240c257a64b --- /dev/null +++ b/raw/aaer/2018/AAER-3971.txt @@ -0,0 +1,1400 @@ + + + + + + + + + + + + + + + + SEC.gov | Adam C. Wasserman + + + + + + + + !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\/521821","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Wasserman + + + + + + + + + + + + Adam C. Wasserman + + + + + + + + + + + + + + + + + + + + + --> + + SEC Charges Outsourced CFO with Accounting Controls Deficiencies + + Litigation Release No. 24265 / September 12, 2018 + + Accounting and Auditing Enforcement Release No. 3971 / September 12, 2018 + + Securities and Exchange Commission v. Adam C. Wasserman , No. 18-cv-23729 (S.D. Fla. filed Sept. 12, 2018) + + + + + + + + + The Securities and Exchange Commission has charged the U.S.-based former CFO of a public company based in China with improperly commingling corporate and personal funds as part of a practice to transfer funds to the U.S. while avoiding foreign currency controls. + + According to the SEC's complaint, over a 20-month period, Adam C. Wasserman used a personal account to transfer over $400,000 in corporate funds from China to the U.S. to pay the Chinese company's U.S. expenses. The SEC's complaint also alleges that Wasserman had previously engaged in the same practice with at least two other China-based public companies. The SEC's complaint alleges that by repeatedly commingling corporate funds with his own personal funds Wasserman put the company's assets at risk for misuse and loss and, through his conduct, Wasserman knowingly failed to implement a system of internal accounting controls in violation of Section 13(b)(5) of the Securities Exchange Act of 1934. + + Wasserman agreed to settle the charges without admitting or denying the allegations of the complaint and consented to the entry of a final judgment that permanently enjoins him from future violations of Section 13(b)(5) of the Exchange Act, orders him to pay a civil penalty of $20,000, and bars him from serving as an officer or director of a public company for five years. The settlement is subject to court approval. + + The SEC's investigation was conducted by Gregory C. Padgett and Cecilia B. Connor and supervised by Amy L. Friedman, with assistance from Leigh Barrett, Jan M. Folena, James E. Smith, and Janet S. Yang. + + + + + + + + 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/2018/AAER-3972.txt b/raw/aaer/2018/AAER-3972.txt new file mode 100644 index 0000000000000000000000000000000000000000..2f1270d61c84fecd59f4fdf3979c5e8fca393d34 --- /dev/null +++ b/raw/aaer/2018/AAER-3972.txt @@ -0,0 +1,122 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84131 / September 14, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3972 / September 14, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18769 + + +In the Matter of + +JENNIFER F. WOLF, CPA, + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +AND IMPOSING TEMPORARY +SUSPENSION PURSUANT TO +RULE 102(e)(3)(i)(A) OF THE +COMMISSION’S RULES OF PRACTICE +AND IMPOSING TEMPORARY +SUSPENSION + + +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)(i)(A)1 of the Commission’s Rules of Practice against Respondent Jennifer F. Wolf +(“Wolf”). + +II. + + The Commission finds that: + +1. Jennifer F. Wolf, 54, is and, at all relevant times, was a certified public accountant +in the State of California, and is the former Acting Controller of Logitech International, S.A. +(“Logitech”). + +1 Rule 102(e)(3)(i)(A) 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 +2. On April 18, 2016, the Commission filed a complaint against Wolf in the United +States District Court for the Northern District of California. Securities and Exchange +Commission v. Bardman, et al., No. 15-cv-02023-JST (N.D. Cal.) (the “District Court Action”). +The complaint alleged, among other things, that Wolf’s conduct resulted in Logitech’s filing a +false and misleading Form 10-K for the fiscal year ended March 31, 2011 based on Logitech’s +failure to record an inventory reserve for its Revue product. +3. From April 2016 through February 2018, the parties engaged in extensive +litigation in the District Court Action, which included motions practice, written discovery, and +the taking of 12 depositions. +4. On February 21, 2018, the parties reached agreement on the terms of a settlement +in the District Court Action in which Wolf would consent to the entry of a Final Judgment that: +(a) permanently enjoins Wolf from violation of Section 17(a)(3) of the Securities Act of +1933 (“Securities Act”), and Rule 13b2-1 of the Securities Exchange Act of 1934 +(“Exchange Act”); +(b) orders Wolf to pay a civil penalty in the amount of $50,000; +(c) permits the SEC Division of Enforcement to initiate against Wolf a follow-on +administrative proceeding with the Commission pursuant to Rule 102(e) of the +Commission’s Rules of Practice (the “Administrative Proceeding”), and to which +Defendant agrees to waive all constitutional, timeliness, and procedural objections. For +the Administrative Proceeding, the parties agreed that: + Wolf may not argue that she did not violate the above described provisions of the +Securities Act and Exchange Act; + Solely for the purposes of the Administrative Proceeding, the allegations in the +Amended Complaint shall be accepted as and deemed true, with the exception of +any allegations that Ms. Wolf acted with scienter; and + The determination of what, if any, sanctions are due against Wolf pursuant to +Rule 102(e) shall be determined by the Commission upon written submissions of +the parties, pursuant to Rule 250(c), based on citations to the evidentiary record in +the District Court Action, which includes investigative materials that were +produced to Wolf during discovery in the District Court Action, and without a +hearing for the purpose of taking evidence, as set forth in Rule 300, et seq. +5. On September 6, 2018, the Court entered a consent final judgment against Wolf +(the “Final Judgment”) permanently enjoining her from future violations of Section 17(a)(3) of +the Securities Act and Rule 13b2-1 of the Exchange Act (the “Final Judgment”); ordering her to +pay $50,000 in civil penalties; and incorporating the terms set forth above relating to the form +and manner of the Administrative Proceeding. + +3 +III. +Based upon the foregoing, the Commission finds that a court of competent jurisdiction +has permanently enjoined Respondent, a CPA, from violating the Federal securities laws within +the meaning of Rule 102(e)(3)(i)(A) of the Commission’s Rules of Practice. In view of these +findings, the Commission deems it appropriate and in the public interest that Wolf be +temporarily suspended from appearing or practicing before the Commission. +The Commission also deems it appropriate that the manner and form of the +Administrative Proceedings described in paragraph 4(c) above, shall be proscribed herein. +IT IS HEREBY ORDERED that Wolf be, and hereby is, temporarily suspended from +appearing or practicing before the Commission. This Order shall be effective upon service on +Wolf. +IT IS FURTHER ORDERED that Wolf 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, lift the temporary suspension and set a +briefing schedule pursuant to Rule 250. Following full opportunity for briefing by the parties, +and full consideration thereof, 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 Wolf +personally, by certified mail at her last known address, or through counsel. + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3973.txt b/raw/aaer/2018/AAER-3973.txt new file mode 100644 index 0000000000000000000000000000000000000000..30bf4277e450c84e9b4dfebf1270dd0d6b1bc0b7 --- /dev/null +++ b/raw/aaer/2018/AAER-3973.txt @@ -0,0 +1,120 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84198 / September 19, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3973 / September 19, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18790 + + +In the Matter of + +Karen Bruton, CPA + + Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS AND +IMPOSING TEMPORARY SUSPENSION +PURSUANT TO RULE 102(e)(3) OF THE +COMMISSION’S RULES OF PRACTICE + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Rule 102(e)(3)1 of the Commission’s Rules of Practice against Karen Bruton (“Respondent” or +“Bruton”). + +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. Karen Bruton, age 69, is the owner of Hope Advisors, LLC (“Hope”) and +resides in Brentwood, Tennessee. Bruton is registered with the U.S. Commodity Futures Trading +Commission (“CFTC”) as an associated person of Hope, a registered commodity pool operator +(“CPO”), and with the National Futures Association (“NFA”) as an associate and principal of +Hope, an NFA member. She has an inactive CPA license from Tennessee. + + B. CIVIL INJUNCTION + +2. On September 14, 2018, the U.S. District Court for the Northern District of +Georgia entered a final judgment against Bruton, permanently enjoining her from future violations, +direct or indirect, of Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule +206(4)-8 thereunder. Securities and Exchange Commission v. Bruton, et al., Civil Action Number +1:16-cv-01752 (N.D. Ga.) + +3. The Commi ssion’s amended complaint alleged that Bruton and the +investment adviser that she owned and controlled, Hope Advisors, LLC, perpetrated a scheme to +charge unearned fees to a fund they managed. Specifically, the fund employed a “high-water- +mark” fee structure pursuant to which Hope was not entitled to a fee unless the fund’s “realized” +gains exceeded any accumulated “realized” losses. Unrealized gains and losses ( i.e., those +attributable to open trading positions at a month’s end) were not included in the fee calculation . +The amended complaint alleges that f rom at least November 2014 until the Commission filed its +initial complaint in 2016, Bruton directed Hope a nd its employees to engage in a continuous +pattern of trading for the purpose of realizing a sufficiently large gain in the current month in order +to guarantee that accumulated realiz ed losses for that month would be wiped out until the +following month. These trades did not simply delay realization of trading losses, however; +according to the amended complaint, Bruton also intentionally sized these trades such that the fund +realized a profit every month, thus allowing Hope to circumvent the high-water-mark structure and +collect a fee. + +III. + +Based upon the foregoing, the Commission finds that a court of competent jurisdiction has +permanently enjoined Bruton, a CPA, from violating the Federal securities laws within the +meaning of Rule 102(e)(3)(i)(A) of the Commission’s Rules of Practice. In view of these findings, +the Commission deems it appropriate and in the public interest that Bruton be temporarily +suspended from appearing or practicing before the Commission. + + IT IS HEREBY ORDERED that Bruton 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 Bruton may within thirty days after service of this Order + 3 +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 Bruton as provided for in the Commission’s Rules of +Practice. + + By the Commission. + + + + + Brent J. Fields + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3974.txt b/raw/aaer/2018/AAER-3974.txt new file mode 100644 index 0000000000000000000000000000000000000000..2c0d65747dbb1a9b55621b826addb75bad5dd8ee --- /dev/null +++ b/raw/aaer/2018/AAER-3974.txt @@ -0,0 +1,75 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84205 / September 19, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3974 / September 19, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18793 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +NASIR SHAKOURI, : 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 Nasir Shakouri (“Shakouri”) 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. On January 3, 2018, a judgment of conviction was entered against Shakouri in +United States v. Robert Torino and Nasir Shakouri, CR No. 17-00136, in the United States +District Court for the Central District of California, finding him guilty of one count of conspiracy +to commit wire fraud in violation of 18 U.S.C. § 371. + +2. As a result of this conviction, Shakouri was sentenced to 15 months’ +imprisonment to be followed by 2 years of supervised release and ordered to pay restitution in +the amount of $5,066,353, jointly and severally with co-defendant Robert Torino. + +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 + + +III. + +In view of the foregoing, the Commission finds that Shakouri 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 Shakouri 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/2018/AAER-3975.txt b/raw/aaer/2018/AAER-3975.txt new file mode 100644 index 0000000000000000000000000000000000000000..67f380f582e443e73588700b6378abaa8c9e3f66 --- /dev/null +++ b/raw/aaer/2018/AAER-3975.txt @@ -0,0 +1,78 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84206 / September 19, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3975 / September 19, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18794 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +ROBERT TORINO : 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 Robert Torino (“Torino”) 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. Torino is a certified public accountant, but his license in Massachusetts expired in +1997. + +2. On January 3, 2018, a judgment of conviction was entered against Torino in +United States v. Robert Torino and Nasir Shakouri, CR No. 17-00136, in the United States +District Court for the Central District of California, finding him guilty of one count of conspiracy +to commit wire fraud in violation of 18 U.S.C. § 371. + + +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 + +3. As a result of this conviction, Torino was sentenced to 15 months’ imprisonment +to be followed by 2 years of supervised release and ordered to pay restitution in the amount of +$5,066,353, jointly and severally with co-defendant Nasir Shakouri. + +III. + +In view of the foregoing, the Commission finds that Torino 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 Torino 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/2018/AAER-3976.txt b/raw/aaer/2018/AAER-3976.txt new file mode 100644 index 0000000000000000000000000000000000000000..84a313d173446966861105a8b3687f2c10cf1542 --- /dev/null +++ b/raw/aaer/2018/AAER-3976.txt @@ -0,0 +1,76 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84207 / September 19, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3976 / September 19, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18796 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +BRONSON L. QUON, CPA, : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Bronson L. Quon (“Quon”) 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. Quon is a certified public accountant in California. + +2. On March 23, 2018, a judgment of conviction was entered against Quon in United +States v. Bronson Quon, CR No. 17-00506, in the United States District Court for the Central +District of California, finding him guilty of one count of omission of material facts in statement +to accountants in violation of 15 U.S.C. §§ 78m(b)(2)(B), 78ff(a) and 17 C.F.R. § 240.13b2-2. + +3. As a result of this conviction, Quon was sentenced to probation for a term of three + +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 + +years with a condition of home detention for six months and ordered to pay a fine of $20,000. + +III. + +In view of the foregoing, the Commission finds that Quon 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 Quon 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/2018/AAER-3977.txt b/raw/aaer/2018/AAER-3977.txt new file mode 100644 index 0000000000000000000000000000000000000000..d466d390fd76610413a71c32284992b7e5120018 --- /dev/null +++ b/raw/aaer/2018/AAER-3977.txt @@ -0,0 +1,576 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10557 / September 20, 2018 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84233 / September 20, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3977 / September 20, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18806 + +In the Matter of + +BARRETT BUSINESS +SERVICES, INC. and MARK +CANNON, 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, 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”) and Section 21C of the Securities Exchange +Act of 1934 (“Exchange Act”), against Respondent Barrett Business Services, Inc. (“BBSI”) and +pursuant to Sections 4C1 and 21C of the Exchange Act, and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice2 against Respondent Mark Cannon (“Cannon”). + +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 issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + 2 + +II. + + In anticipation of the institution of these proceedings, BBSI and Cannon (collectively, the +“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 it and the +subject matter of these proceedings, which are admitted, Respondent BBSI 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 (the “Order”), as set forth below. 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 Cannon consents to the entry of +this Order, as set forth below. +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +Summary + +1. This matter involves accounting practices at BBSI, which violated the antifraud, +books and records, periodic reporting, and internal accounting control provisions of the federal +securities laws. BBSI is a publicly-listed professional employer services company headquartered in +Vancouver, Washington. Clients hire BBSI to process payroll and payroll taxes, to provide +workers’ compensation coverage, and to perform other business administration and consulting +services. BBSI was historically primarily self-insured for the workers’ compensation coverage it +provided. BBSI maintained liability reserves to fund payments it was required to make on workers’ +compensation claims. Workers’ compensation has been one of BBSI’s largest liabilities. + +2. From 2012 through 2014, BBSI through its former Chief Financial Officer, James +Miller, engaged in a number of fraudulent accounting practices primarily to mask negative trends + + + 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 +in BBSI’s workers’ compensation exposure including (1) misclassifying expenses to understate +BBSI’s recorded workers’ compensation expense and overstate BBSI’s recorded payroll tax and +other related expenses, (2) improperly recognizing certain federal and state unemployment tax +expenses over multiple periods rather than in the period incurred, and (3) intentionally +underreporting BBSI’s workers’ compensation liability by, in part, concealing the existence of a +second actuarial report that corroborated BBSI’s independent actuary’s view that BBSI needed to +increase its workers’ compensation reserve by $80 million. + +3. BBSI’s former Controller, Mark Cannon, improperly approved journal entries that +Miller prepared to manipulate the timing of BBSI’s federal and state unemployment tax expenses. + + 4. On March 9, 2016, BBSI filed an 8-K advising the public that it could no longer rely +on its financial statements for the fiscal years ended December 31, 2012, 2013 and 2014, and each +respective quarter in those fiscal years, and as of and for the quarters ended March 31 and June 30, +2015. BBSI’s stock fell 33% on the announcement. In May 2016, BBSI filed a Form 10-K, which +included 2015 financial statements as well as restated annual and – as necessary – interim financial +results for 2011, 2012, 2013, 2014, and the first three quarters of 2015. BBSI reported an additional +$15.8M in workers’ compensation expense in 2012 and 2013, reduced its 2013 net income by $2.2 +million (a reduction of over 10% for the year), and recorded in an earlier period an $80 million +charge to accrue for its workers’ compensation liability. + +Respondents + + 5. Barrett Business Services, Inc. (“BBSI”) is a Maryland corporation headquartered in +Vancouver, Washington. BBSI is a professional employer services and staffing organization, which +provides human resources outsourcing. BBSI operates in multiple states. BBSI is registered +pursuant to Section 12(b) of the Exchange Act and listed on NASDAQ under the ticker “BBSI.” +Throughout the relevant period, BBSI filed with the Commission public reports on Forms 10-Q and +10-K. In addition, BBSI filed an S-8 during the relevant period, which incorporated various Forms +10-K and 10-Q also filed during the relevant period. BBSI stated in its public filings that it prepared +its financial statements in accordance with United States Generally Accepted Accounting Principles +(“GAAP”). + +6. Mark Cannon, age 53, is a resident of Camas, Washington. Cannon joined BBSI in +2013 as its Controller, a position he retained through BBSI’s restatement in 2016. Cannon obtained +a CPA license in Idaho in 1991. Cannon remains employed at BBSI in a different role outside the +accounting department. + +Other Relevant Individual + + 7. James Douglas Miller, age 54, is a resident of Washougal, Washington. From 2008 +to March 2016, when he separated from BBSI, Miller was BBSI’s Vice President of Finance and +Chief Financial Officer. Between 1994 and 2008, Miller was BBSI’s Controller. Miller is a +Certified Public Accountant licensed to practice in Oregon since 1990; his license is currently + 4 +inactive. Miller was responsible for ensuring BBSI fairly presented its workers’ compensation +liability reserve and the associated expense in its financial statements. + +Facts + +8. BBSI provides many of its clients with workers’ compensation liability coverage. +BBSI was historically self-insured for workers’ compensation liability in several states, including +California, its largest market. BBSI operates a captive insurance subsidiary to help manage its +workers’ compensation liability. Managing workers’ compensation exposure is an important +driver of BBSI’s financial health. During the relevant period, workers’ compensation was one of +the largest liabilities on BBSI’s balance sheet. On earnings calls with investors and analysts +between 2012 and 2014, BBSI regularly reported its workers’ compensation expense as a +percentage of its revenue. + +9. To satisfy state insurance regulations in states where it is self-insured, BBSI +maintains available cash that can be drawn down to make payments on claims as they arise. The +cash reserve is kept at a balance commensurate with BBSI’s workers’ compensation reserve on its +balance sheet. In light of certain state statutory requirements for regulated insurance entities – and +consistent with GAAP and the disclosures BBSI made to investors – the workers’ compensation +reserve is estimated using actuarial methods. + +10. Every quarter, from 2009 to Q3 2014, BBSI retained an independent third-party +actuary (“Actuary A”) to estimate the amount to be accrued for the workers’ compensation reserve. +BBSI provided Actuary A with its claims and loss data and, during normal period and year-end +closing processes, Actuary A provided BBSI with a report estimating BBSI’s overall workers’ +compensation liability. BBSI then normally used the actuarially-derived estimate as the basis for +the workers’ compensation liability reflected on its balance sheet. BBSI reflects the accumulation +of reserves in its financial statements by accruing liabilities on its balance sheet (i.e., the overall +amount of unsettled insurance claims) and recognizing periodic expenses on its income statement +(i.e., the quarterly cost of funding the reserve). + +A. BBSI Misclassified Expenses to Underreport BBSI’s Workers’ Compensation +Expense + + 11. In 2012 and 2013, BBSI continued to record its workers’ compensation liability on +its balance sheet using Actuary A’s estimate. Beginning in 2012 and continuing throughout 2013, +Miller caused BBSI to stop recognizing the full amount of BBSI’s workers’ compensation expense +on its income statement. Rather than recording workers’ compensation expense as the amount of +expense required to increase BBSI’s reserve to match Actuary A’s overall estimate of the liability, +Miller instead allocated increased costs across several, unrelated expense accounts such as a +payroll tax expense account. Miller orchestrated these misclassifications through a series of +journal entries that transferred amounts between unrelated expense accounts in order to maintain +consistent levels of workers’ compensation expense, relative to revenue. + + 5 +12. BBSI’s accounting policies and internal accounting controls required one person to +prepare a journal entry and another finance department employee to approve the journal entry +before it was posted to the general ledger. Miller prepared and approved his own +misclassifications, then directed a junior accounting employee to post them to the general ledger. +These journal entries were often set as recurring entries, which would schedule a series of smaller, +cumulative transactions rather than a lump-sum transfer. Miller knew, or was reckless in not +knowing, that his journal entries did not comply with GAAP and BBSI’s internal accounting +controls. + + 13. By misclassifying expenses, Miller and BBSI were able to report workers’ +compensation expenses that were in line with historical trends, when in fact BBSI’s workers’ +compensation expenses were increasing as a percentage of revenue. During quarterly earning calls +with investors throughout 2012 and 2013, Miller reported BBSI’s workers’ compensation expense +as a largely consistent percentage of revenue. Miller knew, or was reckless in not knowing, that +his statements and BBSI’s public filings understated BBSI’s workers’ compensation expense. + +14. As restated, for fiscal-year 2012, BBSI underreported workers’ compensation +expense by approximately $3.9 million and overstated payroll tax expense by a similar amount. +For fiscal year 2013, BBSI underreported its workers’ compensation expense by $11.9 million. + +15. Actuary A’s report for year-end 2013 determined that, despite continuing to book to +Actuary A’s estimate for each quarter during the year, BBSI was still under-reserved for its +workers’ compensation liability. BBSI took a $5 million charge at the end of its 2013 fiscal year to +further increase its workers’ compensation reserve. + +B. BBSI Improperly Recorded Certain Federal and State Unemployment Taxes + +16. In addition to manipulating BBSI’s workers’ compensation expense, Miller +manipulated the period in which BBSI recognized certain federal and state unemployment tax +expenses (“FUTA” and “SUTA,” respectively). During BBSI’s year-end close, BBSI employees +worked to reconcile tax payments owed for FUTA and SUTA against BBSI’s recorded accruals for +the taxes. Even though BBSI had actually paid approximately $3.8 million more in FUTA and +SUTA for 2013 than it had recognized as expense, Miller decided not to expense the incremental +amounts paid. In light of the $5 million charge BBSI had already decided to make in connection +with the workers’ compensation reserve, Miller wanted to avoid further scrutiny of the accounting +department. + +17. In February 2014, Miller prepared a year-end journal entry that did not recognize +the full amount of FUTA and SUTA that BBSI had owed and paid for 2013. In the first quarter of +2014, once Miller confirmed that the FUTA and SUTA amounts were indeed owed to taxing +authorities, he prepared documentation to recognize FUTA and SUTA expense. However, instead +of immediately recognizing the FUTA and SUTA expense at the time it became probable, as +required by GAAP, Miller spread the approximately $3 million expense over several quarters in +2014. Miller knew, or should have known, that the FUTA and SUTA expenses should have been +expensed immediately in order to comply with GAAP. + 6 + +18. Cannon approved Miller’s year-end 2013 journal entry when he knew, or should +have known, that BBSI had actually paid more than it recorded in its books and records for +unemployment taxes. Following the 2013 year-end close, Cannon investigated the causes for +BBSI’s under-accrual of federal and state unemployment taxes. He therefore became aware in +2014 that BBSI needed to quantify and correct its treatment of FUTA and SUTA expenses. +Nevertheless, Cannon approved Miller’s recurring journal entry recognizing unemployment taxes +over a multi-quarter period. Cannon knew, or should have known, that the accounting entries did +not comply with GAAP. + +19. When BBSI restated its financial statements, it corrected the timing of the FUTA +and SUTA expenses. As a result of the FUTA and SUTA issues, BBSI’s fiscal year 2013 income +was $2.2 million lower than previously reported, a reduction of over 10% for the year. + +C. BBSI Underreported Workers’ Compensation Expense in 2014 + +20. In early 2014, Actuary A, which had a new engagement partner, began reporting to +BBSI that it anticipated an increase in its estimate of the company’s overall workers’ compensation +liability. At the end of the first quarter in 2014, Actuary A estimated a liability figure that was $60 +million higher than the company’s year-end reserve (from approximately $112 million to $172 +million). In consultation with BBSI’s executives and independent auditor, Miller determined BBSI +would not book to Actuary A’s estimate for the first quarter pending further analysis. + + 21. Following the first quarter, BBSI retained a second independent actuary (“Actuary +B”) in order to assist BBSI’s analysis of specific claims reserves and its overall workers’ +compensation reserve. BBSI engaged Actuary B to analyze the impact of its reserving practices on +the overall liability. Miller signed BBSI’s engagement letter with Actuary B, and knew Actuary B +would prepare an estimate of BBSI’s workers’ compensation liability as of the end of the second +quarter 2014. + + 22. At the end of the second quarter 2014, both Actuary A and Actuary B estimated +that BBSI was significantly under-reserved for its workers’ compensation liability. Despite using +different methods of analysis, both actuaries presented liability figures that were similar to each +other and significantly higher than BBSI’s prior estimates. Actuary B estimated a liability of +$213.5M (which was $93.4 million higher than BBSI’s reserve as of the end of the first quarter) +while Actuary A estimated a liability of $206M (which was $85.9 million higher than BBSI’s +reserve as of the end of the first quarter). + + 23. At the end of Q2 2014, Miller prepared a memorandum with his analysis of the +adequacy of workers’ compensation liability, which again rejected Actuary’s A recommendation. +Miller’s Q2 2014 memorandum makes no mention of Actuary B’s analysis and Miller did not +discuss Actuary B’s analysis with BBSI’s Audit Committee. Similarly, Miller did not provide +Actuary B’s analysis to BBSI’s independent auditor or BBSI’s Audit Committee. + + 7 + 24. In Q3 2014, BBSI again received reports from Actuary A and Actuary B, which +again both suggested large increases in the reserve. After extensive internal discussions, Miller +shared some of Actuary B’s analysis with its independent auditor. Although Miller had initially +attempted to justify a lower number, after discussion with management and the independent +auditor, BBSI decided adopt an actuarial estimate of the reserve. To increase the reserve, BBSI +recognized an $80 million charge. BBSI’s stock fell 59% on the announcement and the charge +effectively eliminated BBSI’s pre-tax earnings for a five-year period. + + 25. In the third and fourth quarters of 2014, Miller took steps to hide the scope of +Actuary B’s work from BBSI’s independent auditor. In two memoranda he drafted and sent to +BBSI’s independent auditor, Miller falsely claimed BBSI had retained Actuary B in Q3 2014, +rather than earlier in the year. + + 26. When BBSI issued restated financial statements, it moved the $80 million expense +from Q3 2014 to Q2 2014. + +D. BBSI Restated its Financial Statements for Multiple Periods + + 27. On November 4, 2015, BBSI’s independent auditor sent BBSI a letter pursuant to +Section 10A of the Exchange Act, requesting an independent investigation and stating its quarterly +review of BBSI’s Q2 2014 financial statements could no longer be relied upon. BBSI commenced +an investigation, but in the press release following the announcement of the investigation, stated +that “[t]he audit committee believes the concerns raised . . . have no bearing on BBSI’s 2014 +annual financial statements.” + + 28. Following a first investigation into the timing of the 2014 charge, Miller reported +his misclassification entries from 2013 and before. On March 9, 2016, BBSI filed an 8-K +announcing non-reliance on its financial statements. BBSI’s stock dropped 33% based on this +announcement. On May 26, 2016, BBSI filed a Form 10-K, which included 2015 financial +statements as well as restated annual and- as necessary- interim financial results for 2011, 2012, +2013, and 2014 and the first three quarters of 2015. + +Violations + +29. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit, in +connection with the purchase or sale of securities, (1) employing any device, scheme, or artifice to +defraud; (2) making any material misrepresentation or omission; or (3) engaging in any transaction, +practice, or course of business that operates as a fraud or deceit upon any person. As a result of the +conduct described above, BBSI violated Section 10(b) of the Exchange Act and Rule 10b-5 +thereunder. + +30. Section 17(a)(1) of the Securities Act prohibits the use of a device, scheme or +artifice to defraud in the offer or sale of securities. Sections 17(a)(2) and 17(a)(3) make it +unlawful, in the offer or sale of securities, to (1) obtain money or property by means of any +material misrepresentation or omission or (2) engage in any transaction, practice or course of + 8 +business that operates as a fraud or deceit upon the purchaser. As a result of the conduct described +above, BBSI violated sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act. + +31. Section 13(a) of the Exchange Act requires issuers of securities registered pursuant +to Section 12 of the Exchange Act to file periodic and other reports with the Commission. With +exceptions not applicable here, Rules 13a-1, 13a-11, and 13a-13 of the Exchange Act require each +issuer to file annual, current, and quarterly reports respectively on the appropriate forms and within +the period specified on the form. 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, BBSI violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and Cannon caused +BBSI’s violations of these provisions. + +32. Section 13(b)(2)(A) of the Exchange Act 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 their assets. +As a result of the conduct described above, BBSI violated Section 13(b)(2)(A) of the Exchange +Act and Cannon caused BBSI’s violation of this provision. + +33. Section 13(b)(2)(B) of the Exchange Act 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. As a +result of the conduct described above, BBSI violated Section 13(b)(2)(B) of the Exchange Act and +Cannon caused BBSI’s violation of this provision. + +34. Rule 13b2-1 promulgated under the Exchange Act prohibits any person from +directly or indirectly falsifying any books or records subject to Section 13(b)(2)(A) of the +Exchange Act. As a result of the conduct above, Cannon willfully4 violated Rule +13b2-1. + +Undertakings + + Respondent BBSI 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, BBSI shall: + +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)). + + 9 + +A. Produce, without service of a notice or subpoena, any and all non-privileged +documents and other information requested by the Commission staff subject to any +restrictions under the law of any foreign jurisdiction; + +B. Use its best efforts to cause its officers, employees, and directors to be +interviewed by the Commission staff at such time as the staff reasonably may direct; + +C. Use its best efforts to cause its officers, employees, and directors to appear +and testify without service of a notice or subpoena in such investigations, depositions, +hearings or trials as may be requested by the Commission staff; and + +D. In connection with any testimony of BBSI’s officers, employees, and +directors to be conducted at deposition, hearing, or trial pursuant to a notice or subpoena, +BBSI: + +i. Agrees that any such notice or subpoena for BBSI’s officers’, +employees’, and directors’ appearance and testimony may be served by regular or +electronic mail on: Mary Ann Frantz, Esq. of Miller Nash Graham & Dunn LLP, 3400 U.S. +Bancorp Tower, 111 S.W. Fifth Avenue, Portland, OR 97204. + +ii. Agrees that any such notice or subpoena for BBSI’s officers’, +employees’, and directors’ appearance and testimony in any action pending in a +United States District Court may be served, and may require testimony, beyond the +territorial limits imposed by the Federal Rules of Civil Procedure. + +In determining whether to accept BBSI’s Offer, the Commission has considered this +undertaking. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, pursuant to Section 8A of the Securities Act and Sections 4C and 21C of the +Exchange Act and Rule 102(e) of the Commission’s Rules of Practice, it is hereby ORDERED +that: + + A. Respondent BBSI 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) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + +B. BBSI shall, within 30 days of the entry of this Order, pay a civil money penalty +pursuant to Section 21B(a)(2) of the Exchange Act 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 + 10 +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 +Cannon 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 Erin E. Schneider, Associate Director, +Division of Enforcement, San Francisco Regional Office, 44 Montgomery Street, Suite 2800, San +Francisco, CA 94104. + + C. Respondent Cannon cease and desist from committing or causing any violations and +any future violations of 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 13b2-1 thereunder. + +D. Respondent Cannon shall, within 30 days of the entry of this Order, pay a civil +money penalty pursuant to Section 21B(a)(2) of the Exchange Act in the amount of $20,000 to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. §3717. Payment must be made in one of the following +ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + 11 + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Cannon 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 Erin E. Schneider, Associate Director, +Division of Enforcement, San Francisco Regional Office, 44 Montgomery Street, Suite 2800, San +Francisco, CA 94104. + +E. Respondent Cannon is denied the privilege of appearing or practicing before the +Commission as an accountant. + + F. After one year from the date of this order, Respondent Cannon 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 +Cannon’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) Cannon, 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; + + 12 + (b) Cannon, 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 +Cannon will not receive appropriate supervision; + + (c) Cannon 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) Cannon 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 Cannon 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 Cannon’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. 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 BBSI and Cannon 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 civil penalties in this action ("Penalty Offset"). If the court in any +Related Investor Action grants such a Penalty Offset, Respondent agrees that they shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. Such +a payment shall not be deemed an additional civil penalty and shall not be deemed to change the +amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a "Related +Investor Action" means a private damages action brought against Respondents by or on behalf of +one or more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + + + + + + 13 +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 Cannon, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Respondent Cannon 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/2018/AAER-3978.txt b/raw/aaer/2018/AAER-3978.txt new file mode 100644 index 0000000000000000000000000000000000000000..c8301c1911972f097d698070411d90e068c2246e --- /dev/null +++ b/raw/aaer/2018/AAER-3978.txt @@ -0,0 +1,310 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84251 / September 21, 2018 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3978 / September 21, 2018 +ADMINISTRATIVE PROCEEDING +File No. 3-18816 + + +In the Matter of + +Primoris Services Corporation +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 Primoris Services Corporation +(“Primoris” 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 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. This proceeding concerns Primoris’s failure to (i) devise and maintain a sufficient +system of internal accounting controls and (ii) adequately evaluate the effectiveness of its +Internal Control over Financial Reporting (“ICFR”) as of year-end 2014. Due to these control +failures, Primoris also failed to make and keep accurate books and records. +2. At the end of 2014, Primoris learned that it had control deficiencies that affected +its accounting for contingent cost estimates and subsequently discovered three related +contingency accounting errors. In particular, Primoris did not have effective controls in place for +contingency accounting, including, for example, controls related to policies and procedures +describing how contingencies should be estimated at the outset of a project, adjusted during a +project, or how those estimates and adjustments should be documented. +3. This lack of effective controls led to contingency accounting errors on three long- +term construction contracts in 2014 and caused Primoris to record revenue related to those +projects in the wrong quarters. When it evaluated the effectiveness of its ICFR for the year, +however, Primoris failed to properly assess the potential magnitude of the accounting +misstatements that could have resulted from those control deficiencies because it only considered +errors actually identified and did not consider either the total volume of activity, or the entire +class of transactions, exposed to the control deficiencies. +4. Specifically, in 2014 Primoris derived the majority of its revenue and a material +percentage of its pre-tax income from approximately 1,100 construction projects that used the +percentage-of-completion method of accounting and in most instances involved contingent cost +estimates. All projects with contingencies were exposed to the control deficiencies. Yet, in its +assessment of ICFR, Primoris did not assess the total value or potential misstatement of all these +contingencies and, thus, did not evaluate whether it was reasonably possible any contingency +accounting errors would be material to the financial statements. Primoris knew or should have +known, however, that the value of its contingency estimates was material to its financial +statements, and that it should have assessed that fact in its evaluation of ICFR. +5. In determining that its ICFR was effective for 2014, Primoris concluded that +certain compensating controls prevented, or would have detected, accounting errors that could +have led to a material misstatement in its financial reporting. But, these compensating controls +were either not tested in 2014 or not designed to identify errors in contingency accounting. +Accordingly, Primoris should not have relied on these compensating controls in its evaluation of +ICFR for 2014. + +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. + + +6. By failing to properly evaluate its ICFR for 2014, Primoris failed to identify a +material weakness in its ICFR for that year, concluding instead that the lack of controls was only +a significant deficiency. +7. As a result of the foregoing, Primoris violated Exchange Act Sections 13(b)(2)(A) +and (B) and Rule 13a-15(c) thereunder. +RESPONDENT +8. Primoris, a Delaware corporation based in Dallas, Texas, is a holding company +that provides a wide range of construction, fabrication, maintenance and engineering services to +utilities, municipalities and other customers. Primoris’s securities are registered with the +Commission pursuant to Section 12(b) of the Exchange Act, and its securities trade on the +NASDAQ Select Global Market under the symbol “PRIM.” +FACTS +Statutory Requirements +9. Section 13(b)(2) of the Exchange Act requires public companies, among other +things, to (i) make and keep accurate books and records and (ii) 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 GAAP. +See 15 U.S.C. § 78m(b)(2)(A)-(B). +10. Exchange Act Rule 13a-15(a) requires issuers, including Primoris, to maintain +ICFR. See 17 C.F.R. § 240.13a-15(a). Rule 13a-15(f) defines ICFR as: +[A] process designed by, or under the supervision of, the issuer’s principal executive and +principal financial officers, or persons performing similar functions, and effected by the +issuer’s board of directors, management and other personnel, to provide reasonable +assurance regarding the reliability of financial reporting and the preparation of financial +statements for external purposes in accordance with generally accepted accounting +principles[.] 17 C.F.R. § 240.13a-15(f). +11. Exchange Act Rule 13a-15(c) requires management – with the participation of the +principal executive and principal financial officers (or persons performing similar functions) – to +evaluate the effectiveness of ICFR as of the end of each fiscal year. See 17 C.F.R. § 240.13a- +15(c). Under Rule 13a-15(c), management may satisfy its obligation by conducting an +evaluation in accordance with interpretive guidance issued by the Commission in Release 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”). +12. Item 308 of Regulation S-K requires management to provide an annual report that +contains its assessment of the effectiveness of ICFR and any material weakness in ICFR. Under +Item 308, “[m]anagement is not permitted to conclude that the registrant’s [ICFR] is effective if +there are one or more material weaknesses in the registrant’s [ICFR].” 17 C.F.R. § 229.308. + + +13. Item 308 of Regulation S-K instructs that the “registrant must maintain evidential +matter, including documentation, to provide reasonable support for management’s assessment of +the effectiveness of the registrant’s [ICFR]”. +14. Rule 1-02(a)(4) of Regulation S-X defines categories of ICFR deficiencies based +on the severity, as follows: + A “material weakness” is a “deficiency, or a combination of deficiencies, in +[ICFR] such that there is a reasonable possibility that a material misstatement of +the registrant’s annual or interim financial statements will not be prevented or +detected on a timely basis.” (emphasis added). + A “significant deficiency” is a “deficiency, or a combination of deficiencies, in +[ICFR] that is less severe than a material weakness, yet important enough to merit +attention by those responsible for oversight of the registrant’s financial reporting.” +Id. +15. Item 308(a)(3) of Regulation S-K requires public companies such as Primoris to +annually provide a report of management that discloses material weaknesses that have been +identified by management. +Primoris’s Control Deficiencies +16. In 2014, Primoris used the percentage-of-completion method of accounting for +revenue recognition for its fixed-price contracts and identified this method as a significant +accounting policy in its Form 10-K. In the percentage-of-completion method, issuers calculate +their estimated revenues earned using estimates for the value of their contracts and the total costs +expected for those contracts. In estimating the costs associated with its long-term construction +projects, Primoris often included a “contingency” for the risks inherently associated with those +projects. Contingencies include, for example, unanticipated costs caused by weather delays, +third-party design errors, subcontractor performance, or supplier delays. As a project progresses, +and the risk of unanticipated costs decreases, contingency cost expectations should be reduced, +which would result in an increase in the percent complete and an increase in revenue for the +project. Primoris’s calculation of, and decisions to adjust, contingency estimates, therefore, had +a significant impact on its revenue recognition, including whether, and when, it recognized +profits on its construction projects that used the percentage-of-completion method of accounting. +17. Despite the potential impact contingencies had on its ability to accurately +recognize revenue, Primoris did not have written policies or procedures describing how +contingencies should be estimated at the outset of a project, adjusted during a project, or how +those estimates and adjustments should be documented. Nor did Primoris have written policies +or procedures describing how to determine when contingencies should be changed throughout a +project. +18. Primoris also did not sufficiently document its process for evaluating the specific +risks contained in its initial contingency estimates for a project. Nor did it adequately document +whether those risks continued to exist throughout a project and, if so, the likelihood that such a + + +risk would come to fruition. More generally, Primoris did not create adequate documentation to +support or justify its contingency determinations or document the reasons for changes it made to +those contingencies, including when it released contingencies. +Accounting and Books and Records Errors Caused by the Control Deficiencies +19. In March 2015, Primoris learned it had three accounting errors related to +contingencies in its West Construction Services Segment (“WCSS”) that led to that segment’s +failure to reduce contingent cost expectations and recognize revenue and profits in the +appropriate quarter. +20. First, Primoris determined that WCSS received a payment and completion notice +in the last week of December 2013, which should have caused it to close the project, reduce the +remaining contingent cost expectations to zero, and recognize revenue and profits of +approximately $359,000 in the fourth quarter of 2013. However, Primoris did not reduce the +contingent cost expectations or recognize the revenue and profits until the first quarter of 2014. +21. Second, on another WCSS project, Primoris reduced the contingent cost +expectations and recorded revenue and profits of approximately $808,000 in the first quarter of +2014. But, that project was completed and paid in the second quarter of 2013, and Primoris +determined that it should have reduced the contingent cost expectations and recorded the revenue +and profits no later than the fourth quarter of 2013. +22. Finally, on a third WCSS project, Primoris determined that it prematurely reduced +the contingent cost expectations to zero in the third quarter of 2014 instead of the fourth quarter, +which caused it to record approximately $178,000 of excess revenue and profits in the wrong +quarter. +23. As a result of these errors, Primoris failed to accurately make and keep books and +records regarding the contingencies associated with long-term construction projects and, thus, +the company’s revenues. +Primoris’s Failure to Properly Evaluate ICFR +24. Primoris conducted an internal investigation of its contingency accounting +practices in 2014 and identified a number of concerning email communications among division +level executives, project controls managers, and others in the WCSS. Specifically, the emails +used terms such as “cushion,” “cookie jars,” and “sandbagging” when referring to contingencies +on WCSS projects. +25. Despite learning of the control deficiencies and accounting errors described +above, in its assessment of ICFR for 2014 Primoris failed to properly assess the potential +magnitude of the accounting errors it identified. Primoris only considered the specific +accounting errors it identified; it did not consider either the total volume of activity, or the entire +class of transactions, exposed to the control deficiencies. +26. In 2014, Primoris had approximately 1,100 construction projects that used the +percentage-of-completion method of accounting and in most instances involved contingent cost + + +estimates. All of these projects with contingent cost estimates were exposed to the control +deficiencies. Yet, in its assessment of ICFR, Primoris did not assess the total value or potential +misstatement of all these contingencies and, thus, did not evaluate whether it was reasonably +possible any contingency accounting errors would be material to the financial statements. +Primoris was aware of certain information, however, that indicated its contingency estimates +were material to its financial statements and that should have prompted it to properly assess the +potential magnitude of any accounting errors that could have resulted from the control +deficiencies. +27. For the 2014 year-end audit, Primoris prepared a summary for its auditors of 35 of +its largest construction projects. These jobs accounted for approximately 50% of the company’s +2014 revenue, included contingency estimates, and were primarily accounted for using the +percentage-of-completion method. According to the summary, the contingencies for these +projects were valued at approximately $17.9 million, which was approximately 17.5% of +Primoris’s pre-tax income for the year. Although Primoris knew or should have known after +preparing this summary that the value of its contingency estimates was material to the financial +statements, Primoris did not consider that fact when assessing the control deficiencies. +28. Primoris concluded that it had a significant deficiency in its ICFR related to +contingency accounting, but that it did not have a material weakness in its ICFR for 2014 +because it believed that certain compensating controls would have prevented or detected a +material misstatement in its financial statements. But, these compensating controls were either +not tested in 2014 or not designed to identify errors in contingency cost accounting. +Accordingly, Primoris should not have relied on them to conclude that its ICFR was effective. +29. Moreover, as Primoris knew when it evaluated its ICFR for 2014, several +individuals who sent and received the concerning emails (described above in paragraph 24) were +also responsible for providing the information used in the compensating controls. +30. Finally, despite the requirements of Item 308 of Regulation S-K noted above, +Primoris also failed to generate or maintain documentation providing reasonable support for its +assessment of ICFR. +31. For the reasons described above, Primoris failed to properly evaluate its ICFR for +2014 and, in doing so, failed to conclude that it had a material weakness in ICFR for that year. +VIOLATIONS +32. As a result of the conduct described above, Primoris 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. +33. As a result of the conduct described above, Primoris 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, among other things, +transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles. + + +34. As a result of the conduct described above, Primoris violated Rule 13a-15(c) of +the Exchange Act, which requires a company to evaluate the effectiveness of its system of ICFR. +PRIMORIS’S REMEDIAL ACTS +35. At the end of 2014, Primoris began initiating a series of changes and +improvements aimed at enhancing its ICFR, including the standardization of financial accounting +processes and systems across segments and recently-acquired divisions. Over the next three +years, Primoris also undertook other steps to enhance its control environment and remediate the +deficiencies, including the establishment of formal contingency documentation and management +policies. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Primoris’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondent Primoris cease and +desist from committing or causing any violations and any future violations of Sections +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rule 13a-15(c) thereunder. +B. Respondent shall, within 10 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. +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 +Primoris Services Corporation as a Respondent in these proceedings, and the file number of + + +these proceedings; a copy of the cover letter and check or money order must be sent to Antonia +Chion, Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 +F Street N.E., Washington, DC 20549-8549. +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + +By the Commission. +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3979.txt b/raw/aaer/2018/AAER-3979.txt new file mode 100644 index 0000000000000000000000000000000000000000..f62af28f373008148d50c7a202304b01c4d64c4c --- /dev/null +++ b/raw/aaer/2018/AAER-3979.txt @@ -0,0 +1,78 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84252 / September 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3979 / September 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18817 +______________________________ +: +In the Matter of : + : ORDER OF FORTHWITH SUSPENSION + : PURSUANT TO RULE 102(e)(2) OF THE +DENNIS W. HAMILTON, CPA, : COMMISSION’S RULES OF PRACTICE +: +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Dennis W. Hamilton 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. Dennis Wayne Hamilton is a certified public accountant in Colorado. + +2. On September 12, 2016, a judgment of conviction was entered against Hamilton +in United States v. Dennis W. Hamilton, No. 3:16-cr-00058-AWT, in the United States District +Court for the District of Connecticut, finding him guilty of one count of securities fraud. + +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 + + +3. As a result of this conviction, Hamilton was sentenced to 8 months imprisonment +and ordered to pay a fine in the amount of $131,958. + +III. + +In view of the foregoing, the Commission finds that Hamilton 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 Dennis W. Hamilton 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/2018/AAER-3980.txt b/raw/aaer/2018/AAER-3980.txt new file mode 100644 index 0000000000000000000000000000000000000000..c87d51b58536729822563ceea5619ca7a113eb11 --- /dev/null +++ b/raw/aaer/2018/AAER-3980.txt @@ -0,0 +1,364 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10558 / September 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3980 / September 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18819 + + +In the Matter of + +HEARTLAND PAYMENT +SYSTEMS, LLC, F/K/A +HEARTLAND PAYMENT +SYSTEMS, INC. AND +ROBERT O. CARR. + +Respondent. + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF +1933, 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 cease-and-desist proceedings be, and hereby are, instituted pursuant to Section +8A of the Securities Act of 1933 (“Securities Act”) against Heartland Payment Systems, LLC, f/k/a +Heartland Payment Systems, Inc. (“Heartland”) and Robert O. Carr (“Carr”) (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 it and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting +Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, 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 finds1 that: +Summary +1. This matter arises from the disclosures of Heartland Payment Systems, Inc. and its +CEO, Robert O. Carr, regarding an operating metric referred to by the company as “New Margin +Installed” or “NMI.” Between 2013 and 2015, Heartland and Carr disclosed NMI in quarterly +filings with the Commission on Forms 10-Q and 10-K, in earnings releases filed with the +Commission on Form 8-K, and on quarterly earnings calls with securities analysts. Heartland +disclosed NMI publicly as both an absolute quarterly figure and a percentage change over prior +periods (collectively, the “NMI Metrics”), and Carr often included commentary regarding the +importance of NMI to the company’s future revenue generation. NMI did not affect Heartland’s +financial statements, including its reported revenue and earnings. +2. NMI was a metric used by Heartland to estimate the expected annual gross profit +from a merchant contract after deducting processing and servicing costs associated with the +revenue over the merchant’s first year processing payments with Heartland. Heartland used the +NMI Metrics as a measure of salesperson productivity, and described NMI to analysts and +investors as a leading indicator of organic revenue growth, explaining that increases in NMI +from new customers should lead to increased revenue from card processing in future periods. +3. Between 2013 and 2015, Heartland’s NMI Metrics were consistently overstated +as a measure of new business or future revenue growth. During the relevant period, Heartland, +with the knowledge of Carr, included in its disclosed NMI numbers categories of margin that (1) +were not the result of new business but instead resulted from re-signing existing merchants in +circumstances where accounts experience a change of ownership (“COO Margin,” as further +discussed below); and (2) resulted from products that were added to Heartland’s calculation of +NMI, but which were already being sold to merchants and included in reported revenue during +prior periods (“APD Margin,” as further discussed below, and collectively with COO Margin, +“COO and APD Margin”). +4. As a result of the increased NMI from COO and APD Margin, Heartland and Carr +reported to the market inflated NMI Metrics on a quarterly basis during the relevant period. +Research analysts cited the NMI Metrics as an important factor in issuing reports and analyses +regarding Heartland and, in at least one case, a fund manager reported to investors that the fund’s +investment strategy regarding Heartland was directly linked to the relative level of the NMI +Metrics. Absent the inflated NMI Metrics, Heartland’s reported NMI would have been +materially lower throughout the period. + +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. As a result, the descriptions of NMI given by Heartland and Carr to the market +were misleading, and Heartland and Carr omitted material information by failing to disclose that +a material amount of the company’s growth in NMI was from COO and APD Margin. +Respondent +6. Respondent, Heartland Payment Systems, LLC, is a Delaware limited liability +company with headquarters in Atlanta, Georgia. Prior to its 2016 merger with Global Payments +Inc. (“Global Payments”), and at all times relevant to this action, Heartland Payment Systems, +Inc. was a public company with common shares registered pursuant to Section 12(b) of the +Exchange Act and quoted on the New York Stock Exchange (NYSE: HPY). At all times +relevant to this action, Heartland Payment Systems, Inc. provided card payment processing +services for merchants throughout the United States. All of the actions described herein took +place prior to Heartland’s 2016 merger with Global Payments. +7. Robert O. Carr, age 72, is a resident of Princeton, New Jersey. Carr founded +Heartland in 1997 and remained as CEO after Heartland’s initial public offering in 2005. At all +times relevant to this action, Carr was CEO of Heartland and served on Heartland’s Board of +Directors. Carr has no role at Global Payments. +Heartland’s New Margin Installed Metric +8. Heartland Payment Systems, Inc. (NYSE: HPY) was a payment processing +company. Between 2013 and 2015, Heartland sold credit card processing services to retail +merchants through an internal sales force. +9. Salespersons received compensation in the form of bonuses for newly signed +merchants, and residual payments based on actual merchant profitability on a monthly basis. +The signing bonuses were determined based on an operating metric that Heartland referred to as +“new gross margin installed,” and defined as “the expected annual gross profit from a merchant +contract after deducting processing and servicing costs associated with that revenue.” +10. Heartland, with the knowledge of Carr, aggregated individual salespersons’ new +gross margin installed into a reported operating metric referred to as “New Margin Installed” or +“NMI.” +Heartland and Analysts Describe NMI as a Forward Looking Growth Metric +11. In addition to their use as a measure of salesperson compensation, Heartland and +Carr also reported the NMI Metrics to the market as forward looking growth metrics on a +quarterly basis during earnings calls, in earnings releases, and in 10-Ks and 10-Qs filed with the +Commission during the relevant period. +12. Heartland and Carr described the NMI Metrics as forward looking concepts that +were important to driving long-term growth in processing volumes and revenues. Carr regularly +referred to NMI as “new business” and “new sales,” suggesting that NMI was a measure of +organic revenue growth from new merchant accounts. + 4 +13. Analysts following Heartland adopted these concepts, describing NMI variously +as a “leading indicator” for “new business,” “net revenue growth,” and “organic revenue +growth.” Even in quarters when Heartland’s actual financial metrics fell short of analyst +expectations, Heartland and analysts often cited growth in NMI as a reason for continued +confidence in the stock moving forward. +Heartland Reported Increasing and Record Levels of NMI Throughout 2013-2015 +14. Between 2013 and 2015, Heartland and Carr reported increasingly strong levels +of NMI, citing the steady quarterly increases as evidence of improved sales force productivity +and indicative of future growth. Analysts covering the company closely followed the steady +increase in NMI, reporting it in bullish terms as a leading indicator of future revenues. +15. In its earnings releases during the relevant period, Heartland often stated both that +it had achieved record levels of NMI and that NMI was indicative of future growth for the +company. For example, in its third quarter 2013 earnings release, Heartland reported “An all- +time record $18.5 million new margin installed, up 28% from the third quarter of 2012 with new +card margin installed up 29% in the quarter . . . the continued increase in new SME card margin +installed is key to accelerating the rate of organic card net revenue growth.” (emphasis added). +Heartland used similar language to report NMI figures in earnings releases every quarter during +the relevant period. +16. Carr echoed the sentiments expressed in Heartland’s earnings releases during +quarterly earnings calls with research analysts throughout the relevant period. For example, on +its fourth quarter 2014 earnings call, Carr stated that Heartland had “a ninth consecutive quarter +of new business growth with another quarter of record new margin installed.” (emphasis added). +He elaborated that volume growth during the quarter was “a continuation of the solid organic +growth and benefited from an over two-year run of quarter after quarter record new margin +installed.” (emphasis added). Carr made similar statements during earnings calls in every +quarter of the relevant period. +17. Reporting after the quarterly earnings calls, analysts reacted positively to +Heartland’s description of NMI growth, even in quarters when Heartland’s actual financial +metrics fell short of analyst expectations. For example, in maintaining an Equal-Weight rating +after Heartland reported results from second quarter 2015, an analyst from Stephens, Inc. cited +among “Key Positives” that “New margin installed growth accelerated dramatically to 14.6% +and was higher than net rev growth implying good news for future rev growth.” (emphasis +added). An analyst from Wells Fargo Securities was similarly upbeat after Heartland reported +third quarter 2015 results, stating that “More important [than the financial figures reported], the +momentum of the growing sales force and strategic shift of HPY to broaden out its offerings via +organic development and M&A continues to build with new margin installed up about 30% and +at an all-time high.” (emphasis added). Research analysts expressed similar impressions +regarding the implications of Heartland’s NMI growth throughout the relevant period. +18. In addition to analysts, investors also relied on NMI in forming their investment +strategies for Heartland. Writing in April 2014, one money manager with a position in Heartland + 5 +wrote to his investors, “The primary driver for price movements is the ‘new margin installed’ +which is a measure of new customers signed up during a quarter.” The manager went on to +describe how the fund’s approach to its investment in Heartland would depend on whether NMI +was increasing or decreasing moving forward. +19. Heartland and Carr continued to disclose increasing and record amounts of NMI +growth on earnings calls and in press releases throughout the relevant period, and analysts +continued to consider NMI as a key point in their investment theses throughout the relevant +period. +Heartland’s Reported NMI Was Consistently Overstated as a Forward Looking Growth +Metric Throughout 2013-2015 +20. Contrary to the public statements of Heartland and Carr, a significant portion of +the reported NMI Metrics during the 2013-2015 time period was not actually indicative of new +business or organic revenue growth. Instead, a significant portion of Heartland’s NMI resulted +from: (i) “change of ownership” accounts that provided no net revenue growth, and (ii) the +addition of margin from credit card products that were already being sold to merchants and +which were already included in reported revenue, though previously excluded from NMI +calculations. As a result, Heartland’s NMI was overstated as an indicator of new business or +organic revenue growth. +21. By including in its NMI figures margin that was not indicative of new revenue +growth or was related to products already being sold, Heartland and Carr made statements to the +market that were materially misleading. Moreover, Heartland and Carr failed to disclose +material information that was necessary to make the disclosures made, under the circumstances, +not misleading, including by omitting material information regarding the sources and amount of +COO and APD Margin included in the NMI Metrics. +1. Change of Ownership Accounts +22. Throughout 2013, Heartland’s NMI Metrics were inflated by the inclusion of +change of ownership (“COO”) accounts in salespersons’ installed margin numbers. Heartland’s +internal sales policy defined a COO as, “An event involving an active HPS account in which the +existing Client sells or otherwise transfers ownership of their business to another merchant.” +Although the COO accounts generally did not represent a new revenue stream and were – in +most instances2 – simply a continuation of revenue Heartland earned from an existing merchant +that purportedly changed ownership, Heartland included them in the NMI figures that it +described to the market as new business that was indicative of future revenues. +23. Heartland and Carr recognized that COOs generally were not revenue-generating +new business and were aware that a material amount of NMI was being generated by COOs in + +2 COO accounts could have been expected to generate increased revenue in certain limited +situations, such as if the buyer of the existing business had expansion plans. However, this +generally was not the case. + 6 +the 2013-2015 time period. Heartland nevertheless continued to include COO Margin in its +reported NMI figures throughout the 2013-2015 time period, and Carr regularly referred to this +NMI as “new business” and “new sales.” The inclusion of COOs in Heartland’s NMI figures, +and the failure to disclose that a material portion of NMI resulted from these revenue-neutral +account changes, made Heartland’s external descriptions of NMI misleading.3 +24. Heartland and Carr were aware of the amount of NMI generated by COOs +because Heartland tracked the number of COOs and the percentage of NMI resulting from COOs +throughout the period in order to understand their impact on salesperson compensation and +awards. In addition to the COOs that complied with Heartland’s sales-policy definition, +salespeople sometimes incorrectly submitted COO applications as new merchant applications. +Because of the way Heartland tracked its COOs, those that were presented as new merchant +applications were not included in the tracked COO numbers. Thus, the COO figures tracked by +Heartland did not reflect the entire magnitude of COO margin included in NMI. In late 2013, +Heartland and Carr initiated policy changes intended to stop the practice. +2. Mischaracterization of Product Expansion as NMI Growth +25. The use of COOs to inflate the NMI Metrics was compounded by Heartland’s +March 2013 decision to begin including margin from signing up American Express, PIN/Debit, +and Discover card processing products (“APD Margin”) in the NMI numbers. In early 2013, +Heartland started paying signing bonuses based on sales of American Express, PIN/Debit and +Discover products. Although these products had previously been available for sale and the +revenue from the sale of such products had already been included in Heartland’s net revenues, +they had previously been excluded from salesperson bonus calculations. +26. At the same time it began including APD Margin in bonus calculations, the +company also began counting the margin installed for these three additional product types and +consolidating it into the publicly reported NMI figure. Carr approved the plan to include APD +Margin in NMI by at least February 2013. Despite adding the margin from these products into +its NMI figures, neither Heartland nor Carr ever disclosed to the market that this additional +growth in margin came from the inclusion of APD products that were already being sold and +reflected in Heartland’s revenue, rather than from organic growth in NMI. +27. With Carr’s knowledge, Heartland internally tracked margin from APD accounts +along with other sources of “non-organic” margin. However, no breakdown of non-organic +margin generated by APD accounts was disclosed to the market. +28. By adding the APD Margin to the NMI Metrics during the first quarter of 2013 +without disclosing it to the market and tying the increase in NMI to future revenue growth, +Heartland’s and Carr’s external disclosures from 2013 through the first quarter of 2014 gave the + +3 Heartland and Carr disclosed an attrition metric that measured the number of merchant +accounts that had stopped generating revenue for the company. While COOs ultimately were +reflected in attrition, that metric did not provide a complete picture of the impact of COOs on +Heartland’s reported NMI. + 7 +misleading impression that the company was experiencing a material increase in organic +business growth. In fact, APD products were already being sold to merchants prior to their +inclusion in the NMI Metrics, meaning the increase in the NMI growth rate caused by the +inclusion of APD Margin would not correlate to a future increase in organic revenue growth. +29. APD Margin consistently accounted for approximately 10% of Heartland’s +monthly NMI after March 2013. However, neither Heartland nor Carr ever disclosed the +inclusion of APD Margin in its externally reported NMI figures. +Heartland’s Misstatements Regarding NMI Were Material +30. Heartland’s inflation of its reported NMI Metrics was material because of both +quantitative and qualitative factors. +31. Heartland’s overstatement and mischaracterization of NMI regularly accounted +for more than 10% of reported NMI for a given quarter, making the misstatements quantitatively +significant. For example, in 2013, Heartland’s reported NMI was overstated as an indicator of +new business or organic revenue growth by at least 14.1%, 17.3%, 17.7%, and 13.9% on a +quarterly basis and by 15.7% for the full year. These misstatements do not include the COOs that +were processed as new merchant accounts since those numbers were not tracked by the +company. As a result, the actual overstatements were likely higher. +32. Heartland’s inflation of its NMI Metrics from 2013-2015 was qualitatively +significant as well. First, the misstatements were material because the NMI Metrics were +important to analysts and investors, who understood the NMI Metrics to be a leading indicator +for future organic revenue growth at Heartland. Second, Heartland’s inflation of the NMI +Metrics allowed it to report increasing NMI Metrics in certain quarters when it otherwise would +have had to report decreasing or otherwise negative NMI compared to prior periods. Third, +Heartland’s overstatements of the NMI Metrics allowed the company to consistently report new +records in NMI growth throughout the relevant period, when in fact Heartland’s actual NMI was +not consistently growing over the period. +Global Payments’ Conduct and Cooperation +33. In determining to accept the Offer, the Commission considered the fact that none +of the described conduct took place following Heartland’s merger with Global Payments in 2016. +During the course of the investigation, Global Payments meaningfully cooperated with the +Commission staff and, importantly, Global Payments discontinued the practice of disclosing +NMI following the merger. +Violations +34. As a result of the conduct described above, Heartland violated Sections 17(a)(2) +and (3) of the Securities Act and Carr violated Section 17(a)(2) of the Securities Act. Section +17(a)(2) prohibits a person, in the offer or sale of any securities, from obtaining money or +property by means of any untrue statement of a material fact or any omission to state a material +fact necessary to make the statements made, in light of the circumstances under which they were + 8 +made, not misleading. Section 17(a)(3) of the Securities Act prohibits a person, in the offer or +sale of securities, from engaging in any transaction, practice, or course of business which would +operate as a fraud or deceit upon the purchaser. A violation of these sections does not require +scienter, and may rest on a finding of negligence. See Aaron v. SEC, 446 U.S. 680, 685, 701-702 +(1980). +IV. +In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in Respondents’ Offers. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 8A of the Securities Act, Respondent Heartland Payment +Systems, LLC 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. Pursuant to Section 8A of the +Securities Act, Respondent Robert O. Carr shall cease and desist from committing or causing any +violations and any future violations of Sections 17(a)(2) of the Securities Act. +B. Respondent Heartland Payment Systems, LLC shall, within 30 days of the entry of +this Order, pay a civil monetary penalty of $2,160,000.00 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury. If timely payment is not +made, interest shall accrue pursuant to 31 U.S.C. §3717. Respondent Robert O. Carr shall, within +30 days of the entry of this Order, pay a civil monetary penalty of $120,000.00 to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury. If timely +payment is not made, interest shall accrue pursuant to 31 U.S.C. §3717. + +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 Service Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + 9 +Payments by check or money order must be accompanied by a cover letter identifying +Heartland Payment Systems, LLC or Robert O. Carr 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 Associate Director Melissa Hodgman, Division of Enforcement, Securities and Exchange +Commission, 100 F Street, NE, Washington, DC 20549. + +C. Amounts ordered to be paid as civil money penalties in this Order shall be treated as +penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondents agree that in any Related Investor Action, it shall +not argue that it is entitled to, nor shall it benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondents’ payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +Respondents agrees 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 Respondent +by or on behalf of one or more investors based on substantially the same facts as alleged in the +Order instituted by the Commission in this proceeding. + +D. 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 s, and further, any debt for disgorgement, prejudgme nt interest, civil +penalty or other amounts due by Respondent s 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 s of the federa l 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/2018/AAER-3981.txt b/raw/aaer/2018/AAER-3981.txt new file mode 100644 index 0000000000000000000000000000000000000000..0b90350f0587e5b335aedf37591317e70d8836b4 --- /dev/null +++ b/raw/aaer/2018/AAER-3981.txt @@ -0,0 +1,218 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84258 / September 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3981 / September 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18820 + + +In the Matter of + +CARDIFF LEXINGTON +CORPORATION (f/k/a +CARDIFF +INTERNATIONAL, 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 Cardiff Lexington Corporation (f/k/a Cardiff +International, Inc.) (“Cardiff,” “Respondent” or the “Company”). + +II. + + In anticipation of the institution of these proceedings, Cardiff 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 the Regulation S-X requirement that +interim financial statements filed as part of a Form 10-Q be reviewed by an independent public +accounting firm prior to filing (the “Interim Review Requirement”).2 + + 2. On one occasion, Cardiff violated the Interim Review Requirement by filing a +Form 10-Q with the Commission that contained financial statements that were not reviewed by an +independent public accounting firm. + +Respondent + +3. Cardiff, a Florida corporation based in Fort Lauderdale, Florida, is a holding +company which acquires niche companies with high growth potential, income-producing +commercial real estate properties and high return investments. Cardiff’s stock has been registered +under Section 12(g) of the Exchange Act since 2002. Cardiff’s shares are quoted on OTC Link +(formerly “pink sheets”) operated by OTC Markets Group Inc. under the symbol CDIF. Cardiff +defines itself as a “smaller reporting company” in its most recent filing.3 + +Legal Framework and Facts + + 4. Section 13(a) and Rule 13a-13 thereunder require issuers with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports pursuant to Section +13(a) to also file quarterly reports on Form 10-Q. Form 10-Q requires issuers to include financial +statement information as required by Rule 10-01 of Regulation S-X, and further indicates smaller +reporting companies may provide financial statement information as required by Rule 8-03 of + +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 Rule 10-01(d) of Regulation S-X provides in pertinent part: “Prior to filing, interim financial statements +included in quarterly reports on Form 10-Q [] must be reviewed by an independent public accountant using +professional standards and procedures for conducting such reviews, as established by generally accepted auditing +standards, as may be modified or supplemented by the Commission.” 17 C.F.R. § 210.10-01(d). Similarly, with +respect to smaller reporting companies, Rule 8-03 of Regulation S-X provides in pertinent part: “Interim financial +statements may be unaudited; however, before filing, interim financial statements included in quarterly reports on +Form 10-Q [] must be reviewed by an independent public accountant using professional standards and procedures +for conducting such reviews, as established by generally accepted auditing standards, as may be modified or +supplemented by the Commission.” 17 C.F.R. § 210.8-03. + +3 Under the rules in effect as of the date of the misconduct, a company qualifies as a “smaller reporting +company:” (1) if its public float is less than $75 million or (2) if it cannot calculate its public float, it has less than +$50 million in annual revenue. Item 10(f)(1) of Regulation S-K. + + 3 +Regulation S-X. See Part I, Item 1 of Form 10; see also 17 C.F.R. § 210.1-01(a)(2) (indicating +Regulation S-X sets forth the form and content for financial statements required as part of, among +other things, reports required under Section 13 of the Exchange Act). + + 5. As required by Regulation S-X, financial statements included in quarterly reports +filed on Form 10-Q may be unaudited. 17 C.F.R. § 210.10-01(a)(1); 17 C.F.R. § 210.8-03. Prior +to filing, however, an issuer must have an independent registered public accounting firm conduct a +review of the required interim financial information presented in financial statements included in +the quarterly report. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. The review must be +conducted in accordance with the standards of the Public Company Accounting Oversight Board +(“PCAOB”), as may be modified or supplemented by the Commission.4 17 C.F.R. § 210.10-01(d); +17 C.F.R. § 210.8-03. If an issuer states that interim financial information contained in a quarterly +report has been reviewed by an independent public accountant, a report of the accountant must be +filed with the interim financial statements. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. + + 6. On August 21, 2017, Cardiff filed its quarterly report for the second quarter of +2017, which included the interim financial statements for that quarter. The interim financial +statements were not reviewed by an independent public accountant as required by the Interim +Review Requirement. The Form 10-Q did not disclose that the interim financial statements had +not been reviewed in compliance with the Interim Review Requirement. On September 5, 2017, +Cardiff filed a restated and amended Form 10-Q/A, which included interim financial statements +that complied with the Interim Review Requirement. + +Violations + + 7. As a result of the conduct described above, Cardiff violated Section 13(a) of the +Exchange Act and Rule 13a-13 thereunder, which require every issuer with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports to file with the +Commission quarterly reports on Form 10-Q which, among other things, comply with the interim +financial statement information requirements of Regulation S-X. + + 8. As a result of the conduct described above, Cardiff violated Rule 8-03 of +Regulation S-X, which requires interim financial statements included in quarterly reports on +Form 10-Q to be reviewed by an independent public accountant using professional standards and +procedures for conducting such reviews, as established by generally accepted auditor standards. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + +4 See Commission Guidance Regarding the Public Company Accounting Oversight Board’s Auditing and +Related Professional Practice Standard No. 1, Release Nos. 33-8422, 34-49708 (May 14, 2004) (noting that +“references in Commission rules and staff guidance and in the federal securities laws to GAAS or to specific +standards under GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any +applicable rules of the Commission”). + 4 + + 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) of the Exchange +Act and Rule 13a-13 thereunder, and Rule 8-03 of Regulation S-X. + + B. Respondent shall 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 shall be made in the following +installments: + +1. $5,000 within 14 days of the entry of this Order; +2. $8,000 within 60 days of the entry of this Order; +3. $8,000 within 120 days of the entry of this Order; and +4. $4,000 within 180 days of the entry of this Order. + +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 +Cardiff Lexington Corporation as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Fuad Rana, +Assistant Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor + 5 +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/2018/AAER-3982.txt b/raw/aaer/2018/AAER-3982.txt new file mode 100644 index 0000000000000000000000000000000000000000..0072184d296b8c90a32b5fc59c074a717c6db8ce --- /dev/null +++ b/raw/aaer/2018/AAER-3982.txt @@ -0,0 +1,234 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84260 / September 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3982 / September 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18821 + + +In the Matter of + +COOL TECHNOLOGIES, +INC., + +Respondent. + + + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Cool Technologies, Inc. (“Cool Technologies,” +“Respondent” or the “Company”). + +II. + + In anticipation of the institution of these proceedings, Cool Technologies 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 the Regulation S-X requirement that +interim financial statements filed as part of a Form 10-Q be reviewed by an independent public +accounting firm prior to filing (the “Interim Review Requirement”).2 + + 2. On three occasions, Cool Technologies violated the Interim Review Requirement +by filing Forms 10-Q with the Commission that contained financial statements that were not +reviewed by an independent public accounting firm. + +Respondent + +3. Cool Technologies, a Nevada corporation based in Tampa, Florida, develops and +intends to commercialize heat dispersion technologies. Cool Technologies has been registered +under Section 12(g) of the Exchange Act since September 2008. From July 2009 to March 2010, +Cool Technologies’s shares were quoted on OTC Link (formerly “pink sheets”) operated by OTC +Markets Group Inc. under the symbol BIBB. Currently, the Company’s shares are quoted on OTC +Link under the symbol WARM. Cool Technologies defines itself as a “smaller reporting +company” in its most recent filing.3 + +Legal Framework and Facts + + 4. Section 13(a) and Rule 13a-13 thereunder require issuers with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports pursuant to Section +13(a) to also file quarterly reports on Form 10-Q. Form 10-Q requires issuers to include financial +statement information as required by Rule 10-01 of Regulation S-X, and further indicates smaller + +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 Rule 10-01(d) of Regulation S-X provides in pertinent part: “Prior to filing, interim financial statements +included in quarterly reports on Form 10-Q [] must be reviewed by an independent public accountant using +professional standards and procedures for conducting such reviews, as established by generally accepted auditing +standards, as may be modified or supplemented by the Commission.” 17 C.F.R. § 210.10-01(d). Similarly, with +respect to smaller reporting companies, Rule 8-03 of Regulation S-X provides in pertinent part: “Interim financial +statements may be unaudited; however, before filing, interim financial statements included in quarterly reports on +Form 10-Q [] must be reviewed by an independent public accountant using professional standards and procedures +for conducting such reviews, as established by generally accepted auditing standards, as may be modified or +supplemented by the Commission.” 17 C.F.R. § 210.8-03. + +3 Under the rules in effect as of the date of the misconduct, a company qualifies as a “smaller reporting +company:” (1) if its public float is less than $75 million or (2) if it cannot calculate its public float, it has less than +$50 million in annual revenue. Item 10(f)(1) of Regulation S-K. + + 3 +reporting companies may provide financial statement information as required by Rule 8-03 of +Regulation S-X. See Part I, Item 1 of Form 10; see also 17 C.F.R. § 210.1-01(a)(2) (indicating +Regulation S-X sets forth the form and content for financial statements required as part of, among +other things, reports required under Section 13 of the Exchange Act). + + 5. As required by Regulation S-X, financial statements included in quarterly reports +filed on Form 10-Q may be unaudited. 17 C.F.R. § 210.10-01(a)(1); 17 C.F.R. § 210.8-03. Prior +to filing, however, an issuer must have an independent registered public accounting firm conduct a +review of the required interim financial information presented in financial statements included in +the quarterly report. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. The review must be +conducted in accordance with the standards of the Public Company Accounting Oversight Board +(“PCAOB”), as may be modified or supplemented by the Commission.4 17 C.F.R. § 210.10-01(d); +17 C.F.R. § 210.8-03. If an issuer states that interim financial information contained in a quarterly +report has been reviewed by an independent public accountant, a report of the accountant must be +filed with the interim financial statements. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. + + 6. On May 20, 2013, Cool Technologies filed its quarterly report for the first quarter +of 2013, which included the interim financial statements for that quarter. The interim financial +statements were not reviewed by an independent public accountant, as required by the Interim +Review Requirement. Cool Technologies filed an amended Form 10-Q/A on March 4, 2014, +approximately nine months after it filed the original Form 10-Q, which included interim financial +statements that complied with the Interim Review Requirement. + + 7. On August 19, 2013, the Company filed its quarterly report for the second quarter +of 2013, which included the interim financial statements for that quarter. The interim financial +statements were not reviewed by an independent public accountant, as required by the Interim +Review Requirement. Cool Technologies filed an amended Form 10-Q/A on March 4, 2014, +approximately six months after it filed the original Form 10-Q, which included interim financial +statements that complied with the Interim Review Requirement. + + 8. On August 22, 2016, Cool Technologies filed its quarterly report for the second +quarter of 2016, which included its interim financial statements for that quarter. The interim +financial statements were not reviewed by an independent public accountant as required by the +Interim Review Requirement. The Form 10-Q did not disclose that the interim financial statements +had not been reviewed in compliance with the Interim Review Requirement. On August 30, 2016, +the Company filed a restated and amended Form 10-Q/A, which included interim financial +statements that complied with the Interim Review Requirement. + + + + +4 See Commission Guidance Regarding the Public Company Accounting Oversight Board’s Auditing and +Related Professional Practice Standard No. 1, Release Nos. 33-8422, 34-49708 (May 14, 2004) (noting that +“references in Commission rules and staff guidance and in the federal securities laws to GAAS or to specific +standards under GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any +applicable rules of the Commission”). + 4 +Violations + + 9. As a result of the conduct described above, Cool Technologies violated Section +13(a) of the Exchange Act and Rule 13a-13 thereunder, which require every issuer with securities +registered pursuant to Section 12 of the Exchange Act and required to file annual reports to file +with the Commission quarterly reports on Form 10-Q which, among other things, comply with +the interim financial statement information requirements of Regulation S-X. + + 10. As a result of the conduct described above, Cool Technologies violated Rule 8-03 +of Regulation S-X, which requires interim financial statements included in quarterly reports on +Form 10-Q to be reviewed by an independent public accountant using professional standards and +procedures for conducting such reviews, as established by generally accepted auditor standards. + +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) of the Exchange +Act and Rule 13a-13 thereunder, and Rule 8-03 of Regulation S-X. + + B. Respondent shall pay a civil money penalty in the amount of $75,000.00 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 shall be made in the following +installments: + +1. $25,000 within 14 days of entry of this Order; +2. $25,000 within 180 days of entry of this Order; and +3. $25,000 within 360 days of entry of this Order. + +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: + 5 + +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 Cool +Technologies, 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 Fuad Rana, Assistant Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3983.txt b/raw/aaer/2018/AAER-3983.txt new file mode 100644 index 0000000000000000000000000000000000000000..d4793a4df7e553b0d51def1a4a48ed0d6cea3b07 --- /dev/null +++ b/raw/aaer/2018/AAER-3983.txt @@ -0,0 +1,218 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84261 / September 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3983 / September 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18822 + + +In the Matter of + +DASAN ZHONE +SOLUTIONS, 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 Dasan Zhone Solutions, Inc. (“Dasan Zhone,” +“Respondent,” or the “Company”). + +II. + + In anticipation of the institution of these proceedings, Dasan Zhone 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 the Regulation S-X requirement that +interim financial statements filed as part of a Form 10-Q be reviewed by an independent public +accounting firm prior to filing (the “Interim Review Requirement”).2 + + 2. On two occasions, Dasan Zhone violated the Interim Review Requirement by filing +Forms 10-Q with the Commission that contained financial statements that were not reviewed by an +independent public accounting firm. + +Respondent + +3. Dasan Zhone, a Delaware corporation based in Oakland, California, manufactures +and services telecommunications equipment. Dasan Zhone has been registered under Section +12(b) of the Exchange Act since November 2001. Dasan Zhone’s shares are listed on the Nasdaq +Capital Market under the symbol DZSI. Dasan Zhone defines itself as a “smaller reporting +company” in its most recent filing.3 + +Legal Framework and Facts + + 4. Section 13(a) and Rule 13a-13 thereunder require issuers with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports pursuant to Section +13(a) to also file quarterly reports on Form 10-Q. Form 10-Q requires issuers to include financial +statement information as required by Rule 10-01 of Regulation S-X, and further indicates smaller +reporting companies may provide financial statement information as required by Rule 8-03 of +Regulation S-X. See Part I, Item 1 of Form 10; see also 17 C.F.R. § 210.1-01(a)(2) (indicating + +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 Rule 10-01(d) of Regulation S-X provides in pertinent part: “Prior to filing, interim financial statements +included in quarterly reports on Form 10-Q [] must be reviewed by an independent public accountant using +professional standards and procedures for conducting such reviews, as established by generally accepted auditing +standards, as may be modified or supplemented by the Commission.” 17 C.F.R. § 210.10-01(d). Similarly, with +respect to smaller reporting companies, Rule 8-03 of Regulation S-X provides in pertinent part: “Interim financial +statements may be unaudited; however, before filing, interim financial statements included in quarterly reports on +Form 10-Q [] must be reviewed by an independent public accountant using professional standards and procedures +for conducting such reviews, as established by generally accepted auditing standards, as may be modified or +supplemented by the Commission.” 17 C.F.R. § 210.8-03. + +3 Under the rules in effect as of the date of the misconduct, a company qualifies as a “smaller reporting +company:” (1) if its public float is less than $75 million or (2) if it cannot calculate its public float, it has less than +$50 million in annual revenue. Item 10(f)(1) of Regulation S-K. + + 3 +Regulation S-X sets forth the form and content for financial statements required as part of, among +other things, reports required under Section 13 of the Exchange Act). + + 5. As required by Regulation S-X, financial statements included in quarterly reports +filed on Form 10-Q may be unaudited. 17 C.F.R. § 210.10-01(a)(1); 17 C.F.R. § 210.8-03. Prior +to filing, however, an issuer must have an independent registered public accounting firm conduct a +review of the required interim financial information presented in financial statements included in +the quarterly report. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. The review must be +conducted in accordance with the standards of the Public Company Accounting Oversight Board +(“PCAOB”), as may be modified or supplemented by the Commission.4 17 C.F.R. § 210.10-01(d); +17 C.F.R. § 210.8-03. If an issuer states that interim financial information contained in a quarterly +report has been reviewed by an independent public accountant, a report of the accountant must be +filed with the interim financial statements. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. + + 6. On August 9, 2016, Dasan Zhone filed its quarterly report for the second quarter of +2016, which included the interim financial statements for that quarter. The interim financial +statements were not reviewed by an independent public accountant as required by the Interim +Review Requirement. The Form 10-Q did not disclose that the interim financial statements had +not been reviewed in compliance with the Interim Review Requirement. On September 7, 2016, +Dasan Zhone filed an amended Form 10-Q/A, which included interim financial statements that +complied with the Interim Review Requirement. + + 7. On November 14, 2016, Dasan Zhone filed its quarterly report for the third quarter +of 2016, which included the interim financial statements for that quarter. The interim financial +statements were not reviewed by an independent public accountant as required by the Interim +Review Requirement. Dasan Zhone filed a restated and amended Form 10-Q/A on March, 9, +2017, approximately four months after it filed the original Form 10-Q, which included interim +financial statements that complied with the Interim Review Requirement. + +Violations + + 8. As a result of the conduct described above, Dasan Zhone violated Section 13(a) of +the Exchange Act and Rule 13a-13 thereunder, which require every issuer with securities +registered pursuant to Section 12 of the Exchange Act and required to file annual reports to file +with the Commission quarterly reports on Form 10-Q which, among other things, comply with +the interim financial statement information requirements of Regulation S-X. + + 9. As a result of the conduct described above, Dasan Zhone violated Rule 8-03 of +Regulation S-X, which requires interim financial statements included in quarterly reports on + +4 See Commission Guidance Regarding the Public Company Accounting Oversight Board’s Auditing and +Related Professional Practice Standard No. 1, Release Nos. 33-8422, 34-49708 (May 14, 2004) (noting that +“references in Commission rules and staff guidance and in the federal securities laws to GAAS or to specific +standards under GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any +applicable rules of the Commission”). + 4 +Form 10-Q to be reviewed by an independent public accountant using professional standards and +procedures for conducting such reviews, as established by generally accepted auditor standards. + +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) of the Exchange +Act and Rule 13a-13 thereunder, and Rule 8-03 of Regulation S-X. + + B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $50,000.00 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 +Dasan Zhone Solutions, 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 Fuad Rana, +Assistant Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To + 5 +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/2018/AAER-3984.txt b/raw/aaer/2018/AAER-3984.txt new file mode 100644 index 0000000000000000000000000000000000000000..425eedc768e285bcd29efc02ced2a959c43e8a2c --- /dev/null +++ b/raw/aaer/2018/AAER-3984.txt @@ -0,0 +1,216 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84262 / September 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3984 / September 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18823 + + +In the Matter of + +FIRST HARTFORD +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 First Hartford Corporation (“First Hartford,” +“Respondent” or the “Company”). + +II. + + In anticipation of the institution of these proceedings, First Hartford 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 the Regulation S-X requirement that +interim financial statements filed as part of a Form 10-Q be reviewed by an independent public +accounting firm prior to filing (the “Interim Review Requirement”).2 + + 2. On two occasions, First Hartford violated the Interim Review Requirement by filing +Forms 10-Q with the Commission that contained financial statements that were not reviewed by an +independent public accounting firm. + +Respondent + +3. First Hartford, a Maine corporation based in Manchester, Connecticut, engages in +the purchase, development, ownership, management and sale of real estate properties. First +Hartford is registered under Section 12(g) of the Exchange Act. First Hartford’s shares are quoted +on OTC Link (formerly “pink sheets”) operated by OTC Markets Group Inc. under the symbol +FHRT. The Company defines itself as a “smaller reporting company” in its most recent filing.3 + +Legal Framework and Facts + + 4. Section 13(a) and Rule 13a-13 thereunder require issuers with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports pursuant to Section +13(a) to also file quarterly reports on Form 10-Q. Form 10-Q requires issuers to include financial +statement information as required by Rule 10-01 of Regulation S-X, and further indicates smaller +reporting companies may provide financial statement information as required by Rule 8-03 of +Regulation S-X. See Part I, Item 1 of Form 10; see also 17 C.F.R. § 210.1-01(a)(2) (indicating + +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 Rule 10-01(d) of Regulation S-X provides in pertinent part: “Prior to filing, interim financial statements +included in quarterly reports on Form 10-Q [] must be reviewed by an independent public accountant using +professional standards and procedures for conducting such reviews, as established by generally accepted auditing +standards, as may be modified or supplemented by the Commission.” 17 C.F.R. § 210.10-01(d). Similarly, with +respect to smaller reporting companies, Rule 8-03 of Regulation S-X provides in pertinent part: “Interim financial +statements may be unaudited; however, before filing, interim financial statements included in quarterly reports on +Form 10-Q [] must be reviewed by an independent public accountant using professional standards and procedures +for conducting such reviews, as established by generally accepted auditing standards, as may be modified or +supplemented by the Commission.” 17 C.F.R. § 210.8-03. + +3 Under the rules in effect as of the dates of the violations, a company qualifies as a “smaller reporting +company:” (1) if its public float is less than $75 million or (2) if it cannot calculate its public float, it has less than +$50 million in annual revenue. Item 10(f)(1) of Regulation S-K. + 3 +Regulation S-X sets forth the form and content for financial statements required as part of, among +other things, reports required under Section 13 of the Exchange Act). + + 5. As required by Regulation S-X, financial statements included in quarterly reports +filed on Form 10-Q may be unaudited. 17 C.F.R. § 210.10-01(a)(1); 17 C.F.R. § 210.8-03. Prior +to filing, however, an issuer must have an independent registered public accounting firm conduct a +review of the required interim financial information presented in financial statements included in +the quarterly report. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. The review must be +conducted in accordance with the standards of the Public Company Accounting Oversight Board +(“PCAOB”), as may be modified or supplemented by the Commission.4 17 C.F.R. § 210.10-01(d); +17 C.F.R. § 210.8-03. If an issuer states that interim financial information contained in a quarterly +report has been reviewed by an independent public accountant, a report of the accountant must be +filed with the interim financial statements. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. + + 6. On December 19, 2012, First Hartford filed its quarterly report for the second +quarter of 2012, which included the interim financial statements for that quarter. The interim +financial statements were not reviewed by an independent public accountant as required by the +Interim Review Requirement. First Hartford filed a restated and amended Form 10-Q/A on June +10, 2014, approximately eighteen months after it filed the original Form 10-Q, which included +interim financial statements that complied with the Interim Review Requirement. + + 7. On March 29, 2013, First Hartford filed its quarterly report for the third quarter of +2012, which included the interim financial statements for that quarter. The financial statements +were not reviewed by an independent public accountant as required by the Interim Review +Requirement. First Hartford filed a restated and amended Form 10-Q/A on August 7, 2014, +approximately sixteen months after it filed the original Form 10-Q, which included interim +financial statements that complied with the Interim Review Requirement. + +Violations + + 8. As a result of the conduct described above, First Hartford violated Section 13(a) of +the Exchange Act and Rule 13a-13 thereunder, which require every issuer with securities +registered pursuant to Section 12 of the Exchange Act and required to file annual reports to file +with the Commission quarterly reports on Form 10-Q which, among other things, comply with +the interim financial statement information requirements of Regulation S-X. + + 9. As a result of the conduct described above, First Hartford violated Rule 8-03 of +Regulation S-X, which requires interim financial statements included in quarterly reports on +Form 10-Q to be reviewed by an independent public accountant using professional standards and +procedures for conducting such reviews, as established by generally accepted auditor standards. + +4 See Commission Guidance Regarding the Public Company Accounting Oversight Board’s Auditing and +Related Professional Practice Standard No. 1, Release Nos. 33-8422, 34-49708 (May 14, 2004) (noting that +“references in Commission rules and staff guidance and in the federal securities laws to GAAS or to specific +standards under GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any +applicable rules of the Commission”). + 4 + +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) of the Exchange +Act and Rule 13a-13 thereunder, and Rule 8-03 of Regulation S-X. + + B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $50,000.00 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 First +Hartford Corporation as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Fuad Rana, +Assistant Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any + 5 +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/2018/AAER-3985.txt b/raw/aaer/2018/AAER-3985.txt new file mode 100644 index 0000000000000000000000000000000000000000..c7f722ed6cc90d0267c562200657e6f7824374d7 --- /dev/null +++ b/raw/aaer/2018/AAER-3985.txt @@ -0,0 +1,210 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84263 / September 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3985 / September 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18824 + + +In the Matter of + +INFRAX SYSTEMS, 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 Infrax Systems, Inc. (“Infrax,” “Respondent” or +the “Company”). + +II. + + In anticipation of the institution of these proceedings, Infrax 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 the Regulation S-X requirement that +interim financial statements filed as part of a Form 10-Q be reviewed by an independent public +accounting firm prior to filing (the “Interim Review Requirement”).2 + + 2. On two occasions, Infrax violated the Interim Review Requirement by filing Forms +10-Q with the Commission that contained financial statements that were not reviewed by an +independent public accounting firm. + +Respondent + +3. Infrax, a Nevada corporation based in St. Petersburg, Florida, manages and operates +technology for electrical infrastructure. From March 2007 until October 2017, Infrax was +registered under Section 12(g) of the Exchange Act and from January 2008 until October 2017, its +shares were quoted on OTC Link (formerly “pink sheets”) operated by OTC Markets Group Inc. +under the symbol IXFY. On October 16, 2017, Infrax filed a Form 15 terminating its registration. +The Company defined itself as a “smaller reporting company” in its most recent filing.3 + +Legal Framework and Facts + + 4. Section 13(a) and Rule 13a-13 thereunder require issuers with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports pursuant to Section +13(a) to also file quarterly reports on Form 10-Q. Form 10-Q requires issuers to include financial +statement information as required by Rule 10-01 of Regulation S-X, and further indicates smaller +reporting companies may provide financial statement information as required by Rule 8-03 of +Regulation S-X. See Part I, Item 1 of Form 10; see also 17 C.F.R. § 210.1-01(a)(2) (indicating + +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 Rule 10-01(d) of Regulation S-X provides in pertinent part: “Prior to filing, interim financial statements +included in quarterly reports on Form 10-Q [] must be reviewed by an independent public accountant using +professional standards and procedures for conducting such reviews, as established by generally accepted auditing +standards, as may be modified or supplemented by the Commission.” 17 C.F.R. § 210.10-01(d). Similarly, with +respect to smaller reporting companies, Rule 8-03 of Regulation S-X provides in pertinent part: “Interim financial +statements may be unaudited; however, before filing, interim financial statements included in quarterly reports on +Form 10-Q [] must be reviewed by an independent public accountant using professional standards and procedures +for conducting such reviews, as established by generally accepted auditing standards, as may be modified or +supplemented by the Commission.” 17 C.F.R. § 210.8-03. + +3 Under the rules in effect as of the date of the misconduct, a company qualifies as a “smaller reporting +company:” (1) if its public float is less than $75 million or (2) if it cannot calculate its public float, it has less than +$50 million in annual revenue. Item 10(f)(1) of Regulation S-K. + 3 +Regulation S-X sets forth the form and content for financial statements required as part of, among +other things, reports required under Section 13 of the Exchange Act). + + 5. As required by Regulation S-X, financial statements included in quarterly reports +filed on Form 10-Q may be unaudited. 17 C.F.R. § 210.10-01(a)(1); 17 C.F.R. § 210.8-03. Prior +to filing, however, an issuer must have an independent registered public accounting firm conduct a +review of the required interim financial information presented in financial statements included in +the quarterly report. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. The review must be +conducted in accordance with the standards of the Public Company Accounting Oversight Board +(“PCAOB”), as may be modified or supplemented by the Commission.4 17 C.F.R. § 210.10-01(d); +17 C.F.R. § 210.8-03. If an issuer states that interim financial information contained in a quarterly +report has been reviewed by an independent public accountant, a report of the accountant must be +filed with the interim financial statements. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. + + 6. On February 23, 2016, Infrax filed its quarterly report for the second quarter of +2015, and on May 23, 2016, the Company filed its quarterly report for the third quarter of 2015. +Both filings included the interim financial statements for that quarter. The interim financial +statements were not reviewed by an independent public accountant as required by the Interim +Review Requirement. Infrax did not file amended Form 10-Q/As that complied with the Interim +Review Requirement. + +Violations + + 7. As a result of the conduct described above, Infrax violated Section 13(a) of the +Exchange Act and Rule 13a-13 thereunder, which require every issuer with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports to file with the +Commission quarterly reports on Form 10-Q which, among other things, comply with the interim +financial statement information requirements of Regulation S-X. + + 8. As a result of the conduct described above, Infrax violated Rule 8-03 of +Regulation S-X, which requires interim financial statements included in quarterly reports on +Form 10-Q to be reviewed by an independent public accountant using professional standards and +procedures for conducting such reviews, as established by generally accepted auditor standards. + +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: + +4 See Commission Guidance Regarding the Public Company Accounting Oversight Board’s Auditing and +Related Professional Practice Standard No. 1, Release Nos. 33-8422, 34-49708 (May 14, 2004) (noting that +“references in Commission rules and staff guidance and in the federal securities laws to GAAS or to specific +standards under GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any +applicable rules of the Commission”). + 4 + + 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) of the Exchange +Act and Rule 13a-13 thereunder, and Rule 8-03 of Regulation S-X. + + B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $50,000.00 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 +Infrax Systems, 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 Fuad Rana, +Assistant Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a + 5 +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/2018/AAER-3986.txt b/raw/aaer/2018/AAER-3986.txt new file mode 100644 index 0000000000000000000000000000000000000000..22898fab89f3c1660b9f401d9f73eee612db88b1 --- /dev/null +++ b/raw/aaer/2018/AAER-3986.txt @@ -0,0 +1,1403 @@ + + + + + + + + + + + + + + + + SEC.gov | James Douglas 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\/521906","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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James Douglas Miller , No. 18-civ-05761 (W.D. Wash. Filed September 20, 2018) + + + + + + + + + The Securities and Exchange Commission today charged the former chief financial officer of Barrett Business Services Inc. for his role in an accounting fraud involving BBSI's workers' compensation expenses. The SEC also charged BBSI in the accounting fraud and charged the company's former controller for his role in improperly approving certain of the CFO's accounting entries. Both BBSI and the former controller agreed to settle the Commission's charges against them. + + The SEC's complaint against BBSI's former CFO James D. Miller, filed in federal district court in the Western District of Washington, alleges that Miller manipulated BBSI's accounting records to hide the fact that its workers' compensation expense was increasing relative to its revenue. According to the complaint, Miller took steps to conceal from BBSI's independent auditor a third-party actuarial report concluding that BBSI needed to add tens of millions of dollars to its workers' compensation liability. BBSI's stock dropped 32 percent when the Vancouver, Washington-based firm announced it needed to restate its financial results to reflect increased workers' compensation expenses. The SEC's complaint alleges Miller violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5 and 13a-14 thereunder, and Section 304(a) of the Sarbanes-Oxley Act of 2002. The complaint also alleges Miller aided and abetted the company's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13b2-1, 13b2-2, 13a-1, 13a-11, 13a-13 thereunder. + + In a parallel action, the U.S. Attorney's Office for the Western District of Washington today announced criminal charges against Miller. + + The SEC today instituted a settled administrative proceeding against BBSI for violations of the antifraud, books and records, internal accounting controls, and reporting provisions of the federal securities laws, and former Controller Mark Cannon for books and records violations. Without admitting or denying the SEC's findings, BBSI agreed to pay a $1.5 million civil penalty and Cannon agreed to pay a $20,000 civil penalty and to be suspended from appearing and practicing before the Commission as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC's order permits Cannon to apply for reinstatement after one year. + + BBSI CEO Michael Elich, who was not charged by the SEC, has reimbursed the company for $20,800 in cash bonuses he received during the period of the alleged accounting violations. + + The SEC's investigation was conducted by Rahul Kolhatkar, Michael Foley, Chrissy Filipp, and Jason H. Lee, and the case was supervised by Monique Winkler and Jennifer Lee of the San Francisco Regional Office. The litigation against Miller will be led by Suzy LaMarca and Mr. Kolhatkar. The SEC appreciates the assistance of the U.S. Attorney's Office for the Western District of Washington and the Federal Bureau of Investigation. + + + + + + + + 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/2018/AAER-3988.txt b/raw/aaer/2018/AAER-3988.txt new file mode 100644 index 0000000000000000000000000000000000000000..2802dc8ea686ade7db968842652ff4ee11b789e6 --- /dev/null +++ b/raw/aaer/2018/AAER-3988.txt @@ -0,0 +1,82 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84291 / September 26, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3988 / September 26, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18841 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +DHRU DESAI, : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate to issue +an order of forthwith suspension of Dhru Desai (“Desai”) 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. Desai was the Chief Financial Officer of Quadrant 4 System Corp., an Illinois +corporation headquartered in Schaumburg, Illinois. At the time of Desai’s misconduct relevant to +his guilty plea below, QFOR did not have any class of securities registered with the Commission, +but was a reporting company pursuant to Section 15(d) of the Securities Exchange Act of 1934. + +2. On May 31, 2018, Desai pleaded guilty to wire fraud in U.S. v. Nandu +Thondavadi and Dhru Desai, 16-cr-772, in the United States District Court for the Northern +District of Illinois. According to Desai’s plea agreement, Desai and others “knowingly devised, +intended to devise and participated in a scheme to defraud Quadrant 4 System Corporation +(‘QFOR’) and QFOR’s shareholders, and to obtain money and property by means of materially + +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 pr acticing before the +Commission.” + + + +2 + +false and fraudulent pretenses, representations, and promises, and by concealment of material +facts.” ECF No. 70 at 2. + +3. According to Desai’s plea agreement, the charge to which he pleaded guilty +carries a maximum sentence of 20 years’ imprisonment and a maximum fine of $250,000, or +twice the gross gain or gross loss resulting from that offense, whichever is greater. Id. at 6. +According to Desai’s plea agreement, the anticipated advisory sentencing guidelines range is 78 +to 97 months’ imprisonment. Id. at 9. + +III. + +In view of the foregoing, the Commission finds that Desai 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 Dhru Desai 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/2018/AAER-3989.txt b/raw/aaer/2018/AAER-3989.txt new file mode 100644 index 0000000000000000000000000000000000000000..853b9ee254a407772d300d72a23ee4acccc4ea1c --- /dev/null +++ b/raw/aaer/2018/AAER-3989.txt @@ -0,0 +1,426 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 10561 / September 27, 2018 +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84295 / September 27, 2018 +ACCOUNTING AND AUDITING ENFORCEMENT RELEASE +Release No. 3989 / September 27, 2018 +ADMINISTRATIVE PROCEEDING +File No. 3-18843 + ORDER INSTITUTING CEASE-AND- +In the Matter of DESIST PROCEEDINGS PURSUANT TO + SECTION 8A OF THE SECURITIES ACT +PETRÓLEO BRASILEIRO OF 1933 AND SECTION 21C OF THE +S.A. – PETROBRAS, SECURITIES EXCHANGE ACT OF 1934, + MAKING FINDINGS, AND IMPOSING A +Respondent. CEASE-AND-DESIST ORDER + + + +I. +The Securities and Exchange Commission (“Commission” or “SEC”) 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 Petróleo Brasileiro S.A. – Petrobras (“Petrobras “ or +“Respondent” or the “Company”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over it and the subject matter of these proceedings and the findings set forth in +paragraph 43, and 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 Exchange Act of +1934, Making Findings, and Imposing a Cease-and-Desist Order (the “Order”), as set forth +below. + 2 +III. +On the basis of this Order and Respondent’s Offer, the Commission finds that: +1. This matter relates to a massive corruption scheme, perpetrated by certain former +senior executives of Petrobras—a Brazilian government-controlled oil and gas company—who +were appointed by the Brazilian government and who conspired with Petrobras’s largest +contractors and suppliers, resulting in material misstatements and omissions by Petrobras. +2. From at least 2003 to April 2012, Petrobras engaged in a large-scale expansion of +its infrastructure for producing oil and gas, a matter of significant interest to investors. During +the same period, certain former senior Petrobras executives described in more detail below (the +“Corrupt Executives”) worked with Petrobras’s largest contractors and suppliers to inflate the +cost of Petrobras’s infrastructure projects by billions of dollars. In return, the companies +executing those projects paid billions of dollars in kickbacks that typically amounted to between +1% to 3% of the contract cost to the Corrupt Executives and conspiring politicians and political +parties, including the Brazilian politicians to whom the Corrupt Executives owed their jobs at +Petrobras. These same executives submitted misleading documents as part of Petrobras’s +internal process of preparing its filings with the SEC. The overcharges caused by the kickbacks +resulted in an inflation of property, plant and equipment (“PP&E”) in Petrobras’s financial +statements, including its fiscal year 2009 financial statements that were included in its Form 20- +F. +3. The same executives also engaged in other bribery schemes with companies that +sought to win contracts with Petrobras or to obtain better terms for those contracts. This scheme +generated millions of dollars in bribes that the Corrupt Executives used for their own benefit and +for the benefit of their political patrons. +4. Petrobras failed to detect and disclose these corruption schemes. +5. As a result of the Corrupt Executives’ failure to implement Petrobras’s internal +controls, their exploitation of deficiencies in those controls, and their submission of false +certifications in connection with Petrobras’s internal process for preparing its SEC filings, +Petrobras made material misstatements and omissions in filings made with the Commission and +in documents relating to a $69.9 billion global public offering of equity securities in 2010, which +included approximately $10 billion in American Depositary Shares (“ADSs”) in the United +States, and the purpose of which was to raise funds for Petrobras’s ongoing expansion of its +business. +Respondent +6. Petrobras is a Brazilian government-controlled oil and gas company +headquartered in Rio de Janeiro, Brazil. The vast majority of the Company’s shares trade either +on the New York Stock Exchange in the form of ADSs or on the São Paulo Stock Exchange, +with the Brazilian government directly owning approximately 50.26% of Petrobras’s common +shares with voting rights, and an additional 9.87% of its common shares controlled by the +Brazilian Economic and Social Development Bank as of February 28, 2018. Petrobras’s +common and preferred stock is registered with the Commission pursuant to Section 12(b) of the + 3 +Exchange Act and currently trades on the New York Stock Exchange in the form of ADSs under +the symbols “PBR” and “PBR.A,” respectively. +7. On September 29, 2010, Petrobras issued common and preferred shares, including +in the form of ADSs, in a global public offering in Brazil and an international offering, which +included a registered offering in the United States. (the “2010 Offering”). The total amount of +global equity issued in the 2010 offering was approximately $69.9 billion, including +approximately $10 billion in ADSs. +Other Relevant Persons +8. Executive 1, a resident and citizen of Brazil, was the head of Petrobras’s +Downstream Division from approximately 2004 to 2012 and a member of the Company’s +Executive Board. +9. Executive 2, a resident and citizen of Brazil, was a high-ranking manager in +Petrobras’s Services Division (later reorganized as the Engineering Division). From +approximately 2004 to 2011, he reported to the Services/ Engineering Officer. +10. Executive 3, a resident and citizen of Brazil, was the head of Petrobras’s +International Division from approximately 2004 to 2008 and a member of the Company’s +Executive Board. After 2008, he was Chief Financial Officer of a Petrobras subsidiary. +11. Executive 4, a resident and citizen of Brazil, was the head of Petrobras’s +Services/Engineering Division from approximately 2004 to 2012 and a member of the +Company’s Executive Board. +12. Executive 5, a resident and citizen of Brazil, was the head of Petrobras’s +International Division and a member of the Company’s Executive Board from approximately +2008 to 2012. +Corruption at Petrobras +13. Petrobras is overseen by a board of directors, which has the authority to hire and +fire Petrobras’s division directors and other senior officers of its subsidiaries. The Brazilian +government has historically appointed a super-majority of the members of this board. From at +least 2003 to April 2012, prominent Brazilian politicians abused this power by appointing people +of their choosing to specific executive positions, and demanding recompense from the +appointees. The appointees and their co-conspirators engaged in corruption schemes that +benefited themselves and their political patrons, including by diverting billions of dollars from +overpriced contracts for infrastructure projects. Executive 1, Executive 2, Executive 3, +Executive 4, and Executive 5 were among such appointees. +14. The Corrupt Executives who engaged in the scheme were in three of the +Company’s five operating divisions: the Downstream Division, the International Division, and +the Services Division. + 4 +15. The Corrupt Executives all have been convicted in Brazil of crimes related to +their participation in the corruption at Petrobras. Each of the Corrupt Executives, among other +things, failed to implement internal controls, and in some instances, described below, falsified +the Company’s books and records. The Corrupt Executives carried out the scheme in the +following two ways: +A. Corruption in Petrobras’s Procurement Process +16. Between approximately 2004 and 2012, some of the Corrupt Executives +conspired with Brazil’s large construction companies to rig hundreds of Petrobras bids in +exchange for kickbacks, a portion of which they received and a portion of which was paid to +politicians and political parties in Brazil including those to whom the Corrupt Executives owed +their jobs. +17. In particular, the Corrupt Executives conspired with these companies to +implement a cartel. The Corrupt Executives secretly ensured that the cartel companies would be +selected to participate in bidding rounds for goods and services contracts with Petrobras and that +they would secure contracts with Petrobras. The Corrupt Executives facilitated this by giving the +cartel inside information; manipulating the bidding process for the benefit of those companies; +voting to approve contracts that did not conform to Petrobras’s procurement rules; and finding +ways to influence the bidding process so specific companies in the cartel would win. The +Corrupt Executives also helped the companies inflate the cost of Petrobras projects. +18. Pursuant to this scheme, the companies overcharged Petrobras under construction +contracts and contracts to provide goods and services, and used the overpayment to fund the +bribes to the Corrupt Executives and conspiring politicians and political parties. The bribes, +which typically amounted to between 1% to 3% of the contract payments, ensured the continued +success of their scheme. A portion of the kickbacks was shared with the Corrupt Executives’ +political patrons in Brazil. The corruption also caused misstatements in Petrobras’s books and +records because Petrobras recorded all payments made to contractors, a percentage of which was +used for bribes, as money spent to acquire and improve assets. +19. One representative example of this scheme involved the construction of the Abreu +e Lima Refinery in the Brazilian Northeast state of Pernambuco (“RNEST”). In or about 2005, +Petrobras announced its intention to complete RNEST in 2011. In March 2007, Executive 1 +obtained Executive Board authorization to accelerate the completion deadline to 2010. +20. Because the RNEST project involved multiple biddings, which required the +participation of a higher number of contractors, Executive 1, Executive 2, and Executive 4 +ensured that certain companies were invited to RNEST biddings. Executive 2 also shared with +the cartel the final and confidential list of contractors that would be invited for the RNEST +bidding processes in advance of the invitations. The list of invited contractors facilitated the +cartel’s coordination and rigging of the RNEST bidding processes. +21. In exchange, the winning company paid hundreds of millions of dollars – up to +approximately 3% of the contract value – to Executive 1, Executive 2, and Executive 4, as well +as to politicians and political parties in Brazil. + 5 +B. Other Bribery Schemes +22. The Corrupt Executives also engaged in bribery schemes with companies that +sought to win contracts with Petrobras or to obtain better terms for those contracts. For example, +from 2003-2014, Executive 4 took millions of dollars in bribes from two Brazilian companies in +return for granting and inflating contracts for the outsourcing of Petrobras services. +23. Another example involves Petrobras’s purchase of a Texas oil refinery in 2006 +from a Belgium company, which had acquired the refinery for $42.5 million in 2005. Executive +1 knew that the equipment and structures of the refinery had deteriorated, that the oil it produced +did not meet Petrobras’s needs, and that it would require a massive overhaul to fix the physical +condition of the refinery. Nevertheless, he recommended that Petrobras purchase the refinery. +In return, he received a $2.5 million bribe, which he used for his personal benefit and passed on a +portion to his political patron. +24. The Corrupt Executives perpetrated this bribery scheme for years and received +millions in bribes during the relevant period. +Petrobras Reported Inflated Assets in its Financial Statements Filed with the SEC +25. Petrobras includes its financial statements in the Company’s annual report on +Form 20-F. The Company’s Form 20-F for the 2009 fiscal year, filed with the Commission in +May 2010, reported the carrying amount of the Company’s PP&E. Because that carrying +amount included the kickbacks from the corruption scheme at Petrobras, the reported PP&E +figures were overstated. Petrobras continued to report inflated figures for its PP&E in its SEC +filings until its Form 6-K for the quarter ending September 30, 2014 was filed on April 23, 2015. +At that time, Petrobras wrote off $2.527 billion of capitalized costs representing estimated +overpayment amounts attributable to the kickbacks that inflated PP&E during the existence of +the scheme described above. +Other Misstatements and Omissions in Petrobras’s Financial Statements and Forms 20-F +26. The Form 20-F for fiscal year 2009 and subsequent Forms 20-F through fiscal +year 2013 also contained various misstatements and omissions about Petrobras’s assets, the +integrity of its management, and its relationships with the Brazilian government and its major +contractors and suppliers. For example: +a. Petrobras disclosed that its executives were disinterested in Petrobras transactions, +even though the senior executives received bribes and kickbacks in connection +with most major contracts, and some received a percentage of those contracts in +return for corrupting the procurement process. +b. Petrobras disclosed that its officers and directors were selected based on their +qualifications, knowledge, and specialization in their respective areas, when in +fact many, including the Corrupt Executives, were hired or promoted based on a +corrupt system of political patronage. + 6 +c. Petrobras described the Brazilian government’s influence over the Company as a +legitimate influence of any government owner, without disclosing the patronage +scheme. +d. In the Management Discussion & Analysis section, Petrobras listed the typical +risks and trends of a large, state-owned oil company, but failed to disclose the +specific risks and trends associated with the corruption of its senior management +and major projects. +e. Petrobras described that its internal controls were effective, despite the +deficiencies that the Corrupt Executives exploited, leading to abuse of Petrobras’s +procurement practices, improper payment of billions of dollars originating from +Petrobras accounts, and erroneous capitalization of those payments in Petrobras’s +books and records. +27. Certain of the Corrupt Executives facilitated these misstatements by providing +false information as part of Petrobras’s internal process of preparing SEC filings. +28. For example, Executive 4 and Executive 5 certified that the Company’s Form 20- +F for the fiscal year 2009 did not contain materially false or misleading statements with respect +to the areas for which these Executives were responsible, and that the information contained +therein was accurate. Executive 4 and Executive 5 did not disclose the existence of, or their +participation in, the corruption and bribery scheme. +29. Executive 1, Executive 4, and Executive 5 also provided internal control +attestations for the 2009 fiscal year, certifying that they had reviewed the Petrobras internal +controls under their responsibility and deemed them effective. +30. Executive 1, Executive 4, and Executive 5 also submitted Director and Officer +(“D&O”) questionnaires for the 2009 fiscal year solicited by Petrobras as part of the process of +preparing Petrobras’s Form 20-F for fiscal year 2009. Among other things, the questionnaire +asked executives to provide information about any related party transactions. Executives 1, 4, +and 5 failed to disclose their participation in the corruption and bribery schemes. +31. Executive 3 signed false and misleading representation letters to the Company’s +independent auditors on behalf of a Petrobras subsidiary whose financials were also included in +the Company’s Form 20-F for fiscal year 2009. +32. The Corrupt Executives’ false certifications and representations led to the +inclusion of false statements in the financial statements for the 2009 fiscal year and related Form +20-F, which were filed with the Commission on May 19, 2010, and incorporated by reference in +the 2010 Offering documents. +33. Petrobras’s Forms 20-F for fiscal years 2009-2013 included materially false and +misleading information. +34. In its 2010 Offering, Petrobras issued global equity totaling approximately $69.9 +billion, including approximately $10 billion in ADSs. + 7 +Petrobras Did Not Devise and Maintain A Sufficient System of +Internal Accounting Controls +35. During the existence of the scheme described above, the Company did not +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +transactions were recorded as necessary to permit preparation of financial statements in +accordance with generally accepted accounting principles. +36. Despite operating in a country with a well-known history of corruption in its +business and politics, Petrobras did not require employees to receive anti-corruption, anti-fraud, +or compliance training. Instead, it left those matters to the discretion of individual managers like +Executive 1 and Executive 4. Petrobras also did not devise any policies to prevent political +interference, such as policies providing guidance and restrictions on interactions with politicians. +Furthermore, despite its obligations under the Audit Committee’s charter, approved on +December 2005, Petrobras did not have a Chief Compliance Officer or a typical compliance +function until November 2014. +37. Petrobras’s procurement policies and procedures were also deficient in certain +respects. The same executives had the authority to both award and approve contracts. They also +could approve the amendment of contracts without review from the legal department, which only +reviewed such amendments at the request of the Division Directors promoting the contracts. +Although Petrobras had a detailed procurement manual, senior management consistently +approved and permitted bidding and contracting outside those procedures. Bids were often +conducted by ad hoc committees, whose membership was not controlled by corporate policy, +resulting in the inclusion of inexperienced, low-ranking members who were subject to influence +by executives with an interest in the outcome. +38. With respect to filling senior positions, Petrobras did not have a formal process +for vetting people nominated to those posts, and did not conduct integrity screenings of its senior +executives. +39. The Corrupt Executives failed to implement internal controls, exploited +deficiencies in the Company’s internal accounting controls, and submitted false documents in +connection with Petrobras’s internal process for preparing its SEC filings, resulting in both +inflation of PP&E and false and misleading disclosures about the corruption scheme in Forms +20-F. +Legal Standards and Violations +40. As a result of the conduct described above, Petrobras violated Sections 17(a)(2) +and 17(a)(3) of the Securities Act, which prohibit, in the offer or sale of any security (a) +obtaining money or property by means of any untrue statement of a material fact or any omission +of a material fact necessary in order to make the statements made, in light of the circumstances +under which they were made, not misleading, and (b) engaging in any transaction, practice, or +course of business which operates or would operate as a fraud or deceit upon the purchaser. No +scienter is necessary to establish violations of Sections 17(a)(2) and 17(a)(3) of the Securities +Act. Aaron v. SEC, 446 U.S. 680, 697 (1980). + 8 +41. As a result of the conduct described above, Petrobras 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 these reports contain such further material +information as may be necessary to make the required statements not misleading. No scienter is +necessary to establish a violation of Section 13(a). SEC v. Wills, 472 F. Supp. 1250, 1268 +(D.D.C. 1978). +42. As a result of the conduct described above, Petrobras 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 generally accepted +accounting principles. No scienter is necessary to establish violations of Sections 13(b)(2)(A) +and 13(b)(2)(B). SEC v. World Wide Coin Investments, 567 F. Supp. 724, 749-51 (N.D. Ga. +1983). +Non Prosecution Agreement +43. The Company is entering into a non-prosecution agreement with the Department +of Justice that specifically acknowledges and accepts responsibility for criminal conduct relating +to certain findings in the Order. +Petrobras’s Cooperation and Remedial Action +44. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Petrobras and significant cooperation afforded to the Commission staff. +After learning of the corruption and bribery scheme described above, Petrobras immediately +cooperated with the Brazilian authorities’ investigation, and has served as an Assistant to the +Prosecution in 51 proceedings in Brazil. Petrobras conducted a thorough and timely internal +investigation and identified significant documents for the Commission staff, translating them +from Portuguese. Petrobras also provided summaries of the investigation’s findings and assisted +in other SEC investigations. +45. The Commission also took into consideration other significant remedial steps +taken by Petrobras, including (i) amending the Company’s bylaws; (ii) replacing the Board of +Directors and Executive Board; (iii) limiting individual decision-making authority; (iv) creating +several statutory senior manager committees tasked with reviewing, assessing, and making +recommendations on matters subject to Executive Board review; (v) enhancing the Company’s +compliance policies and procedures; (vi) enhancing the Company’s Compliance Function, +including creating the Division of Governance and Compliance; (vii) providing more extensive +compliance training and communications to employees; (viii) creating a new Disciplinary +Committee; (ix) enhancing the Company’s policies and procedures related to confidential +reporting and investigations; (x) enhancing measures to ensure the Company’s operations are +insulated from improper political interference; (xi) enhancing controls related to procurement +and contracting, including requiring enhanced integrity due diligence for prospective contractors; + 9 +and (xii) implementing a work program to mitigate the material weaknesses identified by the +Company’s independent auditors in 2015, which since have been eliminated in the independent +auditors’ 2017 report. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Petrobras’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, Respondent cease and desist from committing or causing any violations and any future +violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder. +B. Respondent shall, within one year of the date of this Order, pay to the +Commission disgorgement of $711,000,000 plus prejudgment interest of $222,473,797, for a +total payment of $933,473,797. The amount of this obligation shall be reduced and deemed +satisfied by the amount of any payment by Respondent to the class action Settlement Fund in the +matter of In re Petrobras Securities Litigation, No. 14-cv-9662 (S.D.N.Y.), up to and including +the entire amount of this obligation. Upon good cause shown, the Commission staff may, in its +discretion, extend by up to an additional year the one-year period within which Petrobras must +make payments to the class action Settlement Fund to satisfy its obligation pursuant to this +Order. +C. If the resulting payments made by Petrobras to the class action Settlement Fund +total less than $933,473,797 as a result of an appeal or other modification to the class action, +Petrobras shall, within one hundred eighty (180) days of the expiration of the required payment +period referenced in IV.B. above, pay to the Commission the difference remaining from the +outstanding amount ordered herein. The Commission will hold the disgorgement and +prejudgment interest funds paid pursuant to this paragraph in an SEC-designated account at the +United States Treasury pending a decision whether the Commission, in its discretion, will seek to +distribute funds, or transfer them for the benefit of the claimants in the class action. If timely +payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. +D. Respondent shall, within one year of the date of this Order, pay a penalty in the +amount of $853,200,000 to the Commission in connection with this Order and as described in the +non-prosecution agreement with the Department of Justice referenced in paragraph 43. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. Respondent +shall receive a dollar-for-dollar credit up to (a) $682,560,000 of any payment made in agreement +with the Brazilian authorities as described in the non-prosecution agreement with the Department +of Justice referenced in paragraph 43; and (b) $85,320,000 of any payment required by the +Respondent’s resolution with the United States Department of Justice in connection with the +non-prosecution agreement referenced in paragraph 43. If Respondent pays less than +$682,560,000 in agreement with the Brazilian authorities as described in sub-paragraph IV.D.(a), +above, Respondent shall receive a dollar-for-dollar credit of up to half the amount that is unpaid + 10 +under that sub-paragraph (a), up to a maximum credit of $341,280,000, for each dollar that +Respondent pays to the U.S. Department of Justice in connection with the non-prosecution +agreement referenced in paragraph 43; such credit shall be in addition to any credit under sub- +paragraph IV.D.(b), above. Should any amount described in sub-paragraph IV.D.(a), above, be +returned to Respondent, or any subsidiary of Respondent, or any entity that Respondent owns or +controls, that amount will not be credited as an offset to Respondent’s penalty obligation under +sub-paragraph (a) and shall be due and payable to the Commission within ten days of its return, +or within one year of the date of this Order, whichever is later, provided, however, that +Respondent shall receive a dollar-for-dollar credit of up to half the returned amount for each +dollar of that returned amount that Respondent pays to the U.S. Department of Justice in +connection with the non-prosecution agreement referenced in paragraph 43; such credit shall be +in addition to any credit under sub-paragraph IV.D.(b), above. +E. Payment pursuant to 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 +Petrobras 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, Division of +Enforcement, Securities and Exchange Commission, 444 S. Flower Street, Los Angeles, CA +90071. +F. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a +Fair Fund is created for the disgorgement, pre-judgment interest and penalties referenced in +Section IV.B-D. above for distribution to harmed investors. 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, 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 + 11 +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 United States Treasury or to a Fair Fund, as the +Commission directs. 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 Section, 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. Nothing in this +paragraph limits Petrobras’s resolution with the Brazilian authorities described in paragraph +IV.D.(a), above. +G. The Commission will appoint a Fund Administrator who will develop a +distribution plan (the “Plan”). The Plan will include a methodology to identify and compensate +investors affected by Respondent’s conduct described herein. The Fund Administrator will +administer the Plan in accordance with the Commission Rules on Fair Fund and Disgorgement +Plans. Respondent shall be responsible for any and all costs of the Fund Administrator +associated with developing and administering the Plan. Respondent shall also be responsible for +any and all tax compliance obligations associated with the Fair Fund. The costs and expenses of +any such tax compliance obligations, including the payment of the fees of a tax administrator and +any taxes, penalties, and interest due, shall be borne by Respondent and shall not be paid out of +the Fair Fund. Any amount remaining in the Fair Fund after all distributions have been made +and costs have been paid shall be transmitted to the Commission for transfer to the U.S. Treasury +in accordance with Section 21F(g)(3) of the Exchange Act. Under no circumstances shall any +part of the Fair Fund be returned to Respondent. +By the Commission. + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3990.txt b/raw/aaer/2018/AAER-3990.txt new file mode 100644 index 0000000000000000000000000000000000000000..f8ae916098cd24303d2ec23c08d6abd1cdef8ab0 --- /dev/null +++ b/raw/aaer/2018/AAER-3990.txt @@ -0,0 +1,551 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84308 / September 28, 2018 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3990 / September 28, 2018 +ADMINISTRATIVE PROCEEDING +File No. 3-18853 + +In the Matter of + +STRYKER CORPORATION + +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 Stryker Corporation (“Stryker” 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 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 that: +Summary +1. This matter concerns violations of the books and records and internal accounting +controls provisions of the Exchange Act by Stryker, a global leader in the medical technology +industry, related to its operations in India, China, and Kuwait. +2. Stryker’s policies, which applied to its global operations, prohibit bribery and +other improper payments. As part of its internal accounting controls, the company had policies, +which applied to its subsidiaries, requiring, among other things, proper documentation of +transactions; written agreements with distributors and sub-distributors that included anti- +corruption provisions and review rights to determine compliance; and due diligence and approval +of, and anti-corruption training for, all distributors and sub-distributors. +India +3. From at least 2010 through 2015, Stryker’s wholly-owned subsidiary in India +(“Stryker India”) failed to keep and maintain any documentation with respect to 27% of the +transactions tested in an internal forensic review that targeted Stryker India’s high-risk and +compliance-sensitive accounts and payments during the relevant period. Additionally, the +forensic review found missing or inaccurate documentation for numerous other transactions +flagged as high-risk, including expenses related to consulting fees, travel, and other benefits to +health-care professionals (“HCPs”) in India. +4. The sales transactions here involved Stryker India’s sales of orthopedic products +to dealers, which subsequently sold the products to certain private hospitals. Stryker India +authorized these dealer transactions only after Stryker India’s management negotiated and +approved the price that the hospitals would pay to the dealers. Thus, in determining the price +charged to dealers, Stryker India’s management and the dealers specifically negotiated the profit +margin such dealers would stand to earn based on the difference between what hospitals paid the +dealers and what the dealers paid Stryker India. Furthermore, all such transactions were +governed by Stryker India’s policy of prohibiting dealers from making, requesting, or accepting +any “improper payments to government or non-government officials, employees, or entities.” +5. During the relevant period, certain of Stryker India’s dealers regularly issued +“inflated invoices” upon the request of certain private hospitals. The private hospitals that +requested inflated invoices from dealers profited from their purchase of Stryker orthopedic +products by passing on the higher (invoiced) prices to their patients or their patients’ insurers, +even as the hospitals paid the lower prices previously negotiated with Stryker India to Stryker +India’s dealers. Stryker received internal complaints of this practice and uncovered evidence of +such overbilling by one dealer when it conducted audits of three dealers in 2012. Yet Stryker +failed to devise and maintain a system of internal accounting controls sufficient to detect, +address, and prevent this widespread practice at the dealer level, which violated Stryker’s own +policies governing the activities of Stryker India’s dealers. + +3 + +China +6. In China, Stryker operates through a wholly-owned subsidiary (“Stryker China”) +that sells its Sonopet ultrasonic aspirator, as well as other products, through distributors. From +2015 through 2017, at least 21 sub-distributors of Stryker’s Sonopet product in China were not +vetted, approved, or trained, as required by Stryker’s policies. At times, Stryker China +employees worked directly with these unauthorized sub-distributors, and at other times +installation records were falsified to hide the involvement of the unauthorized sub-distributors in +the sale of Sonopet products. Stryker had in place certain internal accounting controls relating to +third parties that limited transactions to those that complied with their contractual undertakings +to adhere to Stryker’s anti-corruption policies and procedures. The use of these unauthorized +sub-distributors increased the risk of improper payments in connection with the sale of Stryker +products. Stryker failed to sufficiently implement its policies to detect and prevent the use of +these unauthorized sub-distributors in China. +Kuwait +7. EMEA Supply Chain Services B.V. is a wholly-owned subsidiary of Stryker +based in the Netherlands. From an office located in Dubai, employees of this subsidiary oversee +sales by Stryker's distributors in Kuwait. Until 2018, Stryker had one primary distributor in +Kuwait (the “Kuwait Distributor”) that sold Stryker orthopedic products to the Kuwait Ministry +of Health. From 2015 through 2017, the Kuwait Distributor made over $32,000 in improper “per +diem” payments to Kuwaiti HCPs to attend Stryker events, when Stryker had directly paid the +costs for lodging, meals, and local transportation for these individuals. Stryker had in place +certain internal accounting controls relating to third parties that limited transactions to those that +complied with their contractual undertakings to adhere to Stryker’s anti-corruption policies and +procedures. Stryker failed to sufficiently implement policies to test or otherwise assess whether +the Kuwait Distributor would allow the company to exercise its audit right to review records, and +whether it was complying with the company’s policies prohibiting bribes and other improper +payments by its distributors. +8. Based on all of the above, Stryker violated Section 13(b)(2)(B) of the Exchange +Act because it failed to devise and maintain, in its India, China, and Kuwait operations, 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 +transactions were recorded as necessary to permit preparation of financial statements in +conformity with generally accepted accounting principles and to maintain accountability for +assets. In addition, the failure to have internal accounting controls that ensured proper +documentation of transactions involving Stryker India, described above, caused Stryker to +violate Section 13(b)(2)(A) of the Exchange Act because its books and records did not, in +reasonable detail, accurately or fairly reflect the transactions and dispositions of the assets of +Stryker. +Respondent +9. Stryker is a Michigan corporation with its principal executive offices in +Kalamazoo, Michigan. Its common stock is registered with the Commission pursuant to Section + +4 + +12(b) of the Exchange Act and is listed on the New York Stock Exchange under the symbol +“SYK.” Stryker manufactures and distributes medical devices and products in more than 100 +countries around the world, including India, China, and Kuwait. The financial results of sales +made in these countries are consolidated into the financial statements of Stryker. +Prior Commission Action +10. On October 24, 2013, the SEC filed settled cease-and-desist proceedings against +Stryker for violations of the books and records and internal accounting controls provisions of the +Exchange Act. The Commission order found that, from approximately August 2003 to February +2008, through five wholly-owned subsidiaries, Stryker made approximately $2.2 million in +unlawful payments to government employees, including public HCPs in Mexico, Poland, +Romania, Argentina, and Greece. In the company’s books and records, Stryker incorrectly +described these unlawful payments to foreign officials as legitimate consulting and service +contracts, travel expenses, charitable donations, or commissions, when in fact the payments were +made by Stryker to obtain or retain business. Stryker also failed to devise and maintain a system +of internal accounting controls sufficient to provide reasonable assurance that the company +maintained accountability for its assets and that transactions were executed in accordance with +management’s authorization. As a result of those payments, Stryker earned approximately $7.5 +million in illicit profits. +11. In settling with the Commission, Stryker consented to the issuance of an order +requiring it to cease-and-desist from any violations and any future violations of Sections +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and to pay $7,502,635 in disgorgement, +$2,280,888 in prejudgment interest, and a civil penalty of $3,500,000. +Stryker India’s Business +12. From at least 2010 through December 2015, Stryker sold its medical products in +India through Stryker India, which generated approximately 85% of its revenues through sales to +third-party dealers. These dealers, in turn, sold Stryker products to end customers, primarily +hospitals. Approximately 85% of Stryker India’s end customers are hospitals in the private +sector. +13. Stryker’s policies required Stryker and its subsidiaries, including Stryker India, to +maintain sufficient internal accounting controls. Stryker India was also subject to Stryker’s code +of conduct, which required, among other things, that Stryker India take steps to ensure that all +payments made to government or non-government officials, employees, customers, and other +persons and entities were proper. Further, Stryker India was required to generate or obtain +proper documentation to provide assurances that all transactions and business relationships with +dealers, HCPs, consultants, and other third parties were legitimate. +14. Stryker India entered into a contract with each dealer through which Stryker +products were sold. Pursuant to such contracts, Stryker India’s dealers were required to follow +Stryker’s policies regarding the proper conduct of their business, which included a prohibition on +making, requesting, or accepting any “improper payments to government or non-government +officials, employees, or entities.” The contracts also obligated dealers to “maintain complete and + +5 + +accurate records relating to [their] promotion, marketing, use and distribution of [Stryker] +Products.” Finally, under its contracts with dealers, Stryker India held audit rights to inspect the +books and records of any of the 198 dealers through which Stryker products were sold in India. +Stryker India’s Inadequate Oversight of Its Dealers +15. In 2012, in response to allegations of misconduct concerning Stryker India’s +dealers, Stryker exercised its audit rights over three dealers in India. Those audits revealed +insufficiencies in the financial record-keeping and internal accounting controls of all three +dealers. Additionally, Stryker identified suspicious expenses by one dealer and instances of +another dealer over-billing a hospital upon the hospital’s request. While Stryker took some +corrective actions in response to these audits, including terminating one of the three dealers, the +actions were limited to the three dealers audited. +16. The above deficiencies violated Stryker India’s agreements with its dealers. +Specifically, the deficiencies in dealers’ financial record-keeping violated dealers’ obligation to +“maintain complete and accurate records relating to [their] promotion, marketing, use and +distribution of [Stryker] Products,” and the over-billing violated Stryker’s business conduct +policy prohibiting participation in any improper payments. Despite the red flags raised during +the 2012 audits, and numerous complaints reported to Stryker of dealer misconduct, Stryker did +not act to determine the scope of dealer-inflated invoices until 2015. +17. In 2015, Stryker performed audits of other dealers in India. The audits revealed +that the practice of Stryker India’s dealers inflating invoices for the sale of Stryker orthopedic +products to certain private hospitals – an improper practice identified three years earlier in +connection with the 2012 audits – had become more widespread. Certain private hospitals in +India (mostly large, corporate hospitals) routinely asked dealers to mark up the cost of the +orthopedic products above the price that those hospitals had directly negotiated with Stryker +India and actually paid to Stryker India’s dealers. In doing so, dealers allowed these private +hospitals to gain a windfall from passing on the higher (invoiced) prices to their patients or their +insurance companies. +18. The 2015 audits further confirmed that dealers failed to adequately maintain their +financial records and had provided questionable payments or benefits to HCPs in contravention +of Stryker’s business conduct policy, which prohibits the participation in any improper +payments. These practices, like the deficiencies identified in the 2012 audits, violated the +dealers’ agreements with Stryker India. +Stryker India Failed to Maintain Complete and Accurate Books and Records +19. From 2010 through 2015, Stryker India failed to make and keep complete and +accurate books and records that reflected its transactions and disposition of assets. In particular, +Stryker India recorded potentially problematic payments to its dealers and to HCPs, some of +which lacked any supporting documentation reflecting a clear business purpose. +20. A forensic review of Stryker India’s general ledger for the period 2010 through +2015 found a complete lack of documentation for 144 out of 533 transactions selected as a +sample of Stryker India’s highest-risk and most compliance-sensitive accounts. The missing + +6 + +documentation encompassed transactions of nearly every high-risk category, including: +consulting payments to HCPs, payments of travel and lodging for HCPs, payments to event +organizers, discounts on the price of Stryker products to dealers, commissions awarded to +dealers, and marketing expenses. +21. In addition, for many other high-risk transactions, Stryker India recorded +payments with inaccurate or inadequate documentary support. For example, Stryker India paid +commissions to dealers for which the supporting documentation did not provide a clear +justification, or the amount of such commissions exceeded Stryker India’s commission +guidelines. Payments intended to benefit HCPs also lacked sufficient documentation, such as +consulting fees paid to doctors without adequate explanation of the doctors’ consulting services +or hours billed, and payments for HCP travel with documentation that appeared falsified or +lacking an appropriate basis for the travel. +Stryker’s Sonopet Sales in China +22. Stryker China sells Sonopet products directly to a state-owned “hub” distributor, +which in turn sells the products to a network of sub-distributors. From 2015 through 2017, at +least 21 sub-distributors of Stryker’s Sonopet products in China were not vetted, approved, and +trained by Stryker in accordance with its internal accounting controls. During that time, the sale +of some Sonopet products to hospitals involved third, fourth, and even fifth tier sub-distributors, +none of which were subjected to due diligence approval or training. Stryker China employees +knew of and worked directly with certain of these unauthorized sub-distributors, and at times +installation records Stryker China maintained were falsified to hide the involvement of the +unauthorized sub-distributors. Stryker’s failure to vet, approve, train, and monitor its distributors +and sub-distributors in China in accordance with the company’s policies, increased the risk of +bribery and other improper payments in connection with the sale of Stryker products. Stryker +failed to implement its internal accounting controls to detect and prevent the use of these +unauthorized sub-distributors in China. +Stryker’s Business in Kuwait +23. From its office in Dubai, United Arab Emirates, Stryker, until recently, sold its +orthopedic products to hospitals in Kuwait primarily through the Kuwait Distributor. Most of +the Kuwait Distributor’s sales of Stryker products were to Kuwait’s Ministry of Health, which +procured medical products on behalf of Kuwait’s public hospitals. From 2015 through 2017, the +Kuwait Distributor made at least $32,000 in improper “per diem” payments to Kuwaiti HCPs to +attend Stryker events, when Stryker had already directly paid the lodging, meals, and +transportation costs for these individuals to attend the events. When Stryker sought to exercise +its audit rights under its distribution agreement with the Kuwait Distributor to review records to +determine whether improper payments had been made to any government official, the Kuwait +Distributor denied access. Stryker had not before attempted to audit or otherwise review the +Kuwait Distributor’s records to determine whether it was complying with Stryker’s policies even +though Stryker had previously received a complaint from a former employee of the Kuwait +Distributor alleging that the Kuwait Distributor paid bribes in connection with the sale of Stryker +products. Stryker failed to implement its internal accounting controls to test or otherwise assess +whether the Kuwait Distributor was complying with Stryker’s anti-corruption policies. + +7 + +IV. +Internal Accounting Controls Violations +24. As detailed above, Stryker failed to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that transactions were recorded +as necessary to permit preparation of financial statements in accordance with generally accepted +accounting principles. For example, Stryker recorded transactions of Stryker India for which +Stryker could not verify the business purpose or otherwise account for the legitimacy of those +expenses. +25. Further, Stryker 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 authorizations. In India, even after the 2012 +audits revealed evidence of dealers not complying with Stryker policies — as required by their +contracts with Stryker India — and of hospitals requesting invoices with prices higher than the +prices that Stryker India had specifically negotiated with such hospitals, Stryker failed to devise +and maintain a system of internal accounting controls designed to detect and prevent dealers +from engaging in the practice of inflating invoices to certain private hospitals for the sale of +Stryker orthopedic products. In China, Stryker failed to vet, approve, train, and monitor sub- +distributors of its Sonopet product in accordance with the company’s policies, thereby increasing +the risk of bribery and other improper payments in connection with the sale of Sonopet products. +And in Kuwait, Stryker failed to implement its policies to test or otherwise assess whether the +Kuwait Distributor was complying with Stryker’s anti-corruption policies. +26. As a result of the conduct described above, Stryker violated Section 13(b)(2)(B) +of the Exchange Act, which requires every issuer with a class of securities registered pursuant to +Section 12 of the Exchange Act to, among other things, devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that transactions are (i) executed +in accordance with management’s general or specific authorization; (ii) recorded as necessary to +(I) permit preparation of financial statements in conformity with generally accepted accounting +principles or any other applicable criteria and (II) maintain accountability for assets. +Books and Records Violations +27. As detailed above regarding Stryker India, during the period of 2010 through +2015, Stryker was unable to provide any documentation for 27% of sampled high-risk +transactions on Stryker India’s general ledger. For other compliance-sensitive transactions, the +available documentation was insufficient for purposes of determining accurately the recipient, +amount, or purpose of the payments at issue. +28. As a result of the conduct described above regarding Stryker India, Stryker +violated Section 13(b)(2)(A) of the Exchange Act, which 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 that, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the issuer. + +8 + +Stryker’s Remedial Efforts +29. In response to the Commission’s investigation, Stryker retained outside counsel +and forensic auditors to conduct an internal investigation into the company’s compliance with +the Foreign Corrupt Practices Act (“FCPA”) concerning Stryker’s activities in India, China, and +Kuwait. As the internal investigation progressed, Stryker shared its findings on an ongoing +basis, voluntarily produced reports and other materials, and cooperated with the Commission +staff’s investigation. +30. Since the time of the conduct detailed above, Stryker undertook a number of +remedial efforts, which include: (1) enhanced and updated policies, procedures, and best +practices for Stryker India; (2) new compliance measures with additional controls around (i) the +monitoring of Stryker’s relationship with HCPs and indirect channels, including dealers and +distributors, (ii) reducing the risk of unauthorized business practices in India, and (iii) due +diligence of third parties; (3) increased training of all Stryker India employees and local +management, including an FCPA compliance workshop for Stryker India’s leadership team; (4) a +new centralized system for dealer documentation, and a modified dealer commission model +designed to increase transparency around the payment of commissions to dealers in India; (5) +compliance audits related to marketing events, event documentation, and employee +reimbursements in India; and (6) audits of dealers’ and distributors’ business practices in India. +Further, Stryker terminated certain senior employees at Stryker India, appointed new leadership +to head Stryker India, and sent a notice of termination to the Kuwait Distributor. +31. Also in response to the Commission’s investigation, Stryker fortified its existing +compliance program, which is designed to prevent, detect, and remediate potential +misconduct. This program develops, maintains, and implements corporate policies and standard +operating procedures setting forth specific due diligence and documentation requirements for +relationships with foreign officials, HCPs, consultants, and distributors. +32. In determining to accept Stryker’s Offer, the Commission considered Stryker’s +cooperation and remedial acts undertaken. +V. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Stryker’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondent Stryker 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 Stryker shall, within 14 days of the entry of this Order, pay a civil +money penalty in the amount of $7,800,000 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 ways: + +9 + +(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 +Stryker as Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Sanjay Wadhwa, Senior Associate +Regional Director, Division of Enforcement, Securities and Exchange Commission, 200 Vesey +Street, Suite 400, New York, NY 10281. +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. +D. Respondent Stryker shall comply with the following undertakings: +1. Retain an independent consultant (the “Independent Consultant”) not +unacceptable to the Staff within sixty (60) calendar days after the issuance +of this Order. Within thirty (30) calendar days after the issuance of this +Order, Respondent shall recommend to the Staff a qualified candidate to +serve as the Independent Consultant. The Staff shall provide feedback to +Respondent within fifteen (15) calendar days of receiving Respondent’s +recommendation. + +10 + +2. The Independent Consultant candidate shall have, at a minimum, the +following qualifications: demonstrated expertise with respect to the FCPA, +including experience counseling on FCPA issues; experience designing +and/or reviewing corporate compliance policies, procedures, and internal +controls, including FCPA-specific policies, procedures, and internal +controls; ability to access and deploy resources as necessary to discharge +the Independent Consultant’s duties as described herein; and independence +from Respondent to ensure effective and impartial performance of the +Independent Consultant’s duties. +3. The Independent Consultant should not have provided legal, auditing, or +other services to, or have had any affiliations with, the Respondent during +the two years prior to the issuance of this Order. +4. Respondent shall retain the Independent Consultant for a period of +eighteen (18) months from the date of the engagement. Respondent shall +exclusively bear all costs, including compensation and expenses, +associated with the retention of the Independent Consultant. +5. To ensure the independence of the Independent Consultant, Respondent +shall not have the authority to terminate the Independent Consultant +without the prior written approval of the Staff. +6. The Independent Consultant’s responsibility is to review and evaluate +Respondent’s internal controls, record-keeping, and anti-corruption +policies and procedures relating to use of dealers, agents, distributors, sub- +distributors, and other such third parties that sell on behalf of Stryker (“the +Policies and Procedures”) and to make recommendations designed to +reasonably improve the Policies and Procedures. This review and +evaluation shall include an assessment of the Policies and Procedures as +actually implemented, including in India, China, Kuwait, and other +countries selected by the Independent Consultant, and how the Policies +and Procedures fit within Respondent’s ethics and compliance function. +The Independent Consultant shall consider whether the ethics and +compliance function has sufficient resources, authority, and independence, +and provides sufficient training and guidance. +7. Respondent and the Independent Consultant shall agree that the +Independent Consultant is an independent third-party and not an employee +or agent of the Respondent. In addition, Respondent and the Independent +Consultant agree that no attorney-client relationship shall be formed +between them. +8. Respondent shall require the Independent Consultant to enter in an +agreement with Respondent providing 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, + +11 + +attorney-client, auditing, or other professional relationship with +Respondent, or any of its present or former affiliates, directors, officers, +employees, or agents acting in their capacity as such. Any firm with +which the Independent Consultant 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 Staff, enter into any employment, consultant, +attorney-client, auditing, or other professional relationship with +Respondent, or any of its present or former affiliates, directors, officers, +employees, or agents acting in their capacity as such for the period of the +engagement and for a period of two (2) years after the engagement. +9. Respondent shall require the Independent Consultant to prepare a written +work plan and submit it to Respondent and the Staff for comment within +thirty (30) calendar days of commencing the engagement. The +Respondent’s comments shall be provided to the Independent Consultant +no more than fifteen (15) calendar days after receipt of the written work +plan. In order to conduct an effective initial review and to understand +fully any deficiencies in the Policies and Procedures, including how FCPA +compliance fits within Respondent’s ethics and compliance function, the +Independent Consultant’s initial work plan shall include such steps as are +reasonably necessary to develop an understanding of the facts and +circumstances surrounding any violations that may have occurred as +reflected in this matter and to assess the effectiveness of Respondent’s +existing Policies and Procedures, and of Respondent’s ethics and +compliance program. Any dispute between Respondent and the +Independent Consultant with respect to the work plan shall be decided by +the Staff. +10. Respondent shall cooperate fully with the Independent Consultant, and the +Independent Consultant shall have the authority to take such reasonable +steps as, in his or her view, may be necessary to be fully informed about +Respondent’s Policies and Procedures in accordance with the principles +set forth herein and applicable law, including data protection, blocking +statutes, and labor laws and regulations applicable to Respondent. To that +end Respondent shall provide the Independent Consultant with access to +all information, documents, records, facilities and/or employees, as +requested by the Independent Consultant, that fall within the scope of the +Independent Consultant’s responsibility, except as provided in this +paragraph; and provide guidance on applicable laws (such as relevant data +protection, blocking statutes, and labor laws). +11. In the event the Respondent seeks to withhold from the Independent +Consultant access to information, documents, records, facilities and/or +employees of Respondent that may be subject to a claim of attorney-client +privilege or to the attorney work product doctrine, or where Respondent +reasonably believes production would otherwise be inconsistent with + +12 + +applicable law or beyond the scope of these undertakings, Respondent +shall work cooperatively with the Independent Consultant. If the matter +cannot be resolved, at the request of the Independent Consultant, +Respondent shall promptly provide written notice to the Independent +Consultant and the Staff. Such notice shall include a general description +of the nature of the information, documents, records, facilities and/or +employees that are being withheld, as well as the basis for the claim. To +the extent Respondent has provided information to the Staff in the course +of the investigation leading to this action pursuant to a non-waiver of +privilege agreement, Respondent and the Independent Consultant may +agree to production of such information to the Independent Consultant +pursuant to a similar non-waiver agreement. +12. Respondent shall require the Independent Consultant to issue a written +report (“Report”) within six (6) months after being retained. The Report +shall cover the Independent Consultant’s review of Respondent’s Policies +and Procedures: (a) summarizing its review and evaluation, and (b) if +necessary, making recommendations based on its review and evaluation +that are reasonably designed to improve Respondent’s Policies and +Procedures. Respondent shall require that the Independent Consultant +provide the Report to the Board of Directors of Respondent and +simultaneously transmit a copy to the Staff at the following address: +Thomas P. Smith, Jr. Assistant Regional Director, Division of +Enforcement, New York Regional Office, Brookfield Place, 200 Vesey +Street, Suite 400, New York, NY 10281. +13. Respondent shall adopt all recommendations in the Report within ninety +(90) days of the issuance of the Report; provided, however, that, as to any +recommendations that Respondent considers to be unduly burdensome, +impractical, or costly, Respondent need not adopt the recommendations at +that time, but may submit in writing to the Staff, within thirty (30) days of +receiving the Report, an alternative policy or procedure designed to +achieve the same objective or purpose. Respondent and the Independent +Consultant shall attempt in good faith to reach an agreement relating to +each recommendation Respondent considers unduly burdensome, +impractical, or costly. In the event that Respondent and the Independent +Consultant are unable to agree on an alternative proposal within thirty (30) +days, Respondent will abide by the determinations of the Staff. +14. After 180 days of completion of the implementation set forth above, the +Independent Consultant shall have thirty (30) days to complete a follow- +up review to confirm that Respondent has implemented the +recommendations or agreed-upon alternatives and continued the +application of the Policies and Procedures, and to deliver a supplemental +report to the Board of Directors of Respondent and the Staff setting forth +its conclusions and whether any further improvements should be +implemented. + +13 + +15. Respondent agrees that the Staff may extend any of the dates set forth +above at its direction. +16. Respondent shall certify, in writing, compliance with the undertaking(s) +set forth above. The certification shall identify the undertaking(s), provide +written evidence of compliance in the form of a narrative, and be +supported by exhibits sufficient to demonstrate compliance. The Staff +may make reasonable requests for further evidence of compliance, and +Respondent agrees to provide such evidence. Respondent shall submit the +certification and supporting material to: Thomas P. Smith, Jr., Assistant +Regional Director, Division of Enforcement, 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. +17. Respondent agrees that these undertakings shall be binding upon any +successor in interest to Respondent or any acquirer of substantially all of +Respondent’s assets and liabilities or business. +By the Commission. +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3991.txt b/raw/aaer/2018/AAER-3991.txt new file mode 100644 index 0000000000000000000000000000000000000000..82d2b7cd98d82c174c899fcb7eaeaee62f02b23e --- /dev/null +++ b/raw/aaer/2018/AAER-3991.txt @@ -0,0 +1,377 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10564 / September 28, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3991 / September 28, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18856 + + +In the Matter of + +MOTA GROUP, INC. AND +MOTA “MICHAEL” FARO, + +Respondents. +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933, 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”) against Mota Group, Inc. (“Mota” or the +“Company”) and Mota “Michael” Faro (“Faro”) (together, “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 8A of the Securities Act of 1933, 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 the negligent failure of Mota and its Chief Executive Officer, +Michael Faro, to ensure the accuracy of the financial statements Mota filed with the Commission +in connection with the proposed sale of its securities in a planned initial public offering (“IPO”). +In October 2016, Mota entered into an agreement with a large distributor of electronics and other +consumer products (the “Distributor”) under which Mota shipped approximately $790,000 of +product to the Distributor in advance of the 2016 holiday season.2 In exchange, the Distributor +was to pay Mota only for what the Distributor sold within 90 days, at which point the Distributor +could return the unsold product (the “Holiday Order”). Because the Distributor had unlimited +return rights and was only obligated to pay Mota to the extent the Distributor was able to resell +the products, Mota was not able to recognize revenue under Generally Accepted Accounting +Principles (“GAAP”) until the Distributor sold the products. However, Mota and its CEO +provided the auditing firm with inaccurate information about the Holiday Order, which resulted +in the recognition of $545,481 (or approximately 15 percent) more in revenue on its financial +statements for the six months ended December 31, 2016 than it should have recognized under +GAAP. Based in part on the inaccurate information Mota and Faro provided, the auditor +consented to the inclusion of Mota’s financial statements in four registration statement +amendments filed with the Commission between February and May 2017.3 + +Respondents + +2. Mota Group, Inc. is a privately held Delaware corporation based in San Jose, +California that sells drones, toys, and other consumer products. Between October 2016 and May +2017, Mota filed with the Commission a registration statement on Form S-1 and five +amendments thereto seeking to raise up to $6.5 million by selling its common stock and warrants +in an IPO. In May 2017, The NASDAQ Stock Market LLC approved Mota’s application to list +its common stock and warrants on The Nasdaq Capital Market. Mota’s registration statement +contained an amendment pursuant to Securities Act Rule 473 delaying the effective date of 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 Mota sells drones, toys and other types of consumer products which are popular during +the holiday season. According to Mota’s filings with the Commission, its second fiscal quarter +(which ends December 31) historically has been the quarter during which it recognizes its +highest revenue. + +3 The auditor consented, pursuant to Item 601 of Regulation S-K, to the inclusion in the +registration statement amendments of its report with respect to its audits of Mota’s financial +statements for the fiscal years ended June 30, 2016 and 2015. However, the conduct described +here does not relate to those audits. +3 +registration statement until further request from Mota. Mota requested effectiveness of its +registration statement on May 17, 2017, but voluntarily withdrew the request the following +day. The registration statement was never declared effective and, accordingly, no securities have +been sold under the registration statement. + +3. Mota “Michael” Faro, age 37, resides in Saratoga, California. Faro is Mota’s +founder, Chairman, President and Chief Executive Officer. He has no formal accounting +experience or training. + +The Holiday Order + +4. Mota filed a registration statement on Form S-1 with the Commission on October +5, 2016 seeking to issue securities in an IPO. Later that month, it entered into the Holiday Order, +which is described in detail below. + +5. Previously, in June 2015, Mota entered into a vendor purchase agreement +(“Vendor Purchase Agreement”) with the Distributor. Generally, the Vendor Purchase +Agreement provided that when Mota sold the product to the Distributor, the Distributor would +pay Mota within 60 days. Under certain circumstances, the Distributor could return excess +inventory to Mota, for which the Distributor would issue a credit to Mota’s account with the +Distributor. + +6. In October 2016, Mota’s Sales Director and the Distributor entered into a side +agreement under which the Distributor would order at least $500,000 worth of Mota product in +advance of the 2016 holiday season (the “Side Agreement”). The Side Agreement was +memorialized in an email that Mota’s Sales Director sent to the Distributor, with a copy to Faro. +In the email, the Sales Director stated “Spoke to Michael and he has agreed to the terms we +discussed around the Holiday [buy] in for Mota products as follows.” According to Faro, he +failed to read the email. Prior to this, Mota had entered into a few transactions with the +Distributor, but nothing of this size, and according to the Side Agreement, it was meant, in part, +to give “the Distributor the comfort of knowing [it had] the option to return any overstock.” +Under the Side Agreement: 1) the Distributor would pay Mota only for the products that the +Distributor sold through to its customers within 90 days “based on POS [point-of-sale] sell +through reporting”; and 2) before the expiration of the 90 days (at the end of January 2017), the +Distributor could return any unsold product to Mota without having to pay Mota for the returned +product. These return rights were more generous for the Distributor than those under the Vendor +Purchase Agreement. + +7. In November 2016, Mota shipped $790,071 worth of product to the Distributor. +The Holiday Order was the largest order from this Distributor, and it recorded $643,107 as +revenue in its books and records.4 + +4 This amount represented the total $790,071 in product shipped to the Distributor under +the Holiday Order less product returned to Mota in the December 2016 quarter and less an +estimated reserve for possible future returns. +4 + +8. At the beginning of each month, the Distributor provided Mota with a point-of- +sale report (“POS report”) in an Excel spreadsheet showing for the prior month how much Mota +product the Distributor had sold and to which of the Distributor’s customers. The total dollar +amount of products sold could be determined by summing up a column in the spreadsheet. + +9. Faro and others at Mota had access to and received at least some of the POS +reports. In particular, Faro reviewed the November and December 2016 POS reports and +forwarded them by email to Mota’s Sales Director, commenting on the attached POS reports and +instructing the Sales Director to try to increase sales to a new customer listed in the report. +According to these reports, the Distributor had sold $238,757 worth of product (out of the +$790,071) as of December 31, 2016. However, due to offsets such as rebates, the Distributor +was only obligated to pay Mota $97,626. + +Mota’s Accounting for the Holiday Order + +10. In early January 2017, Mota began discussions with an auditing firm, which had +audited the Company’s annual financial statements (the “Auditor”) and was at the time +reviewing its interim-period financial statements, about Mota’s financial statements for the +quarter ended December 31, 2016.5 The Auditor was reviewing Mota’s interim-period financial +statements before deciding whether to consent to their inclusion in an amended registration +statement that Mota planned to file with the Commission. + +11. Although Mota shipped $790,071 of product to the Distributor in November +2016, both Mota and the Auditor knew the Distributor had not paid it for any of the product as of +the close of the quarter on December 31, 2016. Because of this and the fact that the standard +Vendor Purchase Agreement gave the Distributor certain return rights, the Auditor initially +advised Mota that the Company could not recognize revenue from the transaction in the quarter +ended December 31, 2016 and suggested Mota draft a memorandum explaining its position. + +12. Faro was aware of the Auditor’s initial position, and on January 6, 2017, he +emailed Mota’s outside accounting consultant, who was assisting the Company with accounting +issues in preparation for the financial statements to be included the Company’s registration +statements (“Accounting Consultant”). In his email, Faro requested assistance in preparing an +accounting memo analyzing the accounting treatment for the Holiday Order, which he could then +provide to the Auditor, who had asked for supporting documentation. In his email, Faro +advocated for recognizing the revenue from the Holiday Order (less a reserve for potential +returns) in the December 2016 quarter. Among other reasons, Faro stated that under the terms of + + +5 Mota’s fiscal year ends June 30. Accordingly, its Form S-1 registration statement +amendments filed with the Commission between February and May 2017 included audited +financial statements for the fiscal year ended June 30, 2016, and unaudited financial statements +for the interim periods ended December 31, 2016 and March 30, 2017. + +5 +the sale, this was not a “consignment.”6 The Accounting Consultant was unaware of the Side +Agreement. + +13. On January 10, 2017, Faro learned that the Accounting Consultant was advising +Mota’s Chief Financial Officer to obtain a written estimate from the Distributor of how much of +the Holiday Order it might return to Mota, and that this information was “very critical” and that +without it, there was a low chance that the Auditor would agree that revenue from the sale could +be recognized in the December 2016 quarter. In response, Faro sent an email to the Accounting +Consultant and Mota’s CFO stating that the Distributor had already sold over $600,000 of the +$790,071 Holiday Order. Faro did not exercise reasonable care to ensure that the Distributor in +fact had actually sold over $600,000 of Mota’s product. + +14. In fact, the November and December 2016 POS reports indicated that the +Distributor had sold only $238,757 by the end of the quarter, far less than the $600,000 Faro had +told the Accounting Consultant. However, neither Faro nor anyone else at Mota provided the +POS reports, or the information reflected in those reports, to the Accounting Consultant. + +15. The Accounting Consultant then drafted an accounting memo analyzing the +Holiday Order, which he emailed to Mota’s CFO with a copy to Faro, that concluded that under +GAAP, Mota should recognize $790,071 (less a reserve for possible returns) in the December +2016 quarter. Mota’s CFO then sent the accounting memo to the Auditor, with a copy to Faro. +Included in the memo as bases for its conclusion were inaccurate statements, including +statements that the Distributor had already sold approximately $600,000 of the Holiday Order +and that the Distributor’s obligation to pay Mota was not contingent on whether the Distributor +sold the product. + +16. After reviewing the accounting memo, the Auditor asked Faro and Mota’s +bookkeeper to identify the Distributor’s customers that had purchased the $600,000 worth of +product, and how much each customer had purchased. In response, Faro told the Auditor that +Mota had asked the Distributor for the information the Auditor was seeking, but was told that +such information is “proprietary.” Although several individuals at Mota, including Faro, had +reviewed the POS reports that contained this information, no one at Mota provided the POS +reports to the Auditor. Instead, Faro provided them with a list of customer names without sales +amounts. + +17. On February 1, 2017, the Accounting Consultant emailed the Auditor a revised +accounting memo, copying Faro, and others at Mota, which stated that as of January 31, 2017, +the Distributor “has already sold all of the $790,000 total products.” In fact, according to the +December 31, 2016 POS report, which had been emailed to Faro and others at Mota, the +Distributor had sold far less than that. Faro did not take any steps to ensure that the sales +information included in the accounting memo was accurate. + +6 A consignment is an arrangement in which the owner of goods sends them to another +party, who sells them on behalf of the owner. In a consignment sale, the owner of the goods may +not recognize revenue until the goods are sold and it has the right to receive payment. +6 + +18. Thereafter, Mota improperly recognized revenue of $643,107 from the Holiday +Order in the quarter ended December 31, 2016. Mota recognized this revenue despite the fact +that under the Side Agreement, the Distributor had the right to return product to Mota and not +pay for it, and that as of December 31, 2016, the Distributor had not yet paid Mota anything from +the Holiday Order.7 + +19. As a result, Mota’s financial statements improperly recognized $545,481 more in +revenue for the six months ended December 31, 2016 from the Holiday Sale than it should have +recognized under GAAP, overstating revenue for that period by approximately 15 percent. + +20. The Auditor completed its review (based in part on inaccurate information +provided by Mota and Faro) and consented to the Company’s filing with the Commission of +amended registration statements on Form S-1 on February 10, 2017 and April 25, 2017, which +included these financial statements. The improperly recognized revenue for the December 2016 +quarter flowed through to the following quarter, and after receiving the Auditor’s consent, the +Company included financial statements for the nine months ended March 31, 2017, which +overstated revenue by approximately 11 percent, in amended registration statements filed with +the Commission on May 10, 2017 and May 17, 2017. + +Violations + +21. As a result of the conduct described above, Mota and Faro violated Section +17(a)(3) of the Securities Act, which makes it unlawful for any person, in the offer or sale of +any securities, directly or indirectly, to engage in any transaction, practice, or course of +business which operates or would operate as a fraud or deceit upon the purchaser. A violation +of Section 17(a)(3) does not require scienter, but may be established by a showing of +negligence. See Aaron v. SEC, 446 U.S. 680, 701-02 (1980); SEC v. Dain Rauscher, Inc., +254 F.3d 852 (9th Cir. 2001). + + +7 Under GAAP, Mota could not recognize revenue from the Holiday Order in the +quarter ended December 31, 2016 (when Mota shipped the product) because the Distributor +had not yet paid Mota and its obligation to pay was contingent on its resale of the product. +See Financial Accounting Standards Board (“FASB”) Accounting Standards Codification +(“ASC”) 605-15-25- 1(b) (accounting for sale where buyer has right to return product and +payment is contingent on resale)). Even though Mota recognized the revenue less an +estimated reserve for potential returns, this was improper under GAAP because the +Distributor’s payment obligation was contingent on its resale of the product. See Id. Under +GAAP, Mota should only have recognized $97,626 in revenue from the Holiday Sale. This is +the amount the Distributor was obligated to pay Mota as of December 31, 2016 and represents +the amount of product the Distributor sold as of that date, less rebates and other offsets. +7 +Undertaking + +Respondent Mota undertakes to: + +22. Within five business days of the entry of this Order, submit a request on +EDGAR pursuant to Rule 477 with the EDGAR header Form RW to withdraw its registration +statement on Form S-1, File No. 333-213982, originally filed on October 5, 2016, including all +amendments thereto. + +23. Certify, in writing, compliance with the undertaking set forth above. The +certification shall identify the undertaking, provide written evidence of compliance in the form +of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The +Commission staff may make reasonable requests for further evidence of compliance, and +Respondent Mota agrees to provide such evidence. The certification and supporting material +shall be submitted to Jeremy E. Pendrey, Assistant Regional Director, Securities and Exchange +Commission, 44 Montgomery Street, Suite 2800, San Francisco, California 94104-4802 with a +copy to the Office of Chief Counsel of the Enforcement Division, Securities and Exchange +Commission, 100 F Street NE, Washington, DC 20549 no later than five days from the date of +the completion of the undertaking. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondents’ Offers. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 8A of the Securities Act, Respondents Mota and Faro +cease and desist from committing or causing any violations and any future violations of +Section 17(a)(3) of the Securities Act; + +B. Respondent Mota shall comply with the undertakings enumerated in +Paragraphs 22 and 23 above; and + +C. Respondent Faro shall, within 14 days of the entry of this Order, pay a civil +money penalty in the amount of $10,000 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 +U.S.C. § 3717. + +D. Payment must be made in one of the following ways: + +(1) Respondent Faro may transmit payment electronically to the +Commission, which will provide detailed ACH transfer/Fedwire +instructions upon request; +8 + +(2) Respondent Faro 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 Faro 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 +Faro 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 Jeremy E. Pendrey, Assistant +Regional Director, Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, +San Francisco, California 94104-4802. + +E. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent Faro 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 +Faro’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 Faro 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 Faro 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 Faro, and further, any debt for disgorgement, prejudgment interest, +civil penalty or other amounts due by Respondent Faro under this Order or any other judgment, + +9 +order, consent order, decree or settlement agreement entered in connection with this +proceeding, is a debt for the violation by Respondent Faro 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/2018/AAER-3992.txt b/raw/aaer/2018/AAER-3992.txt new file mode 100644 index 0000000000000000000000000000000000000000..0aed3a068b6043e9ab70be0a47ecb7b64482ff61 --- /dev/null +++ b/raw/aaer/2018/AAER-3992.txt @@ -0,0 +1,989 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84419 / October 12, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3992 / October 12, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18868 + + + +In the Matter of + +Richard J. Bertuglia, CPA, +John W. Green, CPA, and +Lev Nagdimov, CPA, + + +Respondents. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS AND IMPOSING +REMEDIAL SANCTIONS + + + + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against Richard J. Bertuglia, CPA +(“Bertuglia”), John W. Green, CPA (“Green”), and Lev Nagdimov, CPA (“Nagdimov”) +(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 . . . (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 a ided and abetted the violation of, any +provision of the securities laws or the rules and regulations issued thereunder. + + + +2 + +(“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offer s”) 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 a s to the Co mmission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section IV, Respondents +consent to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section +4C of t he Securities Exchan ge Act of 1934 and Rule 102(e ) of t he 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 Respondents’ Offers, the Commission finds3 that: + +A. SUMMARY + +1. This matter concerns improper professional conduct by Bertuglia, Green, and +Nagdimov during an audit performed by BDO USA, LLP (“BDO”) for AmTrust Financial +Services, Inc. (“AmTrust” or the “Company”). In 2013, AmTrust engaged BDO to conduct an +integrated audit of the Company’s 2013 consolidated annual financial statements and internal +control over financial reporting (“ICFR”) in accordance with Public Company Accounting +Oversight Board (“PCAOB”) standards. For the engagement, BDO staffed Bertuglia as the +engagement partner, Green as the engagement quality review partner, and Nagdimov as a senior +manager. + +2. Shortly before AmTrust filed its 2013 Form 10 -K, Nagdimov instructed BDO’s +audit team to sign-off on all their work papers and audit programs — regardless of whether their +work was finished — so the audit procedures would appear complete before the release date for +BDO’s audit report . Nagdimov also directed the audit team to load blank or placeholder +documents into BDO’s electronic work paper files and sign-off on those documents, if necessary, +to comply with his instructions. The audit team generally obeyed Nagdimov’s orders and created + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of a ppearing or practicing before +it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. + + + +3 + +misleading audit documentation that did not accurately reflect the dates when audit procedures +were actually completed and audit evidence was actually obtained . This practice of creating +misleading audit documentation by signing incomplete work papers or audit programs is generally +characterized as “predating” in this Order. + +3. This predating of audit documentation was intended to conceal the failure to +complete necessary procedures and obtain sufficient audit evidence for certain journal entries, +internal controls, premium revenue, premium receivable and share-based compensation before the +release date for BDO’s audit report. After the audit report was released, the audit team performed +these incomplete procedures during the 45-day documentation completion period following the +report release date. To preserve the original, predated sign -offs in BDO’s electronic work paper +files, the audit team documented the additional procedures performed and subsequent evidence +obtained by overwriting or supplementing the existing audit documentation in the predated work +papers. + +4. Despite these significant audit deficiencies, Bertuglia, the engagement partner, and +Green, the engagement quality review partner, authorized the release of BDO’s audit report before +AmTrust filed its 2013 Form 10 -K on M arch 3, 2014. The audit report provided unqualified +opinions on AmTrust’s 2013 financial statements and ICFR. At the time, Bertuglia and Green did +not know the audit team had failed to comple te necessary audit procedures, and obtain sufficient +audit evidence, to support the report. In fact, Bertuglia and Green did not discover these audit +deficiencies until approximately one week after BDO’s audit report was published in AmTrust’s +2013 Form 10-K. If Bertuglia and Green had properly exercised due professional care, they would +have identified these deficiencies before they released the report. + +5. As a result of this conduct, Bertuglia, Green, and Nagdimov violated auditing +standards established by the PCAOB. As the engagement partner, Bertuglia was responsible for +the audit and its performance, but he failed to exercise due professional care and properly supervise +the engagement. Specifically, Bertuglia failed to properly supervise the audit and the work of audit +team members, who (i) violated numerous PCAOB standards, including audit documentation +standards, and (ii) failed to complete necessary audit procedures , and obtain sufficient audit +evidence, to support BDO’s audit report . Green also failed to exercise due professional care and +fulfill his responsibilities as the engagement quality review partner when he provided his +concurring approval to release BDO’s audit report, a nd when he failed to review and assess the +audit team’s subsequent analysis of omitted procedures after the audit report release date. + +6. Nagdimov violated PCAOB audit documentation standards by directing the audit +team to predate their incomplete work paper s and audit programs. Further, Nagdimov, who +assisted Bertuglia’s supervision of the audit, failed to exercise due professional care and properly +supervise the engagemen t in Nagdimov’s assigned areas . Specifically, Nagdimov failed to +properly supervise t he audit and the work of audit team members, who (i) violated numerous +PCAOB standards, including audit documentation standards, and (ii) failed to complete necessary +procedures, and obtain sufficient audit evidence, to support BDO’s audit report. + + +4 + + +B. RESPONDENTS + +7. Richard J. Bertuglia, CPA is a resident of Dix Hills, New York and a former +partner at BDO. Bertuglia is a Certified Public Accountant licensed in the state of New York. His +license is currently in inactive status. Bertuglia was an audit partner in BDO’s New York City +office from July 2000 until he retired from the firm in June 2017. He was the engagement partner +responsible for BDO’s audits of AmTrust in 2011 through 2015, including BDO’s integrated audit +of AmTrust’s financial statements and ICFR in 2013. +8. John W. Green, CPA is a resident of Tucson, Arizona and a former partner at +BDO. Green is a Certified Public Accountant licensed in the state of New York and Arizona. +Green joined BDO in August 2012 as an audit partner in the firm’s New York City office until he +left the firm in August 2016. In 2012 and 2013, Green was the engagement quality review partner +for BDO’s integrated audits of AmTrust’s financial statements and ICFR. +9. Lev Nagdimov, CPA is a resident of Scarsdale, New York and a former senior +manager at BDO. Nagdimov is a Certified Public Accountant licensed in the state of New York. +Nagdimov joined BDO in November 2003 and was staffed on BDO’s audit engagement team for +AmTrust from 2006 until he was terminated by the firm in November 2014. In 2012 and 2013 , +Nagdimov was a senior manager for BDO’s integrated audits of AmTrust’s financial statements +and ICFR. +C. RELATED ENTITIES +10. BDO USA, LLP , formerly BDO Seidman LLP, is a Delaware limited liability +partnership headquartered in Chicago, Illinois. BDO is a PCAOB -registered public accounting +firm and is the U.S. member firm of BDO International Limited, a U.K. company limited by +guarantee, and forms part of the international BDO network of independent member firms. BDO +was AmTrust’s independent auditor from 2006 through May 10, 2016. + +11. AmTrust Financial Services, Inc. is a Delaware corporation based in New York, +New York that underwrites and provides property and casualty insurance. During the relevant time +period, AmTrust’s common stock was registered with the Commission pursuant to Section 12(b) of +the Exchange Act and traded on the NASDAQ Global Market . AmTrust’s Series A preferred +stock and depository shares of Series B and Series C preferred stock traded on the New York Stock +Exchange. AmTrust 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 June 21, 2018, +AmTrust’s public shareholders approved an offer to purchase their common stock and take the +company private. + + +5 + +D. FACTS + +Background + +12. AmTrust engaged BDO to co nduct an integrated audit of the Company’s 2013 +consolidated annual financial statements and ICFR in accordance with PCAOB standards (the +“Consolidated Audit”).4 AmTrust also engaged BDO to audit many of its individual subsidiaries’ +financial statements in accordance with generally accepted auditing standards established by the +American Institute of Certified Public Accountants (the “Subsidiary Audits”). + +13. Bertuglia was BDO’s engagement partner for the Consolidated Audit and the +Subsidiary Audits. He supervised the work of audit team members and supervised the audit’s +compliance with PCAOB standards . During the Consolidated Audit, Bertuglia delegated his +general day-to-day supervision of the engagement to his managers, and was primarily assisted by +Nagdimov and a second manager (the “Second Manager”). + +14. Green was the engagement quality review partner for the Consolidated Audit. The +objective of the engagement quality reviewer is to perform an evaluation of the significant +judgments made by the engagement team and the related conclusions reached in forming +the overall conclusion on the engagement and in preparing the engagem ent report in order to +determine whether to provide concurring approval of issuance.5 + +15. BDO maintained all of its audit documentation for the Consolidated Audit and the +Subsidiary Audits in a single set of electronic work paper files retained in BDO’s audit process tool +(“APT”). The audit team planned to conduct the Consolidated Audit simultaneously with the +individual Subsidiary Audits. The team’s audit plan for these simultaneous audits relied on audit +procedures performed at the subsidiary level, including subsidiary-level materiality thresholds that +supported both the Consolidated Audit and the Subsidiary Audits. +The Audit Team Falls Behind Schedule + +16. The audit team fell behind schedule during the fourth quarter of 2013. On +December 18, 2013, the Second Manager emailed a status report to Bertuglia and Nagdimov. The +report estimated that the audit team was 870 total hours behind schedule as a group, or roughly 14 +weeks behind, based on current staffing and 60-hour work weeks. To cure this deficit , Bertuglia +staffed four more auditors to the engagement, including two managers. + +17. On January 7, 2014, SEC staff issued a subpoena to BDO requesting copies of the +firm’s documents, including prior work papers and audit files related to AmTrust. + + +4 Auditing standards referenced in this Order relate to PCAOB standards in effect when the audit was performed. +5 PCAOB Auditing Standard No. 7, Engagement Quality Review, par. 7.2. + + +6 + +18. Bertuglia wanted the audit team to substantially complete their work on all major +financial statement audit areas before AmTrust issued its earnings release on February 13, 2014 . +When AmTrust published the earnings release, however, the audit team had not completed their +work on these major audit areas. As time passed, Bertuglia concluded the audit team would not be +able to complete all their audit work for the Consolidated Audit and Subsidiary Audits as planned +by February 28, 2014, which was the expected filing date for AmTrust’s 2013 Form 10 -K. +Bertuglia directed the audit team to focus their efforts on completing audit work for the +Consolidated Audit, and delay any audit work that related solely to the Subsidiary Audits, because +the subsidiaries’ statutory financial statements were not required to be filed until after AmTrust’s +expected filing date for the 2013 Form 10-K. + +19. To accomplish this goal, Nagdimov and the Second Manager manually reviewed +AmTrust’s financial statement accounts, by subsidiary and lead account schedule, to identify +accounts that exceeded the Consolidated Audit’s tolerable misstatement (“consolidated +materiality”) and ensure that any untested balances did not exceed consolidated materiality. By +applying this approach, the audit team departed from their original audit plan, which relied on +subsidiary-level materiality thresholds and related audit procedures to support both the +Consolidated Audit and Subsidiary Audits. The audit team failed to document this change to the +audit plan in the work papers. + +20. Following the managers’ review, Bertuglia told the audit team they had to complete +their work in three audit areas before AmTrust filed its 2013 Form 10-K: (i) journal entry testing; +(ii) internal controls testing; and (iii) testing of material account balances for the Consolidated +Audit. A few days later, on February 18, the audit team emailed a status update to Bertuglia, +Nagdimov, and the Second Manager. The update , which detailed the team’s incomplete work, +showed that several significant audit areas were still incomplete, including internal controls testing. + +Nagdimov Instructs the Audit Team to Sign Incomplete Work +21. On February 21, Bertuglia met with the audit team again and told them they had to +finish their incomplete audit work for journal entry testing, internal controls testing, and material +account balances for the Consolidated Audit before AmTrust filed it s Form 10 -K. After this +meeting, Nagdimov instructed the audit team to ensure all their work papers and audit programs +were loaded and signed in APT — regardless of whether the work was complete. Several days +later, Nagdimov issued a more direct instruction to the audit team: sign everything in APT, +including work papers and audit programs. He also told the audit team to load and sign blank or +placeholder work papers, if necessary, to comply with his instructions.6 + +6 BDO’s APT software required users to load work papers into the program before they can sign those work papers +in APT . Upon sign -off, APT automatically registered an electronic timestamp for the signature. The software +allowed users to update their time-stamped sign-offs as needed, and the software also retained a log of all prior sign - +offs for each work paper. But users could still revise the content of work pap ers after they were signed, and these +revisions did not automatically update or delete the original time-stamped sign-offs. + + +7 + + +22. The audit team generally followed Nagdimov’s orders and signed all their work +papers and audit programs, even if their work was incomplete. They also loaded placeholder +documents into APT, such as blank templates, preliminary schedules, and prior -period work +papers, and signed-off on these placeholder documents. +Bertuglia and Green Release BDO’s Audit Report Despite Missing Audit Work +23. The audit team expected AmTrust to file its Form 10 -K on Friday, February 28 , +2014. That morning, Bertuglia and Green were reviewing work papers in APT when they noticed +that several work papers were still incomplete, so they called Nagdimov. Bertuglia claims that +during this call, Nagdimov told Bertuglia and Green the audit team had completed their work but +technical problems were preventing them from loading their updated work papers into APT. +According to Bertuglia and Green, Nagdimov assured Bertuglia and Green that all necessary audit +work for the Consolidated Audit was complete, including the three audit areas that Bertuglia +instructed the audit team to finish before AmTrust’s Form 10-K filing. +24. Based on these verbal assurances, Bertuglia authorized the release of BDO’s audit +report and Green provided his concurring approval of issuance later that afternoon on February 28, +2014 (the “First Report Release Date”). The audit report contained unqualified opinions on +AmTrust’s 2013 consolidated annual financial statements and ICFR. When Bertuglia and Green +released the report, they had not yet reviewed the missing work papers outside of APT or discussed +the missing work with team members who were responsible for the procedures. +25. Bertuglia and Green subsequently learned that AmTrust had decided to delay its +Form 10-K filing until Monday, March 3, 2014 , which was the actual filing deadline . Bertuglia +and Green continued to review and sign work papers over the weekend and on Monday, March 3. +From Friday, February 28 through Monday, March 3, Bertuglia and Green collectively signed over +2,000 work papers, including work papers they did not actually review, but they did not revisit the +incomplete work papers to confirm that neces sary procedures were complete and sufficient audit +evidence had been obtained. On Monday, Bertuglia redated BDO’s audit report to March 3, 2014 +(the “Second Report Release Date”), and AmTrust filed its 2013 Form 10-K later that day. +The Audit Team Performs Necessary Procedures After the Report Release Dates +26. On March 7, 2014, the audit staff members emailed a status report to Bertuglia, +Nagdimov and the Second Manager. The report showed that necessary work for the Consolidated +Audit remained incomplete and the audit team needed more time to finish their audit procedures. +The incomplete work included certain testing of journal entries , internal controls, and material +accounts for the Consolidated Audit — the same audit areas that Bertuglia repeatedly told the audit +team to complete before AmTrust filed its Form 10-K. + +27. Several days later, Bertuglia reviewed the status report and was surprised by the list +of incomplete work for the Consolidated Audit. He promptly instructed the audit team to prepare + + +8 + +an updated summary of incomplete audit work and provide projected timelines for completing the +remaining items. This updated summary, which was emailed to Bertuglia on March 14, 2014, +identified all of the incomplete audit work that had to be finished by the audit team, including work +for the Consolidated Audit and the individual Subsidiary Audits. + +28. Bertuglia also notified Green of the incomplete work for the Consolidated Audit. +They concluded that the audit team needed to complete the omitted procedures and assess their +potential impact on BDO’s audit report, as required by AU Section 390, Consideration of Omitted +Procedures After the Report Date (AU § 390). Neither Bertuglia nor Green discussed the omitted +procedures or their approach under AU § 390 with anyone else at BDO. + +29. The audit team completed their work over the next month. For the incomplete, +predated work papers — particularly placeholder documents — the audit team generally overwrote +and thus replaced the prior audit documentation with new documentation reflecting the procedures +performed and evidence obtained. This new documentation did not indicate that such audit work +occurred after the report release dates, and it did not affect the original, predated sign-offs in APT. +Moreover, the audit team did not update their sign -offs in APT when the predated work papers +were completed. As a result of this conduct, the audit team created misleading documentation of +the timing of procedures that were performed after the report release dat es because (i) the new +documentation did not identify the procedures performed and audit evidence obtained after the +report release dates, and (ii) the original, predated sign-offs did not accurately reflect the date s +when procedures were performed or audit evidence was obtained . The audit team’s predated +placeholder work papers included, among others, certain testing of journal entries , entity-level +internal controls, and certain premium revenues. + +30. Bertuglia reviewed the completed audit work and concluded that the omitted +procedures did not affect BDO’s previously issued audit report. Green also reviewed this work +and reached the same conclusion, but he never reviewed the team’s list of incomplete audit work +nor the team’s assessment of omitted procedures, and he never discussed any assessment of the +omitted procedures with Bertuglia or anyone else on the audit team. In fact, t here is no +documentation of any assessment of omitted procedures under AU § 390, and neither Bertuglia nor +Green documented their own assessment or review. + +Summary of Significant Audit Deficiencies + +31. The audit team did not have sufficient audit evidence to support BDO’s audit report +when it was included in AmTrust’s Form 10 -K on March 3, 2014 . The following summary +describes the significant audit deficiencies and documentation failures existing on that date: the +Second Report Release date.7 + +7 On February 28, 2014, SEC staff requested an electronic copy (i.e., a “snapshot”) of BDO’s audit work papers at +the moment when BD O released its audit report for AmTrust’s 2013 consolidated annual financial statements and +ICFR. SEC staff identified the predated work papers and audit deficiencies by comparing these “snapshot” work +papers on the Second Report Release date to BDO’s final, archived work papers. + + +9 + + +a. Incomplete Journal Entry Testing + +32. BDO’s audit plan identified improper journal entries as a fraud risk factor related to +management’s potential override of internal controls. To address this risk, the audit team planned +to perform journal entry testing for evidence of possible material misstatement due to fraud, as +required under AU Section 316, Consideration of Fraud in a Financial Statement Audit (“AU § +316”). See AU § 316.58-62. During the Consolidated Audit, the audit team failed to perform any +journal entry testing for the second half of the year (July 2013 through December 2013) before the +Second Report Release Date. But the audit team loaded two placeholder work papers, signed them +on February 27, 2014 , and signed several incomplete audit steps for journal entry testing in the +audit program. Specifically, the audit team loaded and signed a BDO template for performing and +documenting journal entry testing. The audit team also loaded and signed a journal entry testing +spreadsheet from the prior year ’s work papers. Bertuglia also signed the BDO template +placeholder w ork paper on February 28, 2014 , even though it did not document any work +performed, evidence obtained or conclusions reached. After the Second Report Release Date, the +audit team performed the incomplete procedures and documented them by overwriting existing +documentation in the placeholder work papers, thus preserving the original, predated sign-off dates +in APT. +b. Incomplete Internal Controls Testing +33. BDO’s audit plan included testing of internal control processes for premium +underwriting, treasury and investment s, entity -level controls and share -based compensation. +During the Consolidated Audit, the audit team failed to complete certain testing for these internal +control areas before the Second Report Release Date . But the audit team signed-off on an +incomplete control testing work paper and loaded and signed a placeholder work paper. The audit +team also signed incomplete audit program steps for internal controls testing . Nagdimov signed +incomplete control testing work papers on February 27 and 28, 2014, and Bertuglia signed the +predated placeholder work paper on March 3, 2014. After the Second Report Release Date, the +audit team performed the incomplete procedures and documented them by overwriting existing +documentation in these work papers, thus preserving the original, predated sign-off dates in APT. + +34. In December 2013, an audit team member also loaded and signed blank BDO +templates for share-based compensation and another internal control process as placeholder work +papers. After the Second Report Release Date, the team member documented his work in the +templates, thus preserving the original, predated preparer sign-off dates in APT. + +c. Incomplete Substantive Testing for Material Accounts +35. BDO’s audit plan included substantive audit procedures for material accounts, +including various procedures concerning premium revenue, premium receivable, and share-based +compensation. The planned audit procedures for premium revenue also included substantive + + +10 + +procedures for certain insurance programs. During the Consolidated Audit, the audit team failed to +complete certain substantive audit procedures for these material accounts. +36. For certain premium revenue testing, an audit team member loaded and signed a +placeholder work paper on February 25, 2014, and signed the incomplete audit step in BDO’s audit +program. Green signed the placeholder work paper as the engagement quality review partner on +March 3, 2014. After the Second Report Release Date , the team me mber performed the +incomplete procedures and documented them by overwriting existing documentation in the +placeholder work papers, thus preserving the original, predated sign-off dates in APT. +37. BDO’s audit plan included substantive audit procedures for workers’ compensation +premium receivable, one of the Company’s most significant line s of business. The audit team +member responsible for this work for three of the Company’s largest insurance subsidiaries signed +interim work papers in January 2014 but failed to complete all of the year-end procedures before +the Second Report Release Date. Shortly before the Second Report Release Date, Bertuglia signed +one of these incomplete work papers and Green signed two of these incomplete work papers, +despite the failure to document work performed, evidence obtained or conclusions reached for the +year-end procedures. After the Second Report Release Date, the team member performed the +incomplete year-end procedures and documented them by overwriting existing do cumentation in +these interim work papers, thus preserving the original preparer and reviewer sign -off dates in +APT. +38. BDO’s audit plan also included substantive audit procedures for share -based +compensation. The audit team failed to complete some of these audit procedures before the +Second Report Release Date. These work papers were not improperly predated but the audit +procedures were performed and documented after the Second Report Release Date. + d. Other Incomplete Audit Procedures for Risk of Fraud +39. BDO’s audit plan included several audit procedures to address the risk of fraud, as +required under AU § 316, including vendor fraud testing. During the Consolidated Audit, the audit +team failed to complete audit procedures for vendor fraud testing before the Second Report +Release Date. An audit team member loaded and signed a placeholder work paper for this testing +on February 27, 2014. After the Second Report Release Date, the team member performed the +audit procedures and documented them by overwriting existing documentation in the work paper, +thus preserving the original, predated sign-off date in APT. +Bertuglia’s and Nagdimov’s Violations of PCAOB Standards + + a. Failure to Supervise and Exercise Due Professional Care + (AS 10 and AU § 230) + +40. Under PCAOB Auditing Standard No. 10, Supervision of the Audit Engagement +(“AS 10”), “the engagement partner is responsible for the engagement and its performance. + + +11 + +Accordingly, the engagement partner is responsible for proper supervision of the work of +engagement team members and for compliance with PCAOB standards . . . .” AS 10.3 . +Additionally, “[e]ngagement team members who assist the engagement partner with supervision of +the work of other engagement team members a lso should comply with the requirements in this +standard with respect to the supervisory responsibilities assigned to them .” AS 10.4. The +engagement partner and, as applicable, other engagement team members performing supervisory +activities, should, among other things, “review the work of engagement team members to +evaluate whether: (1) [t]he work was performed and documented; (2) [t]he objectives of the +procedures were achieved; and (3) [t]he results of the work support the conclusions reached.” +AS 10.5. +41. PCAOB Auditing Standard AU 230, Due Professional Care in the Performance of +Work (“AU § 230”) , requires auditors to exercise due professional care in the planning and +performance of an audit and the preparation of an audit report. AU § 230.01. Due professional +care requires the auditor to exercise professional skepticism, which is an attitude that includes a +questioning mind and a critical assessment of audit evidence. AU § 230.07. Due professional care +also requires the auditor to consider the comp etency and sufficiency of evidence , and since +evidence is gathered and evaluated throughout the audit, professional skepticism should be +exercised throughout the audit process. AU § 230.08 . The exercise of due professional care +allows the auditor to obtain reasonable assurance about whether the financial statements are free of +material misstatement, whether caused by error or fraud, or whether any material weaknesses exist +on the date of mana gement’s assessment of ICFR. AU § 230.10. The auditor’s objective is to +obtain sufficient appropriate evidential matter to provide a reasonable basis for forming an opinion. +AU § 230.11. +42. As a result of the conduct described above, Bertuglia and Nagdimov failed to +properly supervise the audit team and exercise due professional care during the Consolidated +Audit. In particular, Bertuglia and Nagdimov failed to properly evaluate whether: (i) the audit +complied with PCAOB standards, including audit documentation standards; (ii) necessary audit +procedures were completed before the audit report was released; and (iii) the audit team obtained +sufficient audit evidence to support BDO’s audit report. +43. Bertuglia authorized the release of BDO’s audit report even though necessary audit +procedures were not completed and the audit evidence obtained did not comply with PCAOB +standards. Bertuglia also signed work papers that lacked sufficient evidence to support the audit +team’s conclusions. Bertuglia also failed to properly supervise the audit team’s compliance with +audit documentation standards for additional audit work that was performed after the audit report +was released. As a result, Bertuglia violated AS 10 and AU § 230. +44. Additionally, Nagdimov violated AS 10 and AU § 230 when he instructed the audit +team to predate their incomplete work papers and audit programs. He also violated these standards +when he failed to report the true status of the Consolidated Audit work to Bertuglia and Green +before they released BDO’s audit report. + + +12 + + b. Failure to Properly Examine Journal Entries For Evidence of Possible + Material Misstatement Due to Fraud (AU § 316, AU § 230 and AS 15) +45. Under AU § 316, “the auditor has a responsibility to plan and perform the audit to +obtain reasonable assurance about whether the financial statements are free of material +misstatement, whether caused by error or fraud.” AU § 316.01.8 Additionally, AU § 316 +prescribes certain audit procedures to specifically address the risk of management override of +controls, including examining journal entries and other adjustments for evidence of possible +material misstatement due to fraud . See AU § 316.57-62. Material misstatements of financial +statements due to fraud often involve, among other things, the manipulation of financial reporting +through recording journal entries and other adjustments at the end of a reporting period . The +auditor should “design procedures to test the appropriateness of journal entries recorded in the +general ledger and other adjustments . . . made in the preparation of the financial statements.” AU +§ 316.58. For example, the auditor should identify and select journal entries and other adjustments +for testing and examine supporting documentation. AU § 316.61 -62. AU § 316 requirements +concerning fraud risks also emphasize the need for auditors to exercise due professional care and +professional skepticism. AU § 316.13; see also AU § 230.01, .07-.08, and .10-.11. +46. Under PCAOB Auditing Standard No. 15, Audit Evidence (“AS 15”), an “auditor +must plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a +reasonable basis for his or her opinion.” AS 15.4. +47. As a result of the conduct described above, Bertuglia failed to comply with AU § +316 because the audit team did not complete journal entry testing before the audit report was +released.9 Consequently, Bertuglia also failed to exercise due professional care and professional +skepticism, fail ed to obtain reasonable assurance that AmTrust’s 2013 consolidated annual +financial statements were free of material misstatement, and failed to obtain sufficient appropriate +audit evidence to provide a reasonable basis for the opinions in BDO’s audit report, as required by +AU § 230 and AS 15. + c. Failure to Perform Sufficient Tests of Internal Controls and Substantive + Audit Procedures to Obtain Sufficient Evidence to Support the Audit + Opinions (AS 5, AS 13, AS 14 and AS 15) +48. PCAOB Auditing Standard No. 5, An Audit of Internal Control Over Financial +Reporting That Is Integrated with An Audit of Financial Statements (“AS 5”), establishes +requirements to test and evaluate internal control over financial reporting. When auditing internal +control over financial repor ting in an integrated audit, AS 5 requires, amon g other things, the +auditor to obtain sufficient evidence to support the auditor ’s opinion on internal control over + +8 See also AU Section 110, Responsibilities and Functions of the Independent Auditor, at para. 2. +9 During the Consolidated Audit , Nagdimov was not responsible for supervising or reviewing year-end audit +procedures for journal entry testing. + + +13 + +financial reporting as of year-end. AS 5.7. The auditor should also properly plan the audit of +internal control over financial reporting and properly supervise the engagement team members. +AS 5.9. The auditor should test those controls that are important to the auditor’s conclusion about +whether the compa ny’s controls sufficiently address the assessed risk of misstatement to each +relevant assertion. AS 5.39. The auditor must also test those entity -level controls that are +important to the auditor ’s conclusion about whether the company has effective intern al control +over financial reporting. AS 5.22.10 +49. PCAOB Auditing Stand ard No. 13, The Auditor ’s Responses to the Risks of +Material Misstatement (“AS 13”), establishes requirements regarding designing and implementing +appropriate responses to the risks of material misstatement . AS 13.1. The audit procedures +performed in response to the assessed risks of material misstatement can be classified into two +categories: (i) tests of controls ; and (ii) substantive procedures. AS 13.1-3, .8, and .10. If the +auditor plans to assess control risk at less than the maximum . . . , the auditor must obtain evidence +that the controls selected for testing were designed and operating effectively during the entire +period for which the auditor plans to rely on controls to modify the substantive procedures in the +financial statement audit. AS 13.16. When substantive procedures are performed at an interim +date, the auditor should cover the remaining period by performing substantive procedures, or +substantive procedures combined with tests of controls, that provide a reasonable basis for +extending the audit conclusions from the interim date to the period end. AS 13.45. +50. AS 14 establishes requirements regarding the auditor’s evaluation of audit results +and determination of whether he or she has obtained sufficient appropriate audit evidence. AS +14.1. When evaluating audit results, the auditor must conclude whether sufficient appropriate audit +evidence has been obtained to support his or her opinion on the financial statements. AS 14.33. +51. AS 15 states than an “auditor must plan and perform audit procedures to obtain +sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion.” AS 15.4. +52. As a result of the conduct described above, Bertuglia failed to comply with these +standards because the audit team did not complete their testing of internal controls for the +Consolidated Audit before the audit report was released. Similarly, Nagdimov also failed to +comply with these standards to the extent that he was responsible for supervising the internal +controls testing that was incomplete when the audit report was released. +53. Bertuglia and Nagdimov also failed to appropriately respond to the risks of material +misstatement because the audit team did not complete substantive audit procedures that were +designed to address the assessed risks of material misstatement , as required by AS 13. +Consequently, Bertuglia and Nagdimov also failed to adequately evaluate audit evidence and +obtain sufficient evidence as required by AS 14 and AS 15. + +10 See also AS 12, Identifying and Assessing Risks of Material Misstatement (“AS 12”), at para. 40. + + + +14 + +d. Failure to Prepare and Retain Required Audit Documentation + (AS 3 and AU § 230) + +54. PCAOB Auditing Standard No. 3, Audit Documentation (“AS 3”), requires an +auditor to prepare and retain documentation that provides a wri tten record of the basis for the +auditor’s conclusions. Audit documentation also facilitates the planning, performance, and +supervision of the engagement, and is the basis for review ing the quality of the work because it +provides the reviewer with written documentation of the evidence supporting the auditor ’s +significant conclusions. AS 3.1-.2 and .5. +55. Audit documentation must clearly demonstrate that the work wa s in fact +performed. AS 3.6. Audit documentation must also 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 ob tained, 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 3.6. If +the auditor cannot determine or demonstrate that sufficient procedures were performed, sufficient +evidence was obtained, or appropriate conclusions were reached, the auditor should comply with +the provisions of AU §390, Consideration of Omitted Procedures After the Report Date. AS 3.9. +56. Before the report release date ,11 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. After the report release date, a complete and final set of audit documentation +should be assembled for retention no more than 45 days later (the documentation completion date). +AS 3.15. Circumstances may require additions to audit documentation after the report re lease +date. AS 3.16. 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. AS 3.16. Furthermore, auditors should not discard +any previously existing documentat ion in connection with obtaining and documenting evidenc e +after the report release date. AS 3.A56. If the auditor obtains and documents evidence after the +report release date, the auditor should refer to AU § 390, Consideration of Omitted Procedures +After the Report Date, and AU § 561, Subsequent Discovery of Facts Existing at the Date of the +Auditor’s Report. AS 3.A56. +57. AU § 230 requires auditors to exercise due professional care in the planning and +performance of an audit and the preparation of an audit report. AU § 230.01. +58. As a result of the conduct described above, Bertuglia and Nagdimov violated AS 3 +and AU § 230 because: (i) the audit team improperly predated incomplete work papers and audit + +11 The report release date is the date the auditor grants permission to use the auditor’s report for the company’s +financial statements. AS 3.A41. + + + +15 + +programs, which intentionally preceded the report release dates and did not accurately reflect the +dates when audit procedures were actually completed or reviewed ; (ii) the audit team failed to +properly document the audit procedures they performed, and the evidence they obtained, after the +report release dates; (iii) the audit team improperly discarded audit documentation that existed on +the report release dates by overwriting such documentation in connection with obtaining and +documenting evidence after the report release dates; (iv) the audit team failed to sign the predated +work papers again when the audit work was actually completed; (v) the audit team failed to +document their change in audit approach using the higher, consolidated materiality threshold; and +(vi) the audit team failed to document their assessment of omitted procedures under AU § 390. +59. Nagdimov violated AS 3 and AU § 230 because he instructed the audit team to +predate their incomplete work papers and audit programs before the First Report Release Date . +His improper instructions also extend to the audit documentation failures that occurred after the +report release dates, which served to continue and further the misleading nature of the audit team’s +predated documentation in the work papers and audit programs. +60. Bertuglia violated AS 3 and AU § 230 because he failed to remediate the audit +team’s predated documentation. Bertuglia further violated these standards because he also signed +some of the predated work papers, and because he signed work papers that he never actually +reviewed. In fact, Bertuglia signed numerous work papers in the file, including work papers he +never actually reviewed, because he used his review signatures as a “management tracking tool” in +APT to identify new work papers when they were added to the file. His practice of signing work +papers that he never reviewed violated AS 3 and AU § 230. +61. Bertuglia also violated AS 3 and AU § 230 because he failed to remediate the audit +team’s documentation failures that occurred after the report release dates, and because he failed to +document his assessment of omitted audit procedures under AU § 390. Bertuglia’s failure to +document this analysis also violated BDO’s audit policies in effect during the Consolidated Audit. +Green’s Violations of PCAOB Standards + +a. Failure to Perform Appropriate Engagement Quality Review + (AS 7 and AU § 230) + +62. PCAOB Auditing Standard No. 7, Engagement Quality Review (“AS 7”), +establishes requirements for an engagement quality review and concurring approval of issuance for +each audit engagement. The objective of the engagement quality reviewer is to perform an +evaluation of the significant judgments made by the engagement team and the related conclusions +reached in forming the overall conclusion on the engagement, and in preparing the engagement +report, in order to determine whether to provide concurring approval of issuance. AS 7.2. To +evaluate such judgments and conclusions, the engagement quality reviewer should, to the extent +necessary: (1) hold discussions with the engagement partner and other members of the engagement +team, and (2) review documentation. AS 7.9. Additionally, in an audit, the engagement quality + + +16 + +reviewer should evaluate, among other things, the engagement team’s assessment of, and audit +responses to, (1) significant risks identified by the engagement team, including fraud risks, and (2) +other signi ficant risks identified by the engagement quality reviewer through perform ing the +procedures required by this standard. AS 7.10. +63. The engagement quality reviewer should also evaluate whether the engagement +documentation that he or she review ed when performing the review (1 ) indicates that the +engagement team responded appropriat ely to significant risks, and (2 ) supports the conclusions +reached by the engagement team with respect to the matters reviewed. AS 7.11. In an audit, the +engagement quality reviewer may provide concurring approval of issuance only if, after +performing with due professional care the review required by this standard, he or she is not aware +of a significant engagement deficiency. AS 7.12. +64. Documentation of the engagement qual ity review should contain sufficient +information to enable an experienced auditor, having no previous connection with the engagement, +to understand the procedures performed by the engagement quality reviewer and include +information that identifies: (1) the engagement quality reviewer; (2) the documents reviewed by +the engagement quality reviewer; and (3) the date the engagement quality reviewer provided +concurring approval of is suance. AS 7.19. Documentation of the engagement quality review +should also be included in the audit engagement documentation. AS 7.20. +65. AU § 230 requires auditors to exercise due professional care in the planning and +performance of an audit and the preparation of an audit report . Due professional care requires +auditors to exercise professional skepticism and consider the competency and sufficiency of audit +evidence to provide a reasonable basis for forming an opinion. See AU § 230.01, .07-.08, and .10- +.11. +66. As a result of the conduct described above, Green violated AS 7 and failed to +exercise due professional care under AU § 230 because he provided his concurring approval of +issuance to release BDO’s audit report even though work papers in significant risk ar eas did not +have sufficient documentation of the performed procedures, appropriate audit evidence obtained, +or conclusions reached by the audit team. Green also failed to follow BDO’s audit policies in +effect during the Consolidated Audit, which required him to review the audit team’s journal entry +testing. +67. Green further violated AS 7 and AU § 230 when he provided his concurring +approval of issuance despite the omitted audit procedures , which constituted a significant +engagement deficiency , because the audit team had failed to obtain sufficient evidence in +accordance with PCAOB standards. 12 Green also violated these standards when he failed to + +12 Under AS 7, a significant engagement deficiency exists in an audit when (1) the engagement team failed to obtain +sufficient appropr iate evidence in accordance with PCAOB standards, (2) the engagement team reached an +inappropriate overall conclusion on the subject matter of the engagement, (3) the engagement report is not appropriate +in the circumstances, or (4) the firm is not independent of its client. AS 7.12. + + +17 + +review and evaluate the audit team’s assessment of these omitted procedures under AU § 390, and +when he failed to alert the audit team to the absence of necessary documentation that would allow +Green to perform his review and evaluation of the audit team’s AU § 390 assessment. Finally, +Green violated these standards when he signed work papers that he did not actually review. +E. VIOLATIONS + +68. As a result of the conduct described above, Respondents Bertuglia, Green, and +Nagdimov 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. In relevant part, +Section 4C(b) of the Exchange Act and Rule 102(e)(1)(iv) of the Commission’s Rules of Practice +define “improper pro fessional conduct” as one of three classes of conduct: (1) intentional or +knowing conduct, including reckless conduct, that results in a violation of applicable +professional standards; (2) a single instance of highly unreasonable conduct in circumstances f or +which heightened scrutiny is warranted; or (3 ) repeated instances of unreasonable conduct that +indicate a lack of competence to practice before the Commission. +F. FINDINGS + +69. Based on the foregoing, the Commission finds that Respondents Bertuglia and +Green engaged in improper professional conduct pursuant to Sections 4C(a)(2) and 4C(b)(2) of the +Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice based upon repeated +instances of unreasonable conduct. +70. Based on the foregoing, the Commission finds that Respondent Nagdimov engaged +in improper professional conduct pursuant to Section s 4C(a)(2), 4C(b)(1) and 4C(b)(2) of the +Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice based upon intentional +or knowing conduct, including reckless conduct, and repeated instances of unreasonable conduct. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the agreed +sanctions in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice, Respondent Bertuglia is denied the privilege of appearing or +practicing before the Commission as an accountant. + +1. After three years from the date of this Order, Respondent Bertuglia + + + + +18 + +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 +Securities Exchange Act of 1934). Such an application must +satisfy the Commission that Bertuglia’s work in his practice +before the Commission as an accountant will be reviewed either +by the independent audit committee o f 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 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 + +c. an independent accountant. + + Such an application must satisfy the Commission that: + +i. Bertuglia, 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; + +ii. Bertuglia, 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 the respondent’s or the firm’s quality +control system that would indicate Bertuglia will not receive +appropriate supervision; + +iii. Bertuglia has resolved all disciplinary issues with the +PCAOB, and has complied with all terms and conditions of + + +19 + +any sanctions imposed by the PCAOB (other than +reinstatement by the Commission); and + +iv. Bertuglia 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 Bertuglia 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 Bertuglia’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. + +B. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice, Respondent Green is denied the privilege of appearing or +practicing before the Commission as an accountant. + +1. After one year from the date of this Order, Respondent Green 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 +Securities Exchange Act of 1934). Such an application must +satisfy the Commission that Green’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 + + +20 + +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 + +c. an independent accountant. + + Such an application must satisfy the Commission that: + +i. Green, or the pub lic 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; + +ii. Green, 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 the respondent’s or the firm’s quality control +system that would indicate Green will not receive appropriate +supervision; + +iii. Green 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 + +iv. Green 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 regis tration, inspections, +concurring partner reviews and quality control standards. + +2. The Commission will consider an application by Green to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he has res olved 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 Green’s character, integrity, professional conduct, or + + +21 + +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. + +C. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice, Respondent Nagdimov is denied the privilege of appearing or +practicing before the Commission as an accountant. + +1. After five years from the date of this Order, Respondent Nagdimov +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 fi nancial 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 Nagdimov’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 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 + +c. an independent accountant. + + Such an application must satisfy the Commission that: + +i. Nagdimov, or the pub lic 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; + + + +22 + +ii. Nagdimov, 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 the respondent’s or the firm’s quality +control system that would indicate Nagdimov will not +receive appropriate supervision; + +iii. Nagdimov 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 + +iv. Nagdimov 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 re gistration, inspections, +concurring partner reviews and quality control standards. + +2. The Commission will consider an application by Nagdimov 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 Nagdimov’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. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3993.txt b/raw/aaer/2018/AAER-3993.txt new file mode 100644 index 0000000000000000000000000000000000000000..e49f7e9f8cf1e9c3c2ae9f521956166a6692a4a2 --- /dev/null +++ b/raw/aaer/2018/AAER-3993.txt @@ -0,0 +1,250 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84562 / November 9, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3993 / November 9, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18891 + + +In the Matter of + +Pyxus International, 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 Pyxus International, Inc., which was previously +known as Alliance One International, Inc. (“Alliance One” or “Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, +Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + + +III. + 2 + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY + +1. This matter concerns violations of the reporting, books and records, and internal +accounting control provisions of the Exchange Act by Alliance One, a tobacco processing company, +from at least 2011 to 2015. Throughout the period, the processes and control activities designed to +support the amounts of inventory, deferred crop costs, and the revenue transactions at Alliance +One’s subsidiary in Kenya, Alliance One Tobacco (Kenya) Ltd. (“Alliance One Kenya”), were not +sufficient at a local or regional level. Additionally, Alliance One Kenya’s management overrode +existing controls and failed to report accounting errors to Alliance One. As a result, Alliance One +filed with the Commission materially misstated financial statements in annual and quarterly reports +from at least 2011 through the second quarter of 2015. + +2. In May 2016, Alliance One filed restated financial statements to correct the +accounting errors of Alliance One Kenya, determined that its internal control over financial +reporting had not been designed or operating effectively, and reported the existence of material +weaknesses in its internal control over financial reporting, which had been remediated. The +correction of these errors decreased the reported amount of inventory by approximately $32 million, +decreased accounts receivable by approximately $7 million, and decreased retained earnings by +approximately $39 million. + +RESPONDENT + + 3. Alliance One, a Virginia corporation based in Morrisville, North Carolina, +purchases, processes, and sells tobacco leaf. Alliance One’s stock is registered under Section 12(b) +of the Exchange Act and is listed on the New York Stock Exchange (NYSE: AOI). Alliance One +has a wholly-owned Kenyan subsidiary, Alliance One Kenya. The subsidiary’s operations were +downsized and certain operations were largely terminated in 2015. Alliance One maintains +regional operating and financial management in Africa (“Alliance One Africa”), which oversaw +Alliance One Kenya’s operations. Alliance One Kenya’s financial statements were consolidated +into Alliance One’s financial statements. Other than inter-company sales, Alliance One Kenya had +one main customer during the relevant time frame (“the Customer”). + +FACTS + + 4. Alliance One publicly announced that it was restructuring Alliance One Kenya in +June 2015 and terminated the majority of Alliance One Kenya’s management in September 2015. +In October 2015, Alliance One Africa’s regional management identified discrepancies in Alliance +One Kenya’s physical inventory and learned that Alliance One Kenya’s Customer disputed 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 +outstanding accounts receivable balance. Alliance One began an internal investigation, which it +reported to the Commission in November 2015. + + 5. On November 7, 2015, Alliance One disclosed that it was delaying filing a +quarterly report due to accounting discrepancies it had discovered at Alliance One Kenya. +Alliance One announced that the discrepancies consisted primarily of inventory variances and +accounts receivable, and could date back to 2008 or earlier. In February 2016, Alliance One +announced that its consolidated financial statements for most of its quarterly and annual periods +dating back to its fiscal year ended March 31, 2012 could no longer be relied upon, and that +accounting discrepancies could also affect earlier periods. + + 6. Alliance One’s misstated financial statements resulted from improper accounting +practices at Alliance One Kenya from at least 2011 through September 2015, including recording +fictitious sales, improper revenue recognition, overstating inventory, and understating costs. +Alliance One misstated the trade and other receivables, tobacco, cash, advances, other assets, and +fixed assets, accounts payable and accrued expenses line items in its financial statements. For the +same period, Alliance One reported material weaknesses in inventory and accounts receivable +processes, ineffective controls, and controls that were overridden by personnel at Alliance One +Kenya. + + 7. Employees at Alliance One Kenya made, or directed individuals in the Alliance +One Kenya accounting department to make, improper accounting entries which understated costs, +overstated inventory, recorded fictitious sales to the Alliance One Kenya’s Customer, and +improperly overstated revenue. + + 8. With respect to fictitious sales and improper revenue recognition, Alliance One +Kenya sent an invoice to the Customer just before the end of each fiscal year for the amount of +estimated sales in the coming year, and recognized revenue for the full amount of this invoice, +even though only a small portion of the sales had occurred. As actual sales to the Customer +occurred throughout the following year, employees at Alliance One Kenya created manual invoices +that were not recorded in the general ledger system. No adjustments were made for any +differences between actual sales and estimated sales at year end. As a result of this invoicing +practice, the majority of revenue from the Customer was recognized prematurely. In certain +periods when actual sales were less than estimated, this practice also resulted in fictitious revenue +being recorded. This resulted in a significantly overstated Customer receivable, since the +receivable was recorded at the full amount of the invoice issued at the prior year end, but only paid +as actual sales occurred. + + 9. Alliance One Africa and Alliance One relied on representations from Alliance One +Kenya as to why the Customer’s accounts receivable balance remained large and continued to age. +Alliance One Africa and Alliance One failed to enforce or enhance existing controls to detect an +error in recording of revenue and accounts receivable. For example, while Alliance One Africa +and Alliance One requested updates from Alliance One Kenya regarding payment of aged +receivables by the Customer and noted the high outstanding balance during the quarterly account +review process, Alliance One Africa and Alliance One accepted explanations provided by Alliance + 4 +One Kenya, rather than pressing for prompt payment of the outstanding balance. Failure to +substantiate this receivable balance allowed Alliance One Kenya to continue misstating revenue +and receivables. + + 10. Alliance One Kenya’s inventory counting and valuation procedures were +insufficient to provide reasonable assurance that the amount and value of inventory on hand was +properly reflected in the subsidiary’s books and records and that the cost of inventory sold was +properly recorded. Employees at Alliance One Kenya were aware of significant ongoing +discrepancies in Alliance One Kenya’s inventory accounting practices, and that these discrepancies +were primarily due to (a) erroneous accounting entries to inflate the dry tobacco inventory balance, +and (b) using artificially low standard costs to record inventory sold without adequately adjusting +those costs to reflect the actual cost of the inventory sold or on hand. Actual costs in excess of +standard costs remained in inventory, causing an overstatement, and the artificially low costs +applied to finished goods resulted in cost of sales being understated. + + 11. On May 25, 2016, Alliance One filed a Form 10-K for the years ending March 31, +2015, 2014, and 2013, in which it restated its prior financial statements to correct these and other +errors. As of March 31, 2015, the restatement decreased the reported amount of inventory by +approximately $32 million, decreased accounts receivable by approximately $7 million, and +decreased retained earnings by approximately $39 million. The effect of the restatements on +Alliance One’s income (loss) before income taxes was to increase income by 3.83% in fiscal 2013, +increase losses by 26.74% in fiscal 2014 and by 20.07% in the quarter ended June 30, 2015, and +change income of $4.5 million to a loss of $8.3 million in fiscal 2015—a 283% decrease. Alliance +One also restated certain selected financial data for its fiscal years ended March 31, 2012 and 2011. +Alliance One also restated approximately $10.7 million in retained earnings prior to April 1, 2011, +but was unable to determine the extent of the impact of these errors in specific periods. + + 12. In its restatement, Alliance One identified that material weaknesses in its internal +control over financial reporting existed at Alliance One Kenya, including that processes and +control activities relating to the amounts of inventory recorded in the general ledger, deferred crop +costs recorded in the general ledger, and the revenue transactions recorded in the general ledger +were not effective, were incorrectly applied, or were overridden. Alliance One identified that +material weaknesses in its internal control over financial reporting existed at Alliance One Africa +and Alliance One, including that the regional review of operations in Africa was ineffective due to +the lack of adequate qualified resources to appropriately examine and investigate financial results +and that Alliance One’s fraud risk assessment was not adequately designed or implemented to +address the risks of fraud in certain origins. Alliance One also disclosed that it had remediated its +material weaknesses in internal control over financial reporting as a result of various control +enhancements and other remedial actions. + + 13. As a result of Alliance One Kenya’s improper accounting, Alliance One included +materially false and misleading financial statements and information in: (a) annual reports on Form +10-K from at least 2011 through 2015; (b) quarterly reports on Form 10-Q from at least the first +quarter of 2013 through the second quarter of 2015; and (c) current reports on Form 8-K reporting +Alliance One’s financial results from at least fiscal 2011 through the second quarter of 2015. + 5 +VIOLATIONS + + 14. As a result of the conduct described above, Alliance One violated Section 13(a) of +the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which require every +issuer of a security registered pursuant to Section 12 of the Exchange Act 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. + + 15. Because Alliance One improperly recorded its inventory, cost of sales, and revenue, +its books, records and accounts did not, in reasonable detail, accurately and fairly reflect its +transactions and dispositions of assets. + + 16. In addition, Alliance One failed to implement internal accounting controls relating +to its inventory, cost of sales, and revenue accounts which were sufficient to provide reasonable +assurances that its financial statements were accurately stated in accordance with generally +accepted accounting principles. + + 17. As a result of the conduct described above, Alliance One 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. + + 18. As a result of the conduct described above, Alliance One violated Section +13(b)(2)(B) of the Exchange Act, which requires all reporting companies to devise and maintain a +system of internal accounting controls sufficient to provide reasonable assurances that transactions +are recorded as necessary to permit preparation of financial statements in accordance with +generally accepted accounting principles. + +ALLIANCE ONE’S REMEDIAL EFFORTS AND COOPERATION +In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and the cooperation afforded the Commission staff. +Specifically, Alliance One undertook remedial efforts, including (i) through a Special +Committee of the Board of Directors, retaining independent outside counsel and a +forensic accounting firm to conduct an investigation at Alliance One Kenya and other +similarly situated subsidiaries; (ii) keeping the Commission informed throughout the +internal investigation; (iii) restating its financial statements impacted by the improper and +erroneous accounting uncovered by the investigation; (iv) hiring new accounting control +positions within the African region; and (v) implementing new internal accounting +control procedures and policies. In addition, Alliance One voluntarily shared the results, +details, and documents related to the Special Committee’s internal investigation, which +reduced the time and resources necessary for the Commission staff to conclude the +investigation. + 6 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Alliance One’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Alliance One cease and +desist from committing or causing any violations and any future violations of 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + By the Commission. + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3994.txt b/raw/aaer/2018/AAER-3994.txt new file mode 100644 index 0000000000000000000000000000000000000000..73b03bee6d186d0ddab62d4805c18bf6f4378b82 --- /dev/null +++ b/raw/aaer/2018/AAER-3994.txt @@ -0,0 +1,406 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84617 / November 19, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3994 / November 19, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18899 +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 Vantage Drilling International +(“Vantage” or “Respondent”). + +II. + +In anticipation of the institution of these proceedings, Vantage 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, Vantage 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. + +In the Matter of + +VANTAGE DRILLING +INTERNATIONAL + +Respondent. + + +III. + +On the basis of this Order and Vantage’s Offer, the Commission finds1 that: + +Summary + +1. These proceedings arise from violations of the internal accounting control +provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”), 15 U.S.C. § +78m(b)(2)(B), by Vantage Drilling Company (“VDC”). Specifically, VDC failed to devise a +system of internal accounting controls with regard to VDC’s transactions with VDC’s former +outside director, largest shareholder, and only supplier of drilling assets (“Director A”), and +failed to properly implement internal accounting controls related to its use of third-party +marketing agents. These violations occurred against a backdrop where VDC had an +ineffective anticorruption compliance program. + +2. As a result of its internal accounting control failures, VDC made substantial +payments to Director A that, among other things, created a risk that VDC was providing or +reimbursing funds that Director A intended to use to make improper payments to officials at +Petroleo Brasileiro SA Petrobras (“Petrobras”), a Brazilian state-owned oil and gas company, +in connection with obtaining an 8-year drilling services contract valued at over $1.8 billion +that benefited both Director A, as the supplier of the drilling asset, and VDC. + +Respondent and Related Entities + +3. Vantage Drilling Company (“VDC”) is organized under the laws of the Cayman +Islands and headquartered in Houston, Texas. The Company’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 Market under the Ticker “VTG.” In December 2015, VDC commenced +liquidation proceedings in the Cayman Islands. + +4. Vantage Drilling International (“Vantage”), an offshore drilling company, is +organized under the laws of the Cayman Islands and headquartered in Houston, Texas. Until +February 2016, Vantage was a subsidiary of VDC. It now owns and controls all of the tangible +assets and operations of VDC. + +Facts + +VDC was Formed and Established a Business Relationship with Director A + +5. VDC was formed in 2006 by former executives and directors of a major offshore +drilling company. After an initial public offering in May 2007, VDC sought to market itself as an +ultra-high end driller but did not own any drilling assets. During 2007, VDC identified Director +A, a Taiwanese shipping magnate that had previously placed orders at a Korean shipyard for + +1 Pursuant to Respondent’s Offer of Settlement, the SEC makes these findings in this proceeding. The findings are not +binding on any other person or entity or in any other proceeding. + + +offshore drilling rigs, as a prospective investor and/or supplier. Through a series of agreements +entered into in 2007 and 2008, VDC acquired the rights to purchase Director A’s drilling assets, +including the Titanium Explorer, an ultra-deepwater drillship, which had an expected delivery +date in 2012. In return, Director A was appointed to VDC’s board, paid $56 million in cash, and +issued 40% of VDC’s common stock – making Director A VDC’s largest shareholder. + +6. VDC did not conduct any due diligence on Director A or his related companies +to assess whether he was capable of fulfilling his contractual obligations before relying on him +as its sole source of drilling equipment and appointing him to its board of directors. + +7. In connection with VDC’s efforts to buy another drillship, the Platinum +Explorer, from Director A, Director A misrepresented the underlying terms of his payment plan +with the Korean shipyard building the drillship and falsely represented to VDC that he would +make the payments to the shipyard in advance of receiving a corresponding payment from +VDC. In September 2008, VDC learned that – not only had Director A failed to make the +installment payment to the shipyard – but he claimed to be incapable of making the payment. +In response, VDC provided Director A with $32 million to make the installment payment. +Later, VDC learned that the shipyard had granted Director A an extension, and the $32 million +was not actually due in September 2008. Despite VDC’s knowledge of the misrepresentations +by Director A, VDC did not enhance its internal accounting controls in regards to its +transactions with respect to Director A. + +8. Ultimately, VDC was unable to obtain financing for the purchase of the Titanium +Explorer outright. Instead, VDC announced on November 19, 2008 that Director A would +continue to wholly own the Titanium Explorer but that Director A would engage and pay VDC to +oversee construction of and then operate the drillship. Under the agreements memorializing these +arrangements, VDC was to be paid $5 million a year to oversee construction of the Titanium +Explorer and anticipated that it would be paid between $13 and $15 million a year to operate the +drillship. As part of the agreement, Director A also authorized VDC to market the Titanium +Explorer to potential clients. + +The Titanium Explorer Contract + +9. In early 2007, the CEO of VDC contacted a Brazilian third-party agent +(“Agent”) and requested his assistance in marketing VDC to Petrobras. While VDC policies +required due diligence and prudent safeguards against improper payments to be in place with an +agent who acted on its behalf with regard to foreign governments on international business +development before retaining the agent, neither was done with respect to the Agent. Instead, +without these internal accounting controls in effect, the Agent assisted VDC in responding to a +marketing inquiry released by Petrobras’ International Division (“PBID”) on August 15, 2008 +seeking proposals from drilling operators who could deliver a new ultra-deepwater drillship. + +10. During the bidding process, the Agent was contacted by an individual who +identified himself as an intermediary (“Intermediary A”) for a senior PBID official (“PBID +Official”) and who informed the Agent that the PBID Official was willing to award the contract +to VDC in return for a payment of money. Intermediary A introduced the Agent to another +person also identified as an intermediary for the PBID Official (“Intermediary B”) who + + +explained that a portion of the requested bribe was earmarked for the Brazilian politicians that +appointed the PBID Official to his position at Petrobras. + +11. At the Agent’s request, the CEO and another VDC Director (“Director B”) +arranged a meeting in New York City between Director A and the Agent on November 22, +2008, for the purported purpose of familiarizing the Agent with Director A, the owner of the +drillship being marketed to PBID. In actuality, and unbeknownst to the CEO and Director B, +the Agent had requested the meeting in order to speak directly to Director A to ask whether +Director A was willing to make the improper payments the PBID Official demanded. At a +private meeting between the Agent and Director A, the Agent told Director A that in order to +win the contract, Director A would have to pay a commission to the Agent and an additional +payment to the PBID Official. Although the Agent and Director A did not discuss specific +amounts, Director A agreed to personally make the payments and to travel to Brazil to finalize +the details. + +12. The Agent personally agreed to make an additional payment of $1 million to a +PBID manager that was PBID’s chief negotiator for the contract. At the request of the Agent, +the PBID manager agreed to defer receipt of the bribe payment until 2012 when the Titanium +Explorer began working for Petrobras and the Agent would begin receiving his commission +payments. In return for the promised $1 million, the PBID manager supported VDC in the +bidding process over its competitors. + +13. During the ensuing weeks, the Agent told the CEO that Petrobras officials were +still concerned about entering a contract with VDC that required the use of a drillship that VDC +did not own and wanted to meet with Director A in Brazil. In actuality, the purpose of the +meeting, which took place on December 20, 2008, in Rio de Janeiro, was to formalize the +arrangement whereby Director A would make payments from his personal funds to the Agent +and Intermediary B with the understanding that the money would be used by the Agent and +Intermediary B to pay Petrobras officials. As a result of the meeting, Director A signed +consulting agreements with the Agent and Intermediary B, respectively, requiring Director A to +make payments in three installments: (1) $6,200,000 when PBID signed the drilling services +contract with VDC; (2) $4,650,000 six months after the contract was signed and (3) $4,650,000 +when the drillship began working for PBID. In total, Director A agreed to pay $31 million +from his personal funds which equated to approximately 1.7% of the expected contract value. + +14. On February 4, 2009, Petrobras and VDC signed the Titanium Explorer contract +for an eight-year term and with an approximate value of $1.8 billion. A month later, VDC and +Director A formalized their agreement regarding the Titanium Explorer, which required VDC +to send Director A all revenues received from Petrobras less VDC’s management fee. This +agreement contemplated that Director A would continue to make the necessary installment +payments to the shipyard to fund the construction of the drillship. Despite the fact that Director +A had already made misrepresentations to VDC related to the Platinum Explorer – once again – +VDC failed to establish adequate internal accounting controls with respect to its transactions +with Director A. + + + +The Improper Payments + +15. Two weeks after the Titanium Explorer drilling contract was signed, Director A +transferred approximately $6,200,000 to the Agent and Intermediary B, respectively. On +September 10, 2009, Director A made the second improper payment that was due. + +16. After the Agent received these payments from Director A, the Agent transferred +$550,000 to the former PBID manager on September 17, 2010. Before these funds were +transferred, the Agent and the former PBID manager agreed that the manager would accept half +of the $1 million that previously had been promised in lieu of waiting to receive the total sum +in 2012 when the Titanium Explorer began working for Petrobras. + +17. Before the third improper payment was due from Director A, he sustained +substantial financial losses in his other businesses and ran out of funds to continue financing the +construction of the Titanium Explorer. To avoid defaulting on its contract with Petrobras, VDC +decided to purchase the Titanium Explorer from Director A. After lengthy negotiations, +Director A agreed to sell the Titanium Explorer to VDC in exchange for: (1) $169 million in +cash, (2) VDC’s agreement to make all future payments due to the shipyard, and (3) VDC’s +forgiveness of $33.6 million in debt Director A owed to VDC under the Titanium Explorer +construction management agreement. Once again, VDC failed to have sufficient internal +accounting controls associated with the transaction. To fund the purchase, VDC conducted a +debt offering in April 2012. + +Director A’s and the Agent’s Corrupt Acts Went Undetected by VDC Despite Red +Flags + +18. Although VDC’s internal accounting controls prohibited making payments in +violation of the FCPA both directly and indirectly through third parties and required that +suspected violations of the FCPA be reported to the Chief Compliance Officer, VDC did not +effectively respond to red flags indicating a risk that Director A and the Agent had promised +and made improper payments to Petrobras officials to obtain the Titanium Explorer contract. +First, on September 5, 2012, a consultant who had worked for Director A during the +negotiations to sell the Titanium Explorer to VDC, hinted to the CEO that Director A expected +that VDC would reimburse Director A for his “payment to P.” Second, around the time the +third and final improper payment was due, the Agent reported to the CEO that he had +personally made a “final payment” regarding the Titanium Explorer contract. Third, on August +9, 2013, a Brazilian reporter sent the CEO and VDC’s marketing department an email +requesting clarification for a story she was writing concerning alleged payments made by +Director A to obtain the Titanium Explorer contract. In her email, the reporter explicitly stated +that Director A had promised three payments but defaulted on the final payment due and asked +VDC whether it was aware of the arrangement. + +19. VDC did not follow-up on these red flags, and took no steps to determine +whether any payments VDC made to Director A were made to fund or reimburse him for +improper payments. Moreover, with regard to the reporter’s inquiry to the CEO, the CEO did +not take or direct others to take any action to understand the nature of and basis for the +payments described in the reporter’s email. + + + +The Bribery Scheme Was Exposed + +20. Ultimately, Director A’s scheme to make improper payments to the Agent and +Intermediary B and the Agent’s payment to a former PBID official were exposed as part of a +sweeping criminal investigation in Brazil named “Operation Car Wash” that uncovered a +decades-long bribery scheme involving Petrobras officials and Brazilian politicians extracting +bribes in return for contract awards. + +21. On July 27, 2015, the Agent entered into a collaboration agreement with the +Brazilian Federal Public Prosecutor’s Office. As part of his agreement, the Agent admitted to +participating in the scheme involving the Titanium Explorer contract. On February 1, 2016, the +Agent was convicted of corruption and money laundering. Director A was also charged in +Brazil for his part in the scheme. + +22. On August 31, 2015, Petrobras cancelled the Titanium Explorer contract. At the +time of cancellation, VDC had realized net profits of approximately $106 million on the +contract. + +23. As a result of the revenue loss caused by the contract cancellation, VDC was +unable to meet its debt obligations. Consequently, VDC entered into a restructuring agreement +with its secured creditors. Pursuant to the restructuring agreement, VDC transferred its tangible +assets and operations to Vantage, a wholly-owned subsidiary of VDC and holder of VDC’s +senior secured debt, in exchange for a $61.5 million promissory note. On December 3, 2015, +Vantage commenced Chapter 11 bankruptcy proceedings in the United States Bankruptcy +Court for the District of Delaware. Shortly thereafter, VDC initiated liquidation proceedings in +the Cayman Islands. Vantage reemerged from bankruptcy on February 10, 2016. + +VDC’s Insufficient and Unenforced Internal Accounting Controls + +24. VDC failed to devise and maintain a sufficient system of internal accounting +controls. Specifically, VDC’s internal accounting controls in regards to its transactions with +Director A were insufficient in relation to the heightened risk of conducting business in the oil +and gas industry in Brazil. The lack of internal accounting controls surrounding VDC’s +payments to Director A increased the risk that VDC provided or reimbursed Director A the +funds used to make the corrupt payments. + +25. In addition to failing to devise any meaningful internal accounting controls +around its transactions with Director A, VDC also did not follow its own internal accounting +controls by failing to conduct due diligence on the Agent and follow-up on red flags indicating +that Director A and the Agent made corrupt payments in connection with the Titanium Explorer +contract. + +Legal Standards and FCPA Violations + +26. As a result of the conduct described above, Vantage violated Section 13(b)(2)(B) +of the Exchange Act, which requires issuers to devise and maintain a system of internal + + +accounting controls sufficient to provide reasonable assurances that (i) transactions are +executed in accordance with management’s general or specific authorization; (ii) transactions +are recorded as necessary (I) to permit preparation of financial statements in conformity with +generally accepted accounting principles or any other criteria applicable to such statements, and +(II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance +with management’s general or specific authorization; and (iv) the recorded accountability for +assets is compared with the existing assets at reasonable intervals and appropriate action is +taken with respect to any differences. + +27. 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. + +Commission Consideration of Vantage’s Cooperation, Remedial Efforts and +Current Financial Condition + +28. In determining to accept the Offer, the Commission considered Vantage’s +cooperation and remedial efforts. Additionally, in determining the disgorgement amount and +not to impose a penalty, the Commission has considered Vantage’s current financial condition +and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities. + +29. The Company provided significant cooperation to the Commission during the +entire course of its investigation. Vantage voluntarily disclosed information obtained during its +own internal investigation, highlighted key documents, and disclosed facts that the Commission +would not have been able to readily and independently discover. Further, Vantage took the +following remedial actions to strengthen its ability to prevent or detect corruption, including: +(1) reconstituting its Board of Directors on February 10, 2016; (2) obtaining a completely new +management team, including a new Chief Executive Officer, Chief Financial Officer, and +General Counsel, Chief Compliance Officer & Corporate Secretary; (3) severing its +relationship with the Agent; (4) undertaking a comprehensive review of and enhancing its anti- +corruption policies and procedures in consultation with outside counsel and consultants; (5) +improving its third-party due diligence procedures; (6) undertaking a review of all of its +relationships with joint venture partners, agents, customs brokers, and freight forwarders; and +(7) committing additional resources to the compliance and internal audit functions at a time +when the company reduced its overall expenses. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent shall cease and desist +from committing or causing any violations and any future violations of Section 13(b)(2)(B) of + + +the Exchange Act. + +B. Respondent shall, within 14 days of entry of this Order, pay disgorgement of +$5,000,000.00 (the “Disgorgement Amount”) 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 within 14 days of when due additional interest shall +accrue pursuant to SEC Rule of Practice 600. If Respondent has become a debtor under the +Bankruptcy Code before the Disgorgement Amount is paid to the Commission, then, unless +otherwise ordered by the bankruptcy court having jurisdiction over Respondent’s bankruptcy +case, Respondent shall pay the Disgorgement Amount to the Commission within 14 days of the +bankruptcy court’s approval of such payment. If timely payment is not made within 14 days of +when due additional interest shall accrue pursuant to SEC Rule of Practice 600, unless 11 U.S.C. +§ 502(b)(2) applies. 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 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 Vantage +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 Charles Cain , Unit Chief, FCPA +Unit, 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 its cooperation in a Commission investigation and its financial condition. 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 brought by the +Commission, 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/2018/AAER-3995.txt b/raw/aaer/2018/AAER-3995.txt new file mode 100644 index 0000000000000000000000000000000000000000..c4c26f6023ced70dbd6921d36c575fdb8cd76435 --- /dev/null +++ b/raw/aaer/2018/AAER-3995.txt @@ -0,0 +1,375 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84718 / December 4, 2018 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 33314 / December 4, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3995 / December 4, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18912 + + + +In the Matter of + +KCAP Financial, Inc. + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND SECTION +9(f) OF THE INVESTMENT COMPANY +ACT OF 1940, 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”) and Section 9(f) of the Investment Company Act of 1940 +(“Investment Company Act”), against KCAP Financial, Inc. (“KCAP” or “Respondent”). + +II. + + In anticipation of the institution of the se proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) that the Commission has determined to accept. Respondent admits the +facts set forth in Paragraphs 1 through 38 below, acknowledges that its conduct violated the federal +securities l aws, 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 and Section 9(f) of the Investment +Company Act of 1940, 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. From at least 2010 through the third quarter of 2014 (the “relevant period”) KCAP, +a New York based company that elected to be regulated as a business development company +(“BDC”) under the Investment Company Act, received approximately $35.8 million from its +wholly-owned Asset Manager Affiliates (“AMAs”) and improperly recorded and distributed the +entire amount as taxable dividends when, in fact, approximately $22.3 million (62.3%) of the funds +received were actually return of capital. + +2. Generally Accepted Accounting Principles (“GAAP”) allow distributions by +investment companies to be recorded as dividends only when they are paid from current or +accumulated tax basis earnings and profits. KCAP recorded the entirety of the distributions as +dividends despite the fact that it prepared quarterly tax accrual worksheets demonstrating that +certain AMAs lacked current or accumulated tax basis earnings and profits from which to pay +dividends in certain reporting periods. + +3. In short, KCAP failed to: (i) analyze the distributions it received from the AMAs to +determine whether the funds it received were paid from current or accumulated tax basis earnings +and profits, or another source; and (ii) record the distributions in conformity with GAAP. + +4. In order to maintain its status as a Regulated Investment Company (“RIC”) for U.S. +federal income tax purposes, and to avoid paying an excise tax on undistributed income, KCAP +distributed approximately 98% of its investment income to shareholders each year, including +income received from the AMAs, through quarterly distribution payments. + +5. By failing to record the distributions it received from the AMAs in conformity with +GAAP, however, a significant portion of the quarterly distributions KCAP paid to its shareholders +also were a return of capital and not dividends. The quarterly distribution payments were not, +however, accompanied by a contemporaneous written statement disclosing the source of the funds +distributed. Instead, KCAP issued tax Forms 1099 to its shareholders at year end, but those Forms +1099 inaccurately described the distributions as dividends because KCAP had recorded the +distributions it received from the AMAs incorrectly. + +6. Although this accounting error was not quantitatively large as a percentage of net +asset value or net income, KCAP determined that the erroneous recording and recognition of the +distributions it received from the AMAs was material because it impacted tax-basis distributable + +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. + + +income, which KCAP identified as one of two main metrics used by analysts and investors to +evaluate BDCs. + +7. Accordingly, in March 2015, KCAP restated its financial statements for the years +2010 through 2013 and the first three quarters of 2014. In doing so, KCAP disclosed that the +AMA distribution accounting error was material and that the company had identified a material +weakness in the internal control over financial reporting regarding the way it recorded those +distributions. + +8. More specifically, KCAP disclosed in the restatement that its management had +assessed the effectiveness of the company’s internal control over financial reporting and +determined that it “did not maintain effective internal control over financial reporting as of +December 31, 2014.” + +9. Accordingly, as explained further below, KCAP violated the reporting, books and +records, and internal accounting controls provisions of the Exchange Act and Investment Company +Act as well as the payment and distribution provisions of the Investment Company Act. + +RESPONDENT + +10. KCAP is an internally managed, non-diversified closed-end investment company +that elected to be regulated as a BDC under the Investment Company Act. KCAP is incorporated in +the State of Delaware and is headquartered in New York City. KCAP’s common stock is registered +with the Commission pursuant to Section 12(b) of the Exchange Act and trades on the NASDAQ +Global Select Market under the symbol “KCAP.” Because KCAP has elected to be treated as an +RIC for U.S. federal income tax purposes, and to avoid paying an additional excise tax, KCAP +distributes to its shareholders each year approximately 98% of its net ordinary income. + +FACTS + +A. KCAP’s AMAs + +11. During the relevant period, KCAP invested in as many as four wholly-owned asset +management companies. Even though the AMAs are wholly-owned subsidiaries of KCAP, in +accordance with Article 6 of Regulation S-X, KCAP does not consolidate the AMAs’ investments. + +12. Instead, KCAP’s AMA investments are reported at fair value in KCAP’s financial +statements. While the AMAs, unlike KCAP, are not public companies, they are required to have +consolidated audited financial statements included in KCAP’s annual reports on Forms 10-K +pursuant to Rule 3-09 of Regulation S-X. + +13. While the AMAs’ financial statements can be filed on a consolidated basis, each +AMA must separately file its own federal tax return. Both KCAP and the AMAs typically filed +their tax returns in September of the following tax year (i.e., KCAP and the AMAs filed their tax +returns for tax year 2011 in September 2012), or several months after the filing of the financial +statements for that corresponding year. + +14. Although KCAP had the ultimate responsibility for complying with GAAP and the +federal tax rules, because they lacked in-house tax expertise, KCAP and the AMAs engaged +external tax advisers throughout the relevant period. The services provided by the external tax +advisers included review of quarterly AMA tax accruals prepared by KCAP, tax return preparation +for both KCAP and the AMAs, review of KCAP’s Form-1099-DIV information, and review of the +tax-related notes to the financial statements in KCAP’s SEC filings. + +15. KCAP financial executives served in those same capacities for the AMAs and were +responsible for managing and reviewing the work of the external tax advisers. + +B. Relevant Accounting and Tax Rules + +16. FASB Accounting Standards Codification Topic 946 (“ASC 946”) states that +“[d]istributions that represent returns of capital shall be credited to investment cost rather than +investment income.” ASC 946-320-35-5. Returns of capital are “distributions by investment +companies in excess of tax-basis earnings and profits.” ASC 946-320-20-Glossary. + +17. In addition, ASC 946-20-50-8 states that “[d]ividends paid to investors shall be +disclosed as a single line item in the statement of changes in net assets except return of capital +distributions, which shall be disclosed separately. The notes shall disclose the tax basis components +of the dividends paid (that is, either from ordinary income, capital gains, or tax return of capital).” + +18. Similarly, the relevant tax rule expressly states that dividends can only be paid out of +current year earnings and profits (E&P) and/or accumulated E&P. IRS Rule, Topic 404 – +Dividends. “[Dividends are] paid out of the earnings and profits of the corporation.” Id. + +C. KCAP’s Distributions from the AMAs + +i. Determining the Distribution Amount from the AMAs to KCAP +19. Each quarter, KCAP determined that the total amount of the distributions the +AMAs paid it were “dividends” without regard to whether the AMAs had current or accumulated +tax-basis earnings and profits from which to make the distribution. KCAP subsequently reported +the AMA distributions as dividends in its current, quarterly, and annual SEC filings, the latter two +of which were reviewed by its auditor. + +20. During the first quarter of each year, KCAP prepared a consolidated AMA dividend +budget based on actual results for the first quarter and estimates for the next three quarters. As the +year progressed, KCAP updated the budget on a rolling quarter basis to reflect actual results by +quarter. + +21. The “dividend” budget for the AMAs did not take into consideration whether the +AMAs had tax-basis earnings and profits as defined by GAAP and IRS rules. The AMAs +determined how much cash was available for each to distribute by reviewing their bank statements +and deducting the funds needed to pay their outstanding bills. + +22. Essentially, KCAP and the AMAs used cash as a proxy for taxable income, and +KCAP determined that – since the distributions from the AMAs came from cash – the distributions +could be treated for tax and financial reporting purposes as dividends. KCAP did not, however, +analyze the distributions from the AMAs for compliance with GAAP or the federal tax rules +governing dividends. + +ii. Information Indicating the Improper Classification of Distributions +23. Although KCAP recorded the AMA distributions as dividends, KCAP had certain +information that should have prompted it to record significant portions of the AMAs’ distributions +as return of capital. + +24. First, each quarter, and at year end, KCAP prepared, and the external tax advisers +reviewed, spreadsheets tracking the AMAs’ tax accruals. Throughout the relevant period, these +AMA tax accrual spreadsheets reflected that certain of the AMAs had taxable losses, as well as +accumulated Net Operating Losses (“NOLs”). Accordingly, it was not possible that all of the cash +distributions from the AMAs to KCAP were made from tax-basis earnings and profits (current or +accumulated) and, thus, could not properly have been recorded as dividends in conformity with +GAAP. + +25. Second, for virtually all the tax years during the relevant period, the AMAs filed tax +returns correctly identifying that certain of the distributions to KCAP had not come from current or +accumulated tax-basis earnings and profits. + +26. More specifically, many of the AMAs’ tax returns included tax Form 5452 +(“Corporate Report of Non-Dividend Distributions”), which indicated that certain distributions +were paid from sources “other than earnings and profits.” Although the returns were prepared by +the external tax advisers, KCAP received and reviewed copies of the AMAs’ tax returns. + +27. Because KCAP recorded the AMA distributions incorrectly in its books and +records, however, the tax returns prepared for KCAP by the external tax advisers incorrectly +treated the distributions as dividends instead of return of capital. KCAP also received and +reviewed these tax returns and authorized their filing with the IRS. + +D. KCAP’s Earnings and Profits Analysis and Discovery of Error + +28. One way to ensure that distributions are properly classified in conformity with ASC +946 as either a dividend or return of capital is to perform an Earnings and Profits Analysis (“E&P +Analysis”). In an E&P Analysis, a company calculates its current year tax-basis earnings and +profits as well as its historical tax basis earnings and profits to determine whether distributions are +being made out of current or accumulated tax-basis earnings and profits. + +29. Despite its practice of distributing approximately 98% of investment income each +year and its external tax advisers’ suggestion that it conduct such an analysis for the AMAs in the +fall of 2013, KCAP did not perform its first E&P Analysis until early 2015 when its new auditor +requested that KCAP complete one. KCAP subsequently hired new external tax advisers to +conduct an E&P Analysis, which identified the scope of the accounting error described above in +March 2015 (before KCAP filed its 2014 Form 10-K). + +E. The Restatement + +30. On March 31, 2015, KCAP filed its 2014 Form 10-K, restating certain financial +statements to correct the material error related to its accounting for the AMA distributions. +Specifically, KCAP restated its financial statements for fiscal years 2010 through 2013, all quarters +in 2013, and the first three quarters of 2014. + +31. KCAP determined that the accounting error was material because it impacted the +tax-basis distributable income, which KCAP identified as one of the two main metrics used by +analysts and investors to evaluate BDCs. + +32. In its restatement, KCAP disclosed that management had “identified that there was +a material weakness in [its] internal control over financial reporting relating to the Company’s +recording of distributions from its wholly-owned Asset Management Affiliates” and that “the +Company did not maintain effective internal control over financial reporting as of December 31, +2014.” In an internal review memo assessing the company’s internal control over financial +reporting, KCAP also noted that management had identified that there was a design deficiency in +its system of internal control over financial reporting such that there was no control in place to +ensure that the amounts received from its AMAs were properly recorded as dividends or return of +capital. In short, regarding the way it recorded distributions it received from the AMAs, KCAP +failed to adopt and implement policies and procedures that were reasonably designed to prevent +violation of the federal securities laws. + +33. As reflected in the following table, and pursuant to Item 301 of Regulation S-K, +KCAP restated its selected financial data for the prior five years:2 + +Year Total AMA +Dividend/Distribution +Amount Comprising Return of +Shareholder Capital +Error +% +2010 $4,500,000 $4,500,000 100% +2011 $1,910,000 $850,000 45% +2012 $4,700,000 $3,485,002 74% +2013 $12,750,000 $7,014,955 55% +2014 $11,900,000 $6,432,086 54% + +F. Notices to Shareholders Accompanying Investment Company Distributions + +34. As noted, in order to maintain its status as an RIC for federal income tax purposes, +and to avoid paying an excise tax on undistributed income, KCAP distributed approximately 98% + +2 KCAP made the same accounting error with respect to the AMA distributions it received +in 2008, recording all of the approximately $1.3 million paid as dividends when the entire +amount was actually a return of capital. KCAP received no AMA distributions in 2009. +of its investment income to shareholders each year, including income received from the AMAs, +through quarterly distribution payments. + +35. As a result of the accounting errors described above, a significant portion of the +quarterly distributions KCAP made to its shareholders were return of capital and not dividends. At +the time it paid the distributions, KCAP did not provide its shareholders with a contemporaneous +written statement explaining the sources from which the payments were made. + +36. KCAP did not send contemporaneous written statements to its shareholders because +it mistakenly believed, based at least in part on the advice of counsel, that it could comply with +Section 19(a) of the Investment Company Act at year end in connection with the preparation of its +tax returns when it was able to determine its taxable income for the full year. + +37. Accordingly, KCAP attempted to communicate the sources of the distributions it +made to its shareholders through the tax Forms 1099 it issued to them via its transfer agent in +January of the following year. In January 2014, for example, KCAP issued Forms 1099 to its +shareholders attempting to describe the distributions paid in tax year 2013. + +38. As a result of the accounting errors described above, however, those Forms 1099 +also were inaccurate. Thus, until the time of the restatement, KCAP never accurately disclosed to +its shareholders the source of the distributions it paid them during the relevant period. + +VIOLATIONS + +39. Section 13(a) of the Exchange Act requires issuers with securities registered under +Section 12 to file such periodic and other reports as the Commission may prescribe and in +conformity with such rules as the Commission may promulgate. 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 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). + +40. Section 13(b)(2)(A) of the Exchange Act requires issuers with securities registered +under Section 12 to “make and keep books, records, and accounts, which, in reasonable detail, +accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” Section +13(b)(2)(B) of the Exchange Act requires issuers with securities registered under Section 12 to +devise and maintain a system of internal accounting controls sufficient to, among other things, +provide reasonable assurances that transactions are recorded as necessary to permit the preparation +of financial statements in conformity with generally accepted accounting principles. + +41. Investment Company Act Rule 38a-1(a)(1) requires registered investment +companies to adopt and implement written policies and procedures reasonably designed to prevent +violation of the federal securities laws. + +42. Section 19(a) of the Investment Company Act prohibits investment companies from +paying any dividend or making any distribution in the nature of a dividend payment, wholly or +partly, from any source other than current-year or accumulated net income unless the payments are +accompanied by contemporaneous written statements to shareholders disclosing the sources of the +distributions. Rule 19a-1 thereunder specifies that the written statement must be on a separate +paper and clearly indicate what portion of the payment is from: 1) net income (not including +capital gains); 2) capital gains; and 3) paid-in surplus or other capital source. The purpose of +Section 19(a) and Rule 19a-1 is to afford shareholders adequate disclosure of the sources from +which the payments are made so shareholders will not believe that a fund portfolio is generating +investment income when, in fact, distributions are paid from other sources, such as shareholder +capital or capital gains. + +43. By engaging in the conduct described above, KCAP violated Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 +thereunder; and Section 19(a) of the Investment Company Act and Rules 19a-1 and 38a-1(a)(1) +thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent KCAP’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act and Section 9(f) of the Investment +Company Act, Respondent KCAP 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 as well as Section 19(a) of the Investment Company +Act and Rules 19a-1and 38a-1(a)(1) thereunder. + + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-3996.txt b/raw/aaer/2018/AAER-3996.txt new file mode 100644 index 0000000000000000000000000000000000000000..87028b2c7c31fcf1f7446cefbde7633a942b72bb --- /dev/null +++ b/raw/aaer/2018/AAER-3996.txt @@ -0,0 +1,504 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84763/ December 10, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3996 / December 10, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18917 + + +In the Matter of + +AGRIA 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 Agria Corporation (“Agria” or “Respondent”). + +II + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +And-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing A Cease-And-Desist Order (“Order”), as set forth below. + +III + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on +any other person or entity in this or any other proceeding. + +2 + +Summary + +1. Agria violated the anti-fraud, reporting, books and records, and internal accounting +control provisions of the federal securities laws. Between 2010 and 2013, Agria engaged in a +course of fraudulent accounting related to its July 2010 divestiture of Taiyuan Primalights III +Modernized Agriculture Development Co., Ltd. (“P3A”), a consolidated affiliated entity. Agria +materially overstated the value of the consideration it received in the transaction and concealed +material losses as a result of the divestiture. + +2. The divestiture involved a related-party exchange between Agria and P3A’s +president. Agria transferred its ownership interest in P3A to P3A’s president in exchange for +14.393 million shares of Agria’s common stock. Agria incurred a loss on the transaction, which +it materially underreported. In doing so, Agria ignored controlling accounting guidance and +manipulated its valuation of the shares it received. + +3. As part of the transaction Agria received land use rights from P3A relating to +13,500 acres of leased agricultural property in China. The leased properties were located in a +remote mountainous area which had a severe lack of rainfall, other natural water sources and +infrastructure for irrigation. Although P3A had in the past used the lands for sheep breeding, +Agria was not engaged in that business and was otherwise unable to use the lands for any +revenue generating purpose from the time of divestiture. Nor was Agria able to develop a +business plan that would generate future cash flows. In addition, legal defects in the leases +obtained by P3A from the original lessors and in the lease transfer agreements between P3A and +Agria precluded Agria from selling or subleasing the properties. Agria’s senior management was +aware of these legal defects prior to the P3A divestiture. + +4. The changes in use of the lands and the legal defects constituted impairment +indicators that required Agria to perform an impairment analysis to determine whether it would +be able to recover the carrying value of the land use rights. Agria’s senior financial officers +knowingly or recklessly failed to perform the analysis and to impair the carrying value of the +land use rights. + +5. In early 2013 Agria did perform an impairment analysis and wrote off the full +$57.3 million carrying value of the land use rights. The impairment decision was based on facts +that were known or readily knowable in 2010: The land had no economic viability, and the legal +defects precluded Agria from realizing any salvage value through resale. Because the facts +giving rise to the impairment had existed since 2010, Agria’s decision to record the impairment +in 2013, rather than restating its financial statements for 2010 through 2012, was improper. + +6. Agria’s delay in impairing the carrying value of the land use rights and its +subsequent failure to restate its 2010-2012 financial statements allowed it to hide the impact of +the impairment on its 2010 balance sheet and income statement and on its 2011 and 2012 balance +sheets. +7. By engaging in the conduct described in this Order, Agria violated 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-16 +thereunder. +3 + +Respondent + +8. Agria is a Cayman Islands company engaged in the agricultural business, with +operations in the People’s Republic of China, New Zealand, and Australia. Agria’s corporate +headquarters during the relevant period was in Hong Kong. Agria is a foreign private issuer whose +ordinary shares were registered with the Commission pursuant to Exchange Act Section 12(b). +Agria’s American Depository Shares (“ADSs”), each representing two ordinary shares, traded on +the New York Stock Exchange under the symbol “GRO.” The NYSE suspended trading in +Agria’s ADSs on November 3, 2016 and they were delisted on January 2, 2017. + +Other Relevant Entity + +9. P3A was a limited liability company established in China with three primary +product lines: corn seed, sheep breeding, and seedlings. Prior to the July 2010 divestiture, P3A +served as Agria’s primary operating entity in China. Because government regulations restricted +foreign ownership of the seed and sheep businesses, Agria conducted its Chinese operations +through contractual arrangements with P3A and its shareholders, all of whom were required to be +Chinese citizens. P3A’s financial results were recorded in Agria’s consolidated financial +statements prior to the divestiture. + +Background + +A. The July 2010 Divestiture of P3A + +10. In early 2010 Agria negotiated an agreement with P3A’s president for Agria to +divest its P3A ownership interest. The divestiture resulted in Agria discontinuing all its sheep- +breeding operations, leaving it to focus on its seed business in China. + +11. The divestiture involved the following exchange: Agria transferred its 100% +ownership interest in P3A to P3A’s president, and in return P3A’s president transferred his +ownership of 11.5% of Agria’s outstanding shares. Agria also acquired, for no additional +consideration, the land use rights held by P3A. Agria accounted for the P3A divestiture as a +discontinued operation. + +12. Agria retained three external advisory firms in order to assess the fairness of the +terms of the divestiture. + +13. A Chinese law firm issued a legal opinion regarding the land use rights. The +rights were to nine parcels of land covering 13,500 acres. P3A had entered into long-term lease +agreements with village collectives. The parcels were located in a remote area of Shanxi Province, +far from Agria’s primary bases of operations in Beijing and Shenzhen. The land itself was of poor +soil quality, in an area with little natural rainfall, serious water shortages, and no infrastructure for +irrigation. + +14. The legal opinion identified defects relating to the legality of the leases that P3A +had originally obtained. Among the defects, eight of the nine lessors did not hold valid title +4 + +certificates; lessors for two of the parcels were not the legal owners; the 30-year leasing period for +eight of the lots was ten years in excess of the statutory limit under Chinese law; and the lease +agreements for seven of the parcels were not registered with the local government. The opinion +further advised that because Agria had not obtained written consent of the underlying lessors, the +lease transfer agreements from P3A to Agria were not “legal and effective.” Agria and its senior +management knew that neither P3A nor Agria had obtained the lessors’ written consent to the lease +transfer agreements and that they would be unable to do so in the future. + +15. A consulting firm prepared a report on the fair value of Agria’s 100% equity +interest in P3A’s assets, as well as a report on the calculated value of the rental prepayments for +the unexpired lease terms underlying the land use rights. The consulting firm advised that the +calculation report was not a “valuation” of the land use rights. The calculation was based on +“certain assumptions and selective data,” provided by Agria, the most important of which was +the assumption that the properties could “be legally leased or sub-leased in the market without +any legal defects in terms of relevant tenancy.” The calculations made “no allowance . . . for any +potential title defects,” such as those identified by the Chinese law firm. + +16. A financial advisory firm separately assessed the impact of the divestiture on +Agria’s fair market value. For the purposes of this assessment, Agria instructed the firm to +calculate the fair value of the P3A net assets that Agria divested as the difference between the +fair value of P3A’s total assets and the calculated value of the land use rights rental prepayments. + +17. Agria’s board of directors approved the terms of divestiture on July13, 2010. + +B. Agria’s Fraudulent Accounting Relating to the P3A Disposal + +18. As Agria prepared its 2010 financial statements, it was required to determine its +gain or loss on the P3A divestiture using Generally Accepted Accounting Principles (“GAAP”). +Under GAAP, the gain or loss is determined by measuring the difference between the fair value +of the consideration received and the carrying value of the assets divested. The consideration +received consisted of 14.393 million shares of Agria common stock. The assets divested +consisted of P3A’s total assets less the acquired land use rights. + +19. Accounting Standards Codification 845-10 (“ASC 845-10”) provides a +framework for accounting for transactions that include nonmonetary elements. It provides +specific guidance for nonreciprocal, “split-off” transactions, such as the P3A divestiture, that +involve the transfer of a subsidiary to another party in exchange for the entity’s shares held by +that party. Under ASC 845-10, the split-off transaction should be accounted for based on the fair +value of the assets transferred or the fair value of the shares reacquired, whichever is the more +clearly evident basis of measurement. + +20. The fair value of the Agria shares received (transferred by P3A’s president to +Agria) was reflected by the market price of those shares. Agria’s ADSs, each of which +represented two shares of common stock, were publicly traded on the NYSE, and the market +price of the ADSs was readily observable. + +5 + +21. Instead of relying on the objective evidence available to it, Agria employed the +assumption that the fair value of the shares it received was equal to a calculated value of the P3A +net assets it divested. That calculation relied on the two reports prepared by the consulting firm +during the due diligence process, namely the valuation report on P3A’s total assets and the +calculation report relating to the retained land use rights. + +22. Agria’s valuation was improper for two reasons. First, because Agria’s ADSs +were publicly traded on the NYSE, the available market price rather than the calculated value of +P3A net assets divested was the more clearly evident basis for measuring the fair value of the +shares. Second, the calculated value of P3A net assets divested relied on assumptions that +Agria’s senior financial management knew to be false. The most important of these false +assumptions was that the land use rights were free of legal defects. + +23. Agria’s improper valuation allowed it to book an inflated value of $1.88 per share +for the common stock it received. During the relevant time, based on the market price of $1.27 +per ADS, Agria’s common stock effectively traded at a price of $0.635 per share. The improper +valuation enabled Agria to conceal a loss on the P3A divestiture of approximately $17.5 million, +instead of the loss it reported of only $0.2 million. + +C. Agria’s Fraudulent Accounting Relating to Impairment of Land Use Rights + +i. Agria Failed to Perform an Impairment Assessment of the Land +Use Rights in Connection with its 2010 Financial Statements. + +24. ASC 360-10 provides that a long-lived asset shall be tested for impairment +whenever events or changes in circumstances indicate that its carrying value may not be +recoverable. (ASC 360-10-35-21). The carrying value of an asset is not recoverable if it exceeds +the sum of the undiscounted cash flows expected to result from the asset’s use and eventual +disposition. (ASC 360-10-35-17). + +25. ASC 360-10-35-21 provides examples of impairment indicators, including: + + a significant adverse change in the extent or manner in which a long-lived asset +is being used or in its physical condition; + + a significant adverse change in legal factors or in the business climate that +could affect the value of a long-lived asset, including an adverse action or +assessment by a regulator. + +(ASC 360-10-35-21b and c). + +26. During the preparation of Agria’s 2010 financial statements, the company’s senior +financial management knew of two impairment indicators resulting from the P3A divestiture. +First, having divested its sheep-breeding operations, Agria was no longer able to use the land to +generate revenue. Second, Agria had been advised by counsel that without written consent of the +lessors, the lease transfer agreements were neither legal nor effective. Both developments +6 + +constituted significant adverse changes indicating that the carrying value of the land use rights +might not be recoverable. + +27. With the existence of the two significant adverse changes, the controlling +accounting guidance required Agria to estimate the future cash flows “directly associated with and +…expected to arise as a direct result of the use and eventual disposition of the asset” to determine +whether they exceeded the carrying amounts of the land use rights, and if not, how much the +carrying amounts should be impaired. Agria’s senior financial officers were familiar with the +accounting guidance and knowingly or recklessly failed to conduct this analysis. + +28. Had Agria conducted an impairment analysis, it would have had to write down the +carrying value of the land use rights. Agria knew that it had been unable to identify any economic +use for the land and therefore had no basis for projecting a cash flow. In June 2011 Agria’s then- +CFO confirmed to its outside auditors that the company had not yet been able to develop a feasible +business plan. + +29. It was also clear to Agria that the land use rights had no salvage value because, as +counsel had advised, the lease transfer agreements were not “legal and effective” without written +consent of the original lessors. In mid-June 2011, Agria’s senior financial officers were aware that +its outside counsel refused to sign a written confirmation to the company’s auditors that Agria “can +legally sublease its right to the leased land to a third party.” + +ii. Agria Continued its Failure to Impair the Value of the Land Use +Rights in 2011 and 2012. + +30. Agria changed its fiscal year-end beginning with 2011, from December 31 to June +30. On December 16, 2011, Agria filed a Form 20-F Transition Report containing financial +statements for the six months ended June 30, 2011. On October 10, 2012, Agria filed its 2012 +Form 20-F with audited financial statements covering the year ended June 30, 2012 and the six +months ended June 30, 2011. Agria continued to record the amortized carrying values for the land +use rights in its financial statements for both reporting periods. + +31. Agria knowingly or recklessly failed to assess the land use rights for possible +impairment for both its 2011 and 2012 financial statements. The impairment indicators that +required an assessment in connection with the 2010 financial statements continued to exist in those +years. Agria was still unable to use the land in a commercially viable manner, and remained +unable to realize any salvage value through resale. + +iii. Agria Improperly Impaired the Land Use Rights in 2013 Rather +than Restating its Financial Statements for 2010 through 2012. + +32. On March 13, 2013, Agria filed a Form 6-K reporting its financial results for the six +months ended December 31, 2012. It reported that “[i]n accordance with US GAAP Accounting +Standards Codification (ASC) Section 360, without clear visibility as to its cash flow generating +capacity in the foreseeable future, we determined that it was appropriate to record an impairment +provision of RMB357.3 million (US$57.3 million) for the six months ended December 31, 2012, +7 + +which was the aggregate sum of our unamortized prepayments for the [land use rights].” The +$57.3 million reflected the amortized carrying value of the land use rights as of year-end 2012. + +33. Agria based its decision to take a full impairment of the carrying value of the land +use rights on two factors that were known to exist at the time the company acquired the rights to +the land: (i) The leased lands had no expected future economic viability, primarily due to the poor +soil quality, the lack of rainfall and irrigation infrastructure, and the cost of fertilizer; and (ii) as +determined by an independent valuation specialist, the legal defects that Agria’s counsel had +identified in 2010 “severely affected” the land values and prevented the company from reselling +the land use rights. As a result, Agria’s senior managers knew or were reckless in not knowing that +the company should have recorded the impairment in prior periods rather than in 2013. + +34. Agria’s fiscal year 2013 financial statements incorporated the impairment of the +land use rights in both its balance sheet and income statement. + +35. Under GAAP a company is required to restate its prior year financial statements to +correct prior period material errors resulting from, among other things, oversight or misuse of facts +that existed at the time the financial statements were prepared. ASC 250-10. + +36. As confirmed by the company’s internal documentation, Agria’s 2013 decision to +write off the full carrying value of the land use rights was based on facts known or readily +knowable at the time of the P3A divestiture. Agria’s senior financial officers knew or were +reckless in not knowing that the prior period errors were material to Agria’s financial statements in +those earlier periods. + +37. Agria knew or was reckless in not knowing that, following its impairment of the +land use rights in 2013, it was required to restate its financial statements for 2010-2012. Agria +failed to restate its prior financial statements. + +D. Agria’s Accounting Failures were Material. + +38. Agria’s divestiture of P3A was effective as of July 13, 2010. In fiscal year 2010 +Agria reported $222 million in shareholders’ equity and a net loss of $8.9 million on revenue of +$4.3 million. By overvaluing the stock it received in the P3A divestiture, Agria concealed a loss of +approximately $17.45 million, which would have tripled its net reported loss. Further, by failing +to impair the carrying value of the land use rights Agria concealed an additional loss of $59.2 +million. Had the carrying value of the land use rights been impaired in 2010 as required, Agria’s +reported net loss would have increased by a factor of six, and the equity on its balance sheet would +have been reduced by 27%. + +39. Agria’s delay in impairing the carrying value of the land use rights was equally +material to its 2011 and 2012 financial statements. In 2011 Agria reported $224 million in +shareholders’ equity, and in 2012 it reported $228 million in shareholders’ equity. As a result of its +failure to impair the carrying value of the land use rights, Agria materially overstated its assets. + +8 + +E. Agria Made Inaccurate and Materially Misleading Disclosures +Regarding the Basis for the Impairment of the Land Use Rights. + +40. On March 13, 2013, Agria issued a press release on Form 6-K in which it +announced the full impairment of the land use rights. That disclosure was materially misleading +because it presented that the reasons for the impairment as having arisen only in late 2012 and +early 2013, when in truth the impairment was based on facts that had been known to Agria since +2010. The press release stated that Agria had conducted “extensive trial plantation of grass” and +that the evaluation of that effort was “completed in late 2012 and indicated that it would not be +economically viable to carry out large scale commercial plantation on this land.” In fact, however, +Agria had known since 2010 that the lands could not be used for any commercially viable purpose +and had no salvage value. These misrepresentations were material because it concealed from +investors the fact that Agria had carried a materially overvalued asset on its books for several +years. + +Legal Standards and Violations + +41. Under Exchange Act Section 21C(a) the Commission may impose a cease-and- +desist order upon any person who is violating, has violated, or is about to violate any provision of +the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, or +would be a cause of the violation, due to an act or omission the person knew or should have known +would contribute to such violation. + +42. Exchange Act Section 10(b) makes it unlawful “[t]o use or employ, in connection +with the purchase or sale of any security[,] . . . any manipulative or deceptive device or contrivance +in contravention of” rules enacted by the Commission. Rule 10b-5 implements Section 10(b) and +makes it unlawful for any person, directly or indirectly, in connection with the purchase or sale of +any security: (a) to employ any device, scheme, or artifice to defraud; (b) to make any untrue +statement of a material fact or to omit to state a material fact necessary in order to make the +statements made, in light of the circumstances under which they were made, not misleading; or +(c) to engage in any act, practice, or course of business which operates or would operate as a fraud +or deceit upon any person. Agria violated Section 10(b) and Rule 10b-5(b) thereunder by +materially underreporting the loss incurred on its disposal of P3A and overvaluing the value of the +shares acquired in that transaction. Agria knowingly or recklessly reported a materially inflated +carrying value of the land use rights for fiscal years 2010 through 2012. Agria also improperly +recorded the impairment of the land use rights in 2013, rather than in prior years. + +43. Exchange Act Section 13(a) and Rule 13a-1 thereunder require that every issuer of +a security registered pursuant to Exchange Act Section 12 file with the Commission annual and +other reports as the Commission may require. Exchange Act Rule 13a-16 requires foreign private +issuers to furnish certain information to the Commission in Form 6-K reports. Exchange Act Rule +12b-20 requires that, in addition to the information expressly required to be included in a statement +or report filed with the Commission, there shall be added such further material information, if any, +as may be necessary to make the required statements, in light of the circumstances under which +they are made not misleading. Agria violated these reporting provisions by filing with the +9 + +Commission annual reports for fiscal years 2010 through 2013 that materially misstated its +financial position. + +44. Exchange Act Section 13(b)(2)(A) requires all 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. Agria violated Section 13(b)(2)(A) by maintaining +false and misleading books, records and accounts concerning the loss incurred on its disposal of +P3A and the value of the shares acquired in that transaction, and the value of its land use rights for +fiscal years 2010 through 2013. + +45. 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. Agria violated the internal controls of Section 13(b)(2)(B) by failing to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +Agria’s assets were recorded appropriately. + +Findings + +46. Based on the foregoing, the Commission finds that Agria violated 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-16 +thereunder. + +Undertakings + + Agria undertakes to: + +47. Cooperate fully with the Commission’s staff (“Staff”) in any action or related +judicial or administrative proceeding or investigation commenced by the Commission, or to which +the Commission is a party, and subject to compliance with applicable law. In connection with such +cooperation, Agria Corporation undertakes to: + +i. Produce, without service of a notice or subpoena, any and all documents and +other information requested by the Staff; + +ii. Use its best efforts to cause its current and former employees to be interviewed +by the Staff at such times as the Staff reasonably may direct; and + +iii. Use its best efforts to cause its current and former employees to appear and +testify truthfully and completely without service of a notice or subpoena as may +be requested by the Staff. + +In determining whether to accept the Offer, the Commission has considered these undertakings. + +10 + +IV + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Agria Corporation’s Offer. + + Accordingly, pursuant to Exchange Act Section 21C it is hereby ORDERED that: + +A. Respondent cease and desist from committing or causing any violations and any +future violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and +Rules 10b-5, 12b-20, 13a-1, and 13a-16 thereunder. + + B. Respondent shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $3,000,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600 or +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 +Agria Corporation as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Charles E. Cain, Chief, FCPA +Unit, 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 +11 + +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/2018/AAER-3997.txt b/raw/aaer/2018/AAER-3997.txt new file mode 100644 index 0000000000000000000000000000000000000000..e0a530bffb8207de2f31c4f12c063490a4454299 --- /dev/null +++ b/raw/aaer/2018/AAER-3997.txt @@ -0,0 +1,344 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84781 / December 11, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3997 / December 11, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18921 + +In the Matter of + +The Hain Celestial Group, Inc. + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS, PURSUANT TO SECTION +21C OF THE SECURITIES EXCHANGE ACT +OF 1934, MAKING FINDINGS, AND +IMPOSING A CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) against The Hain Celestial Group, Inc. (“Respondent” or +“Hain”). + +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 (“Order”), as set +forth below. + + + + 2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +Summary + + From at least 2014 until May 2016, Hain U.S. sales personnel gave sales incentives to +certain distributors to promote sales at the end of quarters. These incentives had potential +accounting implications. In August 2016, Hain self-reported the incentives practice to the SEC and +announced it was delaying its financial reporting for fiscal year 2016. Hain ultimately determined +that no financial restatements were required, but it took the company approximately 10 months to +do so, given the existence of an internal review on a number of issues, and Hain’s inadequate +documentation of the incentives and lack of sufficient internal accounting controls to provide +reasonable assurances that the incentives were accounted for correctly. Hain disclosed in its Annual +Report for fiscal year 2016, filed in June 2017, that it had material weaknesses in its internal +controls over financial reporting. + +Respondent + + + 1. Hain is a Delaware corporation headquartered in Lake Success, New York. Hain’s +common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act +and trades on the NASDAQ (under the ticker symbol HAIN). Hain files periodic reports, including +Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange Act and +related rules thereunder. + +Background + +2. Hain is a leading marketer, manufacturer, and seller of organic and natural food and +personal care products. In its fiscal year ending June 30, 2016 (FY 2016), Hain reported $2.885 +billion in worldwide net sales, including $1.321 billion relating to the United States reporting +segment (the “U.S. Business Segment”). Over the past five years, net sales for the U.S. Business +Segment have constituted an increasingly smaller portion of Hain’s worldwide sales: While U.S. +net sales accounted for 63% of Hain’s worldwide sales in FY 2013, by FY 2016, U.S. net sales +constituted only 46% of worldwide sales. While U.S. Business Segment sales were increasing, due +to a variety of factors, the rate of year-to-date net sales growth for the U.S. Business Segment +declined over these years, from a high of 17% sales growth (FY 2014), to 6.6% sales growth (FY +2015), to declining year-to-date sales growth in the first two quarters of FY 2016 (-1.7% and - +3.3%, respectively).1 + + +1 All sales figures as originally reported. + + + 3 +3. Hain’s customer base consists principally of specialty and natural food distributors, +supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels +and club, drug and convenience stores. A portion of the products marketed by Hain in the U.S. are +sold through independent food distributors, who have access to key retailers and which purchase +products from Hain for resale to these retailers. Sales to these distributors provide Hain access to +these key retailers. + +Hain’s U.S. Business Segment: EOQ Agreements with its Largest Distributors. + +4. During Hain’s FY 2014-2016 (the “Relevant Time Period”), approximately 30% of +Hain’s net sales for its U.S. Business Segment were derived from two distributors: (1) “Distributor +1,” accounting for approximately $325-350 million in net sales annually (over 20% of Hain’s net +sales for its U.S. Business Segment), and (2) “Distributor 2,” accounting for over $115 million in +net sales annually (approximately 8% of Hain’s net sales for its U.S. Business Segment). During +this time period, Hain’s U.S. Business Segment sales teams responsible for Distributors 1 and 2 +engaged in varying degrees of “end of quarter” (“EOQ”) sales. + +5. These EOQ sales included asking Distributors 1 and 2 to purchase specific dollar +values of inventory by quarter-end, in exchange for additional incentives. These incentives varied +by distributor (and by quarter), but could include: (1) cash incentives (up to $500,000), (2) +extended payment terms (up to 90 days), (3) discounts off list price (up to 20% off), and (4) spoils +coverage, whereby Hain agreed to reimburse the distributor for products that spoiled or expired +before the distributor could sell through to retailers. None of these types of incentives are +improper; however, they could have financial reporting implications. + +Distributor #1 + +6. During the Relevant Time Period, Distributor 1 and Hain executed annual sales +contracts, stipulating to quarterly inventory sales growth targets. Distributor 1 earned financial +incentives based on meeting these growth targets. This translated in practice to Hain and +Distributor 1 agreeing, on a quarterly basis, to inventory purchasing targets. During the Relevant +Time Period, Hain’s quarterly inventory purchasing targets for Distributor 1 ranged up to $90 +million. In many quarters, however, as the quarter-end grew near, Distributor 1 communicated +to Hain’s sales personnel that it might not purchase sufficient inventory to meet its quarterly +purchasing target. Distributor 1 would predict missing its inventory purchasing target by $10, +$20, or as much as $30 million, and requested additional sales incentives to meet its target. +During the Relevant Time Period, Hain’s overall net sales for its U.S. Business Segment were +approximately $300 million per quarter. + +7. As a way to incentivize Distributor 1 to purchase sufficient inventory to meet or +exceed its agreed-upon sales growth targets, a practice developed whereby Distributor 1 and +Hain would renegotiate their quarterly terms. These renegotiations varied by quarter, but +Distributor 1 would obtain extra-contractual incentives—such as (1) cash financial incentives + + + 4 +(ranging from $75,000 to $500,000 per quarter, in those quarters in which cash incentives were +provided), (2) spoils coverage, and/or (3) occasionally extended payment terms up to 60 days— +in exchange for meeting a renegotiated inventory purchasing target. These inventory purchasing +targets were renegotiated up or down by as much as $10 million. In at least four quarters, +Distributor 1 agreed to increase its quarterly inventory purchase at Hain’s request. In a number of +quarters, Hain and Distributor 1’s renegotiation would also adjust inventory purchasing targets +for subsequent quarters. + + 8. Pursuant to its annual sales contract, Distributor 1 received a 1% off-invoice +discount intended as compensation for spoils, i.e., products that expired or spoiled in Distributor +1’s warehouses before Distributor 1 sold the products to retailers. However, pursuant to its EOQ +sales, Distributor 1 requested and received—in addition to its 1% contractual off-invoice discount +rate—reimbursement for any products purchased in an EOQ sale that ultimately expired or spoiled +before selling to retailers (“EOQ spoils”). During the Relevant Time Period, Hain paid out +increasing amounts to Distributor 1 in EOQ spoils, from $0.5 million in FY 2013, to $0.8 million +in FY 2014, $1.1 million in FY 2015, and $1.6 million in FY 2016. During this period, Hain’s +annual net sales to Distributor 1 varied from $325 to $350 million. The vast majority of the +products purchased in connection with EOQ sales to Distributor 1 ultimately sold through to +retailers. + + 9. Hain’s EOQ sales with Distributor 1 were not appropriately documented. While +Hain and Distributor 1 signed an annual contract, in no instance was the contract amended to +incorporate these EOQ agreements. Rather, these agreements were typically memorialized only in +email correspondence with the distributor. In some quarters, particular incentives, such as spoils +coverage, were agreed to orally. + +10. The inventory purchases that constituted EOQ sales—and thus were eligible for +EOQ spoils coverage—were largely based on oral understandings. Hain and Distributor 1 would +therefore frequently dispute whether specific spoiled or expired products were entitled to EOQ +spoils coverage. Generally, inventory purchased in the final month of the quarter would be +considered an EOQ sale. During the Relevant Time Period, Distributor 1 purchased 52-64% of its +inventory in or around the last month of the quarter, making approximately half of Distributor 1’s +quarterly inventory purchase eligible for this extra-contractual EOQ spoils protection. + +11. Hain lacked sufficient policies and procedures to provide reasonable assurances that +EOQ sales were accounted for properly. Hain’s sales personnel were not appropriately trained or +knowledgeable about the accounting implications of their sales practices. Further, there were +insufficient policies and procedures to monitor incentives made in sales transactions, which could +have potential revenue recognition implications. + +12. In addition, the EOQ sales with Distributor 1 were not fully communicated outside +of the sales department, to the appropriate personnel in Hain’s accounting and finance departments, +to take into consideration any relevant accounting implications. Hain lacked clear policies and + + + 5 +procedures regarding when distributor incentives required approval and/or notification beyond the +sales team (whether based on the concession’s size or character). For example, the extended +payment terms granted to Distributor 1 had not been previously disclosed to the appropriate +personnel in Hain’s accounting and finance departments, or to corporate management. + +Distributor #2 + +13. Distributor 2 was Hain’s second-largest distributor for its U.S. Business Segment, +with annual net sales of up to $117 million during the Relevant Time Period. Unlike Distributor 1, +Distributor 2 was never subject to any contractual provisions related to quarterly sales growth +targets. During the Relevant Time Period, however, a similar practice developed whereby Hain +would request Distributor 2 to purchase a specific amount of inventory by quarter-end, in exchange +for additional incentives. In a number of quarters, Distributor 2 countered Hain’s requested +volume target with a lower figure, noting its pre-existing inventory levels and communicating +concerns that inventory would expire. + +14. In addition to a volume target, Hain’s EOQ sales with Distributor 2 consisted of +incentives including: (1) a discount off invoice; (2) extended payment terms (typically 90 days); +and (3) spoils coverage. Regarding the discounts off invoice, the dollar value of these quarterly +discounts increased upward over the Relevant Time Period, from around $200,000 to nearly $1.5 +million in the final quarter of fiscal year 2016. Hain’s spoils coverage amounts to Distributor 2 +increased over the Relevant Time Period as well, reaching as high as $430,000 in the final quarter +of fiscal year 2016. As with Distributor 1, these spoils were in addition to a 1% off invoice +discount that Distributor 2 was already receiving. The vast majority of the products purchased in +connection with EOQ sales to Distributor 2 ultimately sold through to retailers. + +15. As with Distributor 1, Hain’s EOQ sales with Distributor 2 were not adequately +documented. Such arrangements were typically memorialized only in email correspondence with +the distributor. + +16. Hain had insufficient policies and procedures in place to provide reasonable +assurances that incentives offered by sales personnel were properly accounted for. Hain’s sales +personnel working with Distributor 2 were not appropriately trained or knowledgeable about the +accounting implications of their sales practices, which could have potential revenue recognition +implications. + +17. In addition, the EOQ sales with Distributor 2 were not fully communicated outside +the sales department, to the appropriate personnel in Hain’s accounting and finance departments, to +take into consideration any relevant accounting implications. For example, Hain repeatedly +provided Distributor 2 with 90-day extended payment terms, yet these terms had not been +previously disclosed to the appropriate personnel in Hain’s accounting and finance departments, or +to corporate management. + + + + 6 + +Hain’s Finance Department Discovered EOQ Sales Practices and Self-Reported to SEC. + + 18. In May 2016, Hain’s Corporate Finance Department learned that Hain had granted +extended payment terms on Distributor 1’s March 2016 EOQ sales. Hain’s Corporate Finance +Department reviewed the matter further and discovered heretofore unknown EOQ sales and +incentives. The Audit Committee of the Company’s Board of Directors conducted an internal +investigation and retained independent counsel to assist in that review. + + 19. On August 15, 2016, Hain self-reported to the SEC that the Company was +investigating EOQ sales incentives granted to certain distributors for its U.S. Business Segment, +including whether the revenue associated with those incentives was accounted for in the correct +period, as well as its internal control over financial reporting. After market close on the same day, +Hain filed a Form 8-K, disclosing these facts, as well as that its fiscal year 2016 results (fiscal year +ending June 30, 2016) would be delayed. + +20. On June 22, 2017—approximately 10 months after announcing its delayed financial +reporting—Hain filed its Annual Report on Form 10-K for its fiscal year 2016. Hain determined +that no financial restatements were required, but corrected immaterial errors to prior period +financial statements. Hain also disclosed material weaknesses in its internal control over financial +reporting—including an ineffective control environment and ineffective controls related to U.S. +revenue recognition. + +Hain’s Largest Distributors for its U.S. Business Segment Reduce Inventories as EOQ Sales +Practices End. + + 21. In fiscal year 2016, Hain engaged outside consultants to, among other things, +undertake an evaluation of its trade and marketing spend in its U.S. Business Segment, including a +review of incentives provided in connection with EOQ sales. Based on this evaluation, Hain +determined to focus its trade and marketing spend on the customer-facing (retail) level, rather than +distributor-level (which had encompassed EOQ incentives). + + 22. Concurrently, near the end of Hain’s fiscal year 2016, Distributors 1 and 2 +independently communicated to Hain that going forward, they planned to reduce their inventory +levels. Over fiscal year 2017, Distributor 1 went from holding approximately $74 million in Hain +inventory (June 2016), to $47 million (June 2017). Similarly, Distributor 2 went from holding +approximately $24 million in Hain inventory (June 2016), to $14 million (June 2017). A sizeable +portion of these declines can be attributed to factors other than the distributors’ desire to realign +their inventories to lower levels, including lowered demand at the retail level, and Hain’s stock- +keeping-unit (“SKU”) rationalization efforts. + + + + 7 + 23. As a result of the foregoing, Hain violated Section 13(b)(2)(A) of the Exchange +Act, which requires Hain to make and keep books, records and accounts which, in reasonable +detail, accurately and fairly reflect Hain’s transactions and disposition of assets. + +24. As a result of the foregoing, Hain also violated Section 13(b)(2)(B) of the +Exchange Act, which requires Hain to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurance that: transactions were or are executed in accordance +with management’s general and specific authorization; transactions were or are recorded as +necessary to permit preparation of financial statements in conformity with Generally Accepted +Accounting Principles or any other criteria applicable to such statements, and to maintain +accountability for assets; access to assets was or is permitted only in accordance with +management's general or specific authorization; and the recorded accountability for assets was or is +compared with the existing assets at reasonable intervals and appropriate action was taken with +respect to any differences. + +Hain’s Remedial Efforts +In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by Respondent and cooperation afforded the Commission Staff. +25. Hain promptly self-reported to the Commission and assisted with the +Commission’s investigation, including by providing regular updates and analyses related to its +internal investigation. Hain’s actions in this regard were important in the determination not to +impose a penalty. +26. Hain has also undertaken remedial measures. In particular, Hain made a number of +organizational changes, such as hiring staff in compliance positions and establishing an internal +audit function. + +27. Hain also implemented changes to its revenue recognition practices, including (1) +revisions to its revenue recognition policies and procedures; (2) standardization of its contract +documentation and revenue analyses; (3) revisions to its review process and monitoring controls +over contracts with customers, customer payments, and incentives; and (4) changes in its +communication function related to contractual modifications, between those involved in the sales +process and those in Corporate Finance. Hain also developed a revenue recognition and contract +review training program. + + + + 8 + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Hain’s Offer. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. Respondent Hain cease and desist from committing or causing any violations and +any future violations of Section 13(b) (2) (A) and 13(b) (2) (B) of the Exchange Act. + +B. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon its cooperation 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 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/2018/AAER-3998.txt b/raw/aaer/2018/AAER-3998.txt new file mode 100644 index 0000000000000000000000000000000000000000..e092985f0faef3975e5f4f032bfe78d72f32341a --- /dev/null +++ b/raw/aaer/2018/AAER-3998.txt @@ -0,0 +1,215 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84782 / December 11, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3998 / December 11, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18922 + + +In the Matter of + +AUSCRETE +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 Auscrete Corporation (“Auscrete,” “Respondent” +or the “Company”). + +II. + + In anticipation of the institution of these proceedings, Auscrete 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 the Regulation S-X requirement that +interim financial statements filed as part of a Form 10-Q be reviewed by an independent public +accounting firm prior to filing (the “Interim Review Requirement”).2 + + 2. On three occasions, Auscrete violated the Interim Review Requirement by filing +Forms 10-Q with the Commission that contained financial statements that were not reviewed by an +independent public accounting firm. + +Respondent + +3. Auscrete, a Wyoming corporation based in Rufus, Oregon, enables financing of +technologies developed for the construction of specialty affordable, thermally efficient and +structurally superior housing. Auscrete’s stock has been registered under Section 12(g) of the +Exchange Act since May 2013. Auscrete’s shares are quoted on OTC Link (formerly “pink +sheets”) operated by OTC Markets Group Inc. under the symbol ASCK. Auscrete defines itself as +a “smaller reporting company” in its most recent filing. 3 + +Legal Framework and Facts + + 4. Section 13(a) and Rule 13a-13 thereunder require issuers with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports pursuant to Section +13(a) to also file quarterly reports on Form 10-Q. Form 10-Q requires issuers to include financial +statement information as required by Rule 10-01 of Regulation S-X, and further indicates smaller + +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 Rule 10-01(d) of Regulation S-X provides in pertinent part: “Prior to filing, interim financial statements +included in quarterly reports on Form 10-Q [] must be reviewed by an independent public accountant using +professional standards and procedures for conducting such reviews, as established b y generally accepted auditing +standards, as may be modified or supplemented by the Commission.” 17 C.F.R. § 210.10 -01(d). Similarly, with +respect to smaller reporting companies, Rule 8-03 of Regulation S-X provides in pertinent part: “Interim financial +statements may be unaudited; however, before filing, interim financial statements included in quarterly reports on +Form 10-Q [] must be reviewed by an independent public accountant using professional standards and procedures +for conducting such reviews, as established by generally accepted auditing standards, as may be modified or +supplemented by the Commission.” 17 C.F.R. § 210.8-03. + +3 Under an amendment to the definition effective September 10, 2018, a company qualifies as a “smaller +reporting company”: (1) if its public float is less than $250 million or (2) it has less than $100 million in annual +revenue for the previous year and either no public float or a public float of less than $700 million. Item 10(f)(1) of +Regulation S-K. + + 3 +reporting companies may provide financial statement information as required by Rule 8-03 of +Regulation S-X. See Part I, Item 1 of Form 10; see also 17 C.F.R. § 210.1-01(a)(2) (indicating +Regulation S-X sets forth the form and content for financial statements required as part of, among +other things, reports required under Section 13 of the Exchange Act). + + 5. As required by Regulation S-X, financial statements included in quarterly reports +filed on Form 10-Q may be unaudited. 17 C.F.R. § 210.10-01(a)(1); 17 C.F.R. § 210.8-03. Prior +to filing, however, an issuer must have an independent registered public accounting firm conduct a +review of the required interim financial information presented in financial statements included in +the quarterly report. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. The review must be +conducted in accordance with the standards of the Public Company Accounting Oversight Board +(“PCAOB”), as may be modified or supplemented by the Commission.4 17 C.F.R. § 210.10-01(d); +17 C.F.R. § 210.8-03. + + 6. On August 15, 2014, Auscrete filed its quarterly report for the second quarter of +2014, which included its interim financial statements for that quarter. The interim financial +statements were not reviewed by an independent public accountant as required by the Interim +Review Requirement. The Form 10-Q did not disclose that the interim financial statements had +not been reviewed in compliance with the Interim Review Requirement. In addition, Auscrete did +not file an amended Form 10-Q/A for this quarter, which included interim financial statements that +had been reviewed in accordance with the Interim Review Requirement. + + 7. On August 14, 2015, Auscrete filed its quarterly report for the second quarter of +2015, which included its interim financial statements for that quarter. The interim financial +statements were not reviewed by an independent public accountant as required by the Interim +Review Requirement. The Form 10-Q did not disclose that the interim financial statements had +not been reviewed in compliance with the Interim Review Requirement. In addition, Auscrete did +not file an amended Form 10-Q/A for this quarter, which included interim financial statements that +had been reviewed in accordance with the Interim Review Requirement. + + 8. On October 6, 2015, Auscrete filed its quarterly report for the third quarter of 2015, +which included its interim financial statements for that quarter. The interim financial statements +were not reviewed by an independent public accountant as required by the Interim Review +Requirement. Auscrete filed an amended Form 10-Q/A on March 23, 2016, approximately six +months after it filed the original Form 10-Q, which included interim financial statements that +complied with the Interim Review Requirement. + + + + + +4 See Commission Guidance Regarding the Public Company Accounting Oversight Board’s Auditing and +Related Professional Practice Standard No. 1, Release Nos. 33-8422, 34-49708 (May 14, 2004) (noting that +“references in Commission rules and staff guidance and in the federal securities laws to GAAS or to specific +standards under GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any +applicable rules of the Commission”). + 4 +Violations + + 9. As a result of the conduct described above, Auscrete violated Section 13(a) of the +Exchange Act and Rule 13a-13 thereunder, which require every issuer with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports to file with the +Commission quarterly reports on Form 10-Q which, among other things, comply with the interim +financial statement information requirements of Regulation S-X. + + 10. As a result of the conduct described above, Auscrete, violated Rule 8-03 of +Regulation S-X, which requires interim financial statements included in quarterly reports on +Form 10-Q to be reviewed by an independent public accountant using professional standards and +procedures for conducting such reviews, as established by generally accepted auditing standards. + +Civil Penalties + + 11. Respondent has submitted a sworn Statement of Financial Condition dated +September 7, 2018 and other evidence and has asserted its 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’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) of the Exchange +Act and Rule 13a-13 thereunder, and Rule 8-03 of Regulation S-X. + + B. Based upon Respondent’s sworn representations in its Statement of Financial +Condition dated September 7, 2018 and other documents submitted to the Commission, the +Commission is not imposing a penalty against Respondent. + + + + + + + + + + + + + 5 + C. 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 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/2018/AAER-3999.txt b/raw/aaer/2018/AAER-3999.txt new file mode 100644 index 0000000000000000000000000000000000000000..38e19672d59a094fc8539e73f9f001d9c90f6c6d --- /dev/null +++ b/raw/aaer/2018/AAER-3999.txt @@ -0,0 +1,214 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84783 / December 11, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3999 / December 11, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18923 + + +In the Matter of + +EASTGATE BIOTECH +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 Eastgate Biotech Corporation (“Eastgate,” +“Respondent” or the “Company”). + +II. + + In anticipation of the institution of these proceedings, Eastgate 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 the Regulation S-X requirement that +interim financial statements filed as part of a Form 10-Q be reviewed by an independent public +accounting firm prior to filing (the “Interim Review Requirement”).2 + + 2. On three occasions, Eastgate violated the Interim Review Requirement by filing +Forms 10-Q with the Commission that contained financial statements that were not reviewed by an +independent public accounting firm. + +Respondent + +3. Eastgate, a Nevada corporation based in Toronto, Ontario, develops novel +formulations of natural compounds and pharmaceutical products. Eastgate has been registered +under Section 12(g) of the Exchange Act since November 2007. From March 2014 to December +2014, Eastgate’s shares were quoted on OTC Link (formerly “pink sheets”) operated by OTC +Markets Group Inc. under the symbol ESAQ. Since December 2014, Eastgate’s shares have been +quoted on OTC Link under the symbol ETBI. Eastgate defines itself as a “smaller reporting +company” in its most recent filing. 3 + +Legal Framework and Facts + + 4. Section 13(a) and Rule 13a-13 thereunder require issuers with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports pursuant to Section +13(a) to also file quarterly reports on Form 10-Q. Form 10-Q requires issuers to include financial + +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 Rule 10-01(d) of Regulation S-X provides in pertinent part: “Prior to filing, interim financial statements +included in quarterly reports on Form 10-Q [] must be reviewed by an independent public accountant using +professional standards and procedures for conducting such reviews, as established by gen erally accepted auditing +standards, as may be modified or supplemented by the Commission.” 17 C.F.R. § 210.10 -01(d). Similarly, with +respect to smaller reporting companies, Rule 8-03 of Regulation S-X provides in pertinent part: “Interim financial +statements may be unaudited; however, before filing, interim financial statements included in quarterly reports on +Form 10-Q [] must be reviewed by an independent public accountant using professional standards and procedures +for conducting such reviews, as established by generally accepted auditing standards, as may be modified or +supplemented by the Commission.” 17 C.F.R. § 210.8-03. + +3 Under an amendment to the definition effective September 10, 2018, a company qualifies as a “smaller +reporting company”: (1) if its public float is less than $250 million or (2) it has less than $100 million in annual +revenue for the previous year and either no public float or a public float of less than $700 million. Item 10(f)(1) of +Regulation S-K. + + 3 +statement information as required by Rule 10-01 of Regulation S-X, and further indicates smaller +reporting companies may provide financial statement information as required by Rule 8-03 of +Regulation S-X. See Part I, Item 1 of Form 10; see also 17 C.F.R. § 210.1-01(a)(2) (indicating +Regulation S-X sets forth the form and content for financial statements required as part of, among +other things, reports required under Section 13 of the Exchange Act). + + 5. As required by Regulation S-X, financial statements included in quarterly reports +filed on Form 10-Q may be unaudited. 17 C.F.R. § 210.10-01(a)(1); 17 C.F.R. § 210.8-03. Prior +to filing, however, an issuer must have an independent registered public accounting firm conduct a +review of the required interim financial information presented in financial statements included in +the quarterly report. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. The review must be +conducted in accordance with the standards of the Public Company Accounting Oversight Board +(“PCAOB”), as may be modified or supplemented by the Commission.4 17 C.F.R. § 210.10-01(d); +17 C.F.R. § 210.8-03. + + 6. On February 27, 2017, Eastgate filed its quarterly report for the first quarter of +2016, which included interim financial statements for that quarter. The interim financial +statements were not reviewed by an independent public accountant as required by the Interim +Review Requirement. The Form 10-Q did not disclose that the interim financial statements had +not been reviewed in compliance with the Interim Review Requirement. Eastgate filed an +amended Form 10-Q/A on March 1, 2018, approximately twelve months after it filed the original +Form 10-Q, which included interim financial statements that complied with the Interim Review +Requirement. + + 7. On March 9, 2017, Eastgate filed its quarterly report for the second quarter of 2016, +which included the interim financial statements for that quarter. The interim financial statements +were not reviewed by an independent public accountant as required by the Interim Review +Requirement. The Form 10-Q did not disclose that the interim financial statements had not been +reviewed in compliance with the Interim Review Requirement. Eastgate filed an amended Form +10-Q/A on March 1, 2018, approximately twelve months after it filed the original Form 10-Q, +which included interim financial statements that complied with the Interim Review Requirement. + + 8. On March 15, 2017, Eastgate filed its quarterly report for the third quarter of 2016, +which included the interim financial statements for that quarter. The interim financial statements +were not reviewed by an independent public accountant as required by the Interim Review +Requirement. The Form 10-Q did not disclose that the interim financial statements had not been +reviewed in compliance with the Interim Review Requirement. Eastgate filed an amended Form +10-Q/A on March 1, 2018, approximately twelve months after it filed the original Form 10-Q, +which included interim financial statements that complied with the Interim Review Requirement. + + +4 See Commission Guidance Regarding the Public Company Accounting Oversight Board’s Auditing and +Related Professional Practice Standard No. 1, Release Nos. 33-8422, 34-49708 (May 14, 2004) (noting that +“references in Commission rules and staff guidance and in the federal securities laws to GAAS or to specific +standards under GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any +applicable rules of the Commission”). + 4 + +Violations + + 9. As a result of the conduct described above, Eastgate violated Section 13(a) of the +Exchange Act and Rule 13a-13 thereunder, which require every issuer with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports to file with the +Commission quarterly reports on Form 10-Q which, among other things, comply with the interim +financial statement information requirements of Regulation S-X. + + 10. As a result of the conduct described above, Eastgate violated Rule 8-03 of +Regulation S-X, which requires interim financial statements included in quarterly reports on +Form 10-Q to be reviewed by an independent public accountant using professional standards and +procedures for conducting such reviews, as established by generally accepted auditing standards. + +Civil Penalties + + 11. Respondent has submitted a sworn Statement of Financial Condition dated August +27, 2018 and other evidence and has asserted its 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’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) of the Exchange +Act and Rule 13a-13 thereunder, and Rule 8-03 of Regulation S-X. + + B. Based upon Respondent’s sworn representations in its Statement of Financial +Condition dated August 27, 2018 and other documents submitted to the Commission, the +Commission is not imposing a penalty against Respondent. + + + + + + + + + + + + 5 + C. 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 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/2018/AAER-4000.txt b/raw/aaer/2018/AAER-4000.txt new file mode 100644 index 0000000000000000000000000000000000000000..7d04d443e38cb84aa1fa78a5e6d87dbfc4002eb0 --- /dev/null +++ b/raw/aaer/2018/AAER-4000.txt @@ -0,0 +1,222 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84784 / December 11, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4000 / December 11, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18924 + + +In the Matter of + +FRONTIER OILFIELD +SERVICES, 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 Frontier Oilfield Services, Inc. (“Frontier,” +“Respondent” or the “Company”). + +II. + + In anticipation of the institution of these proceedings, Frontier 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 the Regulation S-X requirement that +interim financial statements filed as part of a Form 10-Q be reviewed by an independent public +accounting firm prior to filing (the “Interim Review Requirement”).2 + + 2. On one occasion, Frontier violated the Interim Review Requirement by filing a +Form 10-Q with the Commission that contained financial statements that were not reviewed by an +independent public accounting firm. + +Respondent + +3. Frontier, a Texas corporation based in Shreveport, Louisiana, operates in the +disposal of saltwater and other oilfield fluids in Texas. Frontier has been registered under Section +12(g) of the Exchange Act since 2000. Frontier’s shares are quoted on OTC Link (formerly “pink +sheets”) operated by OTC Markets Group Inc. under the symbol FOSI.PK. Frontier defines itself +as a “smaller reporting company” in its most recent filing.3 + +Legal Framework and Facts + + 4. Section 13(a) and Rule 13a-13 thereunder require issuers with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports pursuant to Section +13(a) to also file quarterly reports on Form 10-Q. Form 10-Q requires issuers to include financial +statement information as required by Rule 10-01 of Regulation S-X, and further indicates smaller +reporting companies may provide financial statement information as required by Rule 8-03 of + +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 Rule 10-01(d) of Regulation S-X provides in pertinent part: “Prior to filing, interim financial statements +included in quarterly reports on Form 10-Q [] must be reviewed by an independent public accountant using +professional standards and procedures for conducting such reviews, as established by generally accepted auditing +standards, as may be modified or supplemented by the Commission.” 17 C.F.R. § 210.10 -01(d). Similarly, with +respect to smaller reporting companies, Rule 8-03 of Regulation S-X provides in pertinent part: “Interim financial +statements may be unaudited; however, before filing, interim financial statements included in quarterly reports on +Form 10-Q [] must be reviewed by an independent public accountant using professional standards and procedures +for conducting such reviews, as established by generally accepted auditing standards, as may be modified or +supplemented by the Commission.” 17 C.F.R. § 210.8-03. + +3 Under an amendment to the definition effective September 10, 2018, a company qualifies as a “smaller +reporting company”: (1) if its public float is less than $250 million or (2) it has less than $100 million in annual +revenue for the previous year and either no public float or a public float of less than $700 million. Item 10(f)( 1) of +Regulation S-K. + + 3 +Regulation S-X. See Part I, Item 1 of Form 10; see also 17 C.F.R. § 210.1-01(a)(2) (indicating +Regulation S-X sets forth the form and content for financial statements required as part of, among +other things, reports required under Section 13 of the Exchange Act). + + 5. As required by Regulation S-X, financial statements included in quarterly reports +filed on Form 10-Q may be unaudited. 17 C.F.R. § 210.10-01(a)(1); 17 C.F.R. § 210.8-03. Prior +to filing, however, an issuer must have an independent registered public accounting firm conduct a +review of the required interim financial information presented in financial statements included in +the quarterly report. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. The review must be +conducted in accordance with the standards of the Public Company Accounting Oversight Board +(“PCAOB”), as may be modified or supplemented by the Commission.4 17 C.F.R. § 210.10-01(d); +17 C.F.R. § 210.8-03. + + 6. On June 2, 2017, Frontier filed its quarterly report for the first quarter of 2017, +which included the interim financial statements for that quarter. The interim financial statements +were not reviewed by an independent public accountant as required by the Interim Review +Requirement. The Form 10-Q did not disclose that the interim financial statements had not been +reviewed in compliance with the Interim Review Requirement. Frontier filed an amended Form +10-Q/A on June 19, 2018, approximately thirteen months after it filed the original Form 10-Q, +which included interim financial statements that complied with the Interim Review Requirement. + +Violations + + 7. As a result of the conduct described above, Frontier violated Section 13(a) of the +Exchange Act and Rule 13a-13 thereunder, which require every issuer with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports to file with the +Commission quarterly reports on Form 10-Q which, among other things, comply with the interim +financial statement information requirements of Regulation S-X. + + 8. As a result of the conduct described above, Frontier violated Rule 8-03 of +Regulation S-X, which requires interim financial statements included in quarterly reports on +Form 10-Q to be reviewed by an independent public accountant using professional standards and +procedures for conducting such reviews, as established by generally accepted auditing standards. + +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: + +4 See Commission Guidance Regarding the Public Company Accounting Oversight Board’s Auditing and +Related Professional Practice Standard No. 1, Release Nos. 33-8422, 34-49708 (May 14, 2004) (noting that +“references in Commission rules and staff guidance and in the federal securities laws to GAAS or to specific +standards under GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any +applicable rules of the Commission”). + 4 + + 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) of the Exchange +Act and Rule 13a-13 thereunder, and Rule 8-03 of Regulation S-X. + + B. Respondent shall 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). Payment shall be made in the following +installments: $5,000 within 14 days of the entry of this Order; and the remaining balance shall be +paid in installments over the following two years, in quarterly payments of $2,500 due on January +1, April 1, July 1 and October 1 respectively, until paid in full. + + Payments shall be deemed made on the date they are received by the Commission and shall +be applied first to post-order interest, which accrues pursuant to 31 U.S.C. §3717, on any unpaid +amounts due after 14 days of the entry of this Order. Prior to making the final payment, +Respondent shall contact the staff of the Commission for the amount due for the final payment. If +any payment is not made by the date the payment is required by this Order, the entire outstanding +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 staff of the Commission, 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 +Frontier Oilfield Services, 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 Fuad Rana, +Assistant Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + + 5 +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-4001.txt b/raw/aaer/2018/AAER-4001.txt new file mode 100644 index 0000000000000000000000000000000000000000..a53a8fb7c043c080c61aec0ebcf836d193b8db6e --- /dev/null +++ b/raw/aaer/2018/AAER-4001.txt @@ -0,0 +1,185 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84785 / December 11, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4001 / December 11, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18925 + + +In the Matter of + +LOTUS BIO- +TECHNOLOGY +DEVELOPMENT +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 Lotus Bio-Technology Development +Corporation (“Lotus Bio-Tech,” “Respondent” or the “Company”). + +II. + + In anticipation of the institution of these proceedings, Lotus Bio-Tech 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 the Regulation S-X requirement that +interim financial statements filed as part of a Form 10-Q be reviewed by an independent public +accounting firm prior to filing (the “Interim Review Requirement”).2 + + 2. On one occasion, Lotus Bio-Tech violated the Interim Review Requirement by +filing a Form 10-Q with the Commission that contained financial statements that were not +reviewed by an independent public accounting firm. + +Respondent + +3. Lotus Bio-Tech, a Nevada corporation based in Kowloon, Hong Kong, operates in +the organic refining business in China. Lotus Bio-Tech has been registered under Section 12(g) of +the Exchange Act since 2012. Lotus Bio-Tech’s shares are quoted on OTC Link (formerly “pink +sheets”) operated by OTC Markets Group Inc. under the symbol LBTD. Lotus Bio-Tech defines +itself as a “smaller reporting company” in its most recent filing.3 + +Legal Framework and Facts + + 4. Section 13(a) and Rule 13a-13 thereunder require issuers with securities registered +pursuant to Section 12 of the Exchange Act and required to file annual reports pursuant to Section +13(a) to also file quarterly reports on Form 10-Q. Form 10-Q requires issuers to include financial +statement information as required by Rule 10-01 of Regulation S-X, and further indicates smaller +reporting companies may provide financial statement information as required by Rule 8-03 of + +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 Rule 10-01(d) of Regulation S-X provides in pertinent part: “Prior to filing, interim financial statements +included in quarterly reports on Form 10-Q [] must be reviewed by an independent public accountant using +professional standards and procedures for conducting such reviews, as established by generally accepte d auditing +standards, as may be modified or supplemented by the Commission.” 17 C.F.R. § 210.10 -01(d). Similarly, with +respect to smaller reporting companies, Rule 8-03 of Regulation S-X provides in pertinent part: “Interim financial +statements may be unaudited; however, before filing, interim financial statements included in quarterly reports on +Form 10-Q [] must be reviewed by an independent public accountant using professional standards and procedures +for conducting such reviews, as established by generally accepted auditing standards, as may be modified or +supplemented by the Commission.” 17 C.F.R. § 210.8-03. + +3 Under an amendment to the definition effective September 10, 2018, a company qualifies as a “smaller +reporting company”: (1) if its public float is less than $250 million or (2) it has less than $100 million in annual +revenue for the previous year and either no public float or a public float of less than $700 million. Item 10(f)(1) of +Regulation S-K. + + 3 +Regulation S-X. See Part I, Item 1 of Form 10; see also 17 C.F.R. § 210.1-01(a)(2) (indicating +Regulation S-X sets forth the form and content for financial statements required as part of, among +other things, reports required under Section 13 of the Exchange Act). + + 5. As required by Regulation S-X, financial statements included in quarterly reports +filed on Form 10-Q may be unaudited. 17 C.F.R. § 210.10-01(a)(1); 17 C.F.R. § 210.8-03. Prior +to filing, however, an issuer must have an independent registered public accounting firm conduct a +review of the required interim financial information presented in financial statements included in +the quarterly report. 17 C.F.R. § 210.10-01(d); 17 C.F.R. § 210.8-03. The review must be +conducted in accordance with the standards of the Public Company Accounting Oversight Board +(“PCAOB”), as may be modified or supplemented by the Commission.4 17 C.F.R. § 210.10-01(d); +17 C.F.R. § 210.8-03. + + 6. On November 21, 2016, Lotus Bio-Tech filed its quarterly report for the third +quarter of 2016, which included the interim financial statements for that quarter. The interim +financial statements were not reviewed by an independent public accountant as required by the +Interim Review Requirement. The Form 10-Q did not disclose that the interim financial statements +had not been reviewed in compliance with the Interim Review Requirement. Lotus Bio-Tech did +not file an amended Form 10-Q/A. + +Violations + + 7. As a result of the conduct described above, Lotus Bio-Tech violated Section 13(a) +of the Exchange Act and Rule 13a-13 thereunder, which require every issuer with securities +registered pursuant to Section 12 of the Exchange Act and required to file annual reports to file +with the Commission quarterly reports on Form 10-Q which, among other things, comply with +the interim financial statement information requirements of Regulation S-X. + + 8. As a result of the conduct described above, Lotus Bio-Tech violated Rule 8-03 of +Regulation S-X, which requires interim financial statements included in quarterly reports on +Form 10-Q to be reviewed by an independent public accountant using professional standards and +procedures for conducting such reviews, as established by generally accepted auditing standards. + +Civil Penalties + + 9. Respondent has submitted a sworn Statement of Financial Condition dated August +29, 2018 and other evidence and has asserted its inability to pay a civil penalty. + + + +4 See Commission Guidance Regarding the Public Company Accounting Oversight Board’s Auditing and +Related Professional Practice Standard No. 1, Release Nos. 33-8422, 34-49708 (May 14, 2004) (noting that +“references in Commission rules and staff guidance and in the federal securities laws to G AAS 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”). + 4 +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) of the Exchange +Act and Rule 13a-13 thereunder, and Rule 8-03 of Regulation S-X. + + B. Based upon Respondent’s sworn representations in its Statement of Financial +Condition dated August 29, 2018 and other documents submitted to the Commission, the +Commission is not imposing a penalty against Respondent. + + C. 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 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/2018/AAER-4002.txt b/raw/aaer/2018/AAER-4002.txt new file mode 100644 index 0000000000000000000000000000000000000000..cbd8b7df462c0b401e056e15d4d11dfe047248f2 --- /dev/null +++ b/raw/aaer/2018/AAER-4002.txt @@ -0,0 +1,268 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84829 / December 17, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4002 / December 17, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18932 + +In the Matter of + +SANTANDER CONSUMER +USA HOLDINGS INC., + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Santander Consumer USA Holdings Inc. +(“SCUSA” 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 finds that: + +Summary + +1. SCUSA is a public consumer finance company that purchases and securitizes +subprime automobile loans in the form of retail installment contracts (RICs). More than 75% of +the RICs that SCUSA purchases are considered subprime, which means that they may carry higher +credit risk and at times are more likely to default than loans issued to borrowers with higher credit +scores. By volume, SCUSA issues more subprime securitizations than any other issuer. + +2. For at least eight reporting periods, SCUSA failed to calculate and report its +incurred credit loss allowance in conformity with Generally Accepted Accounting Principles +(“GAAP”). Credit loss allowance reflects whether SCUSA has sufficiently reserved for credit +losses on higher risk loans, including subprime loans. SCUSA’s method of assessing impairment +for a large category of these loans that had previously been restructured, and its lack of segregation +of those loans for evaluation, was not in conformity with GAAP. In addition, SCUSA used an +incorrect discount rate and made errors in calculating the accretion of that discount, which also +impacted its reporting of the impairment of these assets. + +3. SCUSA made these errors for years—beginning before its initial public offering in +January 2014 and continuing through most of 2016. As a result of these and other errors, SCUSA +restated its financial statements twice during this period. The errors largely resulted from +SCUSA’s flawed internal accounting controls, which took years for it to remediate. As a result of +this conduct, SCUSA violated the reporting, books and records, and internal accounting controls +provisions of the federal securities laws. + +Respondent + +4. SCUSA is a Delaware corporation headquartered in Dallas, Texas, that originates, +securitizes, and services automobile loans and leases through a wholly-owned subsidiary. +SCUSA’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act, and it trades on the New York Stock Exchange under the ticker symbol SC. +SCUSA conducted an initial public offering in January 2014 and has filed periodic reports since +that time. + +Facts + +5. SCUSA purchases RICs from auto dealerships across the United States. SCUSA +purchases many of the RICs at a discount to the amount financed. SCUSA typically then +securitizes these loans, but the loans remain classified as assets on SCUSA’s balance sheet since +SCUSA controls and consolidates the securitization trusts. As a result, SCUSA investors can +assess the general performance of SCUSA loans by reviewing the value of these assets on +SCUSA’s balance sheet and the related credit loss allowance. + 3 + +6. SCUSA’s errors in calculating its credit loss allowance, as detailed below, led +SCUSA to restate its financial statements two separate times in one year. The errors impacted +every periodic report and earnings release filed by SCUSA from the time of its initial public +offering in January 2014 until it filed its second restatement in late 2016. SCUSA’s financial +statements contained errors that were material for both quantitative and qualitative factors. + +Failure to Appropriately Segregate and Account for Impairment of Troubled Loans + +7. Approximately 40% of SCUSA’s credit loss allowance has consistently been +attributable to “troubled debt restructuring” loans (“TDRs”). Generally, a TDR is a loan in which +the creditor has granted a concession to the borrower for an economic or legal reason related to the +borrower’s financial difficulties. Because SCUSA’s business is primarily lending to higher credit +risk subprime borrowers, a significant number of SCUSA’s loans become TDRs. + +8. However, both before and after it became a public company, SCUSA incorrectly +calculated its credit loss allowance for TDRs under GAAP. TDRs are, by definition, impaired +loans and, accordingly, should be evaluated to ensure that the credit loss allowance accurately +captures the credit losses on these loans. Accounting Standards Codification ("ASC") 310, +Receivables, requires that TDRs be segregated and evaluated for impairment separately from the +rest of the loan portfolio using a discounted cash flow method. However, as a result of delays in +developing a model to identify TDR loans, SCUSA instead improperly grouped TDRs with the rest +of its loan assets, and collectively evaluated the entire group for impairment. Although SCUSA +knew it was using the wrong approach, it continued this improper accounting until the third quarter +of 2015. + +9. In addition, under GAAP, a registrant must separately disclose in the footnotes to +its financial statements the amount of TDR impairment. Prior to its first restatement, SCUSA did +not disclose that it failed to separately analyze its TDR portfolio for the purpose of calculating its +credit loss allowance. Instead, SCUSA disclosed in the footnotes to its financial statements that it +had assessed TDRs for impairment based on the present value of expected future cash flows. + +Additional GAAP Failures + Discount Rate + +10. For each period until its second restatement, SCUSA also used an improper +discount rate in the discounted cash flow calculation for TDR impairment. Under GAAP, a +creditor is required to measure a TDR’s impairment based on the loan’s discounted future cash +flows using the loan’s original effective interest rate, which is the original contractual rate paid by +a borrower adjusted for the effect of certain loan fees and costs. However, rather than considering +these adjustments, SCUSA used the original contract rate of the loan to calculate impairment. This +was a clear error impacting the TDR impairment, but SCUSA did not identify and remedy it until +late 2016. + + Accretion + 4 + +11. When SCUSA purchases a RIC, any discount to face value of the loan it receives +on the purchase is accreted, or recognized as income over time as the loan performs. SCUSA +failed to properly accrete and analyze these discounts in several ways. These errors resulted in +SCUSA overstating the carrying value of its receivables for each of its 2013, 2014, and 2015 fiscal +years. In addition, because the impairment amount of a TDR is determined as the difference by +which the carrying value of the receivable exceeds the present value of the future cash flows, these +errors also caused SCUSA to misstate its TDR impairment. + +12. SCUSA made three separate types of errors when calculating the amount of +accretion. First, SCUSA improperly accreted amounts attributable to discounts that it received +when it purchased auto loan receivables from dealers. Contrary to GAAP guidance contained in +ASC 310, SCUSA did not properly accrete the discount over the average life of the loan pool. +This error resulted in SCUSA overstating interest income on the income statement and depleting +the deferred discount on its balance sheet more quickly than it should have. + +13. Second, SCUSA erred in anticipating the amount of prepayments that would impact +its accretion. Contrary to GAAP, SCUSA included loans that were expected to charge off due to +default as being prepayments for purposes of calculating its prepayment assumptions. In addition, +SCUSA improperly grouped all loans in a single pool for purposes of estimating prepayments, +rather than segmenting loans based on credit characteristics and then separately estimating +prepayments on each pool as required under ASC 310. SCUSA used its improperly determined +prepayment assumptions when determining the rate of accretion. + +14. Finally, SCUSA improperly accounted for the charge-off of unaccreted discount on +loans deemed uncollectable by accreting the discounts to the income statement as interest income, +rather than as a reduction of the provision for loan loss. As a result of this error, both interest +income and the provision for loan losses were overstated on the income statement. Although this +treatment was clearly improper under GAAP, SCUSA did not identify and remedy it until its +second restatement. + +Ineffective ICFR + +15. In SCUSA’s Form 10-K for the year ended December 31, 2014, the first annual +report it filed after its initial public offering, SCUSA claimed to have effective internal control over +financial reporting (ICFR). However, SCUSA actually had multiple problems in its ICFR related +to each of the specific errors described above as well as its overall control environment. In both of +its restatements, SCUSA acknowledged these issues and concluded that its ICFR was not effective +due to several material weaknesses. SCUSA did not remediate most of its material weaknesses for +years after they were identified. + +Violations + +16. As a result of the conduct described above, SCUSA violated Section 13(a) of the +Exchange Act and Rules 13a-1, 13a-11, 13a-13 and 12b-20 thereunder, which require every issuer + 5 +of a security registered pursuant to Section 12 of the Exchange Act file with the Commission +information, documents, and annual, current, and quarterly reports as the Commission may +require, and mandate that periodic and current reports contain such further material information +as may be necessary to make the required statements not misleading. + +17. As a result of the conduct described above, SCUSA 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. + +18. As a result of the conduct described above, SCUSA violated Sections 13(b)(2)(B) +of the Exchange Act, which requires all reporting companies to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that transactions are +recorded as necessary to permit preparation of financial statements in accordance with generally +accepted accounting principles. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent SCUSA’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent SCUSA cease and desist +from committing or causing any violations and any future violations Sections 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + +B. SCUSA shall, within 30 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 + 6 +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 +SCUSA 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 Metcalfe, Division of +Enforcement, Securities and Exchange Commission, 1961 Stout Street, Suite 1700, Denver, CO +80294. + + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-4003.txt b/raw/aaer/2018/AAER-4003.txt new file mode 100644 index 0000000000000000000000000000000000000000..72d02e3b43a3a2ca67a0335435ebecd2d2e1980c --- /dev/null +++ b/raw/aaer/2018/AAER-4003.txt @@ -0,0 +1,362 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84849 / December 18, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4003 / December 18, 2018 +ADMINISTRATIVE PROCEEDING +File No. 3-18938 + +In the Matter of + +Paul A. Margis + +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 Paul A. Margis (“Margis” or “Respondent”). +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. +III. + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +Summary +1. Beginning in 2007, Paul A. Margis (“Margis”) participated in a plan whereby +Panasonic Avionics Corporation (“PAC”), a wholly-owned, U.S. subsidiary of Panasonic + +1 The findings herein are made pursuant to Margis’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + 2 +Corporation (“Panasonic”), offered a lucrative consulting position to a government official +(“Government Official”) who assisted PAC in obtaining and retaining business from a state-owned +airline (“Government Airline”). While PAC was negotiating two agreements valued at over $700 +million with the Government Airline, Margis authorized PAC to offer the Government Official a +$200,000 a year post-retirement consulting position. Ultimately, PAC retained the Government +Official and paid approximately $875,000 for his position, which required little to no work. +Margis and others arranged for the Government Official to be paid through a third-party vendor +that provided unrelated services to PAC. Margis also authorized payments of more than $900,000 +through the third-party vendor for the retention of two other individuals as consultants, although +they provided little to no services. Through his conduct, Margis knowingly circumvented PAC’s +system of internal accounting controls and knowingly falsified the company’s books and records. +Margis also caused Panasonic to violate the books and records and internal accounting controls +provisions of the federal securities laws. Finally, Margis made false representations to PAC’s +external auditors that PAC did not have any deficiencies concerning its internal financial controls +and books and records, thereby misleading the company’s auditors. +Respondent +2. Paul A. Margis, age 64, was the President (2005-2007; 2012-2017) and Chief +Executive Officer (2007-2017) of PAC. Beginning around June 2012, Margis also held concurrent +positions at Panasonic Corporation, including serving as an executive officer of a Panasonic +business segment, AVC Networks Company (“AVC Networks”), from 2013-2017. +Other Relevant Entities and Individuals +3. Panasonic Corporation is a multinational corporation, headquartered in Osaka, +Japan. During the relevant period, Panasonic’s global business was organized into eight business +segments, including AVC Networks that included PAC. Panasonic’s securities were registered with +the Commission pursuant to Section 12(b) of the Exchange Act until April 22, 2013, and its +American Depositary Shares traded on the New York Stock Exchange under the ticker “PC.” From +May 1, 2015 through June 20, 2016, Panasonic’s securities were registered with the Commission +pursuant to Section 12(g) of the Exchange Act. During the periods when Panasonic securities were +registered with the Commission, Panasonic was required to file or furnish periodic reports with the +Commission pursuant to Section 15 of the Exchange Act. +4. Panasonic Avionics Corporation (f/k/a Matsushita Avionics Systems +Corporation), a wholly-owned subsidiary of Panasonic’s North American subsidiary, is a +Delaware corporation headquartered in Lake Forest, California. PAC designs, engineers, +manufactures, sells and installs in-flight entertainment systems (“IFE”) and global communication +services (“GCS”) to airlines, aircraft leasing companies, and airplane manufacturers worldwide, +including to state-owned airlines. Panasonic managed PAC via AVC Networks, and certain PAC +officers, including Margis, also held concurrent titles at Panasonic. During the relevant period, +PAC’s books and records and financial accounts were consolidated into Panasonic’s books and +records and reported on Panasonic’s consolidated financial statements, which were filed or +furnished with the Commission and reported to investors. + 3 +FACTS +Offer of Consulting Position to Government Official +5. In 1986, PAC retained a sales representative (“Sales Representative” or” Sales +Rep”) to assist PAC in contract negotiations for the sale of IFE and GCS products to several +airlines in its Middle East Region, despite the fact that he had no background or experience in +avionics. Thereafter, PAC periodically renewed its agreements with the Sales Rep until around +May 2016 when it terminated its relationship with him. The Sales Rep was engaged with the +authorization of Panasonic executives, including Margis, who was also directly involved in +authorizing the renewal of agreements between PAC and the Sales Rep. +6. Between 2007 and 2016, PAC paid the Sales Representative more than $184 +million in sales commissions through his British Virgin Islands entity. During this period, the +Sales Representative directly reported to Margis, who authorized monthly commission payments +of $1-3 million to the Sales Representative. The Sales Representative gave Margis cash and luxury +items valued at more than $60,000. +7. Beginning in at least 2004, PAC maintained a separate, regional office in the +Middle East. The office, based in Dubai, was staffed by sales and marketing professionals and had +a repair shop, field engineers, and its own finance staff. Nevertheless, PAC continued to use the +Sales Rep despite concerns raised by PAC employees that the Sales Rep lacked the qualifications +to negotiate technical contracts related to IFE and GCS products and other red flags regarding his +conduct, such as his possession of confidential and proprietary materials of PAC’s competitors and +customers. In addition, Margis was aware of allegations from its regional employees that the Sales +Rep was paying bribes to win business on PAC’s behalf. +8. While PAC engaged the Sales Rep as a sales agent through the entity that he +owned, he operated as a PAC employee. The Sales Representative had: PAC business cards +identifying him as PAC’s General Manager of Sales and Marketing in the Middle East, Africa and +South Asia; his own office space in PAC’s Dubai office; a PAC phone number and email address; +a PAC title; and numerous electronic devices. +9. In 2004, PAC and the Government Airline signed a ten-year Master Product Supply +Agreement (“MPSA”) that ultimately grossed well over a billion dollars for PAC to provide IFE +products and services for planes within the Government Airline’s fleet. Both Margis and the Sales +Rep were involved in the negotiations of the MPSA, and Margis signed the MPSA on behalf of +PAC. Significantly, the MPSA prohibited PAC from providing any consideration to employees of +the Government Airline. +10. The Government Airline appointed its own executive, the Government Official, to +serve as the primary point of contact for contract negotiations with PAC, including for the MPSA. +During the relevant period, the Government Official reported directly to the Government Airline’s +President. The Government Official had influence over the Government Airline’s contracting +decisions, including influence over the airline’s decisions to award business to PAC as well as +interpretations of specific terms in the MPSA and amendments thereto. Finally, the Government +Official negotiated significant terms with PAC, including credits, concessions, and +system/component price lists, and was involved in approving payments to PAC. + + 4 +11. In 2006, the Sales Rep and the Government Official began negotiating an +amendment to the MPSA (“Amendment One”) for the purchase of additional IFE products by the +Government Airline. Negotiations for Amendment One, which was worth nearly $360 million in +additional business to PAC, continued through at least July 2007. +12. Over the course of 2007, PAC and the Government Airline also negotiated and +entered into a second amendment to the MPSA (“Amendment Two”) for the purchase of additional +IFE products. Due to the delay in the receipt of new aircraft by the Government Airline, certain +IFE products that PAC and the Government Airline had contemplated being included in +Amendment One were instead included in Amendment Two. Amendment Two was signed in +November 2007, and was worth over $353 million in additional business to PAC. +13. As with the MPSA, Margis and the Sales Representative were both involved in the +negotiation of Amendment One and Amendment Two. Also as with the MPSA, the Government +Official led negotiations of those amendments and signed Amendment One on behalf of the +Government Airline. +14. During the course of negotiations for Amendments One and Amendment Two, the +Government Official solicited PAC for personal benefits. Beginning in at least April 2007, the +Government Official sent numerous emails to the Sales Representative about obtaining a position +with PAC, which the Sales Representative brought to Margis’s attention. Subsequently on June +17, 2007, the Government Official informed the Sales Representative that he was seeking a +position with PAC, including an annual salary of £150,000 and other benefits. The Sales +Representative informed Margis of the specific request. +15. In or around September 2007, PAC offered the Government Official a position as a +consultant for $200,000 per year plus travel expenses, which would be effective after his retirement +from the Government Airline. Margis authorized the offer of a consulting position to the +Government Official, despite numerous red flags. +16. For example, PAC had no apparent need for the Government Official’s services. +During the six years that he was paid as a consultant, the Government Official performed little to +no work. +17. Additionally, the Sales Representative informed Margis and other PAC executives +that the Government Official did not want any one contacting him due to his current status with his +employer, the Government Airline. +18. In response, a senior PAC executive told Margis and others by email that, “We +should be very sensitive to [Government Official’s] current position . . . . I will get in trouble if we +act like a small company. What we are doing for [the Government Official] is a large risk for a +corporation like Panasonic. I think we still should for good reasons, but we must get this done +above the table with complete transparency.” +19. Finally, based on his prior interactions with the Government Airline, Margis was +aware that the Government Official played a key role in the business relationship between the +Government Airline and PAC, including in connection with the negotiations of the MPSA, +Amendment One, and Amendment Two. +20. During the course of the negotiations for Amendment One and Amendment Two, +and while seeking personal benefits from PAC, the Government Official was providing PAC +commercial and proprietary information that helped PAC secure an improper advantage in + 5 +obtaining and retaining business from the Government Airline. This included confidential +information of the Government Airline and PAC’s competitors, tips on negotiating with the +Government Airline, and advice on how to secure additional business from the Government +Airline. +21. Rather than following PAC’s standard procedures for retaining consultants, Margis +arranged for PAC to retain the Government Official and pay him through an unrelated third-party +vendor that otherwise prepared product manuals for PAC (“Vendor”). +22. Ultimately, between April 2008 and January 2014, the Government Official +provided little to no services, and PAC paid over $875,000 to the Vendor for the Government +Official’s position. Margis was aware that the Government Official was providing few, if any, +services. For instance, in May 2009, PAC employees requested to terminate the agreement with +the Government Official because his services were not required. Nevertheless, Margis authorized +the renewal of the agreement with the Government Official, and continued to authorize monthly +payments to the Vendor for the Government Official through January of 2014. +Retention of Consultants through the Office of the President Budget +23. From at least 2007 through at least January 2014, Margis and others authorized the +engagement of various individuals as consultants in circumstances in which the consultants +provided few, if any, services. Rather than following PAC’s standard procedures for engaging +consultants, these individuals were retained through the Vendor and paid through the Vendor from +an Office of the President budget that Margis controlled. +24. The Office of the President budget was set annually by a senior PAC finance +executive in consultation with Margis, based on the prior year’s costs and anticipated changes to +expenses. Expenditures from this budget were never meaningfully reviewed or approved by any +Panasonic or PAC personnel, and there were no reasonable internal accounting controls in place +surrounding its use. In October 2007, Margis used the Vendor as a conduit to pay a former PAC +employee (“Consultant One”), who was also working as a consultant for one of PAC’s largest +domestic airline customers. Between October 2007 and December 2013, Margis authorized +payments totaling approximately $825,000 for Consultant One from the Office of the President +budget via the Vendor. During this period, Consultant One was not supervised by anyone at PAC +or Panasonic, and provided few, if any, services to PAC or Panasonic. Instead, Consultant One +provided Margis and others at PAC with non-public information regarding the domestic airline +customer, other airlines, and PAC’s competitors, frequently passing information through emails +that were marked “CONFIDENTIAL” or “DO NOT FORWARD.” +25. In yet another instance, between January and December 2009, Margis used the +Office of the President budget and the Vendor to pay $60,000 for a consulting position for another +former PAC employee (“Consultant Two”). In this instance, Consultant Two performed no work +for PAC or Panasonic, and was paid solely to prevent him from working for any of PAC’s +competitors. +26. Margis authorized nearly all payments made out of the Office of the President +Budget, including payments totaling more than $1.76 million to the Government Official, +Consultant One, and Consultant Two, who provided few, if any, services to PAC. These payments +were falsely recorded in PAC’s general ledger as consulting payments to the Vendor and the + 6 +consultants and incorporated into Panasonic’s books, records, and accounts as “selling and general +administrative expenses.” +27. During the period that Margis used the Office of the President budget to pay the +aforementioned consultants, PAC had established policies and procedures concerning the +engagement of consultants. These policies and procedures set out a number of requirements, +including defining the scope of work, engaging PAC Human Resources in the retention process, +and limiting a contract’s duration to six months. In fact, during this period, Margis authorized the +engagement of several other consultants pursuant to PAC’s consultant retention policies and +procedures. Conversely, Margis circumvented those very same policies and procedures when +authorizing the engagement of the Government Official, Consultant One, and Consultant Two. +28. Panasonic failed to maintain internal accounting controls reasonably designed to +ensure that payments to the consultants only were made in exchange for the described consulting +services, that services actually had been rendered, and that its books and records fairly reflected the +transactions and disposition of Panasonic’s assets. Panasonic also lacked sufficient internal +accounting controls to effectuate its policies and procedures concerning the selection and +engagement of these consultants. +29. Margis caused Panasonic to violate the books and records and internal accounting +controls provisions of the federal securities laws by authorizing the engagement of the consultants +through the Vendor and using the Vendor as a conduit for payments to the consultants, which were +made from the Office of the President Budget that he controlled. +Margis Misled PAC’s External Auditors +30. As a wholly-owned subsidiary of Panasonic, PAC senior executives provided +annual certifications of its financial statements, known as “subcertifications,” to PAC’s external +auditors (“Auditors”) each quarter. Similarly, PAC senior executives also provided the Auditors +with quarterly management representations letters confirming, among other things, that the +company did not have any deficiencies concerning its books and records and its internal financial +controls. +31. The subcertifications and management representation letters were presented to the +Auditors in connection with the company's annual and quarterly reviews. The Auditors relied on +these subcertifications and management representation letters as part of the normal course of their +audits of the company and for the preparation of PAC’s financial statements, which were +incorporated into Panasonic’s financial statements and included by Panasonic in its periodic +Commission filings. +32. From at least 2007 through 2015, Margis provided annual subcertifications as well +as management representation letters each quarter to the Auditors. At no time during this period +did Margis disclose to the Auditors, or direct anyone else to disclose, the foregoing issues +concerning the payments to the Government Official and other consultants, PAC’s and Panasonic’s +lack of sufficient internal accounting controls, or the resulting falsification of PAC’s and +Panasonic’s books and records. + + + + 7 +33. Instead, Margis provided false subcertifications and management representation +letters to the Auditors. For example, in the subcertifications Margis falsely stated, “no deficiencies +have been identified and the internal control [sic] over financial reporting have effectively +functioned….” Similarly, in the management representation letters, Margis falsely stated, “there +are no material transactions that have not been properly recorded in the accounting records,” and +“[t]here are no significant deficiencies or material weaknesses in the design or operation of internal +controls over financial reporting….” Both of these certifications were false. +34. As a result of this conduct, Margis made materially false or misleading statements +to the Auditors in connection with their audits of the company’s financial statements and internal +financial controls. +LEGAL STANDARDS AND VIOLATIONS +35. Under Section 21(C) 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 of omission the person knew or should have +known would contribute to such violation. +36. As a result of the conduct described above, Margis violated Section 13(b)(5) of +the Exchange Act, which states 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. +37. Also as a result of the conduct described above, Margis caused Panasonic to +violate Section 13(b)(2)(A) of the Exchange Act, which requires issuers that have a class of +securities registered pursuant to Section 12 of the Exchange Act and issuers with reporting +obligations pursuant to Section 15(d) of the Exchange Act to make and keep books, records, and +accounts which, in reasonable detail, accurately and fairly reflect their transactions and +disposition of their assets. +38. As a result of the conduct described above, Margis also caused Panasonic to +violate Section 13(b)(2)(B) of the Exchange Act, which requires issuers that have a class of +securities registered pursuant to Section 12 of the Exchange Act and issuers with reporting +obligations pursuant to Section 15(d) of the Exchange Act to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that (i) transactions are +executed in accordance with management’s general or specific authorization; (ii) transactions are +recorded as necessary (I) to permit preparation of financial statements in conformity with +generally accepted accounting principles or any other criteria applicable to such statements, and +(II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance +with management’s general or specific authorization; and (iv) the recorded accountability for +assets is compared with the existing assets at reasonable intervals and appropriate action is taken +with respect to any differences. +39. Finally, as a result of the conduct describe above, Margis violated Exchange Act +Rule 13b2-1, 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) and Rule 13b2-2, which +states, in relevant part, that no director or office of an issuer shall, directly or indirectly: (1) +make or cause to be made a materially false or misleading statement to an accountant in connection + 8 +with; or (2) omit to state, or cause 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: (i) any audit, review or examination of +the financial statements of the issuer required to be made pursuant to this subpart; or (ii) the +preparation or filing of any document or report required to be filed with the Commission pursuant +to this subpart or otherwise. +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, Margis cease-and-desist from +committing or causing any violations and any future violations of Exchange Act Sections +13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) [15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(2)(B) and 78m(b)(5)] +and Rules 13b2-1 and 13b2-2 thereunder [17 C.F.R. §§ 240.13b2-1 and 240.13b2-2]. + B. Margis shall, within ten (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 remission to 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 +Panasonic as Respondent in these proceedings, and the file number of these proceedings. A copy +of the cover letter and check or money order must be sent to Charles Cain, Chief, FCPA Unit, +Division of Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, +DC 20549. + + + + + 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 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/2018/AAER-4004.txt b/raw/aaer/2018/AAER-4004.txt new file mode 100644 index 0000000000000000000000000000000000000000..46848a81cee48e0d5d50017b2e77d9c71d947cfc --- /dev/null +++ b/raw/aaer/2018/AAER-4004.txt @@ -0,0 +1,359 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84850 / December 18, 2018 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4004 / December 18, 2018 +ADMINISTRATIVE PROCEEDING +File No. 3-18939 +In the Matter of +Takeshi “Tyrone” Uonaga +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 +Takeshi “Tyrone” Uonaga (“Uonaga” or “Respondent”), pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102e(1)(iii) 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, 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, + +1 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. +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 finds2 that: +Summary +1. This matter concerns accounting, books and records, internal accounting controls +and reporting violations involving Panasonic Corporation (“Panasonic”) and Takeshi “Tyrone” +Uonaga, the Chief Financial Officer of Panasonic’s wholly-owned subsidiary, Panasonic +Avionics Corporation (“PAC”). In July 2012, PAC improperly recognized approximately $82 +million in revenue from a contract with one of its largest customers, a state-owned airline +(“Government Airline”), by backdating the contract to indicate that it had been signed prior to +the quarter ending June 30, 2012. Although Uonaga was aware that a signed contract was +necessary to recognize revenue and that the contract had not been signed prior to the end of the +quarter, Uonaga provided a false certification and management representation letter to PAC’s +external auditor stating that PAC’s financial statements for the quarter had been prepared in +conformity with prevailing audit standards and that there were no deficiencies concerning PAC’s +internal accounting controls and books and records. +2. By engaging in this conduct, Uonaga knowingly circumvented PAC’s internal +accounting controls concerning revenue recognition and caused the company’s books and +records to contain false information. Also as a result of his conduct, Uonaga caused Panasonic to +violate the books and records, internal accounting controls, and reporting provisions of the +securities laws. PAC’s financial results – including the improperly recognized revenue – were +incorporated into Panasonic’s books and records and consolidated financial statements for that +quarter and included in financial statements Panasonic filed with the Commission. As a result of +Uonaga’s actions, Panasonic falsely recorded revenue on its books and records, failed to +maintain reasonable internal accounting controls, and filed a materially false report with the +Commission. +Respondent +3. Takeshi “Tyrone” Uonaga, age 55, was PAC’s Chief Financial Officer (“CFO’) +from June 2012 through April 2016. During that period, Uonaga also held a concurrent position +at Panasonic within the accounting group for Panasonic’s AVC Networks Company business +segment (“AVC Networks”). Uonaga was employed in Panasonic finance since graduating from +a Japanese University in 1986, including holding CFO positions in Panasonic’s U.K. and +Germany subsidiaries. Panasonic terminated Uonaga in February 2018. + + +2 The findings herein are made purs uant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. +3 + +Other Relevant Entities +4. Panasonic Corporation is a multinational corporation, headquartered in Osaka, +Japan. During the relevant period, Panasonic’s global business was organized into eight business +segments, including AVC Networks. PAC was part of AVC Networks. Panasonic’s securities +were registered with the Commission pursuant to Section 12(b) of the Exchange Act until April +22, 2013, and its American Depositary Shares traded on the New York Stock Exchange under +the ticker “PC.” From May 1, 2015 through June 20, 2016, Panasonic’s securities were registered +with the Commission pursuant to Section 12(g) of the Exchange Act. During the periods when +Panasonic securities were registered with the Commission, Panasonic was required to file or +furnish periodic reports with the Commission pursuant to Section 15 of the Exchange Act. +5. Panasonic Avionics Corporation is a wholly-owned subsidiary of Panasonic’s +North American subsidiary and is a Delaware corporation headquartered in Lake Forest, +California. PAC designs, engineers, manufactures, sells and installs in-flight entertainment +systems (“IFE”) and global communication services (“GCS”) to airlines, aircraft leasing +companies, and airplane manufacturers worldwide. Panasonic managed PAC through AVC +Networks and certain PAC officers, including Uonaga, also held concurrent titles at Panasonic. +During the relevant period, PAC’s books and records and financial accounts were consolidated +into Panasonic’s books and records and reported on Panasonic’s consolidated financial +statements, which were filed or furnished with the Commission and reported to investors. +FACTS +6. During the time its securities were registered with the Commission, Panasonic +filed or furnished periodic reports with the Commission containing Panasonic’s consolidated +financial statements. The consolidated financial statements incorporated financial information +(e.g., net sales, pre-tax income, net income) of its numerous subsidiaries, including PAC. +Panasonic reported to its shareholders that the company’s consolidated financial statements were +prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). +7. Uonaga began working as PAC’s CFO in June 2012. In that role, Uonaga +oversaw the personnel and operations of PAC’s finance department and was responsible for the +integrity and operation of PAC finances, including deciding whether revenue could be +recognized in a particular fiscal quarter. He was also responsible for ensuring that PAC devised, +maintained and followed a system of internal accounting controls in order to assure that PAC’s +financial statements – and therefore Panasonic’s financial statements – were prepared in +conformity with GAAP. +8. As CFO, Uonaga communicated regularly with his supervisors and other +accounting staff at Panasonic (within AVC Networks) regarding PAC’s financial results and the +general status of PAC’s finances. These communications between Uonaga and his supervisors +and financial personnel at Panasonic included whether PAC would recognize and report revenue +at or above the forecasts made by PAC. + + +4 + +Revenue Recognition of Amendment Six +9. Under GAAP, Accounting Standards Codification 605-10-25-1, Revenue +Recognition, provides that revenue should not be recognized until it is realized or realizable and +earned. PAC's revenue recognition policy, consistent with GAAP, set forth four requirements +that must generally be met before revenue could be realized and earned: 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. +10. Based on PAC's revenue recognition policy, and its customary business practice +of requiring a written sales agreement from customers such as the Government Airline, it could +not recognize revenue for a quarter unless, among other requirements, a contract was signed by +the customer prior to the end of the quarter in which the revenue was recognized. Furthermore, +PAC and Uonaga were repeatedly advised by PAC’s external auditor (“Auditor”), that a signed +contract was necessary to recognize revenue from customers such as the Government Airline. +11. In June 2012, PAC and the Government Airline were negotiating an amendment +to an existing contract between the parties to provide for additional business (“Amendment +Six”), but were unable to reach agreement on all of the terms of the amendment. While the +negotiations were ongoing and it appeared that Amendment Six would not be signed by the end +of June, PAC sought the advice of the Auditor about options to satisfy the requirement that +persuasive evidence of an agreement existed. Consistent with the Auditor’s prior advice, and +PAC’s past practice in accounting for agreements with the Government Airline, the Auditor +advised PAC that PAC could recognize revenue from Amendment Six in the quarter ending +June 30, 2012 (“First Quarter”) if the agreement was signed prior to the end of June 2012. +12. Throughout June 2012, PAC and the Government Airline continued to negotiate +the terms of Amendment Six, including the number of aircraft to be included in the contract. The +pricing for the IFE equipment was dependent upon the number of aircraft included in the +amendment, as well as certain engineering costs, and discounts requested by the Government +Airline. The parties were engaged in such negotiations when Uonaga became PAC’s CFO in +early June 2012. Uonaga did not take part in the negotiations, but was apprised of the progress +of those negotiations. +13. PAC’s senior executives, including Uonaga, understood that recognizing revenue +from Amendment Six in the First Quarter was important to Panasonic. For example, on June 23, +2012, a Panasonic executive who also served as a senior PAC executive told Uonaga and another +PAC senior executive that failing to recognize revenue from Amendment Six “is a big problem +for all of us.” Similarly, on June 25, 2012 a Panasonic accounting employee told Uonaga that “it +will be a big problem if this contract fails to be signed.” +14. While the negotiations of Amendment Six were ongoing, Uonaga communicated +with the Auditor regarding the rules applicable to revenue recognition. The Auditor provided +Uonaga and another PAC executive with accounting literature that explained the four criteria for +revenue recognition. The Auditor further noted that, in light of PAC’s customary business +practice with the Government Airline to enter into a signed, written agreement, PAC could not +5 + +recognize revenue in the First Quarter unless the Government Airline signed Amendment Six by +the end of the quarter. +15. On June 28, 2012, a PAC contracts manager advised Uonaga that an executive at +the Government Airline had approved Amendment Six, and that the contract was being presented +to another executive for signature. When asked whether PAC had everything it needed to +recognize the revenue for Amendment Six in the First Quarter, a PAC finance employee emailed +Uonaga and others at PAC that: “We are good to go as soon as we have the ink on the paper.” +16. The next day, on June 29, 2012, Uonaga informed his supervisor and an +accounting colleague at Panasonic that the Government Airline had agreed to the terms of +Amendment Six, but that PAC could not recognize the revenue without obtaining a signed +contract. +17. On July 1, 2012, PAC’s contracts manager advised several PAC executives, +including Uonaga, that Amendment Six was “still not signed” by the Government Airline. That +same day, a PAC finance employee also advised Uonaga that Amendment Six still was unsigned. +18. Uonaga then advised accounting staff at Panasonic that the Government Airline +had not yet signed Amendment Six. In response, a Panasonic accounting executive voiced +concern regarding whether the Auditor would approve recognition of revenue for Amendment +Six without a signed contract. +19. On July 2, 2012, the Government Airline advised PAC that it had signed +Amendment Six, but refused to provide a copy of the executed contract because the Government +Airline wanted additional discounts. +20. That same day, Uonaga reported to his supervisor at Panasonic that Amendment +Six had been signed and that PAC would record the revenue for June. He also relayed that the +Government Airline had sought additional discounts and it would not release the signed contract +to PAC until the issue was resolved. +21. On July 3, 2012, the Government Airline provided PAC with an executed, but +undated, signature page for Amendment Six. Uonaga did not personally receive this document, +but was aware that PAC received it on July 3, 2012. PAC’s contracts manager then caused the +signature page for the Government Airline to be dated June 28, 2012, even though he and other +PAC employees and executives, including Uonaga, knew that it was not signed on that date and +that the Government Airline was still seeking additional pricing discounts. +Uonaga Misled PAC’s Auditor +22. Thereafter, PAC sought to persuade the Auditor that Amendment Six revenue +could be recognized in the First Quarter, despite the fact that neither PAC nor the Government +Airline had signed the agreement before the end of the quarter. Several PAC employees falsely +represented to the Auditor, with Uonaga’s knowledge, that Amendment Six had been signed by +the Government Airline on June 28, 2012. Uonaga told a Panasonic accounting employee that +the Auditor had initially determined that PAC should not include the revenue in the First Quarter, +6 + +but that PAC had convinced the Auditor using, , a +Japanese phrase which is subject to differing translations including, “tweaks and tricks.” + +23. In mid-July 2012, PAC provided the Auditor with a Consolidation Package which +included PAC’s financial statements for the First Quarter. PAC included over $82 million of +improperly recognized revenue from Amendment Six in these financial statements. +24. In addition, as PAC’s CFO, Uonaga provided the Auditor with an annual +certification of PAC’s financial statements, known as a “subcertification” for Panasonic’s fiscal +year 2013. Uonaga also provided the Auditor with a management representation letter for the +First Quarter confirming that the financial statements had been prepared in accordance with +GAAP and the company did not have any deficiencies concerning its books and records and its +internal financial controls. +25. The Auditor relied on the subcertification and management representation letter +provided by Uonaga as part of the normal course of its audit of the company and for the +preparation of PAC’s financial statements, which were incorporated into Panasonic’s financial +statements and subsequently included in Panasonic’s filings with the Commission for the First +Quarter. +26. At no time did Uonaga disclose to the Auditor, or direct anyone else to disclose, +that Amendment Six was backdated in order to improperly recognize revenue in the First +Quarter, the falsification of PAC’s and Panasonic’s books and records, or PAC and Panasonic’s +lack of sufficient internal accounting controls concerning revenue recognition. +27. Instead, Uonaga provided a false subcertification and management letter to the +Auditor. For example, in the annual subcertification, Uonaga falsely stated that “no deficiencies +have been identified and the internal control [sic] over financial reporting have effectively +functioned.” Similarly, in the quarterly management representation letter, Uonaga falsely stated +that the information provided to the Auditor was in conformity with US GAAP, that “there are +no material transactions that have not been properly recorded in the accounting records,” and that +“[t]here are no significant deficiencies or material weaknesses in the design or operation of +internal controls over financial reporting.” +28. Subsequently, PAC’s financial results for the First Quarter – including +approximately $82 million of improperly recognized revenue and associated pre-tax income of +$38.5 million and net income of $22.4 million – were incorporated into Panasonic’s books and +records and consolidated financial statements for the First Quarter. +29. Panasonic’s financial results and consolidated financial statements for the First +Quarter were reported on Forms 6-K filed with the Commission on or about August 2, 2012, and +on or about August 21, 2012. As a result of Uonaga’s conduct, Panasonic misstated pre-tax +income by at least $38.5 million or 9%, and net income by at least $22.4 million or 16%, in the +consolidated financial statements for the First Quarter furnished with its Forms 6-K. + + +7 + +30. In addition, Panasonic failed to maintain internal accounting controls reasonably +designed to ensure that transactions were recorded as necessary to permit preparation of financial +statements in conformity with generally accepted accounting principles, and to make and keep +books, records, and accounts, which fairly reflected the transactions and disposition of +Panasonic’s assets. +31. By engaging in this conduct, Uonaga knowingly circumvented PAC’s internal +accounting controls concerning revenue recognition and caused the company’s books and +records to contain false information. Uonaga also caused Panasonic to violate the books and +records, internal accounting controls, and reporting provisions of the federal securities laws by +circumventing the company’s internal accounting controls concerning revenue recognition, +thereby causing Panasonic to improperly record revenue from Amendment Six in the First +Quarter. That revenue, in turn, was improperly reported by Panasonic in its consolidated +financial statements filed with the Commission in August 2012, which resulted in the company +violating the reporting provisions of the federal securities laws. +LEGAL STANDARDS AND VIOLATIONS +32. As a result of the conduct described above, the Commission finds that Uonaga +willfully violated Section 13(b)(5) of the Exchange Act, which states 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. +33. As a result of the conduct described above, the Commission finds that Uonaga +willfully violated Rule 13b2-1, 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, and Rule 13b2-2 of the Exchange Act, which states, in relevant part, that no director or +office of an issuer shall, directly or indirectly: (1) make or cause to be made a materially false or +misleading statement to an accountant in connection with; or (2) omit to state, or cause 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: (i) any audit, review or examination of the financial statements of the issuer +required to be made pursuant to this subpart; or (ii) the preparation or filing of any document or +report required to be filed with the Commission pursuant to this subpart or otherwise. +34. As a result of the conduct described above, the Commission finds that Uonaga +caused Panasonic to violate Section 13(b)(2)(A) of the Exchange Act, which requires issuers that +have a class of securities registered pursuant to Section 12 of the Exchange Act and issuers with +reporting obligations pursuant to Section 15(d) of the Exchange Act to make and keep books, +records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions +and disposition of their assets. +35. As a result of the conduct described above, the Commission finds that Uonaga +caused Panasonic to violate Section 13(b)(2)(B) of the Exchange Act, which requires issuers that +have a class of securities registered pursuant to Section 12 of the Exchange Act and issuers with +reporting obligations pursuant to Section 15(d) of the Exchange Act to devise and maintain a +system of internal accounting controls sufficient to provide reasonable assurances that +8 + +(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. +36. As a result of the conduct described above, the Commission finds that Uonaga +caused Panasonic to violate Section 13(a) of the Exchange Act and Rules 13a-16 and 12b-20 +thereunder. Section 13(a) requires issuers to file periodic and other reports as the Commission +may prescribe and in conformity with such rules as the Commission may promulgate. Rule 13a- +16 of the Exchange Act requires each foreign private issuer to furnish information on Form 6-K +as specified in the Rule. Rule 12b-20 of the Exchange Act requires that the reports contain 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. +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, Uonaga cease and desist +from committing or causing any violations and any future violations of Exchange Act Sections +13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) [15 U.S.C. §§ 78m(a), 78m(b)(2)(A), 78m(b)(2)(B) +and 78m(b)(5)] and Rules13b2-1, 13b2-2, 12b-20, and 13a-16, thereunder [17 C.F.R. §§ +240.12b-20, 240.13a16, 240.13b2-1 and 240.13b2-2]. +B Uonaga is denied the privilege of appearing or practicing before the +Commission as an accountant. +C After five (5) years from the date of this order, Uonaga may request that +the Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as an accountant. +D Respondent shall, within ten (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 +remission to 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: + + +9 + +(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 Panasonic +as Respondent in these proceedings, and the file number of these proceedings. A copy of the +cover letter and check or money order must be sent to Charles Cain, Chief, FCPA Unit, Division +of Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC +20549. +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 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/2018/AAER-4005.txt b/raw/aaer/2018/AAER-4005.txt new file mode 100644 index 0000000000000000000000000000000000000000..e8ff4118f087a2f55ef25698c4f8bda30c48f6a9 --- /dev/null +++ b/raw/aaer/2018/AAER-4005.txt @@ -0,0 +1,447 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84911 / December 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4005 / December 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-15168 + + +In the Matter of + +JOHN J. AESOPH, CPA, and +DARREN M. BENNETT, CPA + +Respondents. + +: +: +: +: +: +: +: +: + +ORDER MAKING FINDINGS +PURSUANT TO SECTION 4C OF +THE SECURITIES EXCHANGE +ACT OF 1934 AND RULE 102(e) OF +THE COMMISSION’S RULES OF +PRACTICE + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in +the public interest to enter this Order Making Findings 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 as to John J. Aesoph, CPA (“Aesoph” or “Respondent”). +II. +On January 9, 2013, the Commission instituted a public administrative proceeding +pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice against John J. Aesoph, CPA, and Darren M. Bennett, CPA (Rel. No. 68605). +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 Making Findings Pursuant to Section 4C of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice (“Order”), as set forth below. + + + +2 + +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +A. Summary + 1. Aesoph engaged in repeated instances of improper professional conduct during +the year-end 2008 audit of TierOne Corporation, a holding company for TierOne Bank +(collectively “TierOne”). He did so by failing to subject TierOne’s loan loss estimates – one of +the highest risk areas of the audit – to appropriate scrutiny. Aesoph served as the audit partner +on the engagement; he had significant responsibility for the audit decisions, the inadequately +designed and implemented audit programs, the review of audit workpapers, and the failures to +follow audit standards that are the subject of this proceeding. + 2. TierOne’s loan losses were a critical audit area that warranted heightened +scrutiny. Up to and during 2008, as a result of the financial crisis and related real estate market +crash, TierOne had been experiencing a dramatic increase in the number of its troubled real +estate loans. TierOne estimated its loan losses for a key component of its troubled loan portfolio +– large, unique loans accounted for under Financial Accounting Standards Board’s Statement of +Financial Accounting Standards No. 114 (“FAS 114”) – by using the value of the collateral +underlying these loans. Rather than get updated appraisals to value the collateral of the loans that +TierOne evaluated for impairment under FAS 114 (called here “the bank’s FAS 114 loans”), +TierOne frequently relied on stale, dated appraisals to which the bank’s management sometimes +applied a discount. TierOne’s determination of the discount amounts, and its decisions not to +apply a discount, were not documented, nor were they supported by reliable facts or evidence. + 3. Aesoph violated numerous Public Company Accounting Oversight Board +(“PCAOB”) audit standards in both his audit of internal control over financial reporting and his +audit of the financial statements. He correctly identified TierOne’s loan losses as presenting a +fraud risk and a significant risk of material misstatement. The actual audit test work in this area, +however, was inadequate considering the associated audit risk and materiality. For example, the +internal controls identified and tested by the audit engagement team relating to the allowance for +loan and lease losses (“ALLL”) did not effectively address one of the most important and riskiest +components of the bank’s loan loss calculations: management’s use of stale and inadequate +appraisals to value the collateral underlying the bank’s FAS 114 loans. Based on this test work, +Aesoph had no reasonable basis to conclude that TierOne maintained, in all material respects, +effective internal control over financial reporting. Moreover, he failed to adequately identify and +evaluate defects in the design and operating effectiveness of controls over collateral valuation +that would have been important to the auditors’ conclusion about whether TierOne’s controls +sufficiently addressed the assessed risk of misstatement. Aesoph violated PCAOB standards, +including specifically Auditing Standard No. 5 (“AS No. 5”), in his audit of internal control over +financial reporting. + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + +3 + + 4. Compounding these flaws in the audit of internal control over financial reporting +were Aesoph’s failures to comply with PCAOB standards in his substantive audit procedures +over the bank’s FAS 114 loans. The relevant audit work on these loans consisted of checking +management’s basic math, confirming that appraisals (no matter how stale) existed, reviewing a +sample of appraisals, and relying on management’s uncorroborated representations concerning +property-specific issues, including whether stale appraisals required adjustment. These +procedures fell short of the requirements of a number of PCAOB standards, including +specifically AU Sections 328 and 342, which address auditing fair value and accounting +estimates, respectively. In short, Aesoph failed to subject management’s estimates to appropriate +scrutiny. +5. Aesoph failed to obtain sufficient, competent evidential matter to provide +assurances that management’s estimates were reasonable. He further failed to act with due +professional care or appropriate professional skepticism. + 6. These failures, along with others detailed below, demonstrate a single instance of +highly unreasonable conduct that resulted in a violation of applicable professional standards in +which Aesoph knew, or should have known, heightened scrutiny was warranted; and 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. +B. Respondent + 7. John J. Aesoph, CPA, age 46, is a resident of Fremont, Nebraska. Aesoph has +been an auditor at KPMG, LLP (“KPMG”) since 2001 and a partner at the firm since 2005. He +was on the TierOne audit engagement from 2002 through KPMG’s resignation in 2010, and was +the engagement partner for the 2008 audit. Aesoph is currently licensed as a CPA in Nebraska. +He has previously been licensed as a CPA in Idaho, Indiana, Iowa, Kansas, North Dakota, and +South Dakota. +C. Other Relevant Parties +8. TierOne Corporation, a Wisconsin corporation, was, during the relevant time +period, a holding company for TierOne Bank, a federally-chartered savings bank headquartered +in Lincoln, Nebraska. TierOne’s common stock was registered with the Commission pursuant to +Section 12(b) of the Exchange Act; that registration was revoked by consent on June 4, 2012. +Prior to May 7, 2010, TierOne’s shares were listed on the NasdaqGS exchange under the stock +symbol “TONE.” TierOne’s common stock was thereafter quoted on OTC Pink, which is +operated by OTC Markets Group Inc. On June 4, 2010, TierOne Bank was closed by its primary +regulator, the United States Office of Thrift Supervision (“OTS”). The Federal Deposit Insurance +Corporation (“FDIC”) was named receiver and another bank took over TierOne’s assets and +deposit accounts. TierOne subsequently filed for Chapter 7 bankruptcy protection on June 24, +2010. In 2014, TierOne’s President and Chief Operating Officer, James Laphen, and its Chief +Credit Officer, Don Langford, pleaded guilty to federal securities fraud, including conspiring to +conceal the bank’s true financial position from shareholders, regulators, and KPMG. In 2015, +TierOne’s Chairman and Chief Executive Officer, Gilbert Lundstrom, was found guilty by a +federal district court jury, later affirmed by the U.S. Court of Appeals for the Eighth Circuit, of + +4 + +conspiring with TierOne management to conceal the bank’s true financial condition from +shareholders, regulators, and KPMG. Each of these members of management was sentenced to +serve time in prison and to pay restitution for their crimes. +9. KPMG LLP is a limited liability partnership headquartered in New York, New +York, engaged in the business of providing accounting and auditing services. KPMG audited +TierOne’s 2008 financial statements and internal control over financial reporting as of December +31, 2008 and issued unqualified opinions. KPMG also performed quarterly reviews for TierOne +during the relevant time period. +10. Darren M. Bennett, CPA, age 41, is a resident of Elkhorn, Nebraska. Bennett +worked as an auditor at KPMG from 2001 to 2016. He worked on the TierOne audit each year +from 2003 through KPMG’s resignation in 2010, with the exception of one year. Bennett was the +senior manager for the 2008 TierOne audit. Bennett was also a member of KPMG’s financial +services practice and served as manager or senior manager on at least four financial services +audits in addition to TierOne. Bennett is currently licensed as a CPA in Nebraska. He has +previously been licensed as a CPA in North Dakota and South Dakota. +D. TierOne’s Risky Problem Loan Portfolio + + 11. TierOne was a century-old thrift bank that had historically focused on residential +and agricultural loans in the Nebraska/Iowa/Kansas region. Beginning in about 2004, however, +TierOne expanded into high-risk types of lending in regions such as Las Vegas, Florida, and +Arizona, which were experiencing unusual, rapid escalation in market values. This strategy +made the bank particularly vulnerable to the subsequent fallout from the financial crisis, as these +areas were hardest hit by the precipitous fall in real estate prices, which began in late 2006 and +early 2007. + +12. Throughout 2008, TierOne was experiencing a dramatic rise in high-risk problem +loans including land and land development and residential construction. Certain of these problem +loans – typically larger and non-homogenous (i.e., not car or residential mortgage loans) – were +deemed “impaired” pursuant to FAS 114, meaning it was probable the bank would not recover +all amounts as contractually due. TierOne’s reported FAS 114 impaired loan balance had +increased from less than $4 million as of December 31, 2006 to nearly $186 million as of +December 31, 2008. +13. In June 2008, the OTS conducted a “risk-focused examination” of the bank that +focused on asset quality, credit administration, management, earnings, and the adequacy of +ALLL. As a result of that examination, the OTS downgraded the bank’s composite CAMELS +rating from a one (indicating a financial institution that was “sound in every respect”) to a four +(indicating a financial institution with “serious financial or managerial deficiencies” that require +close supervisory attention). The OTS provided the bank with a report that deemed the institution +to be in troubled condition and board and management performance to be exceptionally poor. +OTS concluded that TierOne had experienced a significant deterioration in asset quality due to +eroding real estate values in Nevada and Florida, and that poor board and management oversight +had exacerbated the problem. The OTS cited data demonstrating that real estate values were +declining at unprecedented rates in states and markets where the bank had a concentration of + +5 + +loans. The OTS also directed TierOne to maintain higher minimum capital ratios. As the auditors +were aware, failure to correct the problems identified by the OTS or to meet the heightened +capital requirements would result in additional OTS enforcement action. + 14. The bank’s FAS 114 loans had a negative effect on TierOne’s ability to meet the +heightened capital requirements mandated by the OTS. Under Generally Accepted Accounting +Principles (“GAAP”), TierOne was required to assess probable losses associated with its +impaired loans and record those losses in its ALLL. 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 that was typically utilized by TierOne on its FAS 114 loans. As loan losses +increased, the bank’s capital was further eroded, directly impacting the OTS capital +requirements. +15. In order to assess loan losses for the bank’s FAS 114 loans, TierOne prepared +loan-by-loan spreadsheets that contained estimates of collateral values and loan impairment +determinations. TierOne generally based the valuation on the most recent appraisal in its loan +files. If the appraisal was aged, as it typically was, TierOne would sometimes apply a discount to +the appraised value. These discounts were determined by an informal committee at the bank. The +rationale for applying any particular discount – or for not discounting an appraisal at all – was +not documented. +16. In the summer of 2009, after KPMG issued its audit opinion with respect to +TierOne’s 2008 financial statements and when the OTS began its next annual exam, the bank +was forced to get a significant number of updated appraisals and to use those appraisals in its +loan loss calculations. In the fall of 2009, TierOne disclosed over $130 million in additional loan +loss provisions. TierOne was shut down by bank regulators on June 4, 2010 and filed for +bankruptcy later that month. +17. In April 2010, KPMG resigned as TierOne’s auditor. KPMG withdrew its audit +opinion relating to TierOne’s 2008 financial statements on the basis that they were materially +misstated with respect to certain out-of-period adjustments for loan loss reserves. KPMG also +withdrew its opinion relating to TierOne’s internal control over financial reporting as of the year- +end 2008 due to a material weakness in internal control over financial reporting related to the +material misstatements. +E. The Auditors Recognized the Risks in TierOne’s Problem Loan Portfolio + 18. Prior to and during their 2008 audit of TierOne, Aesoph was aware of the risk and +significance of the bank’s loan loss provisions, and of the loan loss component related to the +bank’s FAS 114 loans specifically. +19. The audit planning document – reviewed and approved by Aesoph – identified the +ALLL as a risk that could result in a material misstatement of TierOne’s financial statements. +20. Compounding the identified risks were numerous red flags and other irregularities +that should have triggered Aesoph’s professional skepticism and led him to investigate further. +For example, Aesoph was aware that, in connection with its June 2008 examination, the OTS +identified a deficiency in TierOne’s ALLL representing an approximate 25% increase over the + +6 + +previously-reported ALLL. TierOne’s valuation adjustments on the collateral underlying the +bank’s FAS 114 loans also were inconsistent with independent market data. Further, despite the +market declines, TierOne management often did not get updated appraisals on the collateral +underlying the bank’s FAS 114 loans, and in the limited instances where TierOne did get +updated appraisals or valuations, the collateral value typically showed a significant decline from +the amount used by management in the immediately preceding quarter. And despite TierOne’s +internal policy to do so, the bank often failed to discount Nevada appraisals that were more than +six months old. + 21. In addition to these red flags, the portion of the ALLL related to the bank’s FAS +114 loans was material. PCAOB auditing standards recognize that financial statements are +materially misstated when they contain misstatements whose effect, individually or in the +aggregate, is important enough to cause the financial statements not to be presented fairly, in all +material respects, in conformity with generally accepted accounting principles. AU § 312, ¶ 4. +22. The portion of the ALLL related to the bank’s FAS 114 loans was material to the +financial statements taken as a whole. +23. Given the risk and materiality of the ALLL related to the bank’s FAS 114 loans, +and the many red flags, Aesoph had heightened responsibilities in auditing this area, and was +required to apply professional skepticism in obtaining sufficient competent evidential matter to +support their opinions. He failed in these responsibilities. +F. Aesoph’s Improper Professional Conduct + 24. The Commission’s Rules allow the Commission to censure or deny, temporarily +or permanently, the privilege of appearing or practicing before it in any way certain professionals +who violate “applicable professional standards.” 17 C.F.R. § 201.102(e). For auditors of issuers +such as TierOne, the applicable professional standards include standards issued by the PCAOB. + + 25. The PCAOB’s three general standards of auditing require that an auditor (1) have +adequate technical training and proficiency, (2) maintain an independent mental attitude, and (3) +act with due professional care in the performance of the audit. AU § 150, ¶ 2. The three basic +standards of field work require the auditor to (1) adequately plan and properly supervise the +audit, (2) obtain a sufficient understanding of internal control to plan the audit, and (3) obtain +sufficient competent evidential matter to afford a reasonable basis for an opinion. AU § 150, ¶ 2. +PCAOB standards also require that auditors “must document the procedures performed, evidence +obtained, and conclusions reached with respect to relevant financial statement assertions,” and +such “[a]udit documentation must clearly demonstrate that the work was in fact performed.” AS +No. 3 ¶ 6. +26. Aesoph, as the engagement partner, was responsible for the audit engagement and +its performance, for proper supervision of the work of the engagement team members, and for +compliance with PCAOB standards. + 27. At the completion of the audit, Aesoph signed off that “all necessary auditing +procedures were completed,” that “support for conclusions was obtained,” and that “sufficient + +7 + +appropriate audit evidence was obtained.” Further, Aesoph specifically signed off on the audit +checklist’s requirement that the audit engagement team had “performed and documented its work +in compliance with . . . applicable auditing standards . . . , and the working papers demonstrate +this compliance.” +28. As detailed below, Aesoph’s conduct in planning, supervising, and implementing +KPMG’s audit of TierOne’s 2008 financial statements – and specifically the portions of the audit +relating to the bank’s FAS 114 loans – violated numerous PCAOB standards. Most prominently, +the auditors violated the requirements of AS No. 5 regarding audits of internal control over +financial reporting, and AU Sections 328 (auditing fair value measurements) and 342 (auditing +accounting estimates) related to the substantive audit procedures. Aesoph also violated: the third +general audit standard (due professional care), see AU § 150, ¶ 2; and the third standard of field +work (obtaining sufficient competent evidential matter), see AU § 150, ¶ 2; AS No. 3; and AU +§§ 230, 312, 316, 319, 326, 333, and 561. +29. The KPMG engagement team performed an integrated audit of TierOne, meaning +that the audit of TierOne’s internal control over financial reporting was integrated with the audit +of TierOne’s financial statements. When an auditor assesses control risk below the maximum +level, as the auditors did here, he or she should obtain sufficient evidential matter to support that +assessed level. AU § 319, ¶¶ 80, 90. Moreover, if one or more material weaknesses exist, the +company’s internal control over financial reporting cannot be considered effective. AS No. 5, ¶ +2. A material weakness is a deficiency, or a combination of deficiencies, in internal control over +financial reporting, such that there is a reasonable possibility that a material misstatement of the +company’s annual or interim financial statements will not be prevented or detected on a timely +basis. AS No. 5, Appendix A, ¶ A7. + 30. AS No. 5 provides specific requirements for auditing internal control over +financial reporting in an integrated audit, including that the auditors should understand likely +sources of potential misstatements and focus more of their attention on the areas of highest risk. +But the key ALLL control that the audit engagement team identified (the bank’s Asset +Classification Committee) did not effectively address the riskiest component of the ALLL: the +bank’s valuation of collateral for the bank’s FAS 114 loans with stale appraisals. In addition, the +audit engagement team failed to identify or test any effective internal controls to determine +whether TierOne was complying with its own policies for updating appraisals. Aesoph therefore +violated AS No. 5, and further lacked a reasonable basis for the audit’s conclusion that there +were no material weaknesses in TierOne’s internal control over financial reporting. + 31. Adding to the failures in connection with auditing TierOne’s internal control over +ALLL was Aesoph’s deficient substantive audit procedures. Specifically, the audit engagement +team failed to follow PCAOB standards in reviewing the reasonableness of management’s +estimates of the value of the collateral underlying the bank’s FAS 114 loans – one of the riskiest +and most critical elements of the bank’s FAS 114 loss estimate calculation. The audit +engagement team relied principally on the most recent (and often stale) appraisals given them +and on management’s uncorroborated representations of current value. The audit engagement +team relied on these representations despite evidence that management’s estimates were biased +and inconsistent with independent market data. Aesoph reviewed the FAS 114 test work prior to +signing the audit opinion. By failing to subject management’s estimates to appropriate scrutiny, + +8 + +Aesoph violated PCAOB standards. Aesoph failed to obtain sufficient, competent evidential +matter to provide assurances that management’s estimates were reasonable. He further failed to +act with due professional care or appropriate professional skepticism. + 32. TierOne estimated the value of the collateral underlying the bank’s FAS 114 loans +on a loan-by-loan basis because the bank’s FAS 114 portfolio was made up of large, non- +homogenous loans. Therefore, the audit engagement team performed a loan-by-loan review of +the bank’s FAS 114 loan portfolio to test whether management’s estimates of value were +reasonable. However, the substantive audit procedures and the evidence obtained from those +procedures were insufficient to meet PCAOB standards. +33. The audit engagement team obtained and reviewed each of the more than fifty +FAS 114 spreadsheets prepared by the bank. Most of the audit work was simply “ticking and +tying”: recalculating figures, agreeing charge off amounts, and tying reported appraisal values to +the actual appraisals. +34. The audit engagement team did, however, obtain a sample of original appraisals +from management for additional testing. Specifically, the audit engagement team assumed that +appraisals less than a year old were “current” (regardless of the market). For appraisals older +than a year, they inquired whether a discount was applied to the appraised value, and if not, they +inquired why TierOne didn’t think it was necessary or appropriate. In addition, Bennett and +members of the audit engagement team discussed with management a sample of FAS 114 +calculations and recent trends, and “leveraged” information from certain loan reviews.2 +Following this test work, Aesoph reviewed and discussed the bank’s FAS 114 spreadsheets with +the audit engagement team to ensure that Aesoph was satisfied with the audit engagement team’s +conclusions. Based on the entirety of these procedures, the auditors concluded that “the FAS 114 +calculations appear to be properly prepared and adequately supported at 12/31/08.” Aesoph +lacked a reasonable basis for this conclusion. +35. Aesoph relied on an unsupported – and unsupportable – assumption that +appraisals less than a year old were “current,” without regard to the property’s location or stage +of development, and that market conditions had not materially deteriorated throughout the year. +Many of the markets in which TierOne’s collateral was located were seeing significant +continuing quarterly declines in the value of real estate. In addition, many of the properties that +served as collateral were under development and in varying stages of completion. TierOne’s +lending policy cautioned against relying on aged appraisals in these markets. According to the +policy, “[i]n a rapidly escalating or deteriorating market, a[n appraisal] value may be valid for +only a few months.” Despite this policy, Aesoph arbitrarily assumed that only appraisals older +than a year potentially needed adjusting. + +2 Although the auditors may have “leveraged” the aspects of the loan reviews that arguably +supported their conclusions as to the reasonableness of management’s valuations of certain of the +bank’s FAS 114 loans, they ignored information in those same loan reviews that contradicted +management’s valuation assessment. + +9 + +36. In addition, the test work over management’s valuation estimates was insufficient. +Again, according to its audit program, the audit engagement team would “inquire” of +management whether discounts had been applied to older appraisals, and if not, why not. But +uncorroborated management representations are not sufficient evidence in a high risk audit area. + 37. In addition to appraisal information, TierOne’s FAS 114 worksheets sporadically +contained references to other information in support of management’s estimates of the fair value +of the collateral. This information included, for example, asking prices, borrower development +plans and status, estimated costs to complete, offers to purchase, and other information. The +auditors failed to obtain independent corroboration of any of this information. + 38. Aesoph also failed to recognize bias in management’s loan loss estimates on its +FAS 114 loans. + 39. Finally, the auditors failed to investigate facts discovered after the date of their +report on the 2008 financial statements that may have affected the 2008 financial statements. +40. PCAOB audit standards set out a number of steps that should be taken by an +auditor who, “subsequent to the date of the report upon audited financial statements, becomes +aware that facts may have existed at that date which might have affected the report had he or she +then been aware of such facts.” AU § 561, ¶ 1. As an initial matter, “[w]hen the auditor becomes +aware of information which relates to financial statements previously reported on by him, but +which was not known to him at the date of his report, and which is of such a nature and from +such a source that he would have investigated it had it come to his attention during the course of +his audit, he should, as soon as practicable, undertake to determine whether the information is +reliable and whether the facts existed at the date of his report.” AU § 561, ¶ 4. If in fact the +information is reliable and existed at the date of the report, other steps may be required. AU § +561, ¶¶ 5-8. “Subsequent events affecting the realization of assets . . . ordinarily will require +adjustment of the financial statements . . . .” AU § 560, ¶ 7. + 41. During KPMG’s 2009 quarterly reviews, the engagement team learned of several +borrower relationships that had new appraisals or valuations that likely existed at the date of +KPMG’s 2008 audit report, issued on March 12, 2009. In each case, that new valuation showed a +significant decline from management’s estimate at year end. + 42. Despite learning that there were new appraisals and valuation assessments which +were dated prior to the issuance of the 2008 audit report, Aesoph failed to perform the +procedures required by AU § 561. Rather, Aesoph assumed he had no reason to investigate +because, he claims, he received representations from management shortly before issuing the +audit opinion that no new appraisals had been received that impacted the 2008 financial +statements. This is, however, precisely what should have triggered AU § 561: new information +came to light after the audit report was issued that was inconsistent with previous information +and, for that matter, management’s purported representations that all new appraisals had been +given to KPMG. Aesoph had an obligation to investigate, but failed to do so. + + + +10 + +G. Violations + 43. As described in detail above, Aesoph violated numerous PCAOB audit standards, +failed to obtain sufficient competent evidential matter to support his audit conclusions, and failed +to exercise due professional care and appropriate professional skepticism. + 44. Specifically, Aesoph violated: the third general audit standard (due professional +care), see AU § 150, ¶ 2; the third standard of field work (competent evidential matter), see AU § +150, ¶ 2; AS Nos. 3 and 5; and AU §§ 230, 312, 316, 319, 326, 328, 333, 342, and 561. +45. Aesoph engaged in improper professional conduct, as defined in Section 4C of the +Exchange Act and Rule 102(e)(1)(ii), in that his conduct constituted negligent conduct consisting +of (1) a single instance of highly unreasonable conduct that resulted in a violation of applicable +professional standards in which Aesoph knew, or should have known, that heightened scrutiny +was 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. +IV. + 46. On August 5, 2016, the Commission issued an Opinion finding that Aesoph +engaged in improper professional conduct in the audit of TierOne’s financial statements, and +issued an Order denying Aesoph the privilege of appearing or practicing before the Commission +as an accountant with a right to apply for reinstatement after three years. + 47. On October 3, 2016, Aesoph filed in the U.S. Court of Appeals for the Eighth +Circuit a petition for review of the Commissions’ Opinion and Order. +48. On June 27, 2018, the U.S. Court of Appeals for the Eighth Circuit vacated the +Commission’s Opinion and Order in light of the decision of the Supreme Court in Lucia v. +Securities and Exchange Commission, 138 S. Ct. 2044, ___ U.S. ___ (June 21, 2018). + 49. The Commission finds that Aesoph engaged in improper professional conduct. +Nonetheless, in light of the facts and circumstances present here, we have determined, as an +exercise of our equitable discretion, not to impose a suspension or other sanction pursuant to +Rule 102(e)(1)(ii). It is therefore ORDERED that no suspension or other sanction pursuant to +Rule 102(e)(1)(ii) shall be imposed. + + By the Commission. + +Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-4006.txt b/raw/aaer/2018/AAER-4006.txt new file mode 100644 index 0000000000000000000000000000000000000000..79be4018f34c13c2a98ac294271a3846b3b8907c --- /dev/null +++ b/raw/aaer/2018/AAER-4006.txt @@ -0,0 +1,454 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84912 / December 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4006 / December 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-15168 + + +In the Matter of + +DARREN M. BENNETT, CPA + +Respondents. + +: +: +: +: +: +: +: +: + +ORDER MAKING FINDINGS +PURSUANT TO SECTION 4C OF +THE SECURITIES EXCHANGE +ACT OF 1934 AND RULE 102(e) OF +THE COMMISSION’S RULES OF +PRACTICE + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in +the public interest to enter this Order Making Findings 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 as to Darren M. Bennett, CPA (“Bennett” or “Respondent”). +II. +On January 9, 2013, the Commission instituted public administrative proceedings +pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice against Darren M. Bennett, CPA (Rel. No. 68605). +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 Making Findings Pursuant to Section 4C of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice (“Order”), as set forth below. + + + +2 + +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +A. Summary + 1. Bennett engaged in repeated instances of improper professional conduct during +the year-end 2008 audit of TierOne Corporation, a holding company for TierOne Bank +(collectively “TierOne”). He did so by failing to subject TierOne’s loan loss estimates – one of +the highest risk areas of the audit – to appropriate scrutiny. Bennett served as the senior manager +on the engagement; he had significant responsibility for the audit decisions, the inadequately +designed and implemented audit programs, the review of audit workpapers, and the failures to +follow audit standards that are the subject of this proceeding. + 2. TierOne’s loan losses were a critical audit area that warranted heightened +scrutiny. Up to and during 2008, as a result of the financial crisis and related real estate market +crash, TierOne had been experiencing a dramatic increase in the number of its troubled real +estate loans. TierOne estimated its loan losses for a key component of its troubled loan portfolio +– large, unique loans accounted for under Financial Accounting Standards Board’s Statement of +Financial Accounting Standards No. 114 (“FAS 114”) – by using the value of the collateral +underlying these loans. Rather than get updated appraisals to value the collateral of the loans that +TierOne evaluated for impairment under FAS 114 (called here “the bank’s FAS 114 loans”), +TierOne frequently relied on stale, dated appraisals to which the bank’s management sometimes +applied a discount. TierOne’s determination of the discount amounts, and its decisions not to +apply a discount, were not documented, nor were they supported by reliable facts or evidence. + 3. Bennett violated numerous Public Company Accounting Oversight Board +(“PCAOB”) audit standards in both his audit of internal control over financial reporting and his +audit of the financial statements. He correctly identified TierOne’s loan losses as presenting a +fraud risk and a significant risk of material misstatement. The actual audit test work in this area, +however, was inadequate considering the associated audit risk and materiality. For example, the +internal controls identified and tested by the audit engagement team relating to the allowance for +loan and lease losses (“ALLL”) did not effectively address one of the most important and riskiest +components of the bank’s loan loss calculations: management’s use of stale and inadequate +appraisals to value the collateral underlying the bank’s FAS 114 loans. Based on this test work, +Bennett had no reasonable basis to conclude that TierOne maintained, in all material respects, +effective internal control over financial reporting. Moreover, he failed to adequately identify and +evaluate defects in the design and operating effectiveness of controls over collateral valuation +that would have been important to the auditors’ conclusion about whether TierOne’s controls +sufficiently addressed the assessed risk of misstatement. Bennett violated PCAOB standards, +including specifically Auditing Standard No. 5 (“AS No. 5”), in his audit of internal control over +financial reporting. + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + +3 + + 4. Compounding these flaws in the audit of internal control over financial reporting +were Bennett’s failures to comply with PCAOB standards in his substantive audit procedures +over the bank’s FAS 114 loans. The relevant audit work on these loans consisted of checking +management’s basic math, confirming that appraisals (no matter how stale) existed, reviewing a +sample of appraisals, and relying on management’s uncorroborated representations concerning +property-specific issues, including whether stale appraisals required adjustment. These +procedures fell short of the requirements of a number of PCAOB standards, including +specifically AU Sections 328 and 342, which address auditing fair value and accounting +estimates, respectively. In short, Bennett failed to subject management’s estimates to +appropriate scrutiny. +5. Bennett failed to obtain sufficient, competent evidential matter to provide +assurances that management’s estimates were reasonable. He further failed to act with due +professional care or appropriate professional skepticism. + 6. These failures, along with others detailed below, demonstrate a single instance of +highly unreasonable conduct that resulted in a violation of applicable professional standards in +which Bennett knew, or should have known, heightened scrutiny was warranted; and 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. +B. Respondent +7. Darren M. Bennett, CPA, age 41, is a resident of Elkhorn, Nebraska. Bennett +worked as an auditor at KPMG, LLP (“KPMG”) from 2001 to 2016. He worked on the TierOne +audit each year from 2003 through KPMG’s resignation in 2010, with the exception of one year. +Bennett was the senior manager for the 2008 TierOne audit. Bennett was also a member of +KPMG’s financial services practice and served as manager or senior manager on at least four +financial services audits in addition to TierOne. Bennett is currently licensed as a CPA in +Nebraska. He has previously been licensed as a CPA in North Dakota and South Dakota. +C. Other Relevant Parties +8. TierOne Corporation, a Wisconsin corporation, was, during the relevant time +period, a holding company for TierOne Bank, a federally-chartered savings bank headquartered +in Lincoln, Nebraska. TierOne’s common stock was registered with the Commission pursuant to +Section 12(b) of the Exchange Act; that registration was revoked by consent on June 4, 2012. +Prior to May 7, 2010, TierOne’s shares were listed on the NasdaqGS exchange under the stock +symbol “TONE.” TierOne’s common stock was thereafter quoted on OTC Pink, which is +operated by OTC Markets Group Inc. On June 4, 2010, TierOne Bank was closed by its primary +regulator, the United States Office of Thrift Supervision (“OTS”). The Federal Deposit Insurance +Corporation (“FDIC”) was named receiver and another bank took over TierOne’s assets and +deposit accounts. TierOne subsequently filed for Chapter 7 bankruptcy protection on June 24, +2010. In 2014, TierOne’s President and Chief Operating Officer, James Laphen, and its Chief +Credit Officer, Don Langford, pleaded guilty to federal securities fraud, including conspiring to +conceal the bank’s true financial position from shareholders, regulators, and KPMG. In 2015, +TierOne’s Chairman and Chief Executive Officer, Gilbert Lundstrom, was found guilty by a + +4 + +federal district court jury, later affirmed by the U.S. Court of Appeals for the Eighth Circuit, of +conspiring with TierOne management to conceal the bank’s true financial condition from +shareholders, regulators, and KPMG. Each of these members of management was sentenced to +serve time in prison and to pay restitution for their crimes. +9. KPMG LLP is a limited liability partnership headquartered in New York, New +York, engaged in the business of providing accounting and auditing services. KPMG audited +TierOne’s 2008 financial statements and internal control over financial reporting as of December +31, 2008 and issued unqualified opinions. KPMG also performed quarterly reviews for TierOne +during the relevant time period. + 10. John J. Aesoph, CPA, age 46, is a resident of Fremont, Nebraska. Aesoph has +been an auditor at KPMG since 2001 and a partner at the firm since 2005. He was on the +TierOne audit engagement from 2002 through KPMG’s resignation in 2010, and was the +engagement partner for the 2008 audit. Aesoph is currently licensed as a CPA in Nebraska. He +has previously been licensed as a CPA in Idaho, Indiana, Iowa, Kansas, North Dakota, and South +Dakota. +D. TierOne’s Risky Problem Loan Portfolio + + 11. TierOne was a century-old thrift bank that had historically focused on residential +and agricultural loans in the Nebraska/Iowa/Kansas region. Beginning in about 2004, however, +TierOne expanded into high-risk types of lending in regions such as Las Vegas, Florida, and +Arizona, which were experiencing unusual, rapid escalation in market values. This strategy +made the bank particularly vulnerable to the subsequent fallout from the financial crisis, as these +areas were hardest hit by the precipitous fall in real estate prices, which began in late 2006 and +early 2007. + +12. Throughout 2008, TierOne was experiencing a dramatic rise in high-risk problem +loans including land and land development and residential construction. Certain of these problem +loans – typically larger and non-homogenous (i.e., not car or residential mortgage loans) – were +deemed “impaired” pursuant to FAS 114, meaning it was probable the bank would not recover +all amounts as contractually due. TierOne’s reported FAS 114 impaired loan balance had +increased from less than $4 million as of December 31, 2006 to nearly $186 million as of +December 31, 2008. +13. In June 2008, the OTS conducted a “risk-focused examination” of the bank that +focused on asset quality, credit administration, management, earnings, and the adequacy of +ALLL. As a result of that examination, the OTS downgraded the bank’s composite CAMELS +rating from a one (indicating a financial institution that was “sound in every respect”) to a four +(indicating a financial institution with “serious financial or managerial deficiencies” that require +close supervisory attention). The OTS provided the bank with a report that deemed the institution +to be in troubled condition and board and management performance to be exceptionally poor. +OTS concluded that TierOne had experienced a significant deterioration in asset quality due to +eroding real estate values in Nevada and Florida, and that poor board and management oversight +had exacerbated the problem. The OTS cited data demonstrating that real estate values were +declining at unprecedented rates in states and markets where the bank had a concentration of + +5 + +loans. The OTS also directed TierOne to maintain higher minimum capital ratios. As the auditors +were aware, failure to correct the problems identified by the OTS or to meet the heightened +capital requirements would result in additional OTS enforcement action. + 14. The bank’s FAS 114 loans had a negative effect on TierOne’s ability to meet the +heightened capital requirements mandated by the OTS. Under Generally Accepted Accounting +Principles (“GAAP”), TierOne was required to assess probable losses associated with its +impaired loans and record those losses in its ALLL. 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 that was typically utilized by TierOne on its FAS 114 loans. As loan losses +increased, the bank’s capital was further eroded, directly impacting the OTS capital +requirements. +15. In order to assess loan losses for the bank’s FAS 114 loans, TierOne prepared +loan-by-loan spreadsheets that contained estimates of collateral values and loan impairment +determinations. TierOne generally based the valuation on the most recent appraisal in its loan +files. If the appraisal was aged, as it typically was, TierOne would sometimes apply a discount to +the appraised value. These discounts were determined by an informal committee at the bank. The +rationale for applying any particular discount – or for not discounting an appraisal at all – was +not documented. +16. In the summer of 2009, after KPMG issued its audit opinion with respect to +TierOne’s 2008 financial statements and when the OTS began its next annual exam, the bank +was forced to get a significant number of updated appraisals and to use those appraisals in its +loan loss calculations. In the fall of 2009, TierOne disclosed over $130 million in additional loan +loss provisions. TierOne was shut down by bank regulators on June 4, 2010 and filed for +bankruptcy later that month. +17. In April 2010, KPMG resigned as TierOne’s auditor. KPMG withdrew its audit +opinion relating to TierOne’s 2008 financial statements on the basis that they were materially +misstated with respect to certain out-of-period adjustments for loan loss reserves. KPMG also +withdrew its opinion relating to TierOne’s internal control over financial reporting as of the year- +end 2008 due to a material weakness in internal control over financial reporting related to the +material misstatements. +E. The Auditors Recognized the Risks in TierOne’s Problem Loan Portfolio + 18. Prior to and during their 2008 audit of TierOne, Bennett was aware of the risk and +significance of the bank’s loan loss provisions, and of the loan loss component related to the +bank’s FAS 114 loans specifically. +19. The audit planning document – reviewed and approved by Bennett – identified the +ALLL as a risk that could result in a material misstatement of TierOne’s financial statements. +20. Compounding the identified risks were numerous red flags and other irregularities +that should have triggered Bennett’s professional skepticism and led him to investigate further. +For example, Bennett was aware that, in connection with its June 2008 examination, the OTS +identified a deficiency in TierOne’s ALLL representing an approximate 25% increase over the + +6 + +previously-reported ALLL. TierOne’s valuation adjustments on the collateral underlying the +bank’s FAS 114 loans also were inconsistent with independent market data. Further, despite the +market declines, TierOne management often did not get updated appraisals on the collateral +underlying the bank’s FAS 114 loans, and in the limited instances where TierOne did get +updated appraisals or valuations, the collateral value typically showed a significant decline from +the amount used by management in the immediately preceding quarter. And despite TierOne’s +internal policy to do so, the bank often failed to discount Nevada appraisals that were more than +six months old. + 21. In addition to these red flags, the portion of the ALLL related to the bank’s FAS +114 loans was material. PCAOB auditing standards recognize that financial statements are +materially misstated when they contain misstatements whose effect, individually or in the +aggregate, is important enough to cause the financial statements not to be presented fairly, in all +material respects, in conformity with generally accepted accounting principles. AU § 312, ¶ 4. +22. The portion of the ALLL related to the bank’s FAS 114 loans was material to the +financial statements taken as a whole. +23. Given the risk and materiality of the ALLL related to the bank’s FAS 114 loans, +and the many red flags, Bennett had heightened responsibilities in auditing this area, and was +required to apply professional skepticism in obtaining sufficient competent evidential matter to +support their opinions. He failed in these responsibilities. +F. Bennett’s Improper Professional Conduct + 24. The Commission’s Rules allow the Commission to censure or deny, temporarily +or permanently, the privilege of appearing or practicing before it in any way certain professionals +who violate “applicable professional standards.” 17 C.F.R. § 201.102(e). For auditors of issuers +such as TierOne, the applicable professional standards include standards issued by the PCAOB. + + 25. The PCAOB’s three general standards of auditing require that an auditor (1) have +adequate technical training and proficiency, (2) maintain an independent mental attitude, and (3) +act with due professional care in the performance of the audit. AU § 150, ¶ 2. The three basic +standards of field work require the auditor to (1) adequately plan and properly supervise the +audit, (2) obtain a sufficient understanding of internal control to plan the audit, and (3) obtain +sufficient competent evidential matter to afford a reasonable basis for an opinion. AU § 150, ¶ 2. +PCAOB standards also require that auditors “must document the procedures performed, evidence +obtained, and conclusions reached with respect to relevant financial statement assertions,” and +such “[a]udit documentation must clearly demonstrate that the work was in fact performed.” AS +No. 3 ¶ 6. +26. As the senior manager on the engagement team, Bennett contributed significantly +to the planning of the audit, the design of tests of controls, and the design and implementation of +substantive procedures. Additionally, Bennett was responsible for executing the audit, including +directing the audit engagement team on how to conduct the audit. Bennett reviewed the audit +workpapers and was responsible for on-site supervision of the audit engagement team. Bennett +also played a significant role in gathering and evaluating evidential matter to support the audit of + +7 + +ALLL, and specifically the valuation of collateral underlying the bank’s FAS 114 loans. Bennett +was responsible for compliance with PCAOB standards with respect to the supervisory +responsibilities that were assigned to him. + 27. At the completion of the audit, Bennett signed off that “all necessary auditing +procedures were completed,” that “support for conclusions was obtained,” and that “sufficient +appropriate audit evidence was obtained.” +28. As detailed below, Bennett’s conduct in planning, supervising, and implementing +KPMG’s audit of TierOne’s 2008 financial statements – and specifically the portions of the audit +relating to the bank’s FAS 114 loans – violated numerous PCAOB standards. Most prominently, +the auditors violated the requirements of AS No. 5 regarding audits of internal control over +financial reporting, and AU Sections 328 (auditing fair value measurements) and 342 (auditing +accounting estimates) related to the substantive audit procedures. Bennett also violated: the third +general audit standard (due professional care), see AU § 150, ¶ 2; and the third standard of field +work (obtaining sufficient competent evidential matter), see AU § 150, ¶ 2; AS No. 3; and AU +§§ 230, 312, 316, 319, 326, 333, and 561. +29. The KPMG engagement team performed an integrated audit of TierOne, meaning +that the audit of TierOne’s internal control over financial reporting was integrated with the audit +of TierOne’s financial statements. When an auditor assesses control risk below the maximum +level, as the auditors did here, he or she should obtain sufficient evidential matter to support that +assessed level. AU § 319, ¶¶ 80, 90. Moreover, if one or more material weaknesses exist, the +company’s internal control over financial reporting cannot be considered effective. AS No. 5, ¶ +2. A material weakness is a deficiency, or a combination of deficiencies, in internal control over +financial reporting, such that there is a reasonable possibility that a material misstatement of the +company’s annual or interim financial statements will not be prevented or detected on a timely +basis. AS No. 5, Appendix A, ¶ A7. + 30. AS No. 5 provides specific requirements for auditing internal control over +financial reporting in an integrated audit, including that the auditors should understand likely +sources of potential misstatements and focus more of their attention on the areas of highest risk. +But the key ALLL control that the audit engagement team identified (the bank’s Asset +Classification Committee) did not effectively address the riskiest component of the ALLL: the +bank’s valuation of collateral for the bank’s FAS 114 loans with stale appraisals. In addition, the +audit engagement team failed to identify or test any effective internal controls to determine +whether TierOne was complying with its own policies for updating appraisals. Bennett therefore +violated AS No. 5, and further lacked a reasonable basis for the audit’s conclusion that there +were no material weaknesses in TierOne’s internal control over financial reporting. + 31. Adding to the failures in connection with auditing TierOne’s internal control over +ALLL was Bennett’s deficient substantive audit procedures. Specifically, the audit engagement +team failed to follow PCAOB standards in reviewing the reasonableness of management’s +estimates of the value of the collateral underlying the bank’s FAS 114 loans – one of the riskiest +and most critical elements of the bank’s FAS 114 loss estimate calculation. The audit +engagement team relied principally on the most recent (and often stale) appraisals given them +and on management’s uncorroborated representations of current value. The audit engagement + +8 + +team relied on these representations despite evidence that management’s estimates were biased +and inconsistent with independent market data. Bennett was directly involved in the audit +engagement team’s FAS 114 test work. Specifically: Bennett initially reviewed the individual +spreadsheets prepared by TierOne that purported to justify the valuation of the underlying +collateral of the bank’s FAS 114 loans; Bennett supervised the audit test work and collection of +evidential matter, including meeting directly with management to discuss management’s +estimates of the value of collateral; and Bennett approved the audit engagement team’s FAS 114 +test work prior to passing it to Aesoph. By failing to subject management’s estimates to +appropriate scrutiny, Bennett violated PCAOB standards. Bennett failed to obtain sufficient, +competent evidential matter to provide assurances that management’s estimates were reasonable. +He further failed to act with due professional care or appropriate professional skepticism. + 32. TierOne estimated the value of the collateral underlying the bank’s FAS 114 loans +on a loan-by-loan basis because the bank’s FAS 114 portfolio was made up of large, non- +homogenous loans. Therefore, the audit engagement team performed a loan-by-loan review of +the bank’s FAS 114 loan portfolio to test whether management’s estimates of value were +reasonable. However, the substantive audit procedures and the evidence obtained from those +procedures were insufficient to meet PCAOB standards. +33. The audit engagement team obtained and reviewed each of the more than fifty +FAS 114 spreadsheets prepared by the bank. Most of the audit work was simply “ticking and +tying”: recalculating figures, agreeing charge off amounts, and tying reported appraisal values to +the actual appraisals. +34. The audit engagement team did, however, obtain a sample of original appraisals +from management for additional testing. Specifically, the audit engagement team assumed that +appraisals less than a year old were “current” (regardless of the market). For appraisals older +than a year, they inquired whether a discount was applied to the appraised value, and if not, they +inquired why TierOne didn’t think it was necessary or appropriate. In addition, Bennett and +members of the audit engagement team discussed with management a sample of FAS 114 +calculations and recent trends, and “leveraged” information from certain loan reviews.2 +Following this test work, Bennett also reviewed and discussed the bank’s FAS 114 spreadsheets +with Aesoph to ensure that Aesoph was satisfied with the audit engagement team’s conclusions. +Based on the entirety of these procedures, the auditors concluded that “the FAS 114 calculations +appear to be properly prepared and adequately supported at 12/31/08.” Bennett lacked a +reasonable basis for this conclusion. +35. Bennett relied on an unsupported – and unsupportable – assumption that +appraisals less than a year old were “current,” without regard to the property’s location or stage +of development, and that market conditions had not materially deteriorated throughout the year. +Many of the markets in which TierOne’s collateral was located were seeing significant + +2 Although the auditors may have “leveraged” the aspects of the loan reviews that arguably +supported their conclusions as to the reasonableness of management’s valuations of certain of the +bank’s FAS 114 loans, they ignored information in those same loan reviews that contradicted +management’s valuation assessment. + +9 + +continuing quarterly declines in the value of real estate. In addition, many of the properties that +served as collateral were under development and in varying stages of completion. TierOne’s +lending policy cautioned against relying on aged appraisals in these markets. According to the +policy, “[i]n a rapidly escalating or deteriorating market, a[n appraisal] value may be valid for +only a few months.” Despite this policy, Bennett arbitrarily assumed that only appraisals older +than a year potentially needed adjusting. +36. In addition, the test work over management’s valuation estimates was insufficient. +Again, according to its audit program, the audit engagement team would “inquire” of +management whether discounts had been applied to older appraisals, and if not, why not. But +uncorroborated management representations are not sufficient evidence in a high risk audit area. + 37. In addition to appraisal information, TierOne’s FAS 114 worksheets sporadically +contained references to other information in support of management’s estimates of the fair value +of the collateral. This information included, for example, asking prices, borrower development +plans and status, estimated costs to complete, offers to purchase, and other information. The +auditors failed to obtain independent corroboration of any of this information. + 38. Bennett also failed to recognize bias in management’s loan loss estimates on its +FAS 114 loans. + 39. Finally, the auditors failed to investigate facts discovered after the date of their +report on the 2008 financial statements that may have affected the 2008 financial statements. +40. PCAOB audit standards set out a number of steps that should be taken by an +auditor who, “subsequent to the date of the report upon audited financial statements, becomes +aware that facts may have existed at that date which might have affected the report had he or she +then been aware of such facts.” AU § 561, ¶ 1. As an initial matter, “[w]hen the auditor becomes +aware of information which relates to financial statements previously reported on by him, but +which was not known to him at the date of his report, and which is of such a nature and from +such a source that he would have investigated it had it come to his attention during the course of +his audit, he should, as soon as practicable, undertake to determine whether the information is +reliable and whether the facts existed at the date of his report.” AU § 561, ¶ 4. If in fact the +information is reliable and existed at the date of the report, other steps may be required. AU § +561, ¶¶ 5-8. “Subsequent events affecting the realization of assets . . . ordinarily will require +adjustment of the financial statements . . . .” AU § 560, ¶ 7. + 41. During KPMG’s 2009 quarterly reviews, the engagement team learned of several +borrower relationships that had new appraisals or valuations that likely existed at the date of +KPMG’s 2008 audit report, issued on March 12, 2009. In each case, that new valuation showed a +significant decline from management’s estimate at year end. + 42. Despite learning that there were new appraisals and valuation assessments which +were dated prior to the issuance of the 2008 audit report, Bennett failed to perform the +procedures required by AU § 561. Rather, Bennett assumed he had no reason to investigate +because, he claims, he received representations from management shortly before issuing the +audit opinion that no new appraisals had been received that impacted the 2008 financial + +10 + +statements. This is, however, precisely what should have triggered AU § 561: new information +came to light after the audit report was issued that was inconsistent with previous information +and, for that matter, management’s purported representations that all new appraisals had been +given to KPMG. Bennett had an obligation to investigate, but failed to do so. +G. Violations + 43. As described in detail above, Bennett violated numerous PCAOB audit standards, +failed to obtain sufficient competent evidential matter to support his audit conclusions, and failed +to exercise due professional care and appropriate professional skepticism. + 44. Specifically, Bennett violated: the third general audit standard (due professional +care), see AU § 150, ¶ 2; the third standard of field work (competent evidential matter), see AU § +150, ¶ 2; AS Nos. 3 and 5; and AU §§ 230, 312, 316, 319, 326, 328, 333, 342, and 561. +45. Bennett engaged in improper professional conduct, as defined in Section 4C of +the Exchange Act and Rule 102(e)(1)(ii), in that his conduct constituted negligent conduct +consisting of (1) a single instance of highly unreasonable conduct that resulted in a violation of +applicable professional standards in which Bennett knew, or should have known, that heightened +scrutiny was 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. +IV. + 46. On August 5, 2016, the Commission issued an Opinion finding that Bennett +engaged in improper professional conduct in the audit of TierOne’s financial statements and +issued an Order denying Bennett the privilege of appearing or practicing before the Commission +as an accountant with a right to apply for reinstatement after two years. + 47. On October 3, 2016, Bennett filed in the U.S. Court of Appeals for the Eighth +Circuit a petition for review of the Opinion and Order. + 48. On June 27, 2018, the U.S. Court of Appeals for the Eighth Circuit vacated the +Commission’s Opinion and Order in light of the decision of the Supreme Court in Lucia v. +Securities and Exchange Commission, 138 S. Ct. 2044, ___ U.S. ___ (June 21, 2018). + + + +11 + + 49. The Commission finds that Bennett engaged in improper professional conduct. +Nonetheless, in light of the facts and circumstances present here, we have determined, as an +exercise of our equitable discretion, not to impose a suspension or other sanction pursuant to +Rule 102(e)(1)(ii). It is therefore ORDERED that no suspension or other sanction pursuant to +Rule 102(e)(1)(ii) shall be imposed. + By the Commission. + +Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2018/AAER-4007.txt b/raw/aaer/2018/AAER-4007.txt new file mode 100644 index 0000000000000000000000000000000000000000..cc36dfe78af0fa879f1d8fd880adc6db17f2ec13 --- /dev/null +++ b/raw/aaer/2018/AAER-4007.txt @@ -0,0 +1,1161 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84920 / December 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4007 / December 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18953 + + + +In the Matter of + +CROWE HORWATH LLP, +JOSEPH C. MACINA, CPA, +and +KEVIN V. WYDRA, 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 Practice (“CRP”) against Respondents, Crowe LLP, +f/k/a Crowe Horwath LLP (“Crowe”), Joseph C. Macina, CPA (“Macina”) and Kevin V. Wydra, +CPA (“Wydra”), (collectively, “Respondents”).2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + +2 + +II. +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“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 +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 finds that:3 +SUMMARY +1. This matter involves improper professional conduct regarding the audit of +Corporate Resource Services, Inc. (“CRS”), a temporary staffing services company, for the fiscal +year ended January 3, 2014. Macina was the engagement partner on the audit who approved the +issuance of Crowe’s audit report that contained an unqualified opinion that was included in +CRS’s 2013 Form 10-K filed with the Commission on July 1, 2014. Wydra was the engagement +quality reviewer (“EQR”) who concurred with the issuance of this report. However, the report +was inaccurate in that it stated the audit was conducted in accordance with the standards of the +Public Company Accounting Oversight Board (“PCAOB”) when it was not. Respondents’ audit +deficiencies included, among other things, the failure to: (1) include procedures designed to +provide reasonable assurance of detecting CRS’s material undisclosed payroll tax liabilities; (2) +properly identify and audit related party transactions despite the pervasive risks of fraud; (3) +obtain sufficient appropriate audit evidence to respond to identified fraud risks, support CRS’s +recognition of revenues and cost of revenues, and otherwise support Crowe’s opinion; (4) +evaluate substantial doubt about CRS’s ability to continue as a going concern; and (5) conduct a +proper engagement quality review. The audit report was also inaccurate because Crowe was not +independent. During both the period under audit and the period of the engagement, Crowe had a +direct and ongoing business relationship with CRS where Crowe subcontracted staffing +employees from a CRS subsidiary to serve as “consultants” for the purpose of providing +professional non-audit services to Crowe’s clients. This independence violation together with +the other audit failures caused CRS to file financial statements that were not audited by an +independent accountant 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. + +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 + +RESPONDENTS +2. Crowe is a PCAOB-registered public accounting firm headquartered in Chicago, +Illinois. It provides professional and accounting services through its offices in the United States, +and is affiliated with Crowe Global. In 2013, it had approximately 2,600 professionals. +Effective as of January 3, 2014, Crowe was retained to be CRS’s independent auditor. At no +time did Crowe serve as the auditor of CRS’s related party, TS Employment (“TSE”). On June +30, 2014, Crowe issued an audit report that contained an unqualified opinion on CRS’s 2013 +financial statements and included an emphasis of matter paragraph regarding related parties. +Crowe also conducted interim reviews of CRS’s quarterly financial statements for the first +through third quarters of CRS’s fiscal year 2014. + +3. Joseph C. Macina (“Macina”), age 47, is a resident of Bay Shore, New York, +and a CPA licensed in the State of New York. Macina is a partner at Crowe and was the +engagement partner on the audit of CRS’s 2013 financial statements and interim reviews of +CRS’s quarterly financial statements for the first through third quarters of CRS’s fiscal year +2014. + +4. Kevin V. Wydra (“Wydra”), age 43, is a resident of Batavia, Illinois, and a CPA +licensed in the State of Illinois. Wydra is a partner at Crowe and was the engagement quality +reviewer on Crowe’s audit of CRS’s 2013 financial statements and interim reviews of CRS’s +quarterly financial statements for the first through third quarters of CRS’s fiscal year 2014. + +RELEVANT ENTITIES + +5. Corporate Resource Services, Inc. (“CRS”) was a Delaware corporation +headquartered in New York, New York, whose primary business was to provide temporary +staffing services to customers. CRS’s common stock (ticker “CRRS”) was registered pursuant to +Section 12(g) of the Exchange Act and quoted on the OTC Bulletin Board until September 4, +2013, at which time it was listed on NASDAQ CM. On March 20, 2015, NASDAQ delisted +CRS for failure to timely file periodic reports. On July 23, 2015, CRS filed for Chapter 11 +bankruptcy relief. + +6. TS Employment, Inc. (“TSE”) was a private Florida company headquartered in +New York, New York, that provided professional employer organization (“PEO”) services to +CRS. It was wholly owned by CRS’s controlling shareholder and Board of Director member +(“Director”). At all times, TSE’s only customer and sole source of revenues was CRS. As a +PEO, TSE co-employed CRS’s staffing employees, and through funds received from CRS was +responsible for remitting to authorities all payroll taxes concerning CRS’s employees. On +February 2, 2015, due to an approximately $100 million federal payroll tax liability related to +CRS’s staffing employees, TSE filed for Chapter 11 bankruptcy relief. + + + +4 + +FACTS +Background of CRS and its Pervasive Related Party Transactions + +7. CRS was primarily a temporary staffing services company that reported +approximately $680 million in revenues and approximately $600 million in cost of revenues for +the year ended December 28, 2012, and approximately $820 million in revenues and +approximately $723 million in cost of revenues for the year ended January 3, 2014. Although +CRS contracted with its customers to place employees at job sites, it was at all times the common +law employer of these employees and obligated by law to pay their wages and payroll taxes. +8. CRS outsourced the handling of these obligations and other human resources and +administrative functions solely to TSE as its PEO. TSE had no other customers. By virtue of the +PEO arrangement, CRS and TSE co-employed the temporary staffing employees, and TSE +served as the third party payer of the wages and payroll taxes that otherwise would have been +handled by CRS itself. Thus, CRS remained the common law employer, and TSE was the +employer of record. TSE and its affiliates also handled CRS’s revenue invoicing and receivables +collections, administration of employee benefits, and workers compensation insurance coverage. +As a result, nearly all of CRS’s cost of revenues consisted of TSE charges. +9. Through this PEO relationship and Director’s common control, CRS was +operationally and financially dependent on TSE. Many of CRS’s operations and finance +personnel, managers, executives and board members including CRS’s President, CEO and +Chairman of the Board, worked for TSE and/or its affiliates, which were also solely owned and +controlled by Director. CRS was also dependent on Director, TSE and its affiliates to provide +CRS with working capital, liquidity and financing for acquisitions. Director guaranteed CRS’s +$80 million revolving receivables-backed facility. Also, because the funds from this facility did +not meet CRS’s cash flow needs, TSE provided working capital by allowing CRS to delay +payment for PEO services. It was only through such “loans” that CRS had funds to operate. +Even after TSE had extinguished $14.1 million of CRS’s PEO-related debt in exchange for CRS +stock, CRS’s indebtedness to TSE still exceeded $12.7 million at December 28, 2012, and $15.7 +million by the end of 2013. Though CRS’s debt to TSE continued to mount, CRS still depended +on TSE for liquidity and ongoing wage and tax payments. +Crowe’s Engagement to Audit CRS’s 2013 Financial Statements +10. On September 6, 2013, CRS was listed on NASDAQ. In order to increase +liquidity and pay down PEO debt, CRS planned to execute a $100 million public offering by the +end of 2013 or early 2014. CRS also sought to replace its $80 million receivables-backed +facility with a $100 million asset-based loan. However, after learning that its auditor at that time +had received significant deficiency comments from the PCAOB related to the audit of CRS’s +2011 financial statements and hearing from its underwriters that CRS would be more successful +with a capital raise if another firm audited its financials, CRS hired Crowe effective as of +January 3, 2014. Crowe then served as CRS’s purported independent auditor for the 2013 year- +end financial statements and the first three quarters of 2014. + + +5 + +11. Macina, as the engagement partner, immediately encountered significant +challenges to completing the audit and issuing an audit report that contained an unqualified +opinion. +a. First, he learned of the PCAOB’s comments on the predecessor auditor’s audit of +CRS’s 2011 financial statements. He also had reason to believe, based on +Crowe's analysis, that the predecessor auditor’s working papers did not support +the unqualified opinions in the predecessor’s audit report concerning CRS’s +September 2012 financial statements and the unfiled audit report originally dated +as of December 20, 2013, on CRS’s December 2012 financial statements. He also +concluded that the predecessor auditor’s working papers did not support Crowe’s +reliance on the 2013 opening balance sheet. +b. Second, Macina discovered numerous errors in prior period financial statements +that needed to be corrected. +c. Third, Macina discovered that CRS had no IT general controls and numerous +material weaknesses and significant deficiencies in its internal control over +financial reporting, including, for example, a lack of controls over related party +transactions and the absence of detailed support and approval for CRS’s journal +entries, revenues and cost of sales. +d. Fourth, Macina and the engagement team learned in March 2014 that CRS’s +lender did not intend to renew its receivables-backed facility when it expired in +June 2014, resulting in substantial doubt at that time about CRS’s ability to +continue as a going concern. +12. These issues caused Macina and Crowe to expand the scope of their audit +procedures, which in turn prevented CRS from timely filing its 2013 Form 10-K and resulted in +delisting notices from NASDAQ. Although the lender ultimately renewed the facility on June +20, 2014, the new agreement imposed significant financial covenants and fees. It also imposed a +financing milestone that required CRS to immediately secure a commitment for alternate +financing to fully repay its indebtedness to the lender. Thus, the renewal did not itself alleviate +the substantial doubt. +13. Notwithstanding these problems and the risks posed by CRS’s pervasive related +party transactions and the dependency on the related parties, Crowe provided CRS an audit +report that contained an unqualified opinion and an emphasis paragraph concerning related party +transactions, which CRS filed with its Form 10-K for the 2013 fiscal year on July 1, 2014. +14. In February 2015, CRS disclosed that TSE had a material unpaid federal payroll +tax liability. This liability of approximately $100 million, most of which had been due and +owing since December 2013, forced TSE to file for bankruptcy on February 2, 2015. The +liability also caused CRS’s secured lender to cut almost all funding and put CRS on a path to +liquidation. Crowe then resigned on February 9, 2015, after informing CRS that its audit report +could no longer be relied upon due to material uncertainties as to whether CRS was contingently +liable for any or all of the outstanding payroll taxes. CRS also disclosed that its prior financial +statements could not be relied upon due to the material uncertainties related to the payroll tax + + +6 + +liability. Consequently, CRS was delisted from NASDAQ in April 2015 for failing to timely file +financial statements. In July 2015, CRS filed for bankruptcy. +Failure to Detect Undisclosed Liabilities for Unpaid Payroll Taxes +15. Crowe’s audit of CRS’s 2013 financial statements failed to include procedures +designed to obtain reasonable assurance that CRS did not have material undisclosed contingent +liabilities for unpaid payroll taxes despite evidence to the contrary. +16. Macina should have known that CRS had payroll tax obligations as a co-employer +of its staffing employees. The work papers stated that “[e]ven though the flexible staff are hired +by customers, they are the true employees of the company placing them with the customers,” +namely CRS. The work papers and CRS’s filings also noted that CRS was subject to +employee/employer tax withholding and reporting laws and requirements to “provide for +worker’s compensation, medical and state unemployment taxes within placement fees charged.” +CRS filings further stated that “[i]n conducting our business, we are required to pay a number of +payroll and related expenses, including unemployment taxes, workers’ compensation and +medical insurance, for our personnel.” +17. In recognition of CRS’s payroll tax obligations despite its use of a PEO, the +payroll controls testing work papers identified the risk that CRS’s “liabilities for penalties for +late payments, underpayments or nonpayments of payroll taxes are not recorded or are +understated.” They also identified the risk that CRS’s “recorded compensation and related costs +do not include all amounts paid or due to employees and related obligations for taxes….” For +both of these risks, the engagement team noted that controls were not adequate and that a +substantive test of details and a substantive analytical review were required. Macina also +recognized the fraud risk presented by the unique structure of CRS and its reliance on TSE when, +in a brain-storming session about possible risks, he wrote “hiding liabilities” and “looking for +how they are window dressing” the financial statements while discussing CRS’s audit with +another Crowe partner. +18. Further, treasury regulations in effect in 2013 specifically stated that the +“employment tax liability cannot be altered by a private agreement between an employer and a +third-party payor.” 78 FR 6056 (Jan. 29, 2013). A subsequent treasury regulation, issued in +March 2014, while Crowe was auditing CRS’s 2013 financial statements, also stated that a +business contracting with a PEO remains subject to payroll tax obligations notwithstanding the +PEO arrangement. 79 FR 17860 (Mar. 31, 2014). Indeed, Crowe’s own tax group issued a press +release in April 2014 stating that the IRS had just issued regulations clarifying existing rules that +“the business contracting with the PEO remains subject to all employment tax obligations with +respect to the PEO arrangement and is expected to remit payroll taxes if the PEO does not do +so.” Despite these facts, CRS never disclosed or accounted for any direct or contingent liability +for payroll taxes on its balance sheet, its notes to the financial statements, or otherwise. +19. AU 333, Management Representations,4 makes clear that management +representations “are not a substitute for the application of those auditing procedures necessary to + +4 References to auditing standards in this Order are to PCAOB standards in effect at the time the audit work +was performed. + + +7 + +afford a reasonable basis for an opinion regarding the financial statements under audit.” AU +333.02. Macina and the engagement team, however, accepted CRS’s representation that it was +not liable for payroll taxes without (1) obtaining any corroborating or reliable evidence for +management’s incorrect assertion; (2) performing any audit procedures to test whether CRS’s +omission was proper; and (3) addressing the identified risks that CRS had undisclosed liabilities +for payroll taxes. +20. CRS was also contractually exposed to a contingent liability for any unpaid +payroll taxes under the terms of a Master Services Agreement executed between CRS and TSE. +This agreement stated that CRS was responsible for supervising its employees, maintaining and +providing time and other payroll records upon which payroll would be based, and paying TSE +for all compensation paid to or on behalf of CRS’s employees including taxes. In effect, TSE +was nothing more than a pass-through entity that paid the wages and taxes by virtue of the +money and documentation that CRS provided. +21. The agreement also included clauses whereby (i) TSE indemnified CRS “from +and against any and all losses, liabilities, claims, suits, demands, damages, injuries, costs and +expenses arising solely out of the negligent or willful failure of any [TSE] employee . . . to +comply with applicable worker’s compensation, payroll tax or withholding tax laws, rules, and +regulations;” and (ii) CRS indemnified TSE “from and against all claims, demands, causes of +action, suits, liabilities and expenses (including court costs and attorney’s fees) of every kind or +character…without regard to the cause or causes thereof or the negligence of any party….” The +CRS indemnification clause was a disclosable guarantee under ASC 460, Guarantees. However, +CRS never disclosed it, and Crowe neither inquired about nor audited the basis for its omission. +22. These clauses also provided another reason for Crowe to include audit procedures +to determine whether TSE had remitted payroll taxes. Yet, the engagement team did not perform +procedures related to the indemnity or perform procedures to understand the impact of the +indemnity on CRS’s financial statements. The engagement team also failed to perform sufficient +procedures designed to detect whether CRS had material undisclosed contingent liabilities—both +under tax law and under contract—arising from any non-payment of payroll taxes by its related +party PEO. +23. Macina also knew that CRS’s controlling shareholder, Director, and sole owner of +CRS’s PEO and affiliates had a history of unpaid payroll tax liabilities. A background check +Crowe conducted on Director during the new client acceptance process revealed numerous state +and federal tax liens for payroll taxes that had been filed against Director or entities affiliated +with TSE. The liens covered a 10-year period from 2003 through 2013. Several were still +unpaid or outstanding at the time of the background check. One concerned CRS itself. Yet +neither Macina nor anyone else at Crowe addressed the issues raised during the background +check. +24. Macina was also aware of CRS’s mounting debt to TSE caused by CRS’s failure +to pay invoiced gross wages, including payroll tax amounts. In fact, by the time CRS filed its +2013 Form 10-K in July 2014, Macina and the engagement team knew that the debt had risen to +approximately $34 million and that Director had agreed to waive and subordinate $15 million of +that amount for one year to meet lender’s condition for renewing the facility. Macina and others +at Crowe also knew that CRS was TSE’s only customer and sole source of revenues. Thus, + + +8 + +absent funding from an outside source or capital to cover CRS’s shortfall—which did not exist— +it was not clear how TSE could remit the payroll taxes due. Yet Macina and the engagement +team did not design or perform audit procedures to assess Director’s or TSE’s financial condition +and their ability to fund CRS’s operations and working capital while also remitting the payroll +taxes due. In fact, Crowe asked CRS to provide TSE’s financial statements for the purpose of +assessing whether TSE was a variable interest entity (“VIE”). However, when CRS refused to +provide them, Macina and the engagement team dropped the request without further inquiry or +assessment of risk. +Failure to Properly Identify Related Party Transactions +25. Macina did not properly identify and understand who was providing PEO services +to CRS, despite identifying related party transactions as a pervasive fraud risk. +26. Macina knew that all of CRS’s “main service transactions flow[ed] through the +PEO,” but learned through controls testing that “there is no formal review process between CRS +employees and those of the PEO” and “[n]o controls … over the identification and tracking of +related party transactions.” +27. Macina and the engagement team also learned from controls testing that there was +no meaningful distinction between CRS, TSE and their affiliates. For example, although the +Master Services Agreement identified TSE as the PEO, certain of the PEO services were being +handled by other entities wholly-owned by Director, including Tri-State Employment Services, +Inc., and other similarly named and affiliated entities. They also learned that many of CRS’s key +operations and finance personnel were “dual” employees of CRS, TSE and their affiliates, +including Tri-State Employment Services, Inc., and that all of these “entities” were located in the +same building. +28. The engagement team, however, did not perform appropriate procedures to +understand CRS’s material transactions with related parties and assess the appropriateness of +CRS’s disclosure. Rather, the engagement team simply referred to CRS’s PEO variously and +interchangeably as any one of a number of Director-affiliated entities, including “TS +Employment,” “TSE,” “Tri-State Employment,” “Tri-State Employer Services,” “TSS,” “TS +Staffing,” or, more generically, “Tri-State.” In fact, although the team initially sent a related +party questionnaire to identify the parties and their material transactions, they abandoned this +effort when CRS and its affiliates failed to complete it. When they sought confirmation of +balances due from or owed to “TS Employment” as the PEO, Crowe accepted and relied upon a +confirmation of balances due from or to “Tri-State Employment,” a different related entity. +Ultimately CRS aggregated the myriad known and unknown Director-affiliated entities into the +vague moniker, “Tri-State,” and Macina added to Crowe’s audit report an explanatory paragraph +noting that CRS “has significant transactions with related parties.” +29. By not performing procedures to accurately identify and understand CRS’s +material related party transactions—especially who was providing CRS with PEO services and +whether that PEO was actually paying the required wages and taxes for CRS employees— +Macina did not comply with AU 334, Related Parties. + + + +9 + +Additional Failures to Audit Related Party Transactions +30. AU 334.09 requires auditors to perform procedures related to related party +transactions by “obtaining and evaluating sufficient appropriate evidential matter” which “should +extend beyond inquiry of management.” AU 334.10 also makes clear that, when necessary to +fully understand a particular transaction, the auditor should consider, among other things, +“inspect[ing] evidence in possession of the other party or parties to the transaction” and +“confirm[ing] or discuss[ing] significant information with intermediaries, such as banks, +guarantors, agents, or attorneys to obtain a better understanding.” AU 334.10 also states that +auditors should consider “obtain[ing] information about the financial capability of the other party +or parties to the transaction” when there are material uncollected balances, and advises auditors +to consider obtaining from the related party audited and unaudited financial statements, income +tax returns, and reports issued by regulatory agencies, taxing authorities, financial publications or +credit agencies. AU 9334, Related Parties: Auditing Interpretations of Section 334, further +provides that, to understand the transaction or obtain evidence regarding it, “the auditor may +have to refer to audited or unaudited financial statements of the related party, apply procedures at +the related party, or in some cases audit the financial statements of the related party.” AU +9334.19 also states that the “higher the auditor’s assessment of risk regarding related party +transactions, the more extensive or effective the audit tests should be.” +31. Macina, however, did not substantively test CRS’s transactions with TSE. He +never sought nor obtained sufficient appropriate audit evidence that TSE’s purported extension +of liquidity and working capital to CRS was based on an actual financial capability to continue +paying wages and taxes despite nonpayment by CRS. He never sought nor obtained sufficient +appropriate evidence—including, for example, any evidence specifically outlined within AU 334 +itself—that TSE was actually paying the wages and remitting the taxes due so that he could +address CRS’s risk of undisclosed liabilities. +32. Macina and the engagement team also did not obtain sufficient appropriate audit +evidence to support CRS’s cost of sales. Macina had identified related party transactions as a +fraud risk and knew that CRS’s cost of sales came from the related party PEO. Yet he assessed +the specific risk over cost of sales as “low.” Further, Macina criticized the predecessor auditor +for treating TSE as a true third party and failing to test payroll charges. Yet Macina’s cost of +sales testing also treated TSE as a reliable third party. In fact, the work papers stated that the risk +was assessed as “low” because the “amounts are invoiced directly from the PEO.” The work +paper also inaccurately stated that “costs incurred are not determined or affixed by internal +management … [but] are supported by and driven externally by the invoiced amount directly +from the PEO.” Thus the cost of sales testing did not properly address the related party nature of +the PEO transactions, the identified fraud risks, and the overlap in employees, management, and +ownership between CRS and TSE. +33. Although Macina had identified by email the need to “test that CRS is being +charged (invoiced) the costs that are appropriate” and determine whether they could “trace to +payroll records to see that costs (hours worked and charged to customers) are being accurately +captured,” the engagement team ultimately treated the PEO invoices as accurate. They did not +obtain any supporting documentation. Rather, the team’s cost of sales testing essentially +consisted of aggregating CRS payments to TSE over days or weeks until the payments generally + + +10 + +added up to invoiced amounts, treating any differences between invoiced and paid amounts as +increases or decreases to PEO debt. +34. By relying on TSE invoices, though, the engagement team did not properly +consider critical information about their lack of reliability. The controls testing had revealed that +the PEO was involved with entering information concerning customer contracts, new employees +and pay rates, and employee timesheets directly into CRS’s operational database, and that CRS +neither reviewed the entries nor had any controls to consider their accuracy. The controls testing +also revealed that the PEO used this database to create and send CRS’s revenue-generating +invoices to customers as well as PEO invoices upon which CRS’s cost of sales were based. +Indeed, the work papers had identified the risk that CRS’s “recorded compensation is not for real +services performed by real employees” and that “recorded compensation and related costs do not +include all amounts paid or due to employees and related obligations for taxes.” +35. CRS payments to TSE also provided no evidence that CRS had properly recorded +cost of sales or PEO debt. As documented in the work papers, CRS: (1) did not review TSE’s +payroll invoices prior to payment; and (2) made “recurring wire transfer[s] to the PEO … [from +amounts] left over from daily operations,” which could “either be in surplus or deficit of the +respective invoice payable.” In short, CRS sent money to TSE on a daily or weekly basis +without regard to invoices. +Failures to Respond to Fraud Risks +36. Under AS 13, The Auditor’s Responses to the Risks of Material Misstatement, the +auditor’s “identification of pervasive weaknesses in the company’s control environment” +requires the auditor to “obtain more persuasive audit evidence from substantive procedures.” AS +13.06. AS 13.09 further requires the auditor to “[o]btain more persuasive audit evidence the +higher the auditor’s assessment of risk. Moreover, AS 13.11 states that for significant risks, +which include fraud risks (as defined in AS 12.71), the “auditor should perform substantive +procedures, including tests of details, that are specifically responsive to the assessed risks.” The +standard further provides that (1) “[s]ubstantive procedures generally provide persuasive +evidence when they are designed and performed to obtain evidence that is relevant and reliable”; +(2) “[i]nquiry alone does not provide sufficient appropriate evidence to support a conclusion +about a relevant assertion”; and (3) “increasing the extent of an audit procedure cannot +adequately address an assessed risk of material misstatement unless the evidence to be obtained +from the procedure is reliable and relevant.” AS 13.39; AS 13.42. AU 316.13, Consideration of +Fraud in a Financial Statement Audit, further provides: “Because of the characteristics of fraud, +the auditor's exercise of professional skepticism is important when considering the fraud risks” +and this requires “a questioning mind and a critical assessment of audit evidence.” AU 316.13 +also states that “[i]n exercising professional skepticism in gathering and evaluating evidence, the +auditor should not be satisfied with less-than-persuasive evidence because of a belief that +management is honest.” +37. Macina and the engagement team repeatedly failed to obtain sufficient appropriate +audit evidence. They did not perform substantive testing using reliable evidence to corroborate +management’s assertions related to payroll tax liabilities or cost of sales, despite identifying +related party transactions as a fraud risk. + + +11 + +38. Though the engagement team obtained some third-party bank statements, it did +not obtain sufficient underlying source documents to address the fraud risks related to CRS’s +journal entries and revenues. In fact, the work papers documented the fact that CRS’s journal +entries were 100% manual and lacked any audit trail, documentary support, or other controls, +stating: “During our journal entry testing it was noted that the Company was unable to provide +contemporaneous detailed support for selected journal entries.” The work papers further stated +that “[t]here was also no documentation or process surrounding the review and posting of journal +entries to the general ledger” and that “the Company was unable to provide support for certain +cost of sales, revenue and lease transactions.” Without such source documents, the engagement +team did not obtain sufficient appropriate audit evidence to respond to the fraud risk related to +CRS’s journal entries. +39. With regard to the audit of revenues, Macina and the engagement team +originally planned to obtain customer-signed contracts and customer-approved timesheets to +address documented risks that customer invoices reflected inaccurate hours and rates and that +CRS inflated its revenues by not adhering to its revenue recognition policy. However, they +never obtained such documentation, and instead conducted testing solely on the basis of invoice +and cash receipt testing. Macina and the engagement team also, for example, did not obtain +customer confirmations of invoiced amounts or agreement terms. As a result, Crowe had no +evidence of an arrangement pursuant to which services were actually delivered at set fees that +were not subject to a side agreement or rebate. Crowe had no third-party substantiated, relevant +and reliable audit evidence for its conclusion that CRS’s revenues were recognized in accordance +with GAAP or their own revenue recognition policy as disclosed in the 2013 Form 10-K. +Failure to Properly Evaluate Going Concern +40. AU 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a +Going Concern, requires auditors to evaluate whether there is substantial doubt of the entity’s +ability to continue as a going concern for a reasonable period of time. AU 341.02 states that this +evaluation “is based on his or her knowledge of relevant conditions and events that exist at or +have occurred prior to the date of the auditor's report.” AU 341.06 provides examples of such +conditions and events that may, when considered in the aggregate, indicate there could be +substantial doubt, including recurring operating losses, working capital deficiencies, negative +cash flows from operating activities, adverse key financial ratios, defaults on loan agreements, +denial of usual trade credit and restructuring of debt, need to seek new source and methods of +financing, and substantial dependence on the success of a particular project. +41. AU 341.07 also requires that if an auditor determines that there is substantial +doubt, he should consider management’s plans to deal with the adverse effects of the conditions +and events and whether such plans can be effectively implemented. When plans involve +borrowing money or restructuring debt, AU 341 directs auditors to consider the availability of +debt financing and the sufficiency of available collateral. AU 341.08 further requires auditors to +obtain evidential matter about management’s plans and, for example, “consider the adequacy of +support regarding the ability to obtain additional financing.” When prospective financial +information is important to management’s plans, AU 341.09 suggests auditors should consider +the adequacy of support for significant assumptions underlying the information. When plans +include reduced or delayed expenditures, AU 341.07 states that the auditor’s considerations + + +12 + +relating to management plans may include the “possible direct or indirect effects” of such +reductions and delays. +42. Macina and the engagement team’s going concern analysis did not comply with +AU 341 because they failed to: (1) document and appropriately consider material information of +which he was aware or should have been aware when assessing the existence of substantial +doubt; (2) consider the ability of management to effectively implement its plans; and (3) obtain +appropriate evidential matter to support management’s plans. Although they knew that CRS’s +lender and primary source of liquidity had issued a termination letter in March, 2014, this was +not documented in the going concern work paper. Macina and the engagement team also did not +consider the reasons for the lender’s initial decision to terminate, including that CRS was in +default and lacked sufficient working capital and liquidity due to its rising PEO debt. Although +the lender ultimately renewed the facility on June 20, 2014, the going concern analysis did not +consider the fact that the renewal required CRS to obtain by July 30, 2014, a commitment for full +take-out financing so that the lender could exit the facility. Nor did the analysis consider that +CRS’s all-but-certain failure to comply would be an event of termination. The analysis also +failed to account for increasing material fees the longer it took CRS to complete the take-out +financing. And the covenant analysis did not accurately capture the terms of the covenants or the +formula for the calculation stated in the agreement. Had the analysis been done correctly, it +would have revealed CRS’s probable non-compliance with the covenants. +43. Although Macina had an internal valuation expert conduct a finance-ability +analysis, Macina and the engagement team did not provided him with complete information +regarding CRS’s lending arrangements and historical and projected financial performance. +Macina and the engagement team never provided him with the terms of the renewal or informed +him of the agreement’s July 30 financing milestone. Macina also should have known that the +analysis did not consider the fact that CRS would be missing filing deadlines, correcting prior- +period errors in revised financial statements, and newly disclosing pervasive material weaknesses +in internal control over financial reporting. +44. Macina also did not properly assess and respond to the risks posed by CRS’s +financial dependence on TSE, especially in light of CRS’s inability to fund the payroll that it +nevertheless needed TSE to keep paying in order to stay in business. Macina did not consider +the “direct or indirect effects” of CRS’s plan to not pay down $15 million of PEO debt for one +year, even though he knew that TSE had no other revenue source. Macina did not obtain +evidence about TSE’s financial condition or its ability to provide the “liquidity” and working +capital essential to CRS’s ability to continue as a going concern, despite knowing that CRS’s +term sheets from other lenders had noted that an analysis of TSE’s and Director’s financials +would be part of their due diligence. +45. Because Macina failed to consider significant negative conditions and events of +which he was aware and did not obtain appropriate audit evidence to support his going concern +analysis, he failed to evaluate the existence of substantial doubt and comply with AU 341. +Failure to Properly Conduct an Engagement Quality Review +46. AS 7, Engagement Quality Review, requires an EQR to “evaluate the significant +judgments made by the engagement team and the related conclusions reached in forming the + + +13 + +overall conclusion on the engagement and in preparing the engagement report.” AS 7.2. This +means that the EQR should “evaluate” significant judgments as to planning, including “risks +identified in connection with the firm’s client acceptance and retention process.” Under AS 7.9 +and AS 7.10, the EQR should also evaluate the assessment of, and responses to, identified fraud +risks through discussions with the engagement team and his review of documentation. If the +EQR becomes aware of a significant engagement deficiency, such as a failure to obtain sufficient +appropriate evidence in accordance with PCAOB standards, AS 7.12 states that he cannot +provide concurring approval of issuance of the audit report. +47. Despite these requirements, Wydra failed to identify significant engagement +deficiencies in the CRS audit, including the lack of sufficient appropriate audit evidence. Wydra +knew that CRS was a high risk audit client and that the PCAOB had previously found +deficiencies in the predecessor auditor’s audit of CRS’s 2011 financial statements due, in part, to +failures to trace journal entries and revenues to source documents. He also knew that CRS had +no IT general controls and multiple material weaknesses in its internal control over financial +reporting such that CRS’s prior financial statements contained actual errors and misstatements +that required correction. +48. Wydra, however, did not evaluate the team’s response to identified fraud risks or +the lack of source documents. None of the work papers Wydra reviewed provided sufficient +detail to enable him to evaluate whether the team’s testing had appropriately responded to the +identified fraud risks. Wydra accepted conclusions in those work papers without further inquiry +or review of documentation. +49. As a result, Wydra failed to evaluate the significant judgments as to the +sufficiency of audit evidence and whether the team had appropriately responded to fraud risks +related to CRS’s journal entries and revenues. As for the related party fraud risks, Wydra +reviewed a number of planning documents that revealed CRS’s financial and operational +dependence on TSE, the amount of PEO debt, and the fact that TSE was itself dependent on CRS +as its sole client and revenue source. Yet despite this knowledge, Wydra did not question how +the team could have properly responded to the fraud risk given the absence of any evidence in +the work papers that, for example, the related party had the financial capability to provide +liquidity to CRS while still paying employee wages and taxes upon which CRS relied, or that the +cost of sales were what the related party said they were in PEO invoices. +50. Wydra also failed to properly evaluate the engagement team’s significant +judgments concerning CRS’s ability to continue as a going concern in disregard of his +obligations under AS 7 and the requirements of AU 341. Relying on the fact that the lender had +renewed the financing, Wydra did not review the analyses included within the work paper that +led to the team’s unsupported conclusion that there was no substantial doubt. He did not +consider, for example, the finance-ability analysis, the covenant analysis, or the term sheets. +Failure to Obtain Sufficient Appropriate Audit Evidence to Support the Audit Opinion +51. AS 15.04, Audit Evidence, 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.” Macina did not obtain sufficient appropriate audit evidence to support +management’s assertions regarding CRS’s recognition of revenue, cost of sales, and related party + + +14 + +transaction disclosures. Macina also did not obtain sufficient appropriate evidence to properly +evaluate CRS’s ability to continue as a going concern. Thus, Macina improperly approved +Crowe’s issuance of an audit report containing an unqualified audit opinion. Wydra, in turn, +improperly concurred in the issuance of the audit report despite significant engagement +deficiencies in the audit arising from a lack of audit evidence. +Failures to Exercise Due Care and Professional Skepticism +52. AU 230, Due Professional Care in the Performance of Work, requires auditors to +exercise due professional care throughout the audit. AU 230.01. Due professional care requires +that the auditor exercise professional skepticism, which means “an attitude that includes a +questioning mind and a critical assessment of audit evidence.” AU 230.07. Under this standard, +“the auditor should not be satisfied with less than persuasive evidence because of a belief that +management is honest.” AU 230.09. As described above, Macina failed to exercise the required +due care and professional skepticism when he failed to obtain sufficient appropriate evidence to +respond to fraud risks concerning CRS’s journal entries, revenues, cost of sales and related party +transaction disclosures, in addition to failures to evaluate CRS’s ability to continue as a going +concern. Similarly, through Wydra’s failure to review the going concern analysis, evaluate the +responses (or lack thereof) to fraud risks, and identify the significant engagement deficiencies +arising from the lack of sufficient appropriate audit evidence to support the unqualified opinion, +Wydra also failed to meet the requirements of AU 230. +Failure to be Independent +53. Crowe also was not independent of CRS during both the period under audit and +the professional engagement period as a result of an ongoing direct business relationship. +54. Beginning in approximately June 2012, Crowe and CRS’s subsidiary, +Accountabilities, entered into an “Agreement to Provide Consultants” whereby Crowe’s Risk +Practice Group subcontracted staffing employees from Accountabilities to serve as “consultants” +and provide professional non-audit services to Crowe’s clients. Under this Agreement, CRS’s +subsidiary, Accountabilities, stood “ready, willing, and able to provide consultants as may be +required by Crowe or its clients from time to time” on an “as-needed basis” “for the benefit of +Crowe and Crowe’s clients.” These “consultants” provided loan review services to Crowe’s +banking clients, as well as other regulatory compliance consulting work, including bank secrecy +act reviews, anti-money laundering customer due diligence, and enhanced due diligence. Crowe +billed its third party clients at a profit for the time and services provided by the “consultants” on +their respective non-assurance engagements. +55. Macina first learned of the direct business relationship between CRS’s subsidiary +and Crowe in December 2013. Through internal inquiries and discussions with CRS, he also +understood the business was ongoing throughout the period under audit in 2013 and the period of +Crowe’s engagement. Despite this knowledge, Macina allowed the relationship to be +inaccurately described as a one-time, past event in a new client acceptance form that Crowe +partners relied upon to evaluate whether to accept CRS as an audit client. He also did not +document in any of the work papers the facts of the ongoing business relationship or the basis for +his incorrect conclusion that “no independence issues existed.” + + +15 + +56. Macina also never informed CRS’s Audit Committee of the ongoing direct +business relationship and instead sent CRS’s Audit Committee an “Independence Representation +Letter” on December 18, 2013, that stated his belief that Crowe was independent under PCAOB +and SEC Rules and that he was unaware of any relationships that “may reasonably be thought to +bear on independence.” In reality, the subcontracting relationship between CRS’s subsidiary and +Crowe created a mutuality of interest that impaired Crowe’s independence. +57. There also were at least two occasions during the engagement period that Crowe +became aware of the independence impairing activity. First, the audit team’s revenue and +rebates testing included procedures on Crowe invoices for the prohibited services. Second, +Macina emailed the national office in August 2014 about an additional business opportunity +between CRS and Crowe that also indicated the existence of the ongoing direct business +relationship. Again, however, no one properly analyzed the relationship with respect to Crowe’s +independence. +Crowe National Office Involvement in the Audit +58. The failure to conduct the audit in compliance with PCAOB standards also +occurred despite the involvement of Crowe’s national office, including in some of the areas of +deficiency. For example, the CRS engagement had a dedicated national office pre-issuance +reviewer, who along with other members of the national office, knew that the CRS engagement +was high risk, that the PCAOB had found deficiencies in the predecessor’s audit of CRS’s 2011 +financials, and that CRS had no IT general controls and numerous material weaknesses in its +internal control over financial reporting such that CRS’s prior financial statements contained +actual misstatements that needed to be corrected. +59. The pre-issuance reviewer also participated in the going concern analysis and +signed off on the going concern consultation. The reviewer helped draft portions of the going +concern work paper that lacked sufficient evidentiary support. He also was aware of +inaccuracies in the information upon which the finance-ability analysis was based. He also +ignored the risks posed by CRS’s dependence on TSE to provide liquidity and pay employee +wages and taxes despite CRS’s mounting indebtedness and alternate lender term sheets stating +that analysis of TSE’s and Director’s financials would be a critical part of due diligence. +60. Another national office partner, who had one or more telephone conversations +with the engagement team about its inability to obtain customer contracts, customer-approved +timesheets, or other source documents to support CRS’s revenues and journal entries, +nevertheless did not object to the engagement team’s improper use of invoice and cash receipts +testing. +61. Crowe’s national office also performed an internal inspection on the CRS audit +that included a review of how the engagement team had addressed identified fraud risks. +Although it identified the failure to obtain evidence to support CRS’s revenues, it did not +uncover the failures to obtain sufficient evidence to address each of the fraud risks, including +related party transactions. Also, although the original inspection report was issued in September +2014, the national office only finalized the results in mid-January 2015—after they had revised +the language of the original finding (without obtaining the inspector’s sign-off on the revisions) +and suggested changes to Macina’s response. + + +16 + +62. In terms of policies and procedures, although a background check performed +during the client acceptance process had revealed that entities owned by Director had a history of +incurring and sometimes resolving tax liens regarding payroll taxes, no steps were taken to make +the EQR or the national office pre-issuance reviewer aware of the results of Director’s +background check or the payroll tax issues it identified. +63. Crowe also lacked proper independence controls and controls over the client +acceptance process. Prior to accepting CRS as an audit client, Crowe had no mechanism other +than the independence inquiry email to ascertain whether an independence impairing business +relationship existed. Crowe’s policies also did not require the independence inquiry email to be +sent prior to client acceptance. Even in those instances that an independence inquiry email was +sent, Crowe had no database or other system that captured all vendors, subcontracts or other +entities that conducted business with Crowe. Thus, despite the ongoing business relationship +between Crowe and CRS during both the period under audit and the professional engagement +period itself, Crowe had insufficient policies or procedures in place to prevent the independence +violation. +COOPERATION +64. In determining to accept their Offers, the Commission considered Respondents’ +cooperation. The Commission also considered Crowe’s remedial efforts. +VIOLATIONS +65. Section 10A(a) of the Exchange Act requires each audit to include (1) 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, (2) procedures designed to +identify related party transactions that are material to the financial statements or otherwise +require disclosure therein, and (3) an evaluation of whether there is substantial doubt about the +ability of the issuer to continue as a going concern during the ensuing fiscal year. No showing of +scienter is necessary to establish a violation of Section 10A. As a result of the conduct described +above, Crowe violated, and Macina and Wydra caused Crowe to violate, Sections 10A(a)(1), +10A(a)(2) and 10A(a)(3) of the Exchange Act. +66. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state +“whether the audit was made in accordance with generally accepted auditing standards” +(“GAAS”). “[R]eferences in Commission rules and staff guidance and in the federal securities +laws to GAAS or to specific standards under GAAS, as they relate to issuers, should be +understood to mean the standards of the PCAOB plus any applicable rules of the Commission.” +See SEC Release No. 34-49708 (May 14, 2004). Thus, and through the conduct described +above, Crowe violated, and Macina and Wydra caused Crowe to violate, Regulation S-X Rule 2- +02(b)(1) when Crowe issued its audit report dated June 30, 2014, stating that Crowe had +conducted its audit in accordance with PCAOB standards when it had not. +67. An issuer violates Section 13(a) of the Exchange Act and Rule 13a-1 thereunder +when such issuer files with the Commission annual reports that contain materially false or +misleading information or if they file annual reports that fail to include independently audited +financials. Scienter is not required for a violation of Section 13(a). In administrative + + +17 + +proceedings, the Commission may impose sanctions upon any person that is, was, or would be a +cause of a violation, due to an act or omission the person knew or should have known would +contribute to such violation. In order to establish that a person caused a non-scienter based +violation, a showing of negligence will suffice. By not conducting the audits of CRS’s financial +statements in accordance with PCAOB standards, and issuing audit reports stating that Crowe +was independent when it was not, Crowe, Macina and Wydra were a cause of CRS’s violations +of Section 13(a) and Rule 13a-1. +68. Section 4C of the Exchange Act and CRP Rule 102(e)(1)(ii) provide, in part, that +the Commission may censure or deny, temporarily or permanently, the privilege of appearing or +practicing before the Commission to any person who is found by the Commission to have +engaged in improper professional conduct. With respect to persons licensed to practice as +accountants, “improper professional conduct” includes either of the following two types of +negligent conduct: (1) a single instance of highly unreasonable conduct that results in a violation +of applicable professional standards in circumstances in which an accountant knows, or should +know, that heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct, +each resulting in a violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission. CRP Rule 102(e)(1)(iv)(B). As a result of the +conduct described above, Crowe, Macina and Wydra engaged in “improper professional +conduct” within the meaning of Exchange Act Section 4C(a)(2) and CRP Rule 102(e)(1)(ii). + +FINDINGS +69. Based on the foregoing, the Commission finds that Crowe violated, and Macina +and Wydra caused Crowe to violate, Sections 10A(a) of the Exchange Act and Rule 2-02(b)(1) +of Regulation S-X. +70. Based on the foregoing, the Commission finds that Respondents were a cause of +CRS’s violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. +71. Based on the foregoing, the Commission finds that Respondents engaged in +improper professional conduct pursuant to Sections 4C(a)(2) of the Exchange Act and CRP Rule +102(e)(1)(ii). +UNDERTAKINGS +72. Respondent Crowe has undertaken to retain, within 120 days after the entry of this +Order, an independent consultant (“Independent Consultant”), not unacceptable to the +Commission staff. Crowe shall provide to the Commission staff a copy of the engagement letter +detailing the scope of the Independent Consultant’s responsibilities. The Independent +Consultant’s compensation and expenses shall be borne exclusively by Crowe. +A. Independence. + +a. To ensure the independence of the Independent Consultant, Crowe +(1) shall not have the authority to terminate the Independent +Consultant or substitute another independent consultant for the +initial Independent Consultant, without the prior written approval + + +18 + +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. + +b. Crowe 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 Crowe, or any of its present or former affiliates, +directors, officers, employees, or agents acting in their capacity as +such. The agreement will also provide that the Independent +Consultant will require that any firm with which he/she is affiliated +or of which he/she is a member, and any person engaged to assist +the Independent Consultant in the performance of his/her duties +under this Order shall not, without prior written consent of the +Division of Enforcement, enter into any employment, consultant, +attorney-client, auditing or other professional relationship with +Crowe, or any of its present or former affiliates, directors, officers, +partners, employees, or agents acting in their capacity as such for +the period of the engagement and for a period of two years after +the engagement. + +B. Areas Independent Consultant Is to Review. Within the periods specified in +paragraph 72.C below, the Independent Consultant will review and evaluate +Crowe’s audit policies and procedures regarding: + +a. The exercise of due professional care and professional skepticism +regarding reliance on management representations; +b. Obtaining sufficient appropriate audit evidence in significant audit +risk areas and those subject to fraud risk; +c. Responding to fraud risks and documenting responses to such +risks; +d. Auditing related party transactions; +e. Detecting illegal acts that have a direct and material effect on the +determination of financial statement amounts including fraud; +f. Evaluating substantial doubt about the ability of the issuer to +continue as a going concern; +g. Performing engagement quality reviews according to the guidance +set forth in AS 7; and +h. Independence. + +Crowe 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 + + +19 + +the reports specified in paragraph 72.C below. + +C. Independent Consultant Reports and Certifications. + +a. Within five (5) months of the Independent Consultant being +retained, Crowe shall require the Independent Consultant to issue a +detailed written report (“Report”) to Crowe: (a) summarizing the +Independent Consultant’s review and evaluation of the areas +identified in paragraph 72.B. above; and (b) making +recommendations, where appropriate, reasonably designed to +ensure that audits conducted by Crowe comply with Commission +regulations and with PCAOB standards and rules. Crowe shall +require the Independent Consultant to provide a copy of the Report +to the Commission staff when the Report is issued. + +b. Crowe will adopt all recommendations of the Independent +Consultant in the Report. Provided, however, that within thirty (30) +days of issuance of the Report, Crowe may advise the Independent +Consultant in writing of any recommendation that it considers to +be unnecessary, unduly burdensome, or impractical. Crowe 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. Crowe and the +Independent Consultant will engage in good-faith negotiations in +an effort to reach agreement on any recommendations objected to +by Crowe. + +c. In the event that the Independent Consultant and Crowe are unable +to agree on an alternative proposal within sixty (60) days, Crowe +either will abide by the determinations of the Independent +Consultant or seek approval from the Commission staff pursuant to +paragraph 72.A.a. above to engage, at Crowe’s expense, a qualified +third party acceptable to the Commission staff to promptly resolve +the issue(s). + +d. Within sixty (60) days of issuance of the Report, but not sooner +than thirty (30) days after a copy of the Report is provided to the +Commission staff, Crowe will certify to the Commission staff in +writing that it has adopted and has implemented or will implement +all recommendations of the Independent Consultant (“Certification +of Compliance”). Crowe will provide a copy of the Certification of +Compliance to the Commission staff. + +e. Within six (6) months of the issuance of the Report, Crowe shall +require the Independent Consultant to test whether Crowe has + + +20 + +implemented and enforced its written policies and procedures +concerning the areas specified in paragraph 72.B. above and assess +the effectiveness of those policies and procedures. Within thirty +(30) days of the test, Crowe 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, Crowe 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. In +all events, Crowe must complete the undertakings discussed herein +and provide the Independent Consultant Certification to the +Commission staff no later than eighteen (18) months after the entry +of this Order. + +f. The Report, Final Report, Certification of Compliance, +Independent Consultant Certification, and any related +correspondence or other documents shall be submitted to Anita B. +Bandy, Associate Director, Division of Enforcement, Securities +and Exchange Commission, 100 F St., N.E., Washington, DC +20549, with a copy to the Office of Chief Counsel of the +Enforcement Division. + +D. Crowe shall also certify, in writing, compliance with the undertaking(s) set +forth above. The certification shall identify the undertaking(s), provide +written evidence of compliance in the form of a narrative, and be supported by +exhibits sufficient to demonstrate compliance. The Commission staff may +make reasonable requests for further evidence of compliance, and Crowe +agrees to provide such evidence. This certification and supporting material +shall be submitted to Anita B. Bandy, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F St., N.E., +Washington, DC 20549, with a copy to the Office of Chief Counsel of the +Enforcement Division, no later than sixty (60) days from the date of the +completion of the undertakings. + +E. For good cause shown, the Commission staff may extend any of the +procedural dates relating to the undertakings. Deadlines for procedural dates +shall be counted in calendar days, except that if the last day falls on a weekend +or federal holiday, the next business day shall be considered to be the last day. + +F. Crowe agrees that if the Division of Enforcement believes that Crowe has not +satisfied these undertakings, it may petition the Commission to reopen the + + +21 + +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, Crowe, Macina and Wydra, shall cease and desist from committing +or causing any violations and any future violations of Sections 10A(a) of the Exchange Act, +Section 13(a) of the Exchange Act and Rule 13a-1 promulgated thereunder; and Rule 2-02(b)(1) +of Regulation S-X. + +B. Respondent Crowe is censured. + +C. Respondent Crowe shall comply with its undertakings as enumerated in Paragraph +72 of Section III. above. + +D. Respondent Macina is denied the privilege of appearing or practicing before the +Commission as an accountant. + +E. After three years from the date of this Order, Respondent Macina 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 Macina’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 + + + +22 + +3. an independent accountant. Such an application must satisfy the +Commission that: + +a) Macina, 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) Macina, 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 the firm’s +quality control system that would indicate that Macina will not +receive appropriate supervision; + +c) Macina 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) Macina acknowledges his responsibility, as long as Macina +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. + +F. The Commission will consider an application by Macina 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 Macina’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. Respondent Wydra is denied the privilege of appearing or practicing before the +Commission as an accountant. + +H. After one year from the date of this Order, Respondent Wydra 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 + + +23 + +1934). Such an application must satisfy the Commission that Wydra’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) Wydra, 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) Wydra, 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 the firm’s +quality control system that would indicate that Wydra will not +receive appropriate supervision; + +c) Wydra 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) Wydra acknowledges his responsibility, as long as Wydra 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. + +I. The Commission will consider an application by Wydra 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 Wydra’s character, + + +24 + +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. + +J. Respondent Crowe 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. + +K. Respondent Macina shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $25,000 to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +L. Respondent Wydra shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $15,000 to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +M. 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 +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 +Respondents, Crowe LLP, Joseph C. Macina, and Kevin V. Wydra, 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 Anita B. Bandy, Associate Director, Division of Enforcement, Securities +and Exchange Commission, 100 F St., N.E., Washington, DC 20549. + +N. 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 + + +25 + +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 Respondents Macina and Wydra, and further, any debt for disgorgement, +prejudgment interest, civil penalty or other amounts due by Respondents Macina and Wydra +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 Macina +and Wydra 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/2018/AAER-4008.txt b/raw/aaer/2018/AAER-4008.txt new file mode 100644 index 0000000000000000000000000000000000000000..eab5d02db652e6d801039f618991d381a9d90688 --- /dev/null +++ b/raw/aaer/2018/AAER-4008.txt @@ -0,0 +1,773 @@ +1 + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84921 / December 21, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4008 / December 21, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18954 + + + +In the Matter of + +MITCHELL J. RUBIN, CPA, +and +MICHAEL BERNSTEIN, 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 Practice (“CRP”) against Respondents, Mitchell J. +Rubin, CPA (“Rubin”) and Michael Bernstein, CPA (“Bernstein”), (collectively, +“Respondents”).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 im proper +professional conduct.” +2 + +II. +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offers”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which +are admitted, 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 (“Order”), as set forth below. +III. +On the basis of this Order and Respondents’ Offers, the Commission finds that:3 +SUMMARY +1. Respondents, Rubin and Bernstein, in their capacities as former partners of Rosen, +Seymour, Shapps, Martin & Company, LLP (“RSSM”), performed deficient audits of the +financial statements of Corporate Resource Services, Inc. (“CRS”) for the fiscal years ended +September 28, 2012 and December 28, 2012. Rubin, as the engagement partner, approved the +issuance of audit reports that were included in the 2013 Form 10-K and 2012 Form 10-K that +CRS filed with the Commission on July 1, 2014, and December 21, 2012, respectively. +Bernstein, as the engagement quality reviewer (“EQR”), provided his concurrence. However, +these reports were false in that they stated the audits were conducted in accordance with the +standards of the Public Company Accounting Oversight Board (“PCAOB”)4 when they were not. +Respondents’ audit deficiencies included the failure to, among other things: (1) include +procedures designed to provide reasonable assurance that CRS did not have material +undisclosed contingent liabilities for unpaid payroll taxes; (2) properly identify and audit related +party transactions despite the risks of fraud by CRS; (3) obtain sufficient appropriate audit +evidence to respond to identified fraud risks and otherwise support their unqualified opinions; +and (4) conduct engagement quality reviews. Respondents’ audit of CRS’s revised December +2012 financial statements also amounted to no audit at all. Moreover, Bernstein was not +independent during the 2012 audits given that he had served as the engagement partner on CRS’s +audits for five consecutive years and then immediately served as the EQR for CRS from 2011 +through 2013. + + +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 References to auditing standards in this Order are to PCAOB standards in effect at the time the audit work +was performed. +3 + +RESPONDENTS +2. Mitchell J. Rubin, age 63, is a resident of Chappaqua, New York, and a CPA +licensed in the State of New York. As a non-equity partner at RSSM, Rubin served on the CRS +engagement from 2009 through 2013, and was the engagement partner during the audits of +CRS’s 2012 financial statements (the “Relevant Period”). + +3. Michael Bernstein, age 78, is a resident of New York, New York, and a CPA +licensed in the State of New York. He joined RSSM as a result of a business combination in +2009. Bernstein became the Managing Partner at RSSM in or about August 2012, and continued +in that role until he resigned on October 31, 2014. Bernstein served on the audit engagement of +CRS (including its predecessor entity) from 2006 through 2013, and was the EQR during the +Relevant Period. + +RELEVANT ENTITIES + +4. Corporate Resource Services, Inc. (“CRS”) was a Delaware corporation +headquartered in New York, New York, whose primary business was to provide temporary +staffing services to customers. CRS’s common stock (ticker “CRRS”) was registered pursuant to +Section 12(g) of the Exchange Act and quoted on the OTC Bulletin Board until September 4, +2013, at which time it was listed on NASDAQ CM. On March 20, 2015, NASDAQ delisted +CRS for failure to timely file periodic reports. On July 23, 2015, CRS filed for Chapter 11 +bankruptcy relief. + +5. TS Employment, Inc. (“TSE”) was a private Florida company headquartered in +New York, New York, that provided professional employer organization (“PEO”) services to +CRS. It was wholly owned by CRS’s controlling shareholder and Board of Director member +(“Director”). At all times, TSE’s only customer and sole source of revenues was CRS. As a +PEO, TSE co-employed CRS’s staffing employees, and through funds received from CRS was +responsible for remitting to authorities all payroll taxes concerning CRS’s employees. On +February 2, 2015, due to an approximately $100 million federal payroll tax liability related to +CRS’s staffing employees, TSE filed for Chapter 11 bankruptcy relief. + +6. RSSM CPA LLP (“RSSM”), formerly known as Rosen Seymour Shapss Martin +& Company LLP, was registered with the PCAOB and headquartered in New York, New York +during the relevant period. It provided accounting, auditing, tax, and other professional services. +As of March 31, 2013, it had nine issuer clients and 136 accountants. RSSM served as CRS’s +auditor from 2009 through 2013. It was dismissed as CRS’s auditor on December 27, 2013. On +February 22, 2017, RSSM filed for bankruptcy and was subsequently dissolved. + +FACTS + +Background of CRS and its Pervasive Related Party Transactions + +7. CRS was primarily a temporary staffing services company that reported +approximately $680 million in revenues and approximately $600 million in cost of revenues for +the year ended December 28, 2012, and approximately $820 million in revenues and +4 + +approximately $723 million in cost of revenues for the year ended January 3, 2014. Although +CRS contracted with its customers to place employees at job sites, it was at all times the common +law employer of these employees and obligated by law to pay their wages and payroll taxes. + +8. CRS outsourced the handling of these obligations and other human resources and +administrative functions to TSE as its PEO. TSE had no other customers. By virtue of the PEO +arrangement, CRS and TSE co-employed the temporary staffing employees, and TSE served as +the third party payer of the wages and payroll taxes that otherwise would have been handled by +CRS itself. Thus, CRS remained the common law employer, and TSE was the employer of +record. TSE and its affiliates also handled CRS’s revenue invoicing and receivables collections, +administration of employee benefits, and workers compensation insurance coverage. As a result, +nearly all of CRS’s cost of revenues consisted of TSE charges. + +9. Through this PEO relationship and Director’s common control, CRS was +operationally and financially dependent on TSE. Many of CRS’s operations and finance +personnel, managers, executives and board members including CRS’s President, CEO and +Chairman of the Board, worked for TSE and/or its affiliates, which were also solely owned and +controlled by Director. CRS was also dependent on Director, TSE and its affiliates to provide +CRS with working capital, liquidity and financing for acquisitions. Director guaranteed CRS’s +$80 million revolving receivables-backed facility. Also, because the funds from this facility did +not meet CRS’s cash flow needs, TSE provided working capital by allowing CRS to defer +payment for PEO services. It was only through this arrangement that CRS had funds to operate. +Even after TSE had exchanged $14.1 million of CRS’s PEO-related debt for CRS stock, CRS’s +indebtedness to TSE still exceeded $12.7 million on December 28, 2012, and $15.7 million by +the end of 2013. Though CRS’s debt to TSE continued to mount, CRS still depended on TSE for +liquidity and ongoing wage and tax payments. +RSSM’S Audits of CRS’s Financial Statements +10. RSSM audited CRS’s financial statements for the fiscal years 2009 through 2012, +and issued audit reports containing unqualified opinions each year. For the 2006 through 2010 +audits of CRS’s financial statements, Bernstein served as the engagement partner and, for 2009 +and 2010, Rubin served as the EQR. For the 2011 and 2012 audits of CRS’s financial +statements, Rubin served as the engagement partner and Bernstein served as the EQR. In their +respective roles, Bernstein and Rubin also performed reviews of CRS’s quarterly filings through +the third quarter of 2013. + +11. Because CRS changed its fiscal year end from the Friday closest to September 30 +to the Friday closest to December 31 in early 2013, RSSM audited two different 2012 year-end +financial statements for CRS. First, RSSM audited CRS’s financial statements for the fiscal year +ended September 28, 2012 and issued its audit report on December 21, 2012, both of which were +included within the Form 10-K CRS filed on December 21, 2012. Second, on December 20, +2013, RSSM issued an audit report containing an unqualified opinion on CRS’s financial +statements for the fiscal year ended December 28, 2012. Although CRS received this audit +report, it did not make a filing containing this report or the related financial statements. After +CRS replaced RSSM as its auditor on December 27, 2013, CRS learned of prior period +misstatements from its successor auditor and ultimately revised its financial statements for the +5 + +fiscal year ended December 28, 2012. Some of the adjustments incorporated within the revised +financial statements had previously been proposed by RSSM but rejected by CRS at that time. +CRS included the revised December 2012 financial statements within the 2013 Form 10-K it +filed on July 1, 2014. The 2013 Form 10-K also included a new audit report issued by RSSM +containing an unqualified opinion on these revised and filed December 2012 financial +statements. RSSM dual-dated its report as of December 20, 2013, and June 30, 2014. + +12. In February 2015, and more than a year after CRS had replaced RSSM as its +auditor, CRS disclosed that TSE had a material unpaid federal payroll tax liability. This liability, +which amounted to approximately $100 million, forced TSE to file for bankruptcy on February +2, 2015, and caused CRS’s secured lender to put CRS on a path to liquidation. The successor +auditor then resigned on February 9, 2015, after informing CRS that its audit report containing +an unqualified opinion for the fiscal year ended January 3, 2014, could no longer be relied upon +due to material uncertainties as to whether CRS was contingently liable for any or all of the +outstanding payroll taxes. CRS also disclosed that its prior financial statements could not be +relied upon due to the material uncertainties related to the payroll tax liability. Consequently, +CRS was delisted from NASDAQ in April 2015 for failing to timely file financial statements. In +July 2015, CRS filed for bankruptcy. +Failures to Detect Undisclosed Liabilities for Unpaid Payroll Taxes +13. RSSM failed to include procedures during the Relevant Period designed to obtain +reasonable assurance that CRS did not have material undisclosed contingent liabilities for unpaid +payroll taxes. + +14. As early as the 2010 audit, RSSM identified certain fraud risk factors concerning +CRS’s related party transactions with TSE and Director, including the potential for the +misappropriation of CRS’s assets and unpaid payroll tax liabilities. RSSM work papers also +identified each year the potential going concern risk presented by CRS’s mounting debt to and +ongoing financial dependence on the liquidity and working capital provided by TSE and +Director. + +15. As documented in the work papers describing CRS’s internal controls for the +2010 and subsequent audits RSSM performed, RSSM identified that CRS had direct liability for +payroll taxes in certain states that did not recognize the PEO relationship. More significantly, +the 2010 engagement team, noted in a work paper entitled “Fraud Risk Factors” the fact that +CRS “is dependent on the PEO to remit payroll taxes. The Internal Revenue Service may view +the Company as an extension of the PEO and seek remittance from the Company.” + +16. The “Fraud Risk Factors” work paper also noted: “The Company is dependent on +the fiduciary relationship with the PEO. Unchecked, the PEO may have the opportunity to place +the obligation onto the Company. The PEO may represent to the Company that they have paid +the payroll taxes but that they have actually kept the money and made no remittance of payroll +taxes.” The work paper further stated: “Those controlling the Company may forsake the entity +and let it be the scapegoat for the majority shareholder’s fraud.” + +6 + +17. These risks remained throughout the entire period of RSSM’s CRS engagement +and thereafter. Yet, during the Relevant Period, RSSM, through Rubin as the engagement +partner, failed to perform adequate procedures designed to detect whether CRS had material +undisclosed contingent liabilities arising from any non-payment of payroll taxes by its related +party PEO. + +18. AU 334.09, Related Parties, requires auditors to perform procedures related to +related party transactions “he considers necessary to obtain satisfaction concerning the purpose, +nature, and extent of these transactions and their effect on the financial statements” by “obtaining +and evaluating sufficient appropriate evidential matter” which “should extend beyond inquiry of +management.” AU 334.10 also makes clear that, when necessary to fully understand a particular +transaction, the auditor should consider, among other things, “inspect[ing] evidence in +possession of the other party or parties to the transaction” and “confirm[ing] or discuss[ing] +significant information with intermediaries, such as banks, guarantors, agents, or attorneys to +obtain a better understanding.” AU 334.10 also states that auditors should consider “obtain[ing] +information about the financial capability of the other party or parties to the transaction” when +there are “material uncollected balances, guarantees, and other obligations,” and advises auditors +to consider obtaining from the related party audited and unaudited financial statements, income +tax returns, and reports issued by regulatory agencies, taxing authorities, financial publications or +credit agencies. AU 9334, Related Parties: Auditing Interpretations of Section 334, further +provides that, to understand the transaction or obtain evidence regarding it, “the auditor may +have to refer to audited or unaudited financial statements of the related party, apply procedures at +the related party, or in some cases audit the financial statements of the related party.” AU +9334.19 also states that the “higher the auditor’s assessment of risk regarding related party +transactions, the more extensive or effective the audit tests should be.” + +19. Despite this guidance, during the Relevant Period, RSSM and Rubin did not +obtain from CRS or TSE any of the evidence specifically highlighted in AU 334 and AU 9334. +In fact, instead of getting evidence that the payroll taxes had been remitted as appropriate, the +engagement team told CRS to stop separately recording the payroll tax and administration fee +amounts that were listed in the PEO’s invoices, so as to avoid “potential liabilities if audited by +the IRS.” + +20. RSSM, through Rubin, also did not obtain any evidence that TSE could provide +CRS with liquidity and working capital while simultaneously performing its PEO obligations. +They should have known that TSE had no customers or revenue sources other than CRS. The +work papers also indicated that the PEO typically remitted the taxes to the IRS only after +receiving payment on invoiced amounts from CRS. Yet RSSM and Rubin did not obtain +sufficient appropriate audit evidence that TSE was actually performing its PEO obligation and +remitting the taxes due despite CRS’s nonpayment of certain invoiced amounts. + +21. Evidence of financial capability was also necessary to RSSM’s evaluation during +the Relevant Period of CRS’s ability to continue as a going concern. CRS’s increasing debt to +TSE resulting from CRS’s inability to pay for PEO services was identified in RSSM’s 2012 audit +work papers as an indication of CRS’s financial difficulties. The work papers further noted that +the company had recurring net losses and negative working capital. Together, these facts raised +7 + +substantial doubt that the company could continue as a going concern. However, RSSM, +through Rubin and Bernstein in their respective roles of engagement partner and EQR, ultimately +concluded that, in their judgment, the doubt was sufficiently mitigated because management +represented that Director would not demand payment and CRS’s otherwise negative working +capital would be a positive $7.1 million if the debt was removed from the balance sheet. The +work papers also noted that “TSE is investing sufficient resources to maintain or improve the +Company’s financial position” and had already helped CRS “improve its balance sheet” by +converting $14.1 million from debt to equity. + +22. However, AU 341.07, The Auditor’s Consideration of an Entity’s Ability to +Continue as a Going Concern, states that if an auditor believes that there is substantial doubt, he +should consider whether management’s plans to deal with the adverse effects of the conditions +and events can be effectively implemented. AU 341.08 further directs auditors to obtain +evidential matter about management’s plans that are particularly significant to overcome the +adverse effect. When those plans include reduced or delayed expenditures, the auditor should +consider the “feasibility” and “possible direct or indirect effects” of such reductions and delays. +AU 341.07. Yet RSSM and Rubin did not consider the feasibility or direct or indirect effects of +CRS not paying the PEO for essential services. Despite the documented need for ongoing +financial support and their knowledge that CRS “has an over reliance on debt financing and +amounts received from related parties,” RSSM, through Rubin, never obtained evidence that +TSE in fact had the resources “to maintain or improve” CRS’s financial position by paying the +wages and payroll taxes for CRS’s staffing employees—services critical to CRS’s operations— +without first receiving payment. Bernstein, as EQR, also did not challenge that decision. +Additional Failures to Audit CRS’s Related Party Transactions and Disclosures +23. RSSM also failed to include adequate procedures to identify and fully understand +CRS’s material related party transactions, and who specifically was providing CRS with PEO +services, to determine the appropriateness of related party disclosures. + +24. Through its history with CRS, including its audits of CRS’s financial statements +and review of CRS’s quarterly filings, RSSM knew of CRS’s PEO relationship with TSE and +CRS’s operational and financial dependence on TSE and Director. It was during the period that +Bernstein was the engagement partner and Rubin was the EQR that Director obtained controlling +ownership of CRS and established the mutually-exclusive PEO relationship between CRS and +TSE. RSSM also documented within its 2012 work papers its knowledge that “related party +transactions with their Professional Employer Organization (PEO) are a particularly sensitive +area in the financial statements requiring proper disclosure.” + +25. RSSM also was aware that the obligations of both CRS and TSE under the PEO +arrangement were documented in a Master Services Agreement (“MSA”). The MSA stated that +CRS was responsible for supervising its employees, maintaining and providing time and other +payroll records upon which payroll would be based, and paying TSE for all compensation that +would be paid to or on behalf of CRS’s employees, including taxes. TSE essentially paid the +wages and taxes based on the money and documentation that CRS provided, for which services +TSE charged CRS an administrative fee. + +8 + +26. Though aware that the MSA was a material related party agreement, RSSM, +through Rubin, never performed any audit procedures on the MSA, and Bernstein as EQR did +not challenge that decision or otherwise identify the deficiency. RSSM’s work papers only +contained an incomplete portion of the MSA that was attached to CRS’s September 2010 Form +8-K. This copy of the MSA identified the PEO to be TSE but (1) redacted the amount of +administrative fee that TSE agreed to charge CRS for PEO and other administrative services and +(2) omitted the two Schedules identified on the face of the agreement. The excluded “Schedule +A” contained the material terms of the PEO arrangement as described above and included a +clause whereby CRS indemnified TSE “from and against all claims, demands, causes of action, +suits, liabilities and expenses (including court costs and attorney’s fees) of every kind or +character…without regard to the cause or causes thereof or the negligence of any party….” + +27. This indemnification clause was a disclosable guarantee by CRS under ASC 460 +Guarantees. The clause also provided yet another reason for RSSM, through Rubin during the +Relevant Period, to include certain audit procedures to determine whether TSE had remitted +payroll taxes because it exposed CRS to potential liability for any gross wage and tax amounts +that TSE had not paid—even if CRS had already paid TSE, who in turn had misappropriated the +funds. As a result, CRS’s contingent liability for any unpaid payroll taxes existed not only +because it was the common law employer of its staffing employees, but also because CRS agreed +to indemnify TSE for certain unpaid payroll taxes. + +28. CRS, however, repeatedly failed to disclose its guarantee as required under ASC +460. And, at least during the Relevant Period, RSSM and Rubin failed to obtain and perform any +audit procedures on the MSA. Bernstein similarly failed to identify the resulting audit +deficiencies. + +29. Additionally, although both the MSA and CRS’s 2012 Form 10-K filed on +December 21, 2012, specifically identified the PEO to be TSE, the work papers for the 2012 +audit reveal inconsistencies in the identification of who specifically was providing CRS with +PEO services. For example, the work papers refer to the PEO as any one of a myriad of entities, +including “Tri-State Services,” “Tristate (related party),” “TSE,” “TS Employment,” or +“TriState.” The work papers do not identify the number, nature or names of the entities and +individuals that were conglomerated into the “Tristate” moniker. Other work papers note that +while CRS wired funds daily to TSE “to cover payroll and payroll related expenses,” it was +“TriState” that sent invoices and issued paychecks from a “TriState bank account.” Despite +these apparent inconsistencies, RSSM, through Rubin, did not resolve the issue and obtain +evidence that CRS’s disclosures were accurate. + +30. This omission also resulted in RSSM’s failure to realize that CRS’s related party +disclosures did not comply with generally accepted accounting principles (“GAAP”). For +example, CRS’s 2012 Form 10-K stated: “TS Employment charges the Company its current +market rate for services, which is consistent with the amounts that it charges its other +customers.” However, ASC 850, Related Party Disclosure, prohibits disclosures that related +party transactions are done at fair market value or essentially carried out on an arms-length basis, +unless such disclosures can be substantiated. AU 334.12 also specifically states that “it is +difficult to substantiate representations that a transaction was consummated on terms equivalent +9 + +to those that prevail in arm’s length transactions.” + +31. Despite these accounting and auditing provisions, RSSM, through Rubin, failed to +obtain audit evidence to corroborate CRS’s disclosure that TSE charged CRS a market rate for +its PEO services or to substantiate the accuracy of the administrative fee charged. Bernstein, as +the EQR, also failed to identify the departure from GAAP in CRS’s related party disclosures. +The disclosure was also inaccurate. Given that TSE’s only customer was CRS, TSE could not +charge CRS amounts consistent with what it charged “others.” +Failures to Audit CRS’s Cost of Revenues +32. CRS’s reported cost of revenues was almost wholly comprised of the amounts due +to TSE for PEO services, a material related party transaction that presented fraud risk. However, +RSSM failed to substantively test CRS’s transactions with TSE or otherwise perform audit +procedures to obtain sufficient appropriate evidence to support CRS’s cost of revenues. + +33. During the 2010 audit, the engagement team identified fraud risks concerning cost +of revenues. They noted that Director had managerial control of operations and “may sacrifice +the interest of the minority shareholders for its own benefit,” “manipulate the financial data to +project the desired results,” and “manipulate certain ratios (i.e. gross profit margins) that would +make the stock seem profitable and enticing to investors.” RSSM further identified that “the +most significant financial statement areas in the audit are receivable, revenue, and payroll.” + +34. During the 2011 audit’s fraud risk assessment procedures and management +interviews, RSSM learned that CRS’s cost of revenues could be manipulated and materially +misstated by management and TSE. For example, when asked how someone could overstate net +income if they wanted to, CRS’s CEO, who was also TSE’s Executive Vice President, said: “I +would withhold expense (i.e. lower my costs).” CRS’s Controller further suggested that +someone could “[u]nderstate the payable to the PEO.” The 2011 audit work papers further +highlighted that the company used TSE to process its cost of sales and that “an invoice could be +easily manipulated to be less.” + +35. Moreover, the 2012 internal controls work papers noted that “PEO invoices are +not reconciled to the payroll registers” and that “any errors in the amounts billed on the PEO +invoice would not be encountered” or detected and corrected by CRS. In fact on January 22, +2013, RSSM, through Rubin and Bernstein, identified the lack of reconciliation of PEO invoices +as a significant deficiency in CRS’s internal controls in a letter to CRS’s Board of Directors. +RSSM also reported in the letter that there were some discrepancies between TSE invoices +received and used to record payroll expense and CRS’s actual payroll registers. RSSM also +noted that CRS relied on the amounts charged by TSE and did not obtain support to verify the +charges. + +36. Thus, RSSM, Rubin and Bernstein knew of risks of material misstatement related +to CRS’s cost of revenues that could only be addressed by obtaining persuasive audit evidence +through substantive tests of details. Under AS 13.09, The Auditor’s Responses to the Risks of +Material Misstatements, an auditor should “[o]btain more persuasive audit evidence the higher +the auditor’s assessment of risk.” Moreover, AS 13.11 states that for significant risks, the +10 + +“auditor should perform substantive procedures, including tests of details, that are specifically +responsive to the assessed risks.” The standard further provides that (1) “[s]ubstantive +procedures generally provide persuasive evidence when they are designed and performed to +obtain evidence that is relevant and reliable”; (2) “[i]nquiry alone does not provide sufficient +appropriate evidence to support a conclusion about a relevant assertion”; and (3) “increasing the +extent of an audit procedure cannot adequately address an assessed risk of material misstatement +unless the evidence to be obtained from the procedure is reliable and relevant.” AS 13.39; AS +13.42. AU 333, Management Representations, and AU 334 also provide that sufficient +persuasive audit evidence must extend beyond management representations and unverified or +uncorroborated representations from related parties. + +37. Nonetheless, RSSM, through Rubin, did not perform appropriate substantive tests +of details during the Relevant Period. It did not perform procedures to assess whether TSE’s +invoices reflected an accurate calculation of wages, taxes and benefits. Rather, its cost of sales +testing consisted of obtaining management’s uncorroborated explanations of gross margin +fluctuations. RSSM also obtained a confirmation of costs from TSE. However, in contravention +of AU 333 and AU 334, RSSM labeled the confirmation as being from a third party. This +confirmation also did not provide relevant and reliable evidence because it was signed by a dual +employee of CRS and TSE and was not received until one month after RSSM, through Rubin, +issued its audit report on the September 2012 financial statements. + +38. In his role as the EQR during the Relevant Period, Bernstein failed to exercise the +requisite due care and professional skepticism when he evaluated the engagement team’s planned +procedures for the testing of cost of revenues. He failed to identify that the engagement team +had not planned, performed and documented sufficient substantive testing. He failed to identify +that the engagement team had not obtained sufficient appropriate audit evidence to address the +known fraud risks, in contravention of AS 13, AU 333, and AU 334. +Failure to Obtain Sufficient Appropriate Audit Evidence to Support CRS’s Revenue +Recognition +39. AS 12.68, Identifying and Assessing Risks of Material Misstatement, and AU +316.83, Consideration of Fraud in a Financial Statement Audit, provide that improper revenue +recognition is a presumptive fraud risk for all audits. However, without evidence or analysis of +information sufficient to overcome the presumption, RSSM, through Rubin, did not identify +CRS’s revenues as such during the Relevant Period. Although aware of “managements [sic] +inclination to inflate the bottom line for its potential investors,” RSSM identified revenues as +only a significant risk in the September audit, and as no risk at all in the December audit. + +40. However, because revenues did in fact present fraud risks, RSSM failed to +comply with AS 13 when the engagement team did not conduct substantive tests of details to +obtain persuasive audit evidence. As with cost of revenues, RSSM, through Rubin, essentially +relied on a weekly sales and margin report provided by CRS to see if there were any unusual +fluctuations. As a result, RSSM did not obtain sufficient appropriate and persuasive evidence +that CRS’s revenues were based on an arrangement pursuant to which services were actually +delivered at set fees that were not subject to a side agreement or rebate. RSSM did not have +sufficient appropriate audit evidence to support its conclusion that CRS’s revenues were +11 + +recognized in accordance with GAAP. + +41. Bernstein, as the EQR, should have known that the engagement team’s +performance of only analytical procedures was not sufficient to audit revenues under PCAOB +standards. Yet he did not identify this as a significant engagement deficiency or object to the +issuance of RSSM’s audit reports containing unqualified opinions for the 2012 financial +statements. + +42. These lapses occurred despite Rubin’s and Bernstein’s knowledge before +completing the September and December 2012 audits that the PCAOB had inspected RSSM’s +audit of CRS’s 2011 financial statements and found significant audit deficiencies that rendered +RSSM’s unqualified opinion unsupported. Among other things, the PCAOB noted that RSSM +did not perform sufficient procedures to test the completeness, existence, accuracy and valuation +of revenue. They also found that RSSM had failed to vouch and agree information presented by +management to source documents. +Failure to Obtain Sufficient Appropriate Audit Evidence to Address Fraud Risks +Associated with CRS’s Journal Entries +43. Rubin and Bernstein were also aware during the Relevant Period that the PCAOB +had previously found deficiencies in RSSM’s testing of journal entries. For example, the +PCAOB had commented that RSSM did not examine, during its audit of CRS’s 2011 financial +statements, underlying support for journal entries selected for testing and inappropriately limited +journal entry testing to just two out of twelve months. + +44. They also knew that CRS lacked adequate controls over journal entries and that +this posed fraud risks. As noted in their “Journal Entry Testing” work paper, “one of the major +deficiencies” in CRS’s journal entry process was that CRS used one IT system to prepare its +financial reports, and a wholly separate IT system for “sales invoices, cash receipts and payroll +calculations,” to which related parties had access without CRS oversight. RSSM also identified +as a significant deficiency the fact that CRS made manual batch journal entries at month end +without review and did not keep a detailed general ledger. The engagement team further +documented within the work papers the fact that CRS had a tendency to compound “multiple +concepts” in journal entries, such as depreciation with accrued expense and cash transactions, +and recorded adjustments on a “top-sided” basis that were not assigned to specific accounts or +communicated on a timely basis. + +45. Nevertheless, RSSM and Rubin failed to obtain sufficient support for the 2012 +journal entries that were tested. The work papers, for example, reflect that they failed to +examine evidence for the authorization, accuracy and completeness of journal entries related to +(1) CRS’s reclassifications of temporary employee salaries to related party interest expense, (2) +expenses labeled as “[Director] Commissions,” (3) entries for a corporate acquisition and +purchases of intangibles, (4) top-side entries, (5) non-standard entries made by CRS’s controller, +and (6) entries for the conversion of $14.1 million of related party debt to equity so as to improve +CRS’s balance sheet. + +12 + +46. In addition, AU 316.62 provides that an auditor’s journal entry testing should +ordinarily include a focus on adjustments made at the end of a reporting period, as fraudulent +entries can be made at that time. Despite this requirement, RSSM did not examine, for example, +any support for year-end journal entries, except those for one subsidiary. +Failure to Obtain Sufficient Appropriate Audit Evidence to Support the Audit Opinion +47. AS 15.04, Audit Evidence, 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.” However, RSSM, through Rubin as the engagement partner during the Relevant +Period, did not obtain sufficient appropriate audit evidence to support management’s assertions +regarding CRS’s recognition of revenue, cost of sales, related party transaction disclosures, and +journal entries. Thus, Rubin improperly approved RSSM’s issuance of audit reports containing +unqualified audit opinions regarding CRS’s 2012 financial statements. Bernstein, in turn, +improperly concurred in the issuance of these audit reports despite significant engagement +deficiencies in the audit arising from a lack of audit evidence. +Failure to Perform an Audit on CRS’s December 2012 Revised Financial Statements +48. Although RSSM issued an audit report containing an unqualified opinion on the +December 2012 financial statements included within CRS’s 2013 Form 10-K, the engagement +team, in effect, did not perform audit procedures on those statements. Bernstein was aware of +this fact but still provided his concurrence. + +49. By email dated January 13, 2014, CRS notified RSSM, through Rubin and +Bernstein, that the successor auditor had completed its initial review of RSSM’s September 2012 +and December 2012 work papers and concluded that in its judgment there were deficiencies in +the RSSM work papers. The claimed deficiencies included a lack of adequate audit procedures +concerning related party transactions and lack of testing for journal entries, revenues and +significant contracts. + +50. RSSM did not properly assess the importance of the deficiencies identified by the +successor auditor, perform additional audit procedures, or otherwise supplement the +documentation within the 2012 work papers. + +51. Rubin and Bernstein also learned that the successor auditor had identified a +number of prior-period misstatements that impacted CRS’s financial statements for periods +including the fiscal years ended September 28, 2012, and December 28, 2012. The +misstatements concerned, for example, incorrect accounting for the receivables-backed facility, +stock based compensation, deferred tax assets and liabilities, and the deconsolidation of a joint +venture. Certain of these items resulted in quantitatively material changes to CRS’s balance +sheet and the statements of cash flows, for example. The items also changed certain financial +statement metrics used by investors and lenders, and occurred at a time when CRS was working +to be listed on NASDAQ, raise additional capital through an offering of stock, and increase its +borrowings under a new asset-based lending arrangement. + +13 + +52. CRS ultimately revised its December 2012 financial statements and included a +Note to its 2013 financial statements regarding the revisions. At CRS’s request, Rubin issued +with Bernstein’s concurrence RSSM’s audit report containing an unqualified opinion for the +revised December 2012 financial statements and the accompanying Note. The audit report was +dated as of December 20, 2013, to reflect when RSSM had originally and purportedly completed +the December 2012 audit, and as of June 30, 2014, to cover the revisions. By issuing and dual +dating the audit report, which CRS included in its 2013 Form 10-K, RSSM, through Rubin and +Bernstein, stated that: (1) RSSM had audited the December 2012 financial statements as of +December 20, 2013, in accordance with PCAOB standards, and (2) RSSM had also audited the +revisions to the 2012 financial statements as of June 30, 2014, in accordance with PCAOB +standards. + +53. These two statements, however, were false. RSSM did not quantify the issues +raised by the successor auditor, obtain evidence to support the revisions, audit CRS’s materiality +assessment or otherwise perform audit procedures required by PCAOB standards to provide +reasonable assurance that CRS’s financial statements were not materially misstated. RSSM’s +work papers also failed to support any sign off by Rubin or Bernstein on any work related to any +revisions. Further, RSSM did not take steps to assess and remedy any potential audit +deficiencies within its September and December 2012 work papers, noted by the successor +auditor. Rubin, as the engagement partner, was aware of these facts but nevertheless issued the +dual-dated audit report for filing within CRS’s 2013 Form 10-K. Bernstein, as the EQR, was +also aware of these facts, but nevertheless provided his concurrence. +Bernstein’s Failure to Conduct Engagement Quality Reviews and Lack of Independence +54. AS 7.02, Engagement Quality Review, requires an EQR to 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 to determine +whether to provide concurring approval of issuance of the audit report. + +55. For both the September 2012 and December 2012 audits, and as discussed above, +Bernstein did not comply with AS 7.10 and AS 7.11 in that he did not properly: (1) evaluate +significant judgments made by the engagement team related to engagement planning and +materiality; (2) evaluate the engagement team’s assessment of and responses to significant risks, +including fraud risks; (3) review the engagement completion documents; and (4) evaluate the +sufficiency and completeness of the audit documentation to support the conclusions reached by +the engagement team. + +56. Further, Bernstein, and therefore RSSM, was not independent beginning with the +audit of CRS’s 2011 financial statements, and continuing through RSSM’s issuance of its dual- +dated audit report for the December 2012 financial statements. Bernstein failed to meet the +qualification requirements of an EQR under AS 7.08, which prohibits an auditor from serving as +an EQR if he has served as the engagement partner in either of the previous two audits. He also +failed to comply with Rule 2-01(c)(6)(i)(B)(1) of Regulation S-X which prohibits an auditor +from serving as either an engagement partner or an EQR on any engagement for more than five +consecutive years. As a result, he improperly concurred with the issuance of RSSM’s audit +14 + +reports, and Rubin failed to ensure that the audits adhered to PCAOB Standards and SEC +independence rules. +RESPONDENTS’ COOPERATION +57. In determining to accept Respondents’ Offers, the Commission considered their +cooperation. + +VIOLATIONS + +58. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit, in +connection with the purchase or sale of securities, (a) employing any device, scheme, or artifice +to defraud, (b) making any material misrepresentation or omission, or (c) engaging in any act, +practice, or course of business that operates as a fraud or deceit upon any person. As a result of +the actions described above, Rubin and Bernstein violated Section 10(b) of the Exchange Act +and Rule 10b-5 thereunder by making, preparing, authorizing and issuing audit reports filed with +the Commission that falsely stated they had conducted the December 2012 audit in accordance +with PCAOB standards when, in fact, the audit was so deficient that it amounted to no audit at +all. + +59. Section 10A(a)(1) of the Exchange Act requires each audit of an issuer 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 each audit of an issuer to include procedures designed to +identify related party transactions that are material to the financial statements or otherwise +require disclosure therein. No showing of scienter is necessary to establish a violation of Section +10A. As a result of the conduct described above, Rubin and Bernstein caused RSSM’s violations +of Sections 10A(a)(1) and 10A(a)(2). + +60. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state +“whether the audit was made in accordance with generally accepted auditing standards” +(“GAAS”). “[R]eferences in Commission rules and staff guidance and in the federal securities +laws to GAAS or to specific standards under GAAS, as they relate to issuers, should be +understood to mean the standards of the PCAOB plus any applicable rules of the Commission.” +See SEC Release No. 34-49708 (May 14, 2004). Thus, and through the conduct described +above, Rubin and Bernstein caused RSSM to violate Regulation S-X Rule 2-02(b)(1) when they +issued audit reports stating that they had conducted their audits in accordance with PCAOB +standards when they had not. + +61. An issuer violates Section 13(a) of the Exchange Act and Rule 13a-1 thereunder +when such issuer files with the Commission annual reports that contain materially false or +misleading information or if they file annual reports that fail to include independently audited +financials. Scienter is not required for a violation of Section 13(a). In administrative +proceedings, the Commission may impose sanctions upon any person that is, was, or would be a +cause of a violation, due to an act or omission the person knew or should have known would +contribute to such violation. In order to establish that a person caused a non-scienter based +violation, a showing of negligence will suffice. By not conducting the 2012 audits of CRS’s +15 + +financial statements in accordance with PCAOB standards, and issuing audit reports stating that +RSSM was independent when it was not, Rubin and Bernstein were a cause of CRS’s violations +of Section 13(a) and Rule 13a-1. + +62. Section 4C of the Exchange Act and CRP Rule 102(e)(1)(ii) provide, in part, that +the Commission may censure or deny, temporarily or permanently, the privilege of appearing or +practicing before the Commission to any person who is found by the Commission to have +engaged in improper professional conduct. With respect to persons licensed to practice as +accountants, “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.” The conduct described above, including Rubin’s and +Bernstein’s violations of PCAOB standards and Rubin’s issuance of and Bernstein’s concurrence +with issuances of audit reports that falsely stated that they had conducted CRS audits in +accordance with PCAOB standards when they had not, constituted “improper professional +conduct” within the meaning of Exchange Act Section 4C(a)(2) and CRP Rule 102(e)(1)(ii). + +FINDINGS + +63. Based on the foregoing, the Commission finds that Respondents violated Section +10(b) of the Exchange Act and Rule 10b-5(b) thereunder. + +64. Based on the foregoing, the Commission finds that Respondents caused violations +of Exchange Act Sections 10A(a)(1), 10A(a)(2), 13(a), and Rule 13a-1 thereunder, and Rule 2- +02(b)(1) of Regulation S-X. + +65. Based on the foregoing, the Commission finds that Respondents engaged in +improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and CRP Rule +102(e)(1)(ii). +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, Rubin and Bernstein, shall cease-and-desist from committing or +causing any violations and any future violations of Sections 10(b), 10A(a)(1), 10A(a)(2), and +13(a) of the Exchange Act, Rules 10b-5 and 13a-1 promulgated thereunder; and Rule 2-02(b)(1) +of Regulation S-X. + +B. Respondents, Rubin and Bernstein, are denied the privilege of appearing or +practicing before the Commission as an accountant. + +C. Respondent Rubin shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $25,000 to the Securities and Exchange Commission for transfer +16 + +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +D. Respondent Bernstein shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $25,000 to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +E. 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 as +Respondents, Mitchell J. Rubin and Michael Bernstein, 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 Anita B. Bandy, Associate Director, Division of Enforcement, Securities +and Exchange Commission, 100 F St., N.E., Washington, DC 20549. + +F. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, 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 agrees 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. +17 + + +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/2018/AAER-4009.txt b/raw/aaer/2018/AAER-4009.txt new file mode 100644 index 0000000000000000000000000000000000000000..e1fb6740af9ccaed8b199ac55b132e15bbc2059a --- /dev/null +++ b/raw/aaer/2018/AAER-4009.txt @@ -0,0 +1,187 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84956 / December 26, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4009 / December 26, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18955 + +In the Matter of + +ADT 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 ADT Inc. (“ADT” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +Summary + +These proceedings arise out of ADT’s violations of Section 13(a) of the Exchange Act and +Rule 13a-11 thereunder relating to disclosure requirements concerning non-GAAP financial + + 2 +measures contained in Item 10(e)(1)(i)(A) of Regulation S-K.1 Specifically, ADT did not afford +equal or greater prominence to comparable GAAP financial measures in two of its earnings +releases containing non-GAAP financial measures – ADT’s Q4 2017 and Fiscal Year 2017 +Earnings Release dated and furnished to the Commission on March 15, 2018 (the “FY 2017 +Earnings Release”) and ADT’s Q1 2018 Earning Release dated and furnished to the Commission +on May 9, 2018 (the “Q1 2018 Earnings Release”). + +Respondent + +1. ADT, a Delaware corporation based in Boca Raton, Florida, engaged in home and +business security businesses. ADT’s common stock is registered under Section 12(b) of the +Exchange Act and trades on the New York Stock Exchange under the ticker symbol “ADT.” + +Background + +2. Section 13(a) of the Exchange Act requires every issuer of a security registered +pursuant to Section 12 of the Exchange Act to file with the Commission, among other things, +annual, quarterly and current reports as the Commission may require. Rule 13a-11 of the +Exchange Act requires every such issuer file current reports on Form 8-K as the Commission +may require, including as triggered under Item 2.02 of Form 8-K when a registrant releases a +quarterly or annual earnings release containing material non-public information regarding +registrant’s results of operations or financial condition. Item 10(e)(1)(i)(A) of Regulation S-K +provides that an issuer, when including a non-GAAP financial measure in a filing with the +Commission, must include a presentation, with equal or greater prominence, of the most directly +comparable financial measure or measures calculated and presented in accordance with GAAP. +Instruction 1 of Item 2.02 of Form 8-K states that the “requirements of this Item 2.02 are +triggered by the disclosure of material non-public information regarding a completed fiscal year +or quarter. Release of additional or updated material non-public information regarding a +completed fiscal year or quarter would trigger an additional Item 2.02 requirement.” Instruction +2 of Item 2.02 of Form 8-K states that the “requirements of paragraph (e)(1)(i) of Item 10 of +Regulation S-K (17 CFR 229.10(e)(1)(i)) shall apply to disclosures under this Item 2.02.” + +3. In its FY 2017 Earnings Release and its Q1 2018 Earnings Release, ADT provided +non-GAAP financial measures such as adjusted EBITDA, adjusted net income, and free cash flow +before special items, without giving equal or greater prominence to the comparable GAAP +financial measures. + +4. In the headline of the FY 2017 Earnings Release, ADT presented its adjusted +EBITDA2 for fiscal year 2017 and stated that adjusted EBITDA was up 8% year-over-year, +without mentioning ADT’s net income or loss (the comparable GAAP financial measure) in the + +1 “GAAP” refers to U.S. generally accepted accounting principles. +2 EBITDA (earnings before interest, taxes, depreciation and amortization) is an example of +a non-GAAP financial measure. + + 3 +headline. + +5. In the headline of the Q1 2018 Earnings Release, ADT presented its adjusted +EBITDA (a non-GAAP financial measure) for the first quarter of 2018 and stated that adjusted +EBITDA was up 7% year-over-year, without mentioning ADT’s net income or loss (the +comparable GAAP financial measure) in the headline. On the top of the first page, ADT then +listed “FIRST QUARTER 2018 HIGHLIGHTS” in nine bullet points, including bullet points that +state ADT’s adjusted EBITDA of $620 million was up 7%, adjusted net income of $249 million +was up 26%, and adjusted net income per share of $0.34 was up 10%. These three measures are all +non-GAAP financial measures. ADT did not include comparable GAAP financial measures for +net income or loss in the HIGHLIGHTS section. Instead, ADT reported in the second and sixth +full paragraphs that its GAAP net loss had increased from $141 million for Q1 2017 to $157 +million for Q1 2018. + +6. As a result of the conduct described above, ADT violated Section 13(a) of the +Exchange Act and Rule 13a-11 thereunder. + +7. In determining to accept ADT’s Offer, the Commission considered the +cooperation ADT afforded the Commission staff. + + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent ADT’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent ADT cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rule 13a-11 thereunder. + +B. Respondent shall, within 20 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 + + + 4 +(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 ADT +Inc. as the Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Glenn S. Gordon, Division of +Enforcement, Securities and Exchange Commission, 801 Brickell Avenue, Suite 1800, Miami, FL +33131. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-4010.txt b/raw/aaer/2018/AAER-4010.txt new file mode 100644 index 0000000000000000000000000000000000000000..49b55e42e4cdb9c842f8d97584250ee1f31be672 --- /dev/null +++ b/raw/aaer/2018/AAER-4010.txt @@ -0,0 +1,242 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84973 / December 26, 2018 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4010 / December 26, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18962 +In the Matter of: + +Centrais Elétricas +Brasileiras S.A., +: +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 + +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 Centrais Elétricas Brasileiras S.A. – +Eletrobras (“Eletrobras” or “Respondent”). + +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 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 + + +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +Summary +1. These proceedings arise out of Eletrobras’s violations of the internal accounting +controls and recordkeeping provisions of the Foreign Corrupt Practices Act of 1977 (the +“FCPA”) ,15 U.S.C. § 78m. +2. As described below, former officers at Eletrobras Termonuclear S.A +(“Eletronuclear”), Eletrobras’s majority-owned (over 99%) nuclear power generation subsidiary, +engaged in an illicit bid-rigging and bribery scheme involving the construction of a nuclear +power plant (“UTN Angra III”) from approximately 2009 until 2015. These officers used their +influence at Eletronuclear in favor of a bid-rigging scheme among certain private Brazilian +construction companies. The officers also misused their official positions in authorizing +unnecessary contractors and inflating the cost of Eletronuclear’s infrastructure project. In return, +the construction companies involved in the scheme agreed to pay, and did pay, the former +Eletronuclear officers approximately $9 million +3. Eletronuclear paid invoices related to the inflated contracts in the ordinary course +of its business because Eletrobras had failed to devise and maintain a sufficient system of +internal accounting controls from 2009 through 2015. The corruption scheme at Eletronuclear +caused misstatements in Eletrobras’s books and records because Eletronuclear recorded +payments made to UTN Angra III contractors, a percentage of which was used for bribes, as +money legitimately spent to acquire and improve assets. +4. As a result, Eletrobras violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the +Exchange Act. +Respondent +5. Eletrobras is a Brazilian power generation, transmission and distribution company +based in Rio de Janeiro, Brazil. Eletrobras’s common and preferred shares are registered with the +Commission pursuant to Section 12(b) of the Exchange Act and trade on the New York Stock +Exchange. +6. The Brazilian federal government currently owns a 51% stake in Eletrobras and +appoints seven of Eletrobras’s eleven board members. Eletrobras files periodic reports with the +Commission pursuant to Section 13 or 15(d) of the Exchange Act. + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 + +Facts +Eletrobras’s Power Generation and Transmission Operations +7. Eletrobras is a holding company. From 2009 through 2017, Eletrobras operated +through as many as 13 regional subsidiaries, at least 175 special purpose entities, and non- +controlling interests in approximately 25 companies. As of 2017, Eletrobras had 21,563 salaried +employees, but less than 4% were employees of the holding company. Eletrobras consolidates +the financial reporting of its operations at the parent level. +8. Eletrobras’s core business is the generation, transmission and distribution of +energy. Hydroelectric plants generally account for the vast majority of Eletrobras’s total power +generation, but the company also generates power from thermal and nuclear plants. As of 2017, +Eletrobras owned and operated 44 hydroelectric plants and two nuclear plants. +UTN Angra III Timeline +9. In 2009, Eletrobras’s nuclear power generation and transmission subsidiary, +Eletronuclear, began renegotiation and execution of the UTN Angra III civil construction +contract then valued at approximately $4.6 billion. In 2014, Eletronuclear executed another +contract related to UTN Angra III in connection with electromechanical assembly services +valued at approximately $1.1 billion. All work on UTN Angra III was suspended in 2015. +Former Officers at Eletronuclear Received Bribes in a Bid-Rigging and Bribery +Scheme +10. Several Brazilian government officials, the former Eletronuclear president, and +other Eletronuclear officers received bribes from Brazilian construction company executives +engaged in a bid-rigging and bribery scheme involving UTN Angra III. The scheme ultimately +benefited certain construction companies, at least two Brazilian political parties and Brazilian +government officials, and several now former officers at Eletronuclear. +11. Specifically, construction company executives agreed to pay 2% of the UTN +Angra III contract value to officials associated with two of Brazil’s largest political parties (1% +each). The former Eletronuclear president also received approximately $4.1 million relating +UTN Angra III. Finally, other former Eletronuclear officers collectively received approximately +$4.9 million. +12. In return, the former Eletronuclear officers used their influence over the UTN +Angra III prequalification, budgeting and procurement processes to, among other things, +authorize unnecessary contractors, and inflate the cost of Eletronuclear’s infrastructure project. +The improper payments made by the construction companies to Brazilian officials were funded, +in part, using inflated contract prices or sham invoices that contractors involved in the UTN +Angra III scheme submitted to Eletronuclear for payment. + +4 + +Eletrobras’s Compliance Policies and Internal Accounting Controls were +Insufficient or Ineffective +13. Eletrobras’s anti-corruption policies or procedures and accounting controls relied, +in part, on general or boilerplate prohibitions that did not apply to all employees or were ignored. +For example, Eletrobras adopted a code of ethics in 2005 to ensure that competiveness and +profitability did not override ethical behavior. However, Eletrobras’s code of ethics only applied +to the holding company and made no mention of the subsidiaries and special purpose entities. +14. In 2009, Eletrobras began anti-corruption training for a small number of its +workforce. The company also approved a code of conduct for its subsidiaries in 2010 that +required all employees, including employees at its subsidiaries, to observe Eletrobras’s ethical +principles that prohibited, in part, support or contribution to political parties or campaigns for +elective office. Additionally, Eletrobras’s ethical principles required the selection and hiring of +suppliers based on specific criteria including legal, technical, quality, cost and timeliness. +However, many accounting controls designed to promote these ethical principles, such as certain +contractual measurement criteria requiring that payments to suppliers be proportional to the +worked performed, were ignored or circumvented. +15. Many of these efforts were ineffective because of significant material weaknesses +in Eletrobras’s internal control over financial reporting that were not remediated for many years. +For example, from 2009 through 2015 Eletrobras disclosed in its annual reports material +weaknesses related to its ability to maintain an effective control environment, adequately +perform risk assessments, and effectively maintain and operate controls with respect to its +accounting for property, plant and equipment. Many of these material weaknesses, including the +failure to maintain effective controls to ensure the completeness, accuracy, validity, and +valuation over the purchase and payments of goods and services, contributed to the bribery +scheme flourishing undetected for years. +16. Additionally, Eletrobras failed to devise and maintain a sufficient system of +internal accounting controls in part because of weaknesses that allowed employees at the +subsidiary level to ignore prohibitions against direct payments to subcontractors and allow the +payment of upfront costs for work not performed. This occurred against a backdrop where +Eletrobras’s compliance policies and procedures were not specifically tailored to the inherent +risks associated with Eletrobras’s business operations. +Eletrobras Improperly Accounted for Expenses Relating to the UTN Angra III +Project +17. In order to effectuate the bid-rigging and bribery scheme described above, the +former Eletronuclear officers involved used their influence and official positions to, among other +things, authorize certain contractors, services and expenses connected to the scheme. Pursuant to +this scheme, the construction companies overcharged Eletronuclear under construction contracts +and contracts to provide goods and services, and used the overpayment to fund the bribes to the +executives and political parties. From about 2009 until 2015, the former Eletronuclear officers + +5 + +caused Eletronuclear to approve and pay invoices from contractors involved in the bid-rigging +and bribery scheme relating the UTN Angra III project. At least 28 invoices were from a +contractor used as a conduit for the bribes paid to the former Eletronuclear president. +18. These inflated contract prices and sham invoices were recorded by Eletronuclear +as legitimate expenses for goods or services in connection with UTN Angra III and consolidated +to Eletrobras. As such, Eletrobras’s books and records did not, in reasonable detail, accurately +and fairly reflect the transactions and dispositions of the company’s assets. +19. As a result of the conduct described above, Eletrobras violated Sections +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Eletrobras violated Section 13(b)(2)(A) of the +Exchange Act by improperly recording, as legitimate expenses, the payment of invoices related +to contracts with inflated prices that derived from the bid-rigging and bribery scheme. Eletrobras +also violated Section 13(b)(2)(B) by failing to devise and maintain a sufficient system of internal +accounting controls. +Eletrobras’s Remedial Efforts +In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by Respondent and cooperation afforded the Commission staff. Eletrobras’s +cooperation included sharing facts developed during the course of an internal investigation by its +board and voluntarily producing and translating documents. Eletrobras’s remediation included +disciplining employees involved in the misconduct, enhancing its internal accounting controls +and compliance functions, remediating material weaknesses identified in its annual reports with +the Commission, and adopting a new anti-corruption policies and procedures. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B) of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(A) and +78m(b)(2)(B)]. +B. Respondents shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $2,500,000 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: + + +6 + +(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 +Centrais Elétricas Brasileiras S.A. as a Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to Charles +Cain, 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. + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-4011.txt b/raw/aaer/2018/AAER-4011.txt new file mode 100644 index 0000000000000000000000000000000000000000..e8d8b0ee237a243639994891a7cb5ecbe8aaea8d --- /dev/null +++ b/raw/aaer/2018/AAER-4011.txt @@ -0,0 +1,281 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84978 / December 26, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4011 / December 26, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18964 + +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 o f the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +And-Desist Proceedings Pursuant To Section 21C Of The Securities Exchange Act Of 1934, +Making Findings, And Imposing A Cease-And-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +Summary +1. This matter concerns violations of the books and records and internal accounting +controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by San Jose, California -based +communications solutions prov ider, Polycom, Inc. From 2006 through at least July 2014, + 2 +Polycom’s Vice President of China at Polycom’s China subsidiary, along with senior managers, +provided significant discounts to Polycom’s distributors and/or resellers, knowing and intending +that th e distributors and/or resellers would use the discounts to make payments to officials at +Chinese government agencies and government-owned enterprises in exchange for those officials’ +assistance in obtaining orders for Polycom’s products. Employees and man agers at the China +subsidiary recorded the payments in a parallel deal -tracking and email system located in China, +outside of Polycom’s company-approved systems. These senior managers at Polycom’s Chinese +subsidiary also instructed their sales personnel n ot to use their Polycom email addresses when +discussing sales opportunities with Polycom’s distributors. Throughout this period, Polycom failed +to devise and maintain a sufficient system of internal accounting controls and lacked an effective +anti-corruption compliance program with regard to its Chinese sales operations. During the period +of September 27, 2012 through July 2014, the efforts to make, and conceal, improper payments to +Chinese government officials carried out by Polycom’s Chinese subsidiary ultimately netted +Polycom approximately $10.7 million. +Respondent +2. Polycom is a Delaware corporation headquartered in San Jose, California that sells +voice and video communications products and services. From 1996 until 2016, Polycom’s +common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act +and was quoted on the Nasdaq Global Select Market under the ticker PLCM. On September 27, +2016, a private equity firm acquired Polycom, and the company ceased to trade on the NASDAQ. +On July 2, 2018, Plantronics, Inc. acquired Polycom from the private equity firm. Polycom is now +a wholly-owned subsidiary of Plantronics. Plantronics’ common stock is registered with the +Commission pursuant to Section 12(b) of the Exchange Act. +3. On March 31, 2015, the Commission entered an Order (the “2015 Order”) finding +that Polycom, Inc. had violated Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the +Exchange Act and Rules 13a -1, 12b -20, 14a -3 and 14a -9 thereunder. According to the 2015 +Order, from May 2010 to July 2013, Polycom paid for approximately $190,000 worth of its then- +CEO’s personal expenses. Polycom failed to disclose these perquisites, falsely recorded many of +these personal expenses as business expenses , and failed to implement adequate internal +accounting controls related to company purchasing cards and air travel booking. +Other Relevant Entity +4. During the relevant time period, Polycom Communications Solutions (Beijing) Co., +Ltd. (China) (“Polycom China”) was a company organized in China that sold Polycom’s products +and services into the China Market. During the relevant time period, Polycom China was, through +a chain of holding companies, a wholly-owned subsidiary of Polycom. Polycom China engaged + 3 +distributors to facilitate th e sale of Polycom products throughout China and maintained its own +sales and marketing staff to promote Polycom products. +Facts +5. Polycom sells its voice and video communicatio ns equipment in China through +several distributors. Polycom China sells Polycom’s products to these distributors, who sell the +products to resellers who in turn sell the products to end users. +6. From 2006 through at least July 2014, Polycom’s Vice President of China devised +and implemented a scheme to obtain additional business from publ ic-sector customers by +facilitating improper payments to government officials through Polycom’s distributors. +7. According to Polycom’s policies and procedures, Polycom sales personnel +worldwide were required to enter details concerning sales opportunities and deals into a single, +centralized customer relations management (“CRM”) database. However, Polycom China’s senior +managers directed Polycom China’s sales personnel to enter details concerning sales opportunities +into a separate, parallel sales management system outside of Polycom’s company -approved +systems, which was orchestrated by Polycom’s Vice President of China . Polycom personnel +outside China were unaware of the existence of this parallel system. Polycom China’s senior +managers also directed Polycom China’s sales personnel to use non-Polycom email addresses +when discussing deals with Polycom’s distributors. +8. On numerous occasions during years leading up to July 2014, Polycom China’s +distributors obtained business from public-sector customers in China by offering and making cash +payments to government officials who exercised influence over those customers’ purchasing +decisions. When a distributor sought to make such a payment, it requested that Polycom provide it +with a discount on the equipment tha t was to be sold to the public -sector customer. As senior +management at Polycom China knew, these discounts were not passed on to the end customer, but +instead were intended to cover the cost of the payments the distributors made to the Chinese +government officials. +9. Polycom China sales employees entered the requested discounts into the non - +Polycom sales management system for approval by senior managers at Polycom China, and +recorded information about the reason for the payments in the same off-line system. Polycom +China’s senior managers routinely approved these discounts, knowing that they would be used to +make improper payments to Chinese government officials . Polycom’s Vice President of China +recorded information regarding these improper payments in excel spreadsheets he maintained. +10. Senior managers at Polycom China recorded information about each deal in +Polycom’s centralized CRM database. Entries in the centralized CRM database did not reflect that + 4 +Polycom was providing discounts to its distributors in China in order to fund improper payments to +Chinese government officials. Rather, the entries in the CRM database falsely attributed the +discounts to purportedly legitimate purposes. For example: +a. In connection with a project with a state -owned entity, Polycom China authorized +an improper payment of 60,000 RMB to a government official through a discount +given to one of Polycom China’s channel partners. The Polycom China distributor +made the improper payment in exchange for the official’s assistance in securing an +agreement to purchase Polycom products. In an excel spreadsheet maintained by +Polycom’s Vice President of China, the purpose of the discount was described as +“in order to thank [the official] for help, we promised to give him 60,000 RMB.” +However, the information entered into the centralized CRM database cited +“competition” with another communications products provider as the reason for the +discount that funded this improper payment. + +b. In connection with a transaction with a state -owned entity, Polycom China +authorized an improper payment of 170,000 RMB to a government official through +a discount given to one of Polycom China’s channel partners. The payment was +made in exchange for the official’s assistance in causing the entity to issue a tender +that specifically called for Polycom products. However, the information entered +into the centralized CRM database cited “competition” with two other +communication products providers as the reason for the discount that funded this +improper payment. + +c. In connection with a deal with a public institution, Polycom China authorized a +payment of an 850,000 RMB “end -user fee” through a discount given to one of +Polycom China’s channel partners. However, the information entered into the +centralized CRM database cited only competition and the customer’s refusal to pay +a higher price as the reason for the discount that funded this fee. According to +Polycom China employees, “end -user fees” at times represented kickbacks to +Chinese government officials. +d. In connection with a sale of Polycom products to a government entity, Polycom +China authorized payments of 20,000 RMB, 70,000 RMB, and 200,000 RMB +through a discount to one of Polycom China’s channel partners to three separate +officials who worked at the entity. However, the information entered into the +centralized CRM database cited only “competition” with two other communications +products providers as the reason for the discount that funded these payments. + + 5 +11. Product discounts up to a certain threshold could be approve d unilaterally by +Polycom China’s senior managers. However, discounts above this threshold had to be approved +by Singapore-based personnel who worked for another wholly-owned Polycom subsidiary. When +these Singapore-based personnel sought information regarding the reasons for particular discounts, +Polycom China’s senior managers always cited legitimate concerns such as competition with other +communications products providers or end -user budget constraints. Polycom China’s senior +managers never told the Singapore-based personnel that certain discounts were being used to fund +improper payments to government officials. +12. During the relevant period, Polycom failed to devise and maintain adequate +controls to detect whether any reasons for discounts entered in the centralized CRM database, or +given to Polycom’s Singapore-based personnel, were accurate. Accordingly, Polycom failed to +devise and maintain sufficient accounting controls to detect whether Polycom China was using +product discounts as a vehicle for funding improper payments to government officials. +13. Polycom also failed to translate certain anticorruption training materials into the +Polycom China employees’ local language, Mandarin, and frequently did not follow up if Polycom +China personnel did not attend anticorruption trainings. Moreover, as part of a 2013 due diligence +procedure, Polycom became aware of allegations that one of Polycom China’s distributors had, +years prior on a deal unrelated to Polycom , made an improper payment to a Chinese government +official. Polycom never finished its due diligence review of the relevant distributor. Polycom +nonetheless allowed Polycom China to continue using this distributor to sell its products to public- +sector customers. +14. As a result of the conduct described abov e, Polycom violated Section 13(b)(2)(A) +and 13(b)(2)(B) of the Exchange Act. Polycom violated Section 13(b)(2)(A) of the Exchange Act +by falsely recording improper payments by Polycom China’s employees and agents as legitimate +business expenses, whose results were then consolidated and reported by Polycom on its books and +records. Polycom also violated Section 13(b)(2)(B) of the Exchange Act by failing to devise and +maintain a sufficient system of internal accounting controls to detect and prevent the mak ing of +improper payments by Polycom China to foreign government officials. As a result, Polycom +generated profits of approximately $10.7 million. +Polycom’s Self-Disclosure, Cooperation, and Remedial Efforts +15. In determining to accept the Offer, the Commiss ion considered Polycom’s self- +disclosure, cooperation, and remedial efforts . Polycom hired outside counsel to conduct an +independent investigation to determine the scope of potential issues related to payments made by +Polycom China’s distributors. Polyco m then voluntarily disclosed this misconduct to the +Commission staff and provided cooperation to the Commission during the entire course of its +investigation. Polycom shared facts that it discovered during the course of its internal investigation + 6 +into the matters described above. Polycom also cooperated by voluntarily producing all documents +requested by Commission staff, translating a large volume of documents into English, and making +certain employees available for interviews. +16. Polycom also undertook remedial actions in response to the matters it identified in +its internal investigation. These remedial measures included terminating the employment of eight +employees involved in the matters described above, disciplining 18 other employees, terminating +the Company’s relationship with one of its channel partners and requiring pers onnel changes at +several others, improving the anticorruption and other related trainings Polycom provides to its +China-based employees, hiring additional personnel, including in Chi na, to enhance oversight, +supplementing existing third party policies and trainings and third party due diligence procedures, +and enhancing existing, as well as adopting additional, policies, procedures and controls designed +to detect and prevent improper payments. +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(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. + + B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of +$10,672,926 and prejudgment interest of $1,833,410 to the Securities and Exchange Commission +for transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to SEC Rule of +Practice 600. + +C. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $3,800,000 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 ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + 7 +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Polycom, Inc. as a Respondent in these proceedings, and the file number of t hese proceedings; a +copy of the cover letter and check or money order must be sent to Erin Schneider, Associate +Regional Director, Securities and Exchange Commission, San Francisco Regional Office, 44 +Montgomery Street, Suite 2800, San Francisco, CA 94104. + + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission ’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2018/AAER-4012.txt b/raw/aaer/2018/AAER-4012.txt new file mode 100644 index 0000000000000000000000000000000000000000..a207b1f076251501143c067422c6e7b79976dc46 --- /dev/null +++ b/raw/aaer/2018/AAER-4012.txt @@ -0,0 +1,552 @@ + + + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 10601 / December 31, 2018 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84979 / December 31, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4012 / December 31, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18965 + + +In the Matter of + + HERTZ GLOBAL HOLDINGS, INC. + and + THE HERTZ CORPORATION, + +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 the entities currently known as Hertz Global Holdings, Inc. and The Hertz +Corporation (collectively, “Respondents” or “Hertz”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +2 + +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act and Section 21C of the +Exchange Act, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + On the basis of this Order and Respondents’ Offer, the Commission finds1 that: + +Summary + +1. Respondent Hertz Global Holdings, Inc. (“Hertz Holdings”) is the accounting +successor to an entity also called Hertz Global Holdings, Inc. (“Hertz Global”), and Respondent The +Hertz Corporation (“Hertz Corp.”) is its wholly owned subsidiary. + +2. From at least February 2012 through March 2014, Hertz’s public filings materially +misstated pretax income because of accounting errors made in a number of business units, and over +multiple reporting periods, as reflected in the Restatement that Hertz filed on July 16, 2015. Part of +the misstated income resulted from errors made in various accounts that are subject to management +estimate. For example, Hertz’s car rental business routinely recovers sums of money from third +parties for damages that occur during rental. Hertz estimated an allowance for uncollectible +amounts as an offset to what it recorded as potential recoveries. For years, Hertz’s allowance +related expenses were understated and income was inflated because Hertz relied on inappropriate +estimation methodologies that resulted in inadequate allowances and write-offs. The inappropriate +methodologies occurred within a pressured corporate environment where, in certain instances, there +was an inappropriate emphasis on meeting internal budgets, business plans, and earnings estimates. + +3. Pressure also existed at times when other inadequate disclosures were filed with the +Commission. For example, Hertz, consistent with the regular course of its business, routinely +estimated how long it would hold cars before disposing of them and replacing them. The planned +holding periods were one of the variables in the formula Hertz used to depreciate its car rental +assets, and also could have impacted other aspects of Hertz’s business, such as maintenance costs. +During 2013, Hertz decided to extend the holding periods of a significant portion of its U.S. car +rental fleet. That decision, and its impact on aspects of Hertz’s business, were not adequately +disclosed to investors. + +4. Also in 2013, after having already revised its earnings guidance downward, Hertz +reaffirmed the revised guidance publicly in November 2013 despite certain internal analysis +indicating that the revised guidance had been based in part on inaccurate information and that +certain recent internal estimates fell below the low end of that guidance range. + + +1 The findings herein are made pursuant to Respondents’ Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. +3 + +5. On July 16, 2015, Hertz restated its financial results for 2012, 2013, and prior +periods, including selected data for 2011 (unaudited). Including revisions made in early 2014, the +company reduced its previously reported GAAP pretax income by a total of $235 million (the +“Restatement”). The Restatement identified 17 areas with material accounting errors across the +company’s business units, identified additional information regarding historical depreciation and +planned holding periods, identified eleven separate material weaknesses in Hertz’s internal controls +over financial reporting, and acknowledged that “an inconsistent and sometimes inappropriate tone +at the top” had existed and may have contributed to a number of errors, misstatements and +omissions. + +6. Based on the foregoing and the conduct described herein below, Hertz Holdings +violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder, and +Hertz Corp. violated Section 15(d) of the Exchange Act and Rules 12b-20, 15d-1, 15d-11 and 15d- +13 thereunder. + +Respondents + +7. Hertz Global Holdings, Inc. (“Hertz Holdings”) is a Delaware corporation +headquartered in Estero, Florida. Its securities are registered pursuant to Section 12(b) of the +Exchange Act. Its common stock trades on the New York Stock Exchange, and Hertz Holdings +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. As of June 30, 2016, Hertz Holdings was +spun off from and designated as the accounting successor to Hertz Global, whose securities had +also been registered pursuant to Section 12(b) of the Exchange Act. + +8. The Hertz Corporation (“Hertz Corp.”) is a Delaware corporation headquartered +in Estero, Florida. It filed registration statements with the Commission on Form S-4 that became +effective in February and October 2013. Accordingly, as required by Section 15(d) of the +Exchange Act, Hertz Corp. filed periodic reports, including Forms 10-K and 10-Q, respecting +fiscal year 2013 pursuant to Section 15(d) of the Exchange Act and related rules thereunder. Hertz +Corp. is the wholly-owned operating subsidiary of Hertz Holdings, and it previously was the +wholly-owned subsidiary of Hertz Global. + +Facts +Hertz’s Inaccurate Financial Reporting +9. As noted, the Restatement identified a total of $235 million in previously reported +pretax income did not comply with generally accepted accounting principles (“GAAP”). One of +the largest Restatement items concerned various internal accounts associated with “subrogation,” +which accounted for a cumulative pre-tax misstatement of $48 million. + +4 + +10. Subrogation refers to Hertz’s efforts to offset expenses for vehicle damage during +rental periods by recovering money from renters and other third parties, depending on whether +there was applicable insurance or credit card coverage and, in some cases, whether the renters +purchased the loss damage waiver. Hertz accounted for subrogation by recording income and a +receivable for amounts subject to recovery, partially offset by an associated expense and allowance +for the possibility that some percentage of those amounts might not be recovered. Amounts +ultimately uncollected would be written off against the allowance. + +11. FASB Accounting Standards Codification Topic 450, “Contingencies” (ASC 450), +provides guidance on the accounting for collectability of receivables. ASC 450-20-25-2 requires +the accrual of losses from uncollectible receivables if a loss is probable and the amount of the loss +can be reasonably estimated. Hertz’s longstanding policy for calculating the allowance was based +on a rolling 12-month average, not of collections experience, but of write-offs, divided by monthly +billed receivables. + +12. Starting in August 2012, Hertz began sending claims greater than $5,000 that +remained uncollected after approximately 120 days to attorneys to assist in the collections process. +Whereas amounts due for more than approximately 120 days and sent to third parties for collection +had previously been written off, Hertz did not significantly increase its allowance for or write off +such amounts when sent to attorneys for collection. Instead, such claims were held and allowed for +or written off on a case-by-case basis, based on the rationale that attorneys would be better at +collecting debts but would take more time to do so. In addition, while Hertz’s previous policy had +been to maintain a 100% allowance for all claims older than 360 days, the allowance for claims +sent to attorneys was then set based on the methodology used for other claims, using the much +lower, rolling historical rate of overall claims write-offs, which averaged from approximately 11- +16%. + +13. However, at the time of these accounting changes, Hertz did not have historical data +with respect to the speed of attorney collections or the amount that attorneys would collect. +Months later, the actual attorneys’ net collection rates for August through December 2012 were +approximately 2%. Still, under persistent pressure to meet budgets, and to generate opportunities +to help close company-wide budget gaps or revenue shortfalls, subrogation staff did not +significantly increase the allowance for or write off most of these aging attorney-held claims. This +was not in accordance with GAAP. + +14. During 2013, on several occasions Hertz changed the methodology for either +determining the subrogation allowance or the amounts of aged debt to be written off. Each of the +changes had a favorable impact on the company’s financial statements. And each of the changes +was not in accordance with U.S. GAAP. + +15. For example, in May 2013 Hertz’s Internal Audit Department identified a +spreadsheet error that had resulted in recording no allowance at all for any receivables aged over +360 days, whether or not sent to attorneys. Correcting the error by establishing a 100% +allowance for such aged claims would have resulted in a $7 million increase to the company’s +5 + +expenses. Instead, Hertz staff reserved the receivables aged over 360 days at the rolling 12- +month average write-off rate of 11%, based on the rationale that attorneys – who had most of the +year-old receivables – would achieve substantial recoveries, and that Hertz did not yet have +enough experience to gauge the level of reserve needed for those claims. This was inconsistent +with actual results over the first nine months of the attorney referrals, which had yielded an +approximately 3% net recovery rate. Moreover, other subrogation receivables uncollected for +over 360 days that were not being handled by attorneys also were relieved of the 100% +allowance requirement. Thus, instead of $7 million, expenses were increased by less than $1 +million. + +16. Likewise, in the fall of 2013 budget pressure at Hertz was severe, as the company +had revised its earnings guidance downward in September, only to have certain internal earnings +estimates fall below even the lowered guidance in October. A “gap-closing” effort ensued, and +one idea that emerged from within senior Hertz management was to lower the allowance in +subrogation and other parts of the U.S. rental car business. As of the beginning of October 2013, +approximately $9.3 million of subrogation receivables remained on Hertz’s books though they +were over a year old. + +17. In response to the gap-closing effort, Hertz staff proposed reducing certain non- +subrogation allowances, but recommended a corresponding increase in the subrogation allowance, +to alleviate the risk associated with the aged receivables. After internal review, the allowance for +aged subrogation receivables was increased, but the allowance applied to younger receivables was +reduced. Based on the methodology worked out during this process, some categories of +receivables were reserved at an effective rate of approximately 4%, which implied a 96 percent +recovery rate that was substantially above historical recovery rates for billed receivables. + +18. Finally, in May 2012, April 2013, and May 2013 Hertz headquarters personnel +directed the staff with primary responsibility for the subrogation accounts to make post-close +adjustments to the subrogation unbilled receivable account, each of which departed from the +historical methodology and improved reported results by approximately $1 million. No formal +documentation of a rationale for these changes has been identified. In the summer of 2013, Hertz’s +Internal Audit Department discovered that the April 2013 $1.2 million post-close adjustment +lacked the written documentation of the rationale supporting the adjustment that was required by +Hertz accounting policy. Ultimately, in September 2013, Internal Audit declared the incident a +controls deficiency during its Sarbanes-Oxley independent controls testing. + Hertz’s Misstatements and Omissions Concerning its Extension of Fleet Holding Periods +19. At various times during the second through the fourth quarters of 2013, Hertz +extended the planned holding periods for a significant portion of Hertz’s U.S. rental car fleet. +Many of the company’s top models, for example, had their planned holding periods extended from +20 to 24 or 30 months. + +20. The decisions were changes from prior practice with regard to planned holding +periods, and made Hertz’s planned holding periods for portions of the fleet longer than those of +6 + +other major car rental companies. For Hertz, extending holding periods had a short-term benefit: it +spread out over more months the depreciation expense Hertz had to incur on its cars, lowering such +expense overall for current quarters. At the same time, extending holding periods had long-term +risks, including that older cars were likely to require more costly maintenance, and could injure +Hertz’s premium brand. + +21. FASB Accounting Standards Codification Topic 250-10-50-4 provides that the +effect on, among other things, net income of a change in accounting estimate that affects several +future periods, such as a change in service lives for depreciable assets, shall be disclosed. If a +change in estimate does not have a material effect in the period of change but is reasonably certain +to have a material effect in later periods, a description of that change in estimate must be disclosed +whenever the financial statements of the period of change are presented. + +22. During 2013, Hertz did not adequately disclose its decision to extend the planned +holding period for substantial portions of its fleet. To the contrary, in its Form 10-Q for the second +quarter of 2013, filed on August 2, 2013, Hertz stated the following concerning its depreciation +policies in Management’s Discussion of and Analysis of Financial Condition and Results of +Operations (“MD&A”): “Depreciation rates are reviewed on a quarterly basis based on +management’s routine review of present and estimated future market conditions and their effect on +residual values at the time of disposal. During the six months ended June 30, 2013, depreciation +rates being used to compute the provision for depreciation of revenue earning equipment were +adjusted on certain vehicles in our car rental operations to reflect changes in the estimated residual +values to be realized when revenue earning equipment is sold.” Hertz did not state in this Form +10-Q – as the Restatement later did - the significant adjustment it had made to extend the planned +holding periods. + +23. In the same filing’s MD&A, Hertz stated the following explanation for why its +depreciation expense had declined by $15 million in the first half of the year, a decline +concentrated almost entirely in the second quarter: “In the six months ended June 30, 2013, our +monthly per vehicle depreciation costs decreased as compared to the prior year period due to +improved residual values in the U.S., a continued move towards a greater proportion of non- +program vehicles, mix optimization and improved procurement and remarketing efforts.” In fact, +however, this disclosure, which tracked the language from Hertz’s disclosure in its Form 10-Q for +the first quarter of 2013, was inaccurate, because residual values had declined in the second quarter +of 2013, a fact discussed within Hertz. In addition, the disclosure did not address – as the +Restatement did two years later – that extensions of holding periods had reduced depreciation +expense. + +24. The MD&A in the Form 10-Q for the third quarter of 2013 contained similar +disclosures relating to typical adjustments in depreciation rates that omitted the adjustment in +planned holding periods. Likewise, the filing explained the $18 million decline in depreciation +expense in the third quarter of 2013 in a manner similar to that stated in the Form 10-Q for the +second quarter of 2013, stating that “monthly per vehicle depreciation costs decreased as compared +to the prior year period due to residual values that remained strong in the U.S., a continued move +7 + +towards a greater proportion of non-program vehicles, mix optimization and improved +procurement and remarketing efforts.” The disclosure once again did not adequately disclose the +impact of longer planned holding periods later identified in the Restatement. + +25. Moreover, Hertz’s Form 10-K for 2013, filed in March 2014, recited that “our +approximate average holding period for a rental car was eighteen months in the United States.” +This was the same 18-month average holding period reported in the Form 10-K for 2012, despite +the intervening increases in planned holding periods for a substantial portion of the fleet. During +2013, the weighted average of all planned holding periods across the U.S. fleet increased, from 21 +to almost 25 months. The disclosure of the 18-month average did not explain that the average had +been calculated from the age of cars that had been disposed of, and not from the planned holding +period that had changed for portions of the fleet. The MD&A in the same filing did not address the +extension of planned holding periods, other than to list generally “extended holding periods” as +one of several factors causing an increase in maintenance costs. While Hertz’s Form 10-K for +2013 disclosed that the “holding periods” for its cars ranged from 4 to 36 months, a broader range +than the 4 to 28 months disclosed in its Form 10-K for 2012, that disclosure did not address either +the scale of the shift to longer planned holding periods or that the cause was the result of an +affirmative business decision to extend planned holding periods. + +26. In late 2014, new Hertz management changed the fleet plan to include shorter +planned holding periods. Hertz’s Form 10-K for 2014 filed on July 16, 2015, which included the +Restatement, disclosed that there had been extensions in planned holding periods and the reduction +in the company’s 2013 depreciation expense that resulted from the longer holding periods. As +Hertz also disclosed in this Form 10-K, “[f]leet related expenses” in 2014 “increased $182 million” +due to increases in vehicle maintenance expense, vehicle damage expense, and damage related +liability, which resulted from the “age and mileage” of the company’s fleet and having an “older +fleet compared with the prior year,” as well as certain other factors. + +Hertz’s Misstatements Concerning its Earnings Guidance in November 2013 + +27. Hertz also misrepresented the extent of its declining internal forecasts of overall +financial performance in November 2013. On September 26, 2013, Hertz revised downward the +earnings guidance it had issued in February 2013, based on a series of business and financial +setbacks. The revised guidance was disclosed in a press release issued on the same day that Hertz +publicly filed a slide deck from an investor conference presentation in which it was participating. +The new guidance reduced projected 2013 net income from a range of $1.78-1.88 per share to a +new range of $1.68-1.78 per share. Contemporaneous internal analysis projected the company’s +2013 results at $1.72 per share. + +28. Within two weeks, however, certain new internal analysis and data forecasted +Hertz’s performance to be below the low end of the revised guidance range. Strenuous “gap- +closing” efforts ensued, but by the end of October a Hertz internal estimate for 2013 still projected +EPS at $1.66. Moreover, the company’s process of identifying “opportunities and risks” not yet +built into its projections for year-end financial results yielded a lower number: $1.65 per share. +8 + + +29. Hertz had analysis done to determine why internal estimates had changed so +quickly. One analysis determined that the September 2013 revision had been flawed in part. +Methodological errors occurred, such as recognizing marketing credits in 2013 when the +accounting department had determined that in part they could only be recognized in 2014. + +30. Nonetheless, Hertz reaffirmed its $1.68-1.78 guidance range when it issued its third +quarter 2013 financial statements on November 4, 2013. + +Hertz’s Internal Accounting Controls Failures +31. As set forth in the Restatement, Hertz’s internal controls over financial reporting +suffered from a series of material weaknesses that contributed to the restatement of the company’s +financial statements for 2012 and 2013 and each of the quarters of 2013. These included an +inconsistent and sometimes inappropriate tone at the top, insufficient and inadequately trained +financial personnel, unclear reporting lines, the distraction caused by multiple, conflicting business +initiatives, and ineffective controls over procurement, exacerbated by problems associated with +implementation of a new Oracle enterprise resource management system to manage Hertz’s day- +to-day business activities. All of these in turn contributed to the types of additional accounting- +related material weaknesses detailed above: inadequate controls over accounting estimates, +changes to accounting policies, journal entries, and the period-end financial reporting process, +including account reconciliations and closing adjustments. Finally, as was also disclosed in the +Restatement, Hertz’s internal audit function lacked systems and personnel adequate to ensure the +adequate monitoring of control activities. + +32. For example, in the third quarter of 2013, Hertz staff performed some testing of +relevant internal controls. In mid-November 2013 management informed the audit committee of +Hertz’s board of directors that there were no significant deficiencies in internal controls over +financial reporting. Shortly thereafter, more analysis was performed, which revealed what the +company determined to be pervasive problems with its journal entries and account reconciliations, +which had existed throughout 2013. As noted above, the Restatement determined that these +problems constituted material weaknesses. + +Hertz’s Restatement, Internal Investigation and Cooperation with SEC Staff + +33. On May 13, 2014, Hertz announced that it was unable to file its Form 10-Q for the +first quarter of 2014, explaining that it had identified certain errors relating to prior periods which +might require it to restate its previously issued financial statements for 2011. + +34. On June 6, 2014, Hertz further announced that its continuing review had identified +additional accounting errors, that its Audit Committee had determined that the company’s 2011 +financial statements should no longer be relied upon and must be restated, and that it was +reviewing its 2012 and 2013 financial statements to determine if a restatement of the financial +statements in those periods would also be required. It also announced that it had identified at least +one material weakness in its internal control over financial reporting and that its disclosure controls +9 + +and procedures were ineffective at December 31, 2013. The June 6, 2014 announcement further +disclosed that Hertz was in the process of implementing new procedures and controls and +strengthening its accounting and finance departments through the addition of new personnel, led by +the recently hired Chief Financial Officer and with the assistance of a new Chief Accounting +Officer and new Vice President of SOX/Compliance. Also in June 2014, the audit committee +commenced an investigation of certain identified accounting errors with the participation of +independent counsel. + +35. On August 19, 2014, Hertz announced the departure and replacement of its lead +independent director, and on September 8, 2014, it announced the departure and replacement of its +chief executive officer. On November 14, 2014, Hertz announced that in addition to 2011, its 2012 +and 2013 financial statements must be restated and should no longer be relied upon. On July 16, +2015, based on the results of its accounting review and the internal investigation led by its outside +counsel, Hertz restated its 2011, 2012 and 2013 financial statements and disclosed 11 material +weaknesses in its internal control over financial reporting. + +36. The Restatement items and other material misstatements discussed above impacted, +in sum, Hertz Holdings’ Forms 10-K, Forms 10-Q, and/or earnings reports on Forms 8-K from at +least February 2012 to March 2014, each of which was incorporated into continuous offerings and +sales made during the same period pursuant to registration statements on Form S-8s filed by Hertz +Holdings on May 22, 2008, August 13, 2010 and August 16, 2013 that registered the offer and sale +of stock under an Employee Stock Purchase Plan and the sale of stock upon the exercise of stock +options under an Omnibus Incentive Plan. They also affected Hertz Corp.’s parallel filing of +Forms 10-K, Forms 10-Q and/or earnings reports on Forms 8-K, which were required to be filed +from at least February 2013 through March 2014. + +37. Throughout the staff’s investigation, Respondents met with staff on multiple +occasions, voluntarily providing information likely to be of interest to the staff, both on their own +initiative and at the staff’s request. + +Violations + +38. As a result of the conduct described above: + +a. Respondent Hertz Holdings violated Sections 17(a)(2) and 17(a)(3) of the +Securities Act, which prohibit any person from directly or indirectly obtaining +money or property by means of any untrue statement of a material fact or any +omission to state a material fact necessary in order to make the statements +made, in light of the circumstances under which they made, not misleading, or +engaging in any transaction, practice, or course of business which operates or +would operate as a fraud or deceit upon the purchaser, in the offer or sale of +securities. Claims under Sections 17(a)(2) and 17(a)(3) of the Securities Act +do not require a showing of scienter; instead, a showing of negligence is +10 + +sufficient. Aaron v. SEC, 446 U.S. 680, 697 (1980); SEC v. Hughes Capital +Corp., 124 F.3d 449, 453-54 (3d Cir. 1997); +b. Respondent Hertz Holdings violated Section 13(a) of the Exchange Act and +Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which require issuers with +securities registered under Section 12 of the Exchange Act to file annual, +current, and quarterly reports with the Commission containing such information +as the Commission’s rules may require and such further material information as +may be necessary to make the required statements, in light of the circumstances +under which they were made, not misleading. Additionally, the failure of the +MD&As in Respondent Hertz Holdings’ 2013 Form 10-K and Q2 and Q3 2013 +Form 10-Qs to comply with Regulation S-K constitutes a violation under +Section 13(a) of the Exchange Act. Finally, the failure of Respondent Hertz +Holdings’ Q2 and Q3 2013 Form 10-Qs to comply with Regulation S-X +constitutes a violation under Section 13(a) of the Exchange Act; + +c. Respondent Hertz Corp, violated Section 15(d) of the Exchange Act and Rules +12b-20, 15d-1, 15d-11 and 15d-13 thereunder, which require issuers which have +filed a registration statement with the Commission which has become effective +pursuant to Section 15(d) of the Exchange Act to file annual, current, and +quarterly reports with the Commission containing such information as the +Commission’s rules may require and such further material information as may +be necessary to make the required statements, in light of the circumstances +under which they were made, not misleading. Additionally, the failure of +Respondent Hertz Corp.’s 2013 Form 10-K and Q2 and Q3 2013 Form 10-Qs +to comply with Regulation S-K constitutes a violation under Section 15(d) of +the Exchange Act, and the failure of its Q2 and Q3 2013 Form 10-Qs to comply +with Regulation S-X constitutes a violation under Section 15(d) of the +Exchange Act; + +d. Respondents violated Section 13(b)(2)(A) of the Exchange Act, which +requires issuers with securities registered under Section 12 of the Exchange +Act or which are required to file reports pursuant to Section 15(d) of the +Exchange Act to make and keep books, records and accounts which, in +reasonable detail, accurately and fairly reflect the transactions and dispositions +of assets of the issuer; and + +e. Respondents violated Section 13(b)(2)(B) of the Exchange Act, which +requires issuers with securities registered under Section 12 of the Exchange +Act or which are required to file reports pursuant to Section 15(d) of the +Exchange Act to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurance that, among other things, +transactions are recorded as necessary to permit preparation of financial +statements in conformity with GAAP. + +11 + +Respondents’ Remedial Efforts +In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by Respondents, including replacement of numerous members of senior management +and lower-level staff, and cooperation afforded the Commission staff. +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 Section 21C of the Exchange +Act, it is hereby ORDERED that: + +A. Respondent Hertz Holdings 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 +and 13a-13 thereunder. + +B. Respondent Hertz Corp. cease and desist from committing or causing any violations +and any future violations of Sections 13(b)(2)(A), 13(b)(2)(B) and 15(d) of the Exchange Act and +Rules 12b-20, 15d-1, 15d-11 and 15d-13 thereunder. + +C. Respondent Hertz Holdings shall, within 30 days of the entry of this Order, pay a +civil money penalty in the amount of $16,000,000.00 to the Securities and Exchange Commission +for transfer to the general fund of the United States Treasury, subject to Section 21F(g)(3) of the +Exchange Act. If timely payment is not made, additional interest shall accrue pursuant to 31 +U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Hertz Holdings may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Hertz Holdings 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) Hertz Holdings may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +12 + +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Hertz Holdings 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 Sanjay Wadhwa, Senior +Associate Regional Director, Division of Enforcement, New York Regional Office, Securities and +Exchange Commission, Brookfield Place, 200 Vesey Street, New York, NY 10281. + +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, Hertz Holdings 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 Hertz Holdings’ payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Hertz Holdings 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 Hertz Holdings by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +E. Respondents acknowledge that the Commission is not imposing a civil penalty in +excess of $16,000,000.00 based upon their cooperation in a Commission investigation. If at any +time following the entry of the Order, the Division of Enforcement (“Division”) obtains +information indicating that Respondents 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 Respondents, petition the Commission to reopen this +matter and seek an order directing that the Respondents pay an additional civil penalty. +Respondents may contest by way of defense in any resulting administrative proceeding whether +they 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. 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